Biofuel feedstock contract attributes, substitutability and tradeoffs in sugarcane production for ethanol in the Brazilian Cerrado: A stated choice approach

Abstract

Biofuel expansion may entail elaborate contractual relationships between processors and farmers. Past studies have been limited to explaining choices between single contracts or standard land fixed rental versus crop share contracts. Little is known about how changes in contract attributes affect the probability of farmers' switching between contracts, if given the choice. Contract choice in turn, has implications for biofuel market structure and farmer welfare. Sugarcane expansion into the Brazilian Cerrado provides an optimal setting to investigate farmers’ willingness to enter into contractual arrangements with biofuel processors. The study design involves a hypothetical stated choice experiment conducted with farmers and landowners in the Cerrado. Respondents choose between three contract types (land rental, agricultural partnership, and supply) or to opt-out. A novel two-opt opt model was applied to better model the opt out decision. Data is analyzed using a random parameter mixed logit model. Willingness to pay for contract attributes highlight farmer preference for shorter contracts with higher revenues. Direct and cross-attribute elasticities results provide unique insight into how market competition and farmer welfare can be affected by the substitution between contract options. They show a larger probability of substitution from more autonomous (e.g. supply) to less autonomous (e.g. land rental) contracts. Farmer contract preferences can motivate vertical integration in the emerging biofuel market, potentially resulting in consequences for farmer welfare and long-run sustainability of biofuel production. Our findings provide guidance for countries seeking to expand biofuel production in areas with enrooted agricultural production systems.