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Abstract
There is growing interest in biomass from perennial grasses (e.g. switchgrass and miscanthus)
for bioenergy production because of their high yields, their potential to be grown on low quality
land with minimal competition with food crops and, and their ability to achieve significant
reduction in greenhouse gas (GHG) emissions relative to fossil fuels and corn ethanol. In order to
guarantee the steady supply of biomass feedstock for mandated biofuel production, a crucial
question confronting the biorefinery and policy makers is how to coordinate a market for
biomass production. This paper addresses this issue by analyzing the potential design of biomass
production contracts between biomass growers and biorefineries to promote the development of
the industry. We approach the issue from both the landowner and biorefinery perspectives. We
analyze and examine how the optimal contract design depends on both the farmers’ and
biorefinery’s characteristics. We also contribute to the existing literature examining the role of
risks in contract design by how the risks from multiple sources interact and jointly determine the
optimal contract terms. Our preliminary findings suggest that farmers’ land allocation decisions
depend on the joint distribution of their individual land quality and risk preferences. For a given
level of risk aversion, farmers with low land quality are more willing to sign contracts with
biorefineries to produce bioenergy crops due to the low opportunity cost of foregoing row crop
production. For a given land quality, the farmer’s choice of biomass contract design varies with
their level of risk aversion. More risk averse farmers prefer the fixed lease design to avoid
exposure to yield and price risk. As the level of risk aversion is reduced, preferences shift
towards the fixed price and profit sharing contract designs since they can gain higher payoff in
exchange for the higher risks they are bearing. For reasonable ranges of land quality levels and
heterogeneity of risk aversion levels, the optimal solution for the biorefinery tends to include
offering of multiple contract designs to producers in the region. The biorefinery can induce
highest participation and obtain highest profit in a region with higher concentrations of low land
quality. Furthermore, greater profits can be obtained by establishing a processing plant in an area
where farmers have low risk aversion.