Impact of Environmental Values on the Breakeven Price of Switchgrass

http://purl.umn.edu/142563

Abstract:
This study estimates the farm-gate breakeven price of switchgrass relative to wheat in Oklahoma. The breakeven price of switchgrass is determined for two situations: when external consequences are ignored and when the environment costs of changes in soil erosion, fertilizer (nitrogen and phosphorous) runoff, and soil organic carbon are considered. Results suggest that the farm-gate breakeven price of switchgrass from the internal cost only perspective is higher than the cost if the value of the selected external consequences is considered. The potential environmental benefits are greater if highly erodible land is switched from annual cropping to switchgrass....

Several studies have estimated the production costs of switchgrass biomass. Mooney et al. (2009) determined the breakeven price of switchgrass for four different locations in Tennessee. They found that the farm-gate breakeven price of switchgrass based on 10-year production contracts was $46/Mg for an average yield of 17.7 Mg/ha and $69/Mg for an average yield of 8.5 Mg/ha. Khanna, Dhungana and Brown (2008) estimated the Illinois farm-gate breakeven price of switchgrass to be $98/Mg with average yields of 9.42 Mg/ha. Epplin et al. (2007) found that under a land-lease contract in Oklahoma, the estimated cost of switchgrass production was $41/Mg under an assumed eight-month harvest window. The cost increased to $58/Mg when the harvest window was restricted to two months per year. In Tennessee, based on farmer bids, the cost of producing switchgrass ranged from $40/Mg to $60/Mg assuming that an average yield of 15.70 Mg/ha could be obtained. McLaughlin and Kszos (2005) estimated U.S. farm-gate prices of switchgrass of $30/Mg, and $44/Mg for average yields of 11.4 Mg/ha, and 9.4 Mg/ha, respectively. These studies did not consider the environmental consequences of producing switchgrass relative to existing land use and also did not place any monetary value on those consequences while estimating the farm-gate breakeven price of switchgrass.

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Several previous studies have estimated the costs associated with the abatement of agricultural runoff including nitrogen and phosphorous; and the off-site damage costs of soil erosion. Gerlach and DeSimone (2005) estimated the abatement costs of nitrogen in Maryland to be $13 kg/ha. Zivojinovich (2010) estimated nitrogen abatement costs of $55 kg/ha. Ribaudo et. al. (2010) estimated a U.S. average nitrogen abatement cost using wetland restoration of $6.37 kg/ha. Rabotyagov et al. (2010) estimated that an abatement cost of $6.67kg/ha would be  required to reduce nitrogen loading by 30% through the reduction in the nitrogen fertilizer application on fields in the upper Mississippi River basin.

Non-point phosphorous abatement costs were estimated by Johansson and Randell (2003), Johansson et al. (2004), Keplinger et al. (2003), and Ancev et al. (2006). Ancev et al. (2006) estimated marginal phosphorous abatement costs equivalency with marginal damage costs from phosphorous pollution for the Eucha-Spavinaw watershed in Oklahoma to range from $14.16 to $70.17 kg/ha. Estimates of off-site damage costs from soil erosion including the nonmonetary recreational values have been produced in several previous studies (Pimentel et al., 1995; Ribaudo, 1986; and Huszer and Piper, 1986).

In this study, the cost of nitrogen abatement is assumed to be $6.37/kg/ha; phosphorous abatement costs is assumed at $25.83/kg/ha; and off-site damage costs of soil erosion is assumed at $3.15/Mg/ha (all these values are inflated by 2012 CPI, 2012). According to Bloomberg new energy finance (Doan, 2012), carbon credits have been auctioned for $12 to $15/Mg CO2 by the California Air Resources Board. Therefore, the value of sequestering soil organic carbon was assumed to be $15/Mg CO2.

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The EPIC model predicts that there will be a significant reduction in nitrogen loss, phosphorous loss, and soil loss if no-till wheat production is replaced by switchgrass production. The site-specific reduction in estimated nitrogen loss ranges from 23.51 kg/ha/year on land class I in Hughes County to 68.54 kg/ha/year on land class III in Hughes County. The estimated reduction in soil loss ranges from 0.40 Mg/ha/year on land class II in Lincoln County to 2.71 Mg/ha/year on land class III in Hughes County. The estimated reduction in phosphorous loss ranges from 0.02 kg/ha/year on land class II in Latimer County to 1.89 kg/ha/year on land class III in McIntosh County. These are the net changes estimated from replacing no-till wheat production with switchgrass production (Table 1). The potential environmental benefits from converting land from no-till wheat to switchgrass is greater on land more prone to erosion.

The production of switchgrass can also sequester SOC. In an average year the site-specific net increase in soil organic carbon derived from replacing no-till wheat with switchgrass ranges from 122.10 kg/ha on land class III in Hughes County to 531.41 kg/ha also in Hughes County on land class I. However, the SOC accumulation are greater on land class I compared to land class II and III, which increase with the plant biomass. The average reduction in soil loss, reduction in nitrogen loss, reduction in phosphorous loss, derived from switchgrass production on land class I is lower compared to the reduction in soil, nitrogen and phosphorous losses on land class II and III (Figure 2). Land class III with slope gradient of 4% in Hughes County, McIntosh County, and Pittsburg County have the greatest environmental benefits derived from replacing no-till wheat production with switchgrass production (Table 1). On the other hand, switchgrass produced on land class I sequesters more carbon than that produced on land class II and class III (Figure 2). Therefore, converting land class III from no-till wheat to switchgrass production is associated with greater reduction in runoff and thus more beneficial to society compared to converting class I, and class II land.

The site-specific farm-gate breakeven price of switchgrass derived from the profit maximizing private landowner’s (internal returns and cost) perspective ranges from $37/Mg (Pottawatomie County land class I) to $66/Mg (Johnston County land class I) (Table 2). Switchgrass produced on land class III of each county has a higher farm-gate breakeven price compare to the switchgrass produced on land class I and land class II, due to lower yields. However, when the selected environmental consequences are valued and considered (on-farm plus environmental benefits) the breakeven price reduces and ranges from $11/Mg (Hughes County land class III) to $39/Mg (Johnston County land class I). The average farm-gate breakeven price of switchgrass derived from private landowners’ perspective increases as the average yields decrease from good quality soil to lower quality soil. However, when selected environmental outcomes are valued then the average farm-gate switchgrass breakeven price decreases from good quality soil to lower quality soil. The selected environmental benefits derived from converting no-till wheat to switchgrass production on lower quality soil offsets the revenue loss due to lower yields on the lower quality soil.

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by Deepayan Debnath 1, Arthur  L. Stoecker 2 and Francis M. Epplin 3

1. Post doctoral research associate, Center for Agricultural and Rural Development, Iowa State University, 2. Associate Professor, Department of Agricultural Economics, Oklahoma State University.

Francis M. Epplin, Professor and Jean & Patsy Neustadt Chair, Department of Agricultural Economics, Oklahoma State University.

Paper presented at the Southern Agricultural Economics Association www.saea.org at the 2013 Annual Meeting, February 2-5, 2013, Orlando, Florida with number 142563.
Date of creation: February 4, 2013
via Research Papers in Economics (REPEC) www.repec.org