1. The Optimal Management of the Sugarcane-Refinery Supply Chain Daniel Tregeagle David Zilberman Agricultural and Resource Economics University of California, Berkeley Prepared for the 20 th ICABR Conference, Ravello, Italy June 23, 2016

2. Outline Key Idea Motivation Model Simulation Conclusions

3. Key Idea For feedstock-refinery supply chains, where the feedstock is produced by a perennial crop, the yield of the crop is a choice variable through the mechanism of crop age Therefore different sizes of refinery may have different proportions of yield and land

4. Research Questions As refineries get bigger, does their feedstock growing area become more land intensive or more yield intensive? How do relative contributions of land and yield change as key parameters change? Price Discount rate Costs Is this tradeoff empirically important?

5. Motivation

6. Desire to have a simple, intuitive model that makes clear the tradeoffs between the choices Generally large MILP models Exception: Wright and Brown (2007), but they assume yield constant Want to link the optimal perennial management and optimal refinery size literatures

7. Model Net present value of feedstock-refinery supply chain is given by: Each year Once at start Extension of Wright and Brown (2007)

8. Delivery Cost Processing Cost Refinery Construction Cost

9. For a fixed refinery size, feedstock can be generated by more land with low yields, or less land with high yields

10. Older sugarcane has lower yield Margarido and Santos (2012)

11. Perennial crop age is a choice variable Sugarcane growing handbook/textbooks highlight that optimal age is an economic choice Bakker (1999) James (2004) Also agricultural economists Tisdell and De Silva (1986) Akiyama and Trivedi (1987) Wesseler (1997) Khanna and Zilberman (2012) Contrast with Babcock (2015)

12. Average yield for ‘balanced orchard’ Average Yield

13. Average yield is a function of maximum orchard age

14. Delivery Cost Processing Cost Refinery Construction Cost Feedstock Growing Cost An additional non-linearity is introduced by allowing the renewal cost to vary

15. Cost Minimization

16. Larger refineries have higher yields, but the effect is tiny for these parameters

17. Conclusions Age-yield pathway exists If optimal refinery size increases (e.g. lower refinery costs) then it induces higher yields Further work needed to develop price, cost, discount rate elasticities Not clear whether size of effect is important Not important for sugarcane in Brazil based on (preliminary) simulation results For which parameter constellations will it be important?

18. Additional Material

19. Area and Yield intensity as function of Q Calibrated to Crago et al. (2010) Behavior qualitatively as expected Quantitatively yield effect is unimportant

20. Hoerl Function

21. Simulation Parameters for Area and Yield Intensity

22. References Bakker, H. (1999), Sugarcane Cultivation and Management, New York: Kluwer Academic/Plenum Publishers. Crago, C. L., Khanna, M., Barton, J., Giuliani, E., and Amaral, W. (2010). Competitiveness of Brazilian sugarcane ethanol compared to US corn ethanol. Energy Policy, 38(11):7404– 7415 Hunsigi, G. (1993), Production of Sugarcane: Theory and Practice, Springer-Verlag. James, Glyn [editor] (2004) Sugarcane, Blackwell Science Margarido, Fernando Bomfim and Fernando Santos (2012), “Agricultural Planning,” in Fernando San- tos, Aluízio Borém, and Celso Caldas, eds., Sugarcane Bioenergy, Sugar and Ethanol - Technology and Prospects, Ministry of Agriculture, Livestock and Food Supply, chapter 1, pp. 7–21.

23. References Tisdell, C. A. and De Silva, N. T. M. H. (1986). Supply- Maximising and Variation-Minimizing Replacement Cycles of Perennial Crops and Similar Assets: Theory Illustrated by Coconut Cultivation. Agricultural Economics, 37(2):243–251. Wesseler, J. (1997). Calculating the Economic Value of a Fruit Tree Orchard. Deutsche Gesellschaft für technische Zusammenarbeit, GTZ Wright, M. and Brown, R. C. (2007). Establishing the optimal sizes of different kinds of biorefineries. Biofuels, Bioproducts and Biorefining, 1(3):191–200.

24. Sugarcane Figures