Profitability of Cellulosic Biomass Production in the Northern Great Lakes Region

Abstract

Producing bioenergy feedstocks on non-crop land can largely avoid the food price feedbacks of energy biomass production on cropland. The U.S. northern tier grassland-to-forest ecotone offers large areas of marginal land that is not currently cropped. In this ecological transition zone, the relative profitability of grassy vs. woody sources of energy biomass is little studied. This paper reports an exploratory investment analysis of cellulosic biomass production in the northern Great Lakes region. It compares two short-rotation tree crops, willow (Salix sachalinensis F. Schmidt)and hybrid poplar (Populus nigra L. X P. maximowiczii A. Henry), and switchgrass (Panicum virgatum L.) (a native prairie grass) to conventional mixed hay. Because biomass markets are not yet well developed, this study calculates threshold prices and yields at which biomass crops become at least as profitable as mixed grass hay. At 2010-2012 prices and available production technologies, none of the cellulosic crops is competitive with the hay baseline system. The breakeven price of energy biomass ranges from $90-100 per oven-dry Mg -1 for all three energy crops. Breakeven yields are much more variable, due to the high cost of harvesting woody biomass. At 2010-2012 prices, necessary biomass yield increases range from 3.5-fold for switchgrass and willow to over 25-fold for poplar. While the ratio of input costs to revenue remains relatively constant between the northern and southern Great Lakes regions, the opportunity cost of active cropland in the southern zone is much higher, implying an economic comparative advantage for marginal land of the northern tier of the Great Lakes region.

SRWC bioenergy productivity and economic feasibility on marginal lands

“…To avoid using croplands for energy production and damaging forests and wetlands due to fast growing wood pellet production (Guo et al, 2015), worldwide efforts are underway to evaluate the use of marginal lands for bioenergy production (Gopalakrishnan et al, 2011;Fritz et al, 2012;Zumkehr and Campbell, 2013;Kang et al, 2013;Kells and Swinton, 2014;Lewis and Kelly, 2014;Stoof et al, 2014). The definition of marginal land varies (Kang et al, 2013) and has been used subjectively (Richards et al, 2014) but broadly describes lands not under cultivation due to low agro-economic values for major agricultural crops (Gopalakrishnan et al, 2011).…”

“…The prices of the woody bioenergy products is more critical to economic feasibility than productivity (Schweier and Becker, 2013). Currently, profitability of Populus and Salix cannot compete with profits from traditional grass crops (hay) on marginal lands since woody bioenergy markets are not established (Kells and Swinton, 2014). For the southeastern U.S., markets already exist for traditional wood product uses, and the wood pellet market is established and growing (RISI, 2013).…”

Investment risk in bioenergy crops

“…Comparative breakeven budgeting is a simple, widely used method that identifies the minimum price or yield needed for revenues to cover costs (Dillon, ). The version used here is adapted for investment analysis using the NPV method, so it incorporates discounting of future cash flows to adjust all values to initial year ‘present’ values (Kells & Swinton, ). To calculate a comparative breakeven price, crop yield and opportunity of not adopting the best alternative crop must be known; to calculate a breakeven yield, crop price and opportunity cost must be known.…”

“…Net returns from corn are assumed to come from harvesting all grain plus 38% of stover (Brechbill & Tyner, ), a level of stover harvest consistent with maintaining soil organic matter. Following Kells & Swinton (), the comparative breakeven price of a cellulosic perennial crop to replace corn is as follows: where BE pr is the comparative breakeven price, NPV D is the expected NPV of the ‘defender’ crop (corn), c t the expected cost of producing the new biomass crop, is the expected biomass yield achieved by the ‘challenger’ bioenergy crop, is the expected biomass yield of the defender crop, and r and T as previously defined. The denominator represents the biomass yield gain of the challenger crop over the defender cropping system and implies that a new bioenergy crop breaks even in the comparative sense only if its biomass yield exceeds that of corn stover.…”

“…A critical factor in adopting new crops, such as bioenergy crops, is their profitability relative to that of existing cropping systems. Most farmers will allocate land to bioenergy crops only if the economic returns from these crops are at least equal to returns from the most profitable conventional alternatives (Jain et al ., ; James et al ., ; Kells & Swinton, ). The adoption of new agricultural technologies is also affected by risk (Ghadim et al ., ; Marra et al ., ; Chavas, et al ., ).…”