Sustainable Agriculture Balancing Build-To-Suit Contract and Carbon Prices: An Application To "Green Cattle" and Farming In Brazil

This paper demonstrates the effectiveness of utilizing the real options approach in analyzing investments in "green cattle". The primary objectives include discussing real options theory and illustrating its application in modeling uncertainty and managerial flexibility in a collaborative relationship between a small farmer and a high-emission industry company aiming to reduce emissions through a build-to-suit contract of the land and trading carbon credits produced in the land. Additionally, the paper demonstrates the calculation of specific options, focusing on this contractual arrangement. The analysis explores two management options: expanding business activity and delaying investment. Considering the stochastic nature of future cattle and carbon credit market prices, the Monte Carlo simulations unveil a notable inherent risk, contrasting with conventional analyses that may imply profitability. The real options approach indicates a significant value when an option is exercised, with the level of uncertainty in the expanded model dropping 71%, demonstrating that the option holds substantial value. Sensitivity analysis for input option parameters further emphasizes the limitations of the traditional model to adequately address management's ability to adapt to economic shocks, risks, and uncertainties in investments involving build-to-suit, carbon credit, and green cattle.