Understanding the economic barriers to the adoption of agroforestry: A Real Options analysis

Agroforestry has a potentially important role in helping agriculture address both the climate and biodiversity crises. It provides a means of producing additional marketable goods from agricultural land and enhancing biodiversity at the same time as increasing carbon sequestration and, in silvo-pastural systems, reducing carbon emissions if livestock stocking rates are reduced. However, the uptake of agroforestry in the UK has been limited. This paper adopts Real Options techniques to explore how the decision to adopt agroforestry is influenced by the relative levels of returns from agriculture, forestry and the price of carbon under the scenario where there are financial penalties from livestock Greenhouse Gas (GHG) emissions, financial benefits from carbon sequestration in trees and reversibility in land use decisions. The results are compared to the equivalent findings from a Land Equivalent Value capital budgeting approach to agroforestry adoption. Analysis is based on data from a case study upland livestock farm in Scotland, comparing the impacts of introducing agroforestry into the hill sheep enterprise or the low ground cattle and sheep enterprise. The results suggest that the adoption of agroforestry is far less likely than would be suggested by standard budgeting approaches, especially in more extensive upland enterprises (hill area) where sequestration benefits are low relative to more productive farmland areas (low ground area). Upfront support payments are shown to increase the likelihood of agroforestry adoption. They also have the effect of reducing the rotation length of forestry in such systems.