Risk and the decision to produce biomass crops: a stochastic analysis

There is increasing interest in biomass crops as an alternative farm enterprise. However, given the relatively low uptake of these crops in Ireland, there is limited information concerning the risk associated with their production and its potential impact on returns. The uncertainty surrounding risky variables such as the costs of production, yield level, price per tonne and opportunity cost of land make it difficult to accurately calculate the returns to biomass crops. Their lengthy production lifespan may only serve to heighten the level of risk that affects key variables. A stochastic budgeting model is used to calculate the returns from willow and miscanthus. The opportunity cost of land is accounted for through the inclusion of the foregone returns from selected conventional agricultural activities. The potential for bioremediation to boost returns is also examined. The NPV of various biomass investment options are simulated to ascertain the full distribution of possible returns. The results of these simulations are then compared using their respective CDF’s and the investments are ranked using Stochastic Efficiency with Respect to a Function (SERF).