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Abstract

We develop an economic model of cellulosic biofuel production under stover supply uncertainty. The model considers three contract arrangements that vary according to risk-sharing between the processor and farmers and allows us to evaluate the processor’s choices of plant size and contract terms that acquire corn stover feedstock with relatively low variability. We apply the model to corn stover-based ethanol in U.S. crop reporting districts. A greater quantity of biofuel is supplied at lower cost under right-of-access contracts than a delivered quantity contract. However, the processor bears most of the stover production risk with right-of-access contracts. The processor can lay off some of this risk by contracting excess acreage, and if available, by purchasing deficit stover from a spot market. Contracting excess acreage increases the expected biofuel cost but results in lower uncertainty surrounding cellulosic biofuel supply. A biomass spot market provides a source of biomass during low yielding years, but can also create competition for the processor by providing an alternative outlet for farmers to supply stover. Our results also suggest that farmers’ contract preferences are responsive to the basic structure of incentives. As the industry develops and market uncertainties change, rigidity of farmers’ contract preferences are not expected to limit the processor’s adjustment process.

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