A Real Options Method for Estimating the Adoption Potential of Forestry and Agroforestry Systems on Private Lands in the Lower Mississippi Alluvial Valley, USA
Abstract
The Lower Mississippi River Alluvial Valley (LMAV), once was the largest forested bottom-land area in the continental United States, but has undergone widespread loss of forest through conversion to farmland. Restoration of forest functions and values has been a key conservation goal in the LMAV since the 1970s. This study utilizes a partial differential real options method to determine the optimal switching price and return thresholds between agriculture and forestry and agriculture and agroforestry systems for specific marginal land types in the LMAV. A good land manager will value practices that give him/her the option to change or postpone decisions in order to adapt to changing conditions. Real options techniques value flexibility under variable conditions, known as option value, whereas traditional cost-benefit methods (NPV, SEV, etc.) assume deterministic returns and that farmers’ decisions will not change in the future. Loss of option value incurred by switching from agriculture to forestry or agroforestry may partially explain adoption rates that are lower than predicted by cost -benefit methods. The price conditions under which farmers are likely to adopt forestry/agroforestry are calculated and compared to empirical evidence from government forestry incentive programs. Agroforestry and forestry systems were shown have potential for adoption on the most marginal lands in the LMAV, but are not likely to be adopted on soils of average productivity. Easement payments or incentive payment programs such as payments for ecosystem services would be needed to encourage adoption.