A Real Options Approach To Evaluating Agricultural Investments Under Uncertainty: When To Get In And Out Of Sugarcane Production

Abstract

This case study presents an application of the Real Options approach to evaluate a farming enterprise under sugarcane in the lower Herbert district of north Queensland, Australia. It demonstrates how this approach may be used to calculate the value of a farming enterprise using real-world data as well as the critical prices at which it is optimal for the farm operator to exercise managerial options in order to maximise the value of their investment. In practical terms, this information is useful to assist farmers to make optimal decisions regarding whether or not to plant their field crops for the current season and at which price it is worth considering alternative uses for their crop land, such as rotating their crops or converting their land for other industrial uses.