A Real Options Approach to Valuing Agricultural Resource Assets Under Uncertainty: US Corn Crops

Real options are well known for their usefulness in evaluating non-renewable resources. This study derives an asset valuation model using real options methodology to evaluate renewable agriculture investments. The model calculates the value of an investment project as well as computing the critical strike prices at which it becomes optimal to exercise various options over the asset, including when to invest (commence or recommission operations), divest (temporarily decommission or delay operations) or abandon the asset altogether. The model incorporates the real options approach into a traditional valuation framework to develop an objective means for calculating a risk-adjusted discount rate applicable to traditional discounted cash flow valuations.