Adoption of switchgrass cultivation for biofuel under uncertainty

A discrete-time modeling approach

Pralhad Burli, Eric Forgoston, Pankaj Lal, Lora Billings, Bernabas Wolde

Research output: Contribution to journalArticleResearchpeer-review

Abstract

Production of biofuels from cellulosic sources, such as switchgrass, is being encouraged through mandates, incentives, and subsidies. However, uncertainty in future prices coupled with large establishment costs often inhibit their cultivation. Owing to their inability to incorporate uncertainty and dynamic decision-making, standard discounted cash flow techniques are ineffective for analyzing such investments. We formulate a discrete-time binomial framework to model output prices, allowing us to incorporate price uncertainty, stand age, and variable crop yields into the analytical framework. We analyze the feasibility of investments in switchgrass cultivation under varying price transition paths, evaluate the relationship between risk and profitability, and estimate the value of flexible decision-making options wherein the farmer can alter cultivation choices. We find that switchgrass cultivation is only 32% likely to be profitable in the base model and infer that on-farm management could play an important role in entry and exit decisions. We also find that subsidies are important for project viability and policymakers could consider incorporating payments for ecosystem services to encourage adoption.

Original languageEnglish
Pages (from-to)107-115
Number of pages9
JournalBiomass and Bioenergy
Volume105
DOIs
StatePublished - 1 Jan 2017

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Panicum virgatum
Biofuels
biofuels
biofuel
uncertainty
subsidies
modeling
decision making
Decision making
farm management
analytical framework
profitability
ecosystem service
crop yield
ecosystem services
Ecosystems
Farms
Crops
incentive
Profitability

Keywords

  • Bioenergy
  • Cellulosic
  • Profitability
  • Switchgrass
  • Uncertainty

Cite this

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title = "Adoption of switchgrass cultivation for biofuel under uncertainty: A discrete-time modeling approach",
abstract = "Production of biofuels from cellulosic sources, such as switchgrass, is being encouraged through mandates, incentives, and subsidies. However, uncertainty in future prices coupled with large establishment costs often inhibit their cultivation. Owing to their inability to incorporate uncertainty and dynamic decision-making, standard discounted cash flow techniques are ineffective for analyzing such investments. We formulate a discrete-time binomial framework to model output prices, allowing us to incorporate price uncertainty, stand age, and variable crop yields into the analytical framework. We analyze the feasibility of investments in switchgrass cultivation under varying price transition paths, evaluate the relationship between risk and profitability, and estimate the value of flexible decision-making options wherein the farmer can alter cultivation choices. We find that switchgrass cultivation is only 32{\%} likely to be profitable in the base model and infer that on-farm management could play an important role in entry and exit decisions. We also find that subsidies are important for project viability and policymakers could consider incorporating payments for ecosystem services to encourage adoption.",
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Adoption of switchgrass cultivation for biofuel under uncertainty : A discrete-time modeling approach. / Burli, Pralhad; Forgoston, Eric; Lal, Pankaj; Billings, Lora; Wolde, Bernabas.

In: Biomass and Bioenergy, Vol. 105, 01.01.2017, p. 107-115.

Research output: Contribution to journalArticleResearchpeer-review

TY - JOUR

T1 - Adoption of switchgrass cultivation for biofuel under uncertainty

T2 - A discrete-time modeling approach

AU - Burli, Pralhad

AU - Forgoston, Eric

AU - Lal, Pankaj

AU - Billings, Lora

AU - Wolde, Bernabas

PY - 2017/1/1

Y1 - 2017/1/1

N2 - Production of biofuels from cellulosic sources, such as switchgrass, is being encouraged through mandates, incentives, and subsidies. However, uncertainty in future prices coupled with large establishment costs often inhibit their cultivation. Owing to their inability to incorporate uncertainty and dynamic decision-making, standard discounted cash flow techniques are ineffective for analyzing such investments. We formulate a discrete-time binomial framework to model output prices, allowing us to incorporate price uncertainty, stand age, and variable crop yields into the analytical framework. We analyze the feasibility of investments in switchgrass cultivation under varying price transition paths, evaluate the relationship between risk and profitability, and estimate the value of flexible decision-making options wherein the farmer can alter cultivation choices. We find that switchgrass cultivation is only 32% likely to be profitable in the base model and infer that on-farm management could play an important role in entry and exit decisions. We also find that subsidies are important for project viability and policymakers could consider incorporating payments for ecosystem services to encourage adoption.

AB - Production of biofuels from cellulosic sources, such as switchgrass, is being encouraged through mandates, incentives, and subsidies. However, uncertainty in future prices coupled with large establishment costs often inhibit their cultivation. Owing to their inability to incorporate uncertainty and dynamic decision-making, standard discounted cash flow techniques are ineffective for analyzing such investments. We formulate a discrete-time binomial framework to model output prices, allowing us to incorporate price uncertainty, stand age, and variable crop yields into the analytical framework. We analyze the feasibility of investments in switchgrass cultivation under varying price transition paths, evaluate the relationship between risk and profitability, and estimate the value of flexible decision-making options wherein the farmer can alter cultivation choices. We find that switchgrass cultivation is only 32% likely to be profitable in the base model and infer that on-farm management could play an important role in entry and exit decisions. We also find that subsidies are important for project viability and policymakers could consider incorporating payments for ecosystem services to encourage adoption.

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