The combined effect of many farmers’ decisions about which crop to plant and how to produce it is a supply function for each crop. The supply function is defined as the schedule of the quantities of a commodity that will be produced at various prices for that commodity; all else held constant. Typically, as prices rise, producers are willing to produce more of that commodity. Increased production may be achieved by increasing the amount of various inputs and possibly reducing the production of other commodities. The supply function can be shifted up or down by factors other than the price of the product. For example, increases in the price of a competing product may cause farmers to reduce production of one crop to increase production of the competing crop. The supply function of the original crop would shift up and to the left such that a higher price would be required to maintain the same level of production. Changed prices of inputs are another factor that can shift supply functions. Lower input prices mean farmers are willing to use more inputs and supply more of the crop at the same product price. In other words, the supply function shifts down and to the right with lower input prices. Technological improvement has been a major shifter of supply of agricultural commodities over the past several decades. Technological improvement is characterized by yield increases with declining levels of input use and hence lower cost per unit yield. Technological improvement of cellulosic crops can thus be a major driver of sector growth.

Supply of cellulosic crops may take many forms and may be location specific. Where the cellulosic crop is a lower valued co-product (e. g., corn stover), the supply may be driven largely by the supply of corn and the marginal costs of harvesting and delivering stover and the cost of replacing any soil nutrients exported with the stover. Where the cellulosic crop is a stand-alone crop, such as any of the perennial grasses, in a cash market setting the supply may conform to the classical description above with quantity being driven by price and relative profitability versus other crops. Where the supply is restricted by contracts to a fixed acreage, then price may have limited effect on quantity supplied except to the extent that variable inputs are used or not used to enhance yield. A thorough overview of bioproduct feedstock supply in the United States is provided in the Billion Ton Study Update [5]. A demand function for cellulosic crops may be defined as a schedule of the quantities of cellu­losic feedstock that will be demanded at various prices, all else held constant. As prices rise, the quantity demanded would fall as purchasers find substitute feedstocks or simply reduce the quantity consumed. Shifters of demand for a specific cellulosic feedstock may include the price of a competing feedstock. As the price of a competing feedstock falls, buyers shift to the competing feedstock and demand less of the current feedstock. The demand curve shifts down and to the left as a lower quantity is demanded at the same price. Similarly, an increase in the price of the end product (e. g., fuel) may shift the demand function upward and to the right as buyers are willing to bid more for the same quantity of feedstock.

Longer term, demand for commodities may be expected to increase as the global pop­ulation becomes larger (e. g., from 7 billion to 9.1 billion by 2050) and particularly as income rises (by 135% by 2050). Population and income are important demand shifters for many goods and services. Furthermore, declining stocks of non-renewable inputs such as petroleum and phosphorus may result in reduced supply and higher relative prices for such commodities. Reduced supply may increase the demand for substitutes and increase incentives for technological change that reduces use of those commodities.

15.5.1 Derived Demand

Intermediate products such as cellulosic feedstocks face a derived demand function. That is, the demand function they face is derived from the retail market for the end products and translated through the profit functions of each handler and processor involved in transforming the feedstock at the farm to the products at the consumer outlets (biofuel, other biochemicals, etc.). In addition to the retail prices for end products, derived demand functions are shifted by prices and quantities of inputs used from farm to retail. Capital, labor, and energy are important inputs in converting cellulosic biomass to end products. Because of their bulkiness, the costs of transporting and storing cellulosic feedstocks are important shifters of the derived demand function at a specific farm. That is, the farm price at which a specific quantity is demanded may fall with distance from the initial processing location. Some processing operations offering contracts with transport included may restrict contract offers to farms within a specified radius around the processing location (e. g., 30 or 50 miles).

Again, technological change can result in an upward shift in derived demand. More effi­cient conversion of feedstock to end products allows processors to bid more for feedstock. Historically, the farm to retail margin for bioenergy products has been less variable than the retail price of biofuels and other fuel. In other words, most of the volatility in farm prices for biofuels feedstock crops can be traced to volatility in retail fuel prices.