This paper applies option-pricing theory to evaluate an investment decision by farmers regarding their
potential conversion to organic agriculture. Because the adoption of organic-farming techniques involves risk and
uncertainty, there is a need for well-designed policy schemes (including possible incentives and subsidies for
farmers). However, conventional accounting methods for analysis of such investment decisions-such as the
commonly used net present value (NPV) method-have limitations under uncertain economic conditions. This study
demonstrates that the framework of real-options analysis is an appropriate form of analysis to examine the question
of investment profitability under risk and uncertainty, and to assess the role of economic subsidies in policies
designed to encourage organic farming.
