The Planting Real Option in Cash Rent Valuation

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.