||The United States has increased its emphasis on energy independence and has developed legislation that promotes the development of alternative energy sources. One potential energy source being studied is the perennial cellulosic feedstock switchgrass. Switchgrass is currently being produced for experimental purposes and not on a commercial scale. The first objective of this research was to evaluate, under risk, the switchgrass contract incentives that could encourage a representative farmer in Monroe County, Tennessee to produce switchgrass. The second objective was to evaluate, under risk, the contract type and terms that would induce a representative farmer to produce switchgrass. Net returns and variability of net returns (risk) for traditional enterprises and switchgrass contracting alternatives on three different soil types were analyzed using stochastic dominance methods.
Corn was found dominant on the more productive Dunmore and Dewey soils and cow-calf production was found dominant on the less productive Dandridge soil for traditional enterprises. Results indicate spot market prices based on switchgrass’ energy equivalency to wholesale gasoline would not encourage production. Results suggest that the UT Biofuels Initiative contract would provide enough revenue and risk protection to encourage production on poorer soils such as Dandridge soil, but additional revenue sources were favorable to encouraging more production based on risk behaviors. Contracts with spot market prices and Biomass Crop Assistance Program (BCAP) provisions required additional revenue from electricity and European carbon credits (ECX) to support production on lower quality soils. A quadratic programming model was used to determine the risk efficient mix of traditional enterprises and switchgrass contracting alternatives on the representative farm.
Results suggest that the base UT contract would induce switchgrass production on the poorer Dandridge soil for risk neutral and risk averse producers. The UT contract with ECX and BCAP with electricity and ECX induced risk averse producers to grow slightly more switchgrass on the Dandridge soil than the UT contract without ECX and BCAP. Expected revenue contracts paying $75/dry ton with ECX and $35/dry ton with BCAP and ECX were beneficial in spurring production on the higher quality Dunmore and Dewey soils.