Modelling the impact of business risk on the competitiveness of purpose-grown biomass of annual and perennial crops

Abstract

Perennial energy crops compete with conventional annual crops in land-use. The production price of biomass from perennial energy crops is thus derived on the basis of the opportunity cost principle. This means that in deciding whether to grow perennial energy crops, the farmer will demand a price for biomass that will at least provide him with the same economic effect over the lifetime of the plantation in the form of the present value of net cash flows over the lifetime of the energy crop plantation. The level of discounts used to discount the cash flows associated with (annual) conventional crops and perennial energy crops plays an important role in modelling the biomass production price. The business risk associated with the two types of crops is different, with generally higher risk associated with perennial energy crops. This study focuses on developing a methodology to incorporate the risk associated with growing conventional and energy crops and to derive the discount rate for both crop groups. The methodology is demonstrated using the example of the Czech Republic and the price level in 2021. The analysis using Czech data led to a discount rate of 8.5 % for conventional crops and 11.5 % for perennial energy crops. The increase in the discount value for perennial energy crops leads to an increase in the expected biomass sales price by a producer. The sensitivity of the biomass production price level to an increase in the discount rate is lower for Miscanthus plantations compared to short rotation coppice.