Adoption of Regenerative Farming Practices in Agriculture: A Real Option Analysis

Abstract

We apply a real option analysis to the investment decision of US corn farmers to switch from conventional farming to regenerative farming under a carbon credit system. We establish the existence of significant “wait and see” effects that form a barrier for adoption of regenerative farming practices among farmers. Depending on assumed volatility levels, carbon credit price levels required to incentivize farmers sufficiently to consider switching practices can be twice as high than a traditional cost-benefit analysis would suggest. Farms with more corn acreage experience lower price thresholds to adopt regenerative farming than smaller farms. Finally, we show how individual practice changes such as the degree of nitrogen fertilizer reduction impact the propensity to switch.