Conservation Tillage Systems in the Southeast

Switchgrass Production Systems

Overview

In this section, an economic framework is presented for deciding whether to plant switchgrass as a dedicated energy crop. Emerging issues in the establishment, production, harvest and handling of switchgrass are also discussed. Finally, an overview of policy incentives designed to encourage switchgrass plantings on private landholdings is presented.

Farm managers are faced with four fundamental economic questions when determining what enterprises to pursue on their farms:

  • What products to produce?
  • What production methods to use?
  • With what resources?
  • For what markets?

For a dedicated energy crop to be considered a profitable enterprise, the net return must be high enough to bid away land from competing enterprises. Key factors in the decision-making process include biomass yield, price paid for the biomass, government incentives, production and delivery costs, and resource availability such as labor, money, land and other necessary resources.

A simple decision framework based on net returns highlights multiple channels through which switchgrass could fit into a profitable enterprise mix. For instance, net returns may increase through increased yields, increased biomass prices, decreased input costs or by using resources when they are normally dormant. Other opportunities may include developing markets for co-products such as the seed or hunting habitat, or technological efficiency gains, meaning producing the same amount at a lower cost.

Because markets for biomass are currently absent in much of the United States, most economic analyses of switchgrass production have reported findings on a unit cost basis. For example, findings are reported on a cost per ton or “breakeven price” rather than on net return or profitability [29, 45, 54, 56]. Rather than ask, “Does switchgrass currently bid land away from competing enterprises, and, if so, how much?” these studies answer the question, “What price would producers need to receive for switchgrass to start bidding land away from competing enterprises?”

An important issue in cost-of-production and breakeven-analysis studies is the assumed productive lifespan of a switchgrass stand. The production of perennial, dedicated energy crops results in annual yields and production costs. Switchgrass yields typically reach full potential during the third year of production [51]. Costs are typically higher and yields lower during the establishment phase, which is the first two years of production.

The assumed economic lifespan is important as it reflects the period over which investments may be recovered. Many studies assume a 10-year stand lifespan, which represents the suggested productive lifespan from an agronomic and economic perspective. However, the period might be shorter as a result of contracts or technology development. Under a three- or five-year production contract, a producer will want to recover all of their production costs within that contract period. The shorter the contract period, the higher the breakeven price. Genetic improvements to switchgrass will also occur over time. Each year, the economic impact of adopting a new variety needs to be assessed. If a new variety is adopted, the existing stand will likely be destroyed, reducing the stand life.

Contracting

Contracting is important when developing a feedstock for biofuel production. Contracts help outline the price paid to the farmer for biomass and helps set quality control standards and quantity expectations. Several studies have considered the best type, length and price for a contract between producers and a biorefinery. A study by Larson et al. evaluated four types of contracts that could be used to encourage biomass production [37]. The study included a spot-market contract, a standard marketing contract, an acreage contract and a gross-revenue contract. In a spot-market contract, the price received for the biomass is based on the equivalent cost of gasoline at the time the biomass is delivered. The standard marketing contract has a set price for a certain amount of feedstock, with penalties for underages. Excess biomass is sold at the spot-market price. An acreage contract has a guaranteed annual price for the biomass produced each year on the contracted acreage. The gross-revenue contract provides a guaranteed amount of money per acre based on expected yields over the life of the contract. Larson et al. found that a contract price above the spot-market price would be needed to entice farmers to produce biomass [37]. Gross-revenue contracts induced the greatest amount of biomass production when compared to the other contract types. It was also found that a provision to help offset establishment costs was effective in enticing farmers to produce large amounts of biomass at lower contract prices.

Clark et al. [10] hosted a competitive bidding auction for middle Tennessee farmers as part of a larger project to determine willingness and ability of Tennessee farmers to grow switchgrass. Farmers were instructed to bid a minimum and maximum acreage allotment for switchgrass production. They were also asked for a base bid in dollars per acre plus an incentive payment in dollars per dry ton of switchgrass produced, assuming an average yield of 5.5 tons per acre. Eleven bids were received and five were accepted. Base bids did not differ much, with most being in the $200–$250 per acre range. Seven of the 11 incentive bids were in the $20–$30 per ton range. The minimum and maximum acres bid were eight and 100 acres, respectively. The switchgrass was planted, harvested and transported to Gadsten, Ala., for generating renewable electricity. Following this experiment, another was done in East Tennessee.

Contract length is negotiated between the biorefinery and the farmer. A survey performed by Menard et al. of 7,000 farmers in the Southeast yielded 1,300 responses [44]. They discovered that farmers preferred an average contract length of 6.5 years to produce switchgrass. The most frequent response given by farmers was for a five-year contract followed by 10 years and three years [44]. Most biorefineries are going to want long-term contracts to help guarantee that they have a sufficient supply of biomass year round and in the future. Contract length is likely to be affected by other factors, including a farmer’s lease and rental arrangement with the landowner. The average productive stand life, estimated to be around 10 years, will also affect the contract length but could be shortened due to stand obsolescence resulting from improved varieties. Most contracts will likely fall into the five- to seven-year range [5], which seems to be an adequate length for both the farmer and the biorefinery.

