A stochastic analysis of the decision to produce biomass crops in Ireland

Abstract

There is increasing interest in biomass crops as an alternative farm activity. However farmer concerns about the production and financial risks associated with growing these crops may be impeding the actual rates of adoption. The uncertainty surrounding risky variables such as the costs of production, yield level, price per tonne and opportunity cost of land make it difficult to accurately calculate the returns to biomass crops. Their lengthy production lifespan may only serve to heighten the level of risk that affects key variables. A stochastic budgeting model is used to estimate distributions of returns from willow and miscanthus in Ireland. The opportunity cost of land is accounted for through the inclusion of the foregone returns from selected conventional agricultural activities. The impact on biomass returns of bioremediation is also examined. The Net Present Values (NPVs) of various biomass investment options are simulated to ascertain the full distribution of possible returns. The results of these simulations are then compared using their respective Cumulative Distribution Functions (CDFs) and the investments are ranked using Stochastic Efficiency with Respect to a Function (SERF). While the distributions of investment returns for miscanthus are wider than those of willow, implying greater risk, the distribution of willow returns is predominantly to the left of zero indicating that such an investment has an extremely high probability of generating a negative return. The results from the SERF analysis show that miscanthus generally has higher certainty equivalents (CEs), and therefore farmers would be more likely to invest in miscanthus rather than willow.