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It is generally recognized that cattle ranching in Latin America occupies the major part of the agricultural area, that pasture expansion in favor of cattle ranching is the principal cause of deforestation, and that the conversion of forest into pasture has important environmental consequences. Within the so called 'cattle ranching debate', the expansion of cattle ranching is attributed to the characteristics of cattle ranching, the increased demand for beef products, government policies, land speculation, and resource degradation. Most of the arguments put forward in this debate are, however, qualitative and incomplete in a number of respects. The objective of this study is to obtain an improved understanding of investment and resource use decisions of cattle ranchers in Latin America. To this end, we develop an analytical framework that enables the quantitative appraisal of factors that are considered to have contributed to the expansion of cattle ranching since the 1960's. Illustrative examples are given for cattle ranchers in the Atlantic Zone of Costa Rica.The increase in Latin American beef production is often explained by the increased demand for beef products, though was accompanied by a considerable decrease in beef prices since the mid 1970's. This study demonstrates that investments in land are deflated due to expected decreases in beef prices, though inflated due to expected fluctuations in beef prices. For a risk-neutral cattle rancher in Costa Rica it is shown that the inflationary effect resulting from fluctuations in beef prices outweighs the deflationary effect resulting from expected decreases in beef prices, with subsequent consequences for deforestation.The role of land speculation as a contributor to deforestation is highly debated, and largely comes down to whether or not land prices tend to rise over time. In this study it is shown that variability in land prices alone is a sufficient condition for land speculation and inflated levels of investment in land, with subsequent consequences for deforestation. Furthermore, it is shown that increasing land prices only lead to inflated levels of investment in land and deforestation if the land sales price increases relative to the land purchase price. The opposite occurs when the land purchase as well as the land sales price increase.The role of resource degradation on the expansion of cattle ranching is sparsely and mostly qualitatively dealt with in literature. This study shows that resource degradation provides cattle ranchers the incentive to continuously convert forest into pasture, as forest areas form an important source of fertility for cattle ranchers operating at the agrarian frontier. Fertilizer does not form an economically viable alternative for soil fertility, as current fertilizer prices and application costs per kilogram are far higher than the cost per kilogram of soil fertility obtained through deforestation.The presented farm-economic approach forms a contribution to current cattle ranching modeling approaches, especially in the Latin American context. Contrary to existing cattle ranching models, that invariably assume a fixed farm size and that do not consider uncertainty or resource degradation, the cattle rancher is considered a profit maximizer who uses land as a productive resource as well as an investment object. It is shown that this approach facilitates the analysis of resource use and investment decisions of cattle ranchers, thereby taking farmer objectives, production possibilities and resource constrains, as well as the relevant economic and policy environment into account.

This paper examines the effect of land speculation on investment decisions by cattle ranchers in Latin America, and the subsequent consequences for deforestation under varying levels of land price uncertainty and interest rate subsidy. Based on the Neoclassical investment theory, a stochastic reversible investment model with adjustment costs is developed in which land prices are modeled as a geometric Brownian motion. Analytical results indicate that: 1) the optimal rate of investment is dependent on the price of land at a specific moment in time, 2) the value of the farm increases with the variance in land prices due to speculative returns from land, and 3) the maximum farm size attained over time will be larger, the larger the variance in land prices. For the numerical example of an average cattle rancher in the Atlantic Zone of Costa Rica, it is shown that lower fluctuations in land prices lead to a reduction in these speculative returns, as well as a reduction in the maximum farm size attained over time. This effect is further reinforced in combination with lower interest rate subsidies. Consequently, it can be concluded that variability in land prices alone is a sufficient condition for land speculation and subsequent deforestation of agrarian frontier areas by cattle ranchers in the Atlantic Zone of Costa Rica, and that this deforestation is further promoted by subsidized livestock credit