Risk versus reward, a financial analysis of contract use implications to the miscanthus lignocellulosic supply chain

With growing interest in cellulosic biofuels production, U.S. farmers may soon be called upon to produce new commercial dedicated energy crops such as miscanthus. Producing miscanthus however poses new risks to farmers. In particular, the ambiguity of commercial miscanthus yield risk to date and the obvious learning curve in producing an unfamiliar crop are a few of the challenges that farmers face. Furthermore, biofuels plants also face risk. Ensuring a steady supply of biomass will ultimately influence the investment in biofuels plants. In consequence, finding ways incentivize farmer investment in miscanthus will be crucial to the development of the industry. This research analyzes how contracts can address risk in the miscanthus supply chain. In particular, this analysis analyzes seven different contracts representing four different contract types to assess differences in financial risk to both the farmer and the plant. Results indicate that the addition of a per acre base payment can significantly reduce production risk to farmers by shifting yield risk to the plant and indexing contracts significantly increases investment risk to both parties while reducing counter party risk. Results of this analysis can be applied to building the framework for how biofuels plants can think about optimizing the contract that they offer farmers.