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

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 as- sumed 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 individ- ual practice changes such as the degree of nitrogen fertilizer reduction impact the propensity to switch.