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

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.