The adoption of switchgrass and miscanthus by farmers: Impact of liquidity constraints and risk preferences
Introduction
Many countries are now committed to fight global warming by reducing greenhouse gas emissions. Strict policies are being implemented in both Europe and the United States to favour renewable energy. For instance the European Union established “mandatory national targets consistent with a 20% share of energy from renewable sources and a 10% share of energy from renewable sources in transport in Community energy consumption by 2020” (European Union, 2009). The need for lignocellulosic biofuels to achieve this objective while fulfilling effective sustainability criteria is clearly indicated. Furthermore, lignocellulosic biomass combustion for power and heat production would be another important process (Rowe et al., 2009). Among the likely lignocellulosic crops candidates for producing renewable energy, perennial switchgrass and miscanthus have been repeatedly cited as the most promising species for temperate areas when accounting for several environmental indicators. For example winter coverage has positive effects on soil quality (Hansen et al., 2004) and some animal biodiversity (Bellamy et al., 2009; Roth et al., 2005; Semere and Slater, 2007a, Semere and Slater, 2007b). These herbaceous crops also provide high yields without requiring intensive management in terms of field operations and chemical inputs, which explains their good energy and greenhouse gas balance (Lewandowski and Heinz, 2003; McLaughlin and Walsh, 1998; St Clair et al., 2008).
If many studies have approached the adoption of switchgrass and miscanthus from an environmental point of view, the questions about the economic efficiency of these crops and their probability of adoption by farmers are also addressed. As they are perennial, a time dimension is needed in the evaluations, as well as a representation of farmers’ time preferences. The most common theoretical approach is the net present value (NPV) one, derived from the producer theory. It is largely dominant in general investment problems as well as in natural resource economics because of its simplicity. A single discount factor catches the decision maker's preferences for the present over the future. Almost all of the numerous cost–benefit studies about perennial energy crops at the farm level are based on it. Most of them refer to willow short rotation coppices in either a European (Goor et al., 2000; Rosenqvist and Dawson, 2005; Stolarski et al., 2007; Toivonen and Tahvanainen, 1998; van den Broek et al., 1997) or an American setting (Nienow et al., 1999; Tharakan et al., 2005; Walsh, 1998). While several north American studies have also attempted to measure the economical interest of switchgrass production for farmers (Downing and Graham, 1996; Duffy and Nanhou, 2002; Fox et al., 1999; Khanna et al., 2008; Nelson et al., 2006), only a few have recently considered a European context (Lychnaras and Rozakis, 2006; Monti et al., 2007; Smeets et al., 2009). Economic valuations for miscanthus are scarcer (Deverell et al., 2009; Smeets et al., 2009; Styles et al., 2008). These studies provide very different results according to the cost items and areas considered, which makes them difficult to compare. They have two main drawbacks in common. They assume a deterministic context (or a risk-neutral farmer), using average values. Moreover, by aggregating the return pattern over the crop life-span into a timeless criterion, liquidity needs are ignored.
This paper looks into the ex ante effect of two factors on the potential extent of miscanthus and switchgrass adoption by farmers: liquidity constraints and risk preferences. Many studies have highlighted the central role played by uncertainty and risk aversion in agricultural innovation adoption (Flaten et al., 2005; Greiner et al., 2009; Koundouri et al., 2006; Marra et al., 2003; Serra et al., 2008). Financing constraints have been far less studied, at least in the economic context of developed countries. However, many studies show that some proxies of farmers’ liquidity constraints constitute significant determinants of technology adoption, e.g., farm size, farmers’ debt, extra agricultural income. The few adoption studies specifically dealing with perennial energy crops in developed countries confirm it (Bocquého, 2008; Jensen et al., 2007; Roos et al., 2000; Sherrington et al., 2008; Villamil et al., 2008). Thus, besides risk, financing constraints may be another important factor influencing the adoption of switchgrass and miscanthus. Indeed, these crops require a more or less lengthy establishment period before beginning to produce. During this phase, farmers have to invest in planting while no return is expected (Bocquého, 2008). In this context, assessing the economic conditions in which farmers would be willing to grow perennial herbaceous energy crops assuming a risk neutral behaviour and a perfect capital market could lead to conclusions that do not fully reflect reality.
In this paper, we study the general decision problem of the optimal land resource allocation of a farm between different cropping systems, in a static but multi-periodic framework. One of the crop is a perennial energy crop, switchgrass or miscanthus, whereas the other one is a traditional annual one. We compare four intertemporal choice models to separately and jointly assess the impact of liquidity constraints and risk aversion on the adoption intensity of switchgrass and miscanthus by farmers. Departing from the basic NPV cost–benefit analysis, we relax the assumption of the linearity of the decision maker's utility and follow the discounted utility (DU) and expected utility (EU) theories. Thus, we provide a more complete economic assessment of perennial energy crops by fully taking into account farmers’ risk, time and intertemporal preferences. It allows us to study the impact of different variants of supply contracts on farmers’ decision.
This paper is organized as follows. Section 2 presents the theoretical models of adoption of a new crop. The empirical context and the parameterization are presented in Section 3. In this section the results of the simulations are also displayed, and a Monte Carlo analysis of the sensitivity to parameters is led. In Section 4, results are compared with other studies, followed by some concluding remarks.
Section snippets
New technology and intertemporal choices
The simple once-only decision problem we address aims to assess the relevancy for a farmer to grow miscanthus or switchgrass instead of conventional crops. We consider a representative farm with a homogenous arable area of L hectares which can be divided up by the farmer into a traditional cropping system and an innovative one. Consider a succession of crop years {1,…, t,…, T}, where T is the new technology pre-determined life-span. Crop prices and subsidies are assumed to be constant over
Data and model specification
For the empirical application we have chosen a cereal farm in the Eure-et-Loir department to serve as an example because it is the French department where perennial energy crops are the most widely farmed. The number of cropping systems that can be chosen by the farmer is limited to a set of two: the conventional rape/wheat/barley rotation and a perennial energy system, either switchgrass or miscanthus. Thus, the coupled subsidies the farmer can claim for are the arable crop subsidy in the
Conclusion
We show with a standard NPV analysis (M0) that, in the French Eure-et-Loir department setting, switchgrass and miscanthus are less profitable for a farmer than a traditional rotation of arable crops. This is in line with the results obtained in recent studies when comparing wheat with switchgrass in Italy (Monti et al., 2007), and wheat with miscanthus in Ireland (Deverell et al., 2009). Styles et al. (2008), who also studied miscanthus in Ireland, find a 383 €/ha/yr gross margin (chopped
Ackowledgments
The authors would like to thank the European Union for their economic support through the Bioenergy NoE. They also thank an anonymous reviewer for valuable comments.
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