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

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. Results of the case study indicate that the value of the 99.25 ha cane enterprise in 2011-12 sugar pric-es was $1,380,000, which amounts to $13,904 per hectare ($5,629 per acre), and the average value of the enterprise over the period 1998-99 to 2011-12 was $762,500, which amounts to $7,683 per hec-tare ($3,110 per acre). The critical price at which to cease farming operations is shown to be $15.75 per tonne of cane (IPS sugar price of ~$188/t), while the price at which to recommence operations is $24.14 per tonne of cane (IPS sugar price of ~ $286/t). A significant finding from the case study is that the critical price to abandon sugarcane production on a previously decommissioned cane farm turned out to predict remarkably well a period of low sugar prices during which sugarcane growers within neighbouring districts actually exercised their option to exit the industry and the land was converted to managed-investment forestry schemes.