Francis M. Epplin,[22]‘* Andrew P. Griffith[23] and
Mohua Haque[24]

Introduction

Prior to investing hundreds of millions of dollars in a switchgrass (Panicum virgatum) biomass biorefinery, due diligence would require a business plan that encompasses the complete chain from feedstock acquisition to the sales of products produced. These issues are only of importance if technology is developed to enable companies to profit from procuring switchgrass biomass, converting it to one or more useful products, and selling these products. Technologies and systems will be required to enable processing of lignocellulosic biomass, including switchgrass biomass, into a product or a

portfolio of products. One or more of these products must either be able to fulfill a unique niche of consumer demand or compete economically with existing products. If these biobased products include substitutes for fossil fuels, the potential market for cellulosic biomass could be very large. The potential market for switchgrass depends on its delivered cost relative to alternative feedstocks such as other dedicated energy crops, crop residues, or other sources of biomass. The purpose of this chapter is to identify practical issues related to the economics of developing switchgrass as a dedicated energy crop and to provide estimates of the price for delivered switchgrass biomass that would be required to compensate for the cost of inputs used to produce and deliver it to a biorefinery.

After the oil embargo of the mid 1970s, Oak Ridge National Laboratory (ORNL) added non-nuclear energy issues, including biofuels, to its research agenda (ORNL was officially incorporated into the newly established U. S. Department of Energy in 1977). At the time that ORNL was seeking an alternative source of energy, others were searching for a solution to the "farm problem". In 1978, more than 10.5 million hectares of U. S. cropland were classified as "idle" (Lubowski et al. 2006). Much of this "idle" land was diverted from crop production as a result of various federal programs including the feed grain, wheat, and cotton commodity programs (Tweeten 1970). The development of switchgrass as an energy crop was envisioned as a way to convert this "idle" land to productive use. At the same time it was seen as a way to reduce the cost of government commodity and conservation programs that were funded to entice land owners to set aside the land from the production of traditional crops. The "billion-ton update" published by the U. S. Department of Energy in 2011 projected that a switchgrass price of $66/dry Mg would be sufficient to entice land owners to convert land from current use and establish switchgrass on 21 million U. S. hectares (U. S. Department of Energy 2011).

In the U. S. the infrastructure for production, harvest, storage, transportation, and price risk management of grain is well-developed. The structure of farms used to produce grain and the infrastructure required to harvest, store, and transport grain in the U. S. has evolved over time. Relative to grain, cellulosic biomass from perennial grasses is bulky and difficult to transport. In the U. S., feedstock acquisition logistics for grains such as wheat and corn are relatively simple. Users may post a competitive price, and grain will be delivered by the existing marketing system. However, the infrastructure required to deliver a steady flow of large quantities of cellulosic biomass from fields where it could be produced and harvested to biorefineries where it would be processed remains to be developed.

One method to be considered is vertical integration. Most large U. S. firms that harvest and process trees (lignocellulosic feedstock) into wood products are vertically integrated. Through either ownership or leases, these firms have acquired the rights to millions of hectares and manage the production, harvest, and delivery of feedstock to their mills. Production characteristics and harvest cost economies could result in a structure for switchgrass production for use as a low-valued dedicated energy crop that more closely resembles the structure of integrated timber production and processing businesses. In some parts of the world, these firms harvest and process timber continuously throughout the year. If the low-cost cellulosic feedstock is a perennial with a long stand life and wide harvest window such as switchgrass, market forces could be expected to drive the structure toward vertical integration. For a mature industry, switchgrass production, harvest, and transportation could be expected to be centrally managed and coordinated, which more closely resembles a vertically integrated timber production, harvesting, and processing business than an atomistic grain system. Whether an atomistic structure such as that for U. S. grain or a vertically integrated structure, such as that for U. S. wood products would be the most economically efficient system for producing, harvesting, and delivering a flow of switchgrass biomass feedstock to biorefineries has yet to be determined.

Based on small plot research, in the years after switchgrass is established, it requires little annual maintenance (Fuentes and Taliaferro 2002). Other than harvest, most stands can be maintained with one pass over the field per year to apply fertilizer. Consequently, the relative share of harvest costs to total production costs is substantially greater for bulky biomass from switchgrass than for more dense grain from corn and wheat. Harvest costs (mowing, raking, baling, field stacking) are estimated to account for 45 to 65 percent of the total farm gate costs (including the cost of establishment, land, and fertilizer) to produce switchgrass biomass (Epplin et al. 2007). In contrast, harvest costs account for less than 15 percent of the total farm gate costs of production for corn grain. The structure is likely to be determined by the most cost efficient harvest, storage, and transportation systems.

Two related but different approaches are used to produce estimates of the switchgrass biomass price that would be required to compensate for the cost of inputs used to produce and deliver biomass. First, we present a listing of operations that may be used to establish, maintain, and harvest switchgrass. Second, this information is followed by a presentation of conventional enterprise budgets. Third, given the importance of harvest costs, assumptions regarding harvest machines are presented. Fourth, results of a mathematical programming model that is designed to estimate the costs to deliver a flow of feedstock throughout the year to a biorefinery is presented.