The University of Tennessee (UT) and Genera Energy have contracted more than 5,000 acres of switchgrass in East Tennessee. Two different three-year contracts were used. The first contract paid producers a flat price of $450 per acre each year. The contract currently used by UT and Genera Energy offers a flat price per acre for the first year of production. Each year thereafter, farmers are paid a sliding percentage of a flat fee and a per ton price as the switchgrass reaches its yield potential. The prices received by the farmer under this contract are [9]:

Year one: $450 per acre plus $0 per ton

Year two: $250 per acre plus $40 per ton

Year three: $150 per acre plus $50 per ton

UT and Genera Energy also provide the farmer with seed and professional expertise.

Emerging Issues in Switchgrass Production

Establishment

Switchgrass establishment costs typically include land preparation, seed, planting, weed control and fertilizer application. Seed costs have increased in recent years due to increased demand. They are likely to remain high as seed production becomes commercialized and improved varieties are introduced.

Previous research has suggested that switchgrass yields are unresponsive to increased seeding rates [45, 61, 73]. This finding is likely explained by increased root growth or above-ground growth in stands with low initial plant densities, such that the potential yield is realized. The combination of high seed costs and limited yield response to increased seeding rates will likely result in producers reducing seeding rates below the 6–10 pounds per acre of pure live seed currently recommended in university enterprise budgets. In Mooney et al. [45], using data from a Milan, Tenn., experiment, a maximum cumulative yield over three years of 14.2 dry tons per acre was achieved at a seeding rate of 5.7 pounds per acre of pure live seed with an associated net return of $478 per acre. However, a reduction in the seeding rate from 5.7–3.8 pounds per acre decreased yields by 0.3 dry tons per acre but increased net returns by $23 per acre. The amount of seed to plant when establishing switchgrass is open for debate. In the experiment described above, reducing the seeding rate decreased cost while sacrificing little yield. However, establishment of the stand is critical and there is little information on the probability of stand failure as the seeding rate decreases.

If a switchgrass stand needs to be re-established in the second year of production due to stand failure, production costs increase and the revenue stream is delayed. Little data exists on stand failure rates from large plantings on multiple fields. In establishing 92 acres of switchgrass in middle Tennessee in 2005, 12 percent of the acres required replanting. The stand failure resulted from several factors including weed competition, seed planting depth and chemical application on adjacent fields. Additional experience in Tennessee has been gained through the Tennessee Biofuels Initiative, where planting 720 acres in a drought year required approximately 25 percent of acres to be reseeded. From an economic perspective, this may become an issue for three- to five-year contracts where the period for cost recovery is shorter [43].

Weeds are primarily a factor during the establishment phase. In the first year following planting, most switchgrass growth occurs in the root structure. Stands generally look poor and weed infestations may appear high. Annual grass weeds are potentially more problematic than broadleaf weeds because they more easily canopy the emerging switchgrass seedlings and because recommended chemical controls may damage the switchgrass. However, the economics of weed control in switchgrass are poorly understood. In multiple field experiments conducted by the University of Tennessee Switchgrass Project, strong stands emerged by the third year even where severe weed infestations occurred during the first two years and weed control was absent [43]. It is yet to be determined whether yield losses avoided with chemical weed control during establishment are sufficient to cover the expense of herbicide applications.

Annual Maintenance

The annual maintenance of switchgrass stands typically includes fertilizer application, chemical weed control during years one and two, and harvest costs. Fertilizer applications are an important cost and environmental consideration in switchgrass production. Nitrogen fertilizer is the primary nutrient needed for switchgrass [51]. The dynamics of switchgrass yield response to nitrogen are poorly understood. In a report summarizing 10 years of fertility research, it was observed that switchgrass plots harvested once a year and receiving high nitrogen rates had lower stand densities when compared to single-harvested plots with lower nitrogen rates [52]. The report concludes that the “application of nitrogen to achieve maximum short-term yields may greatly reduce long-term yields . . . and recommend around 45 pounds of nitrogen per acre to achieve good stands with long-term yield potential.” Based on this observation, it is possible that economically optimal nitrogen application rates may change depending on the length of the production contract.

Current recommended phosphorus and potassium application rates differ widely. In Tennessee, recommendations are based on data contained in Parrish et al. [52] where phosphorus and potassium applications are not recommended unless soil levels are low. Even when no phosphorus or potassium is applied, it may be appropriate to include an opportunity cost for the phosphorus and potassium removed in the harvested biomass. Possible approaches include an annual cost based on removal rates or an amortized annual cost representing maintenance applications every few years. Another option is to include no costs during production but charge a fixed cost in the final year of production for building fertility levels back to initial levels.

Harvest

Harvest typically represents the largest cost for switchgrass produced as a bioenergy crop. Recommended harvest procedures for maximum biomass production include one harvest following fall senescence to allow for translocation of nutrients to the roots. This minimizes the nutrients removed and maximizes the amount of lignocelluloses. Decreasing the nutrients in harvested material results in a decreased need for fertilization, a springtime bloom of switchgrass prior to weed growth and a reduction in minerals that might interfere with the conversion of harvested materials to ethanol. Harvest costs will vary by yield and harvest method, for example round bales versus rectangular bales. In this chapter, round bales are 5 feet in diameter and 4 feet long. Rectangular bales are 8 feet by 4 feet by 4 feet [76].

While switchgrass can be harvested with conventional hay equipment, the coarse and fibrous nature of switchgrass plus the large yields may impact equipment repair and maintenance costs. Equipment performance in terms of throughput and field speed may also be reduced. For these reasons, reliance on average engineering performance standards developed for crops with other characteristics and/or much lower yields may significantly misrepresent the actual costs of harvesting switchgrass. Large rectangular balers will generally result in the lowest per-dry-ton harvest costs but are more expensive and require a larger tractor than round balers. Round balers are better adapted to the marginal landscapes, such as small/irregular fields and sloping hillsides, where switchgrass is likely to be grown.

Technological Constraints

While enterprise budgets and cost analyses are useful for on-farm decision making, they do not provide insight into the optimal design of biomass production systems as production scales up. For example, harvest costs will vary by the type of baler used, and this may impact costs of other supply chain elements such as handling, storage and pre-processing on the way to or at the biorefinery. This suggests a need to evaluate different harvest methods within the context of the entire system. Precipitation and weathering may also result in quality losses and dry-matter losses in bales delivered to the plant [37, 60, 79]. Higher precipitation in the fall and winter may limit field access, increase harvest times and increase biomass losses relative to other harvest times [25]. Previous harvest and storage cost analyses have focused on various aspects of integrating harvest, storage and transportation systems [7, 13, 14, 16, 64, 65].

A study in Milan, Tenn., compared round bales and large rectangular bales. The study looked at individual bales rather than bales in the large stacks necessary for commercial operation. The large rectangular bales reduced harvest and transportation costs, but dry-matter losses due to weathering were higher when compared to the round-bale system [75]. When harvest and transportation costs are included with dry-matter losses, a mixture of harvest and storage solutions becomes optimal. Wang [75] reports that if bales are processed immediately after harvest, costs are lowest for rectangular bales. For bales stored without protection and processed within three months of harvest, round bales have the lower cost. And, if bales are stored with protection for more than three months, round bales again have the lowest cost. Protection refers to storing the bales on a pallet covered with a tarp.

Given this, a proposed harvest, storage and transportation system might be described as follows. Harvest is initiated after the first frost and continues until initial greening in the spring. The material that is harvested and transported to the plant for immediate use would be harvested using the large-rectangular-bale system. Any bales that are not to be used during this window would be harvested using a round-bale system. Bales to be stored for fewer than 90 days would not require protection. Bales harvested and stored for more than 90 days would require protection. It is possible that the handling of two different types of bales could increase costs to the biorefinery. The system to handle large rectangular bales may differ from that which handles the large round bales. However, the additional costs that would result from having a dual handling system were not incorporated in the analysis.

Policy Incentives

Typically, switchgrass reaches its full yield potential in the third year after planting [74]. In an experiment in Milan, Tenn., Mooney et al. [45] reported that first- and second-year switchgrass yields across several landscapes and soil types averaged 14 and 60 percent of third-year yields, respectively. Harvest can be conducted in the first two years after planting, though some experts recommend not harvesting the crop in the first year to allow more root growth [74]. Farmers may be reluctant to grow perennial switchgrass as a dedicated energy crop because of the upfront costs to establish the stand and the delay in revenue from selling biomass [35]. This section explores potential incentives that may encourage the adoption of switchgrass.

The government may have a role in creating incentives to establish a commercial-sized biorefinery feedstock supply chain to provide a steady supply of biomass. Suggested methods include a carbon credit market, state-run producer incentive programs and the Bioenergy Crop Assistance Program (BCAP). The 2008 Food, Conservation and Energy Act [68] and the subsequent rule-making process established guidelines for BCAP-eligible feedstocks [69]. In summary, crops known as Title I crops are not eligible to receive benefits from the program. Title I crops include corn, soybeans, sorghum and wheat. Dedicated energy crops such as switchgrass, miscanthus and other grasses are eligible for BCAP. Short-rotation woody crops planted for energy purposes are also eligible. Crop and forest residues such as straw and stover may also be eligible feedstocks. Perennial crops and short-rotation woody crops are eligible for establishment, collection, storage, transportation and logistics payments. Feedstocks produced from agricultural and forest residues are only eligible for collection, storage, transportation and logistics payments.

With BCAP, producers of switchgrass could contract with the USDA to receive payments of up to 75 percent of establishment costs during the first year. Subsequent annual payments then offset the so-called “lost opportunity costs” until the dedicated energy crop is fully established and begins to provide producers with revenue. In addition, the BCAP provides for cost-share payments up to $45 per dry ton for the harvest, storage and transportation of biomass crops to a biorefinery. Eligible participants for BCAP include producers located within a “project area” defined as an area at an economically viable distance from a biorefinery. Contracts with the BCAP program will run for 5–10 years depending on the type of biomass crop grown. Producers will also be required to contract with a biorefinery to receive payments.

Download the tables from Chapter 16.

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