Course: BFM 101 Biofuels Fundamentals

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Bioenergy Crop Budgets
Analyzing Potential Markets

Cost-benefit Analysis in Farm Decision-making
Cost-benefit Analysis in Farm Decision-making

There are many factors for a farmer to consider before dedicating land to bioenergy crop production. Questions worth asking before planting a biofuel crop include:

- Do I have access to a reliable market?
- Do I need to invest in additional equipment or labor to plant, harvest or handle biomass?
- What is my cost of production?
- Which energy crop species fit my situation?
- What are the potential yield and price I need for a biofuel crop to be at least as profitable as my current crop?

Comparative Profitability

Comparative crop profitability is based on partial enterprise budgets of annualized expenses. This provides a performance baseline for cash flow and potential net revenue. When conducting this kind of analysis we have to make some assumptions. It isn’t realistic to know the exact yields, costs and management of every farm. Once we have the models built, assumptions can be challenged and changed to fit each individual farm. The model provides a place to start in making comparisons. Table 1 summarizes the estimated enterprise production costs for continuous corn and five alternative biofuel crops. A copy of these costs can be found at http://bioenergy.msu.edu/bioenergy/economics.

Table 1. Estimated enterprise production costs for continuous corn and five perennial biofuel crops.

Miscanthus spp. production expenses were estimated using $0.34 per rhizome (seed cost). In spring, 2010 rhizomes in the United States cost $2.25 each. In contrast, in Europe at the same time, rhizomes cost $0.05 each. It is expected that the price of rhizomes will decrease significantly as more growers begin to propagate the crop. In spring, 2011, rhizomes cost $0.34 each in the United States.

These perennial biofuel crops are evaluated on a 10-year replanting cycle. The grass crops take 2 to 3 years to produce mature biomass yields, and poplar grows for the full 10 years with only one harvest. During this establishment period, input costs (especially for weed control) are relatively high. We convert all costs over a 10-year period to an annual amortized basis so that profitability can be compared with that of continuous corn. Table 2 presents the per-acre annualized net return to land, labor and management, assuming biomass prices at $30/ton, $60/ton and $90/ton. Shaded cells indicate where annualized expenses exceed annual revenues.

Table 2. Annualized net return to land, labor and management* ($/acre).

The Bottom Line

When adapted to specific growing conditions, the break-even biomass prices and yields offered here provide benchmarks for evaluating the profit potential of converting current cropland to bioenergy crops. Once a market does develop, break-even budgeting is just a first step in evaluating whether to grow these crops. Other important direct costs will include storage and new equipment needs. Contract designs and the risks that they present will also require careful scrutiny before a grower engages in production of perennial bioenergy crops.

For more information, please consult the following references:

- James, L. K., S. M. Swinton, et al. (2010). “Profitability Analysis of Cellulosic Energy Crops Compared with Corn.” Agronomy Journal 102(2): 675-687.
- Tools and information on budgeting for economic analysis of agricultural enterprises: http://www.sustainecon.msu.edu/
- Details about the Biomass Crop Assistance Program: http:// www.fsa.usda.gov/bcap

Resources provided by the eXtension Farm Energy Community of Practice at http://www.extension.org/ag+energy

Bioenergy Crop Budgets
Analyzing Potential Markets