Incentivising agroforestry: A Real Options Analysis

Agroforestry has a potentially important role in helping agriculture address both the climate and biodiversity crises. It provides a means of producing additional marketable goods from agricultural land and enhancing biodiversity at the same time as increasing carbon sequestration and, in silvopastural systems, reducing carbon emissions assuming a reduction in livestock stocking rates. However, the uptake of agroforestry in the UK has been limited. This paper adopts Real Options techniques to explore how the decision to adopt agroforestry is influenced by the relative levels of returns from agriculture, forestry and the price of carbon, taking into account the options value of the farmer being able to change or postpone decisions based on current conditions. The results are compared to the equivalent findings from a standard Land Equivalent Value capital budgeting approach to agroforestry adoption. Analysis is based on data on from a case study upland livestock farm in Scotland, comparing the impacts of introducing agroforestry into the hill sheep enterprise or the low ground cattle and sheep enterprise. The policy implications of the analysis are considered including the potential for upfront support payments to further incentivise the adoption decision