Is short rotation coppice economically interesting? An application to Germany

Abstract

Short rotation coppice (SRC) is, from a comparative static point of view, an interesting economic alternative to traditional agricultural land use. Nevertheless, farmers often do not integrate SRC into their land use. Due to the fact that the conversion to SRC can be seen as an investment, it seems as though farmers do not act according to the classical investment theory. A relatively new approach which could help to explain farmers’ inertia is the real options approach (ROA). Compared to the classical investment theory, the investment triggers in general, and conversion triggers in particular, of the ROA are shifted upwards. We want to know if the ROA could be an explanatory approach for farmers’ inertia to integrate SRC into their land use. To do this we develop a model to calculate the conversion triggers at which farmers should switch from rye production to SRC. The results show that the conversion triggers calculated according to the ROA are higher than those of the classical investment theory. In addition, it is shown that risk-averse farmers should convert earlier from rye production to SRC than risk-neutral farmers. It can be concluded that there is an explanatory potential of the ROA for famers’ inertia concerning the conversion to SRC.