Course: BFM 101 Biofuels Fundamentals

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Cost-benefit Analysis in Farm Decision-making

Bioenergy Crop Budgets
Bioenergy Crop Budgets

Raising crops for bioenergy use incurs many of the same production costs as growing crops for feed or food: seeds or plants, pest control chemicals, fertilizer, fuel, labor and machine use and upkeep. However, farmers wishing to grow crops for the bioenergy market must also consider the costs of dry-down, baling and storage of biomass.

Annualized Present Value

The type of crop grown will affect the yearly cost of production and rate of return. Comparing annual with perennial crops can be tricky. Estimating the cost of production for annual crops like corn is relatively easy. It is more difficult for perennial crops, because you have to amortize the establishment costs over the life of the stand. Most of the costs for perennial crops are incurred up-front and are not recouped until later in the life of the stand. Additional consideration should be given to the timing of cash flows. For example, hybrid poplar trees are harvested every 5-7 years. That means paying establishment and maintenance costs for a crop you will not see any income from for at least 5 years.

Land, Labor and Management

The budgets presented here only account for cash costs for purchased inputs. These are typical expenses you would expect to pay each year for normal crop production such as seed, fertilizer, pest control, fuel and lubrication, and drying. Before making any decisions about producing a new bioenergy crop you need to include the “overhead” expenses like depreciation, interest, and insurance on machinery and buildings, as well as land costs and real estate taxes. There must be enough income to cover these expenses as well. These expenses can be more difficult to calculate and vary widely from one farm to another. The revenue remaining after cash input and overhead costs are subtracted is the return that is available for labor and management.

Time Value of Money

When making any investment, you will want to choose the one that has the greatest return at the end of the investment.  For example, a CD (certificate of deposit) will yield a specified amount of interest over the life of the CD.  You would choose a CD with the highest rate of return.  This is time value of money – an investment today should be worth more at the end of the investment period.  The same is true in the establishment of a bioenergy crop, a farmer will want to assure that there is a gain on the investment that equals, at a minimum, the rate of inflation. Present value – added for the life of the bioenergy crop – is a way to calculate the inflation value of money. For example, switchgrass is expected to last for 10 years. The present value of my initial investment can be calculated for that 10-year period, and then divided by the 10-year period to determine annual cost (annualized present value).  This is the number you would use to compare various perennial bioenergy crops with annual crops.

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

Cost-benefit Analysis in Farm Decision-making