Uncertainty and Time-to-Build in Bioenergy Crop Production

Jerome Dumortier (), Nathan Kauffman and Dermot Hayes

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Over the last years, the cellulosic biofuel mandate has not been enforced by the U.S. Environmental Protection Agency. The uncertainty surrounding the enforcement of the mandate in addition to high production and harvest cost contributes to farmers’ hesitation to plant bioenergy crops such as switchgrass and miscanthus. Previous literature has shown that under uncertainty and sunk cost, the investment threshold is further increased because of the value associated from holding the investment option. This warrants the use of a real option model. In this paper, we extend previous literature by applying a real option model to bioenergy crop production in the United States. We show the spatial allocation of switchgrass under biomass price and agricultural return uncertainty. The empirical model identifies the counties in the contiguous United States that are most likely to change to switchgrass production. Our preliminary results indicate a very small share of land in switchgrass production even at high biomass prices.

Date: 2015-01-01
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Working Paper: Uncertainty and Time-to-Build in Bioenergy Crop Production (2015)
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