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The Planting Real Option in Cash Rent Valuation

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  • Du, Xiaodong
  • Hennessy, David A.

Abstract

After entering into a farmland cash rent contract in the fall, a tenant farmer has flexibility over the spring crop choice and the input application level. Failure to account for these options will bias estimates of what farmers should pay to rent land. Applying Monte Carlo simulation methods, this study investigates the option values for these choices. A Multivariate Gaussian Copula (MGC) is employed to account for dependence among yields and prices. Results show that the average cash rent valuation for the real option approach is $33.6 higher than that for the conventional Net Present Value (NPV) method, in which the input intensity option is $0.9. Crop planting sequence is shown to impact the real option value.

Suggested Citation

  • Du, Xiaodong & Hennessy, David A., 2012. "The Planting Real Option in Cash Rent Valuation," Staff General Research Papers Archive 35021, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:35021
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    References listed on IDEAS

    as
    1. Vedenov, Dmitry V., 2008. "Application of Copulas to Estimation of Joint Crop Yield Distributions," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6264, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Tejeda, Hernan A. & Goodwin, Barry K., 2008. "Modeling Crop prices through a Burr distribution and Analysis of Correlation between Crop Prices and Yields using a Copula method," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6061, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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    Cited by:

    1. Miao, Ruiqing & Khanna, Madhu, 2015. "The Biomass Crop Assistance Program: Critical, Notional, or Distortional Support for Cellulosic Biofuels?," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205818, Agricultural and Applied Economics Association;Western Agricultural Economics Association.
    2. repec:oup:apecpp:v:39:y:2017:i:4:p:584-608. is not listed on IDEAS
    3. repec:eee:eneeco:v:64:y:2017:i:c:p:321-334 is not listed on IDEAS

    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture

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