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Biomass feedstock contracts: Role of land quality and yield variability in near term feasibility

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  • Okwo, Adaora
  • Thomas, Valerie M.

Abstract

In the absence of an infrastructure for the harvest, storage and purchase of cellulosic biomass, contracting is an important mechanism through which biorefineries can ensure adequate feedstock supply. We develop an optimization model to assess the economic potential of dedicated energy crops when profit-maximizing farmers allocate croplands of varying quality toward biomass in response to multi-year contracts. We evaluate the economic competitiveness of perennial grasses with traditional commodity crops, in a case study of switchgrass production in Tennessee. Assuming short-term contracts, we consider the importance of payment structure, land quality, energy crop yield and projected commodity crop returns on a farmer's decision to accept a contract for biomass production. We find that a wholesale contract, in which the farmer is guaranteed a price per unit biomass, is most effective on the highest quality of land, while a contract in which the farmer is guaranteed a price per acre is most effective on lower quality land. From the biorefinery perspective, a wholesale contract is most effective for short-term contracts while an acreage contract is most effective for long-term contracts. Breakeven pricing will only secure feedstock from farmers who produce commodity crops with unfavorable price outlooks on lower quality land; therefore, the contract price must include a premium in order to compete for space in the crop mix. The yield profile of energy crops has a significant effect on the terms at which short-term contracts will be accepted and land allocated toward feedstock production. The extent to which energy crop yields observed in field trials can be maintained at commercial scale also has a substantial effect on the scale at which farmers would be willing to participate in energy crop production.

Suggested Citation

  • Okwo, Adaora & Thomas, Valerie M., 2014. "Biomass feedstock contracts: Role of land quality and yield variability in near term feasibility," Energy Economics, Elsevier, vol. 42(C), pages 67-80.
  • Handle: RePEc:eee:eneeco:v:42:y:2014:i:c:p:67-80
    DOI: 10.1016/j.eneco.2013.11.004
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    References listed on IDEAS

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    Cited by:

    1. Rosburg, Alicia & Miranowski, John & McFadden, Jonathan, 2016. "Mitigating Feedstock Supply Risk in Corn Stover Biofuel Production," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235875, Agricultural and Applied Economics Association.
    2. López-Díaz, Dulce Celeste & Lira-Barragán, Luis Fernando & Rubio-Castro, Eusiel & Ponce-Ortega, José María & El-Halwagi, Mahmoud M., 2017. "Optimal location of biorefineries considering sustainable integration with the environment," Renewable Energy, Elsevier, vol. 100(C), pages 65-77.
    3. repec:gam:jsusta:v:10:y:2018:i:12:p:4821-:d:191216 is not listed on IDEAS
    4. Gouzaye, Amadou & Epplin, Francis M., 2016. "Land requirements, feedstock haul distance, and expected profit response to land use restrictions for switchgrass production," Energy Economics, Elsevier, vol. 58(C), pages 59-66.

    More about this item

    Keywords

    Agricultural contracting; Next-generation biofuels; Land use; Dedicated energy crops; Switchgrass;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • Q24 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Land
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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