The Planting Real Option in Cash Rent Valuation

Xiaodong Du () and David Hennessy

Staff General Research Papers Archive from Iowa State University, Department of Economics

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.

JEL-codes: G1 Q1 (search for similar items in EconPapers)
Date: 2012-03-29
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Citations: View citations in EconPapers (6)

Published in Applied Economics, March 2012, vol. 44 no. 6, pp. 765-776

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Related works:
Journal Article: The planting real option in cash rent valuation (2012)
Working Paper: Planting Real Option in Cash Rent Valuation, The (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:35021

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