Production and Spatial Distribution of Switchgrass and Miscanthus in the United States under Uncertainty and Sunk Cost
Jerome Dumortier, Nathan S. Kauffman, Dermot J. Hayes
September 2016 [16-WP 568]
Dumortier, J., N. Kauffman, and D.J. Hayes. 2016. "Production and Spatial Distribution of Switchgrass and Miscanthus in the United States under Uncertainty and Sunk Cost." Working paper 16-WP 568. Center for Agricultural and Rural Development, Iowa State University.
The U.S. cellulosic biofuel mandate has not been enforced in recent years. Uncertainty surrounding theenforcement of the mandate in addition to high production and harvest cost have contributed to a delay in the widespread planting of bioenergy crops such as switchgrass and miscanthus. Previous literature has shown that under uncertainty and sunk cost, an investment threshold is further increased due to the value associated from holding the investment option. In this paper, we extend the previous literature by applying a real option switching model to bioenergy crop production. First, we calculate the countylevel break-even price which triggers a switching away from traditional field crops (corn, soybeans, and wheat) to bioenergy crops under various scenarios di_ering by commodity prices, production cost and biomass price expectations. We show that the resulting break-even prices at the county-level can be substantially higher than previously estimated due to the inclusion of the option value. In a second step, we identify counties that are most likely to grow switchgrass or miscanthus by simulating a stochastic biomass price over time. Our results highlight two issues: First, switchgrass or miscanthus are not grown in the Midwest under any scenario. Under low agricultural residue removal rates, biomass crops are mostly grown in the Southeast. Second, under the assumption of a high removal rates, bioenergy crops are not grown anywhere in the U.S. since the cellulosic biofuel mandate can be covered by agricultural residues.