Evaluating the Land Conversion of Annual Crop Production
to Cultivate Miscanthus –
An Application of the Real Options Approach

Antonius Diekmann, Matthias Haverkamp, Oliver Mußhoff

Published: 28.02.2015  〉 Volume 64 (2015), Number 1, 16-32  〉 Resort: Articles 
Submitted: N. A.   〉 Feedback to authors after first review: N. A.   〉 Accepted: N. A.

ABSTRACT

Several studies applying the classical investment theory have shown that miscanthus (MSC) is an economically advantageous alternative to traditional agricultural land use. Nevertheless, only few farmers cultivate MSC. Therefore, it seems as if farmers do not act according to classical investment theory. In contrast to the classical investment theory, the real options approach (ROA) considers irreversibility and temporal flexibility of an investment as well as uncertainty with regard to investment returns. Consequently, investment triggers indicating when a decision-maker should invest can be shifted upwards in comparison to the classical investment theory. It is therefore often concluded that the ROA can help to explain investment restraint. However, the possibility of disinvestment is often neglected. Thus, there is the risk that calculated investment triggers of the ROA are overestimated. We develop a model by using a combination of a genetic algorithm and stochastic simulation in order to calculate investment triggers in general, and conversion triggers in particular (with and without reconversion possibilities) to the conversion possibility from wheat to MSC following the ROA. Our results show that the conversion triggers of the ROA are higher than those of the classical investment theory. Nevertheless, the neglection of disinvestment (reconversion) possibilities leads to overestimating conversion triggers. However, conversion triggers of the ROA are still higher than those of the classical conversion triggers of both theories decrease. It can be concluded that the ROA has the potential to partially explain farmers' inertia to convert to MSC.
CONTACT AUTHOR
MATTHIAS HAVERKAMP
Georg-August-Universität Göttingen
Fakultät für Agrarwissenschaften,
Department für Agrarökonomie und Rurale Entwicklung,
Arbeitsbereich Landwirtschaftliche Betriebslehre
Platz der Göttinger Sieben 5, 37073 Göttingen
E-Mail: matthias.haverkamp@agr.uni-goettingen.de
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