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Are short rotation coppices an alternative to traditional agricultural land use in Germany? A real options approach

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  • Haverkamp, Matthias Wolbert
  • Musshoff, Oliver

Abstract

Short rotation coppice (SRC) is an interesting economic alternative to agricultural land use. Nevertheless, farmers often do not switch to SRC. Thus, it seems like the farmers do not act according to the classical investment theory. A relatively new approach which can help to explain farmers’ reluctance is the real options approach (ROA). Compared to the classical investment theory, the investment triggers are shifted upwards. We want to answer the question of whether the ROA is an explanatory approach for farmers’ reluctance to invest in SRC. To do so, we develop a model to calculate the investment triggers of the gross margins (GM) of SRC a farmer should switch from rye production to SRC. The results show that the trigger GMs calculated according to the ROA are higher than those of the net present value and a risk-averse farmer invests earlier than a risk-neutral farmer. It can be concluded that a part of famers’ reluctance concerning SRC can be explained by the ROA.

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Bibliographic Info

Paper provided by Australian Agricultural and Resource Economics Society in its series 2013 Conference (57th), February 5-8, 2013, Sydney, Australia with number 152184.

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Date of creation: Feb 2013
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Handle: RePEc:ags:aare13:152184

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Keywords: Land conversion; short-rotation-coppice; rye; real options approach; net-present-value; Agricultural and Food Policy; Demand and Price Analysis; Land Economics/Use;

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  1. Ibáñez, Alfredo & Zapatero, Fernando, 2004. "Monte Carlo Valuation of American Options through Computation of the Optimal Exercise Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(02), pages 253-275, June.
  2. Gjolberg, Ole & Guttormsen, Atle G., 2002. "Real options in the forest: what if prices are mean-reverting?," Forest Policy and Economics, Elsevier, vol. 4(1), pages 13-20, May.
  3. Anderson, Jock R., 1974. "Risk Efficiency in the Interpretation of Agricultural Production Research," Review of Marketing and Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 42(03), September.
  4. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  5. Darren Hudson & Keith Coble & Jayson Lusk, 2005. "Consistency of risk premium measures," Agricultural Economics, International Association of Agricultural Economists, vol. 33(1), pages 41-49, 07.
  6. Rocha, Katia & Moreira, Ajax R.B. & Reis, Eustaquio J. & Carvalho, Leonardo, 2006. "The market value of forest concessions in the Brazilian Amazon: a Real Option approach," Forest Policy and Economics, Elsevier, vol. 8(2), pages 149-160, March.
  7. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  8. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  9. Jasmina Behan & Kieran McQuinn & Maurice J. Roche, 2006. "Rural Land Use: Traditional Agriculture or Forestry?," Land Economics, University of Wisconsin Press, vol. 82(1), pages 112-123.
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