2. Financial Returns from Biomass Crops: A Comparison with Conventional Agricultural Systems Fiona Thorne and Barry Caslin Teagasc Rural Economy and Development Programme (REDP) Energy in Agriculture, Gurteen College.

3. Presentation Objective Provide an overview of the factors associated with the economic potential of biomass energy crops in Ireland

4. Overview  Background & Rationale  Methods  Results  Cash flow & present values for biomass crops  Previous research on the economic comparison with conventional agriculture  Updated position on the economic comparison with conventional agriculture  Conclusions / Implications  Where to from here…..

5. Background & Rationale  The returns from biomass crops in isolation is not what’s important  Opportunity costs  Competing with conventional ag. systems  Given the limited experience of producing biomass crops in Ireland, it is essential that uncertainty is taken into account in any investment analysis  Sensitivity/Scenario analysis  Risk profile of biomass and cereals

6. Measurement  Cash Flow & Discounted Cash Flow  22 year time horizon……… Net Present Value (NPV)  Based on Teagasc EXCEL calculator  Teagasc calculator available to those interested  Comparison of NPV with conventional ag systems  Original research on the comparison with other agriculture systems was completed back in 2011  An update of this work is now needed and early work on the update is presented here to-day

7. Cost & revenue assumptions for Biomass crops WillowMiscanthus Production Period 22 Years Harvest Cycles10 harvest cycles20 harvest cycles Yield Level7t/DM/ha/Yr 1 st Harvest 10t/DM/ha/Yr Every Harvest Thereafter 7 t/DM/ha/Yr 1 st Harvest 10t/DM/ha/Yr Every Harvest Thereafter Establishment Grant €1030 (75% payable in year 1, 25% in year 2) Harvest Strategy Stick harvested, stored outdoors then chipped Cut with maize Kemper header, naturally dried, stored outdoors. Moisture Content 55% MC20% Price€38.15 per tonne€60 per tonne

8. Costs & Returns of Biomass Crops

9. Results (Baseline) Willow reaches the break-even point in Year 8 Miscanthus reaches the break-even point in Year 7

10. Results (Baseline)  Willow  Under the baseline assumptions, willow returns a NPV of approx. €4,000.  The discounted annualised gross margin of willow is approx. €280 per hectare.  Miscanthus:  Under the baseline assumptions, miscanthus returns a NPV of approx. €5,000  The discounted annualised gross margin of miscanthus is approx. €350 per hectare.

11. The world beyond biomass……

12. Assumptions for Comparative Economics  Baseline – Average returns from Teagasc National Farm Survey (2010 /2015)  Average efficiency levels  Constant proportionality between biomass and conventional ag. systems  Input prices  2% inflation  Output prices  2% inflation  Discount Rate  5%  Constant efficiency levels over time  A conservative assumption on the cereals side  Change in proportionality can be examined in a sensitivity analysis

13. Competing with land rental

14. Results - Competing with Land Rental - Annualised gross margin per hectare  If land was previously rented out:  In the case of willow, adoption of biomass would mean less profit per year  In the case of miscanthus, €30 per hectare per year better off  And farmer is risk adverse  It is unlikely that either biomass crops would be a preferable option

15. Competing with the Cereals Sector

16. Results - Competing with Wheat