Abstract:
A significant portion of the world's agricultural systems currently operate at the extreme end of
the climate conditions that are considered to be suitable for crop and livestock production. Under
these conditions, even moderate climate changes are anticipated to drive substantial
transformational changes to agricultural systems. Transformations require new investments and
infrastructure and can leave some assets stranded. These transformations can be partially or
wholly irreversible and hysteresis effects can make switching difficult and mistakes costly to
reverse. This paper demonstrates how a real options decision framework, Real Options for
Adaptive Decisions (ROADs), can be used to investigate how uncertainties about the climate
affect the adaptation and transformation of agricultural systems. By building upon recent
developments in the mathematics of stochastic optimization, we extend traditional economic
analyses of agricultural investment decisions based on net present values to better represent incomplete knowledge and uncertainty. We report results from a case study in South Australia
that describes the transition pathways farmers might follow as their industries are transformed in
response to climate change.
