Sign for Profitability of Converting to Biofuel Crops

Recent changes in energy markets and policy have created expectations of rising demand for biofuel crops. The 2007-08 run-up of oil prices pulled up demand for ethanol (and with it corn grain) to record levels. The 2007 Energy Independence and Security Act mandates progressive increases in the blending of ethanol and advanced biofuels into the national transportation fuel supply up to a level of 36 billion gallons annually by the year 2022. In Michigan, the 2008 Renewable Portfolio Standard requires that 10 percent of the state’s electrical energy supply come from renewable sources by 2015. Eligible renewable energy sources include biomass co-fired with coal. The Obama administration’s commitment late in 2009 to limit future U.S. greenhouse gas emissions can be expected to add further to demand for renewable fuels.

Dennis holding a tallgrass biofuel crop.

Although prospects for future biofuel demand look bright, farmers considering conversion of land to biofuel crop production face many uncertainties. Markets for biofuel crops are absent or just getting started. Price volatility patterns are unclear, but they are likely to differ from those in current crop commodity markets because of links to fossil fuel markets. Most of the cellulosic bioenergy crops are not commonly grown, so it will take time for growers to learn best agronomic practices and for plant breeders to develop good varieties for bioenergy yield. Also, most of these crops are perennials that take 2 or more years to reach mature yield. So crop growers face investment and cash flow risks different from those for annual crops. Many analysts expect to see new contracts designed to help producers and buyers of biofuel feedstocks manage these risks.

The purpose of this bulletin is to explore the price and yield conditions under which alternative cellulosic bioenergy crops could become profitable enough to replace existing crops. It provides a framework for evaluating alternative crops that are potential biomass feedstocks for either co-firing or cellulosic ethanol production. Residues from the production of corn grain – cobs and stalks – make corn a promising candidate. Tallgrass crops such as switchgrass and miscanthus also show potential as high-volume production systems. Mixed stands of native grasses and restored prairies can provide significant quantities of biomass while offering improved wildlife habitat and increased biodiversity. Finally, hybrid poplar may produce comparable yields to native grasses and could be suitable for areas that will not support profitable grass production.

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?

This bulletin focuses on the last question and examines three measures of profitability. The first is a direct comparison of current crop profitability, based on partial enterprise budgets of annualized expenses. This provides a performance baseline for cash flow and potential net revenue. The second method is a comparative break-even price analysis that incorporates the opportunity cost of giving up earnings from continuous corn into the profitability calculation on switching to other biomass crops. This analysis calculates the price needed for a dedicated biomass crop to be as profitable as growing continuous corn and harvesting both grain and 38 percent of stover. Finally, a comparative break-even yield analysis shows the biomass yield level necessary to make a biofuel crop equally profitable to continuous corn.