Assessing the incentives and financial compensation of agroforestry considering the uncertainty of price and yield

Abstract

Factors such as invasive species, agricultural expansion, and climate change have resulted in global biodiversity loss. When engaging in agricultural expansion, private landowners often choose to plant crops with higher returns than forests provide. However, planting crops leads to the land with low plant coverage, negatively affecting the ecology and reduce biodiversity. Therefore, agroforestry has been one of the recent agricultural policy measures to induce the ecological benefits of farmlands. This study aims to access the payments for ecosystem services (PESs) and economic compensation for agroforestry considering three land use options (i.e., planting rice, corn, and the Taiwan Acacia) under the uncertainty of price and yield with and without support policies. Firstly, the estimated frequency distribution was generated by using the Monte Carlo simulation; then annual income, net present value, annuity, and the PESs at various levels of risk aversion (i.e., strong, moderate, and none) were calculated; and finally, the amounts of economic compensation were assessed. On the basis of Harry Markowitz’s modern portfolio theory, this study evaluated the economic compensation for converting planting a single-type crop to a portfolio of rice, corn, and the Taiwan Acacia; and determined their optimal weights with the minimal risk. The results showed that for farmers with different risk aversion levels, the minimum willingness to accept for economic compensation is approximately $ 657–2,134 ha/yr for rice and $ 667–2,955 ha/yr for corn. The farmers with higher risk aversion are willing to accept lower economic compensation. Regarding the portfolio, farmers with strong risk aversion had incentives to plant trees on less than 15 % of their land, and could receive up to $1,641 as the percentage increased; and farmers with a lower initial investment in the land had more incentives to plant trees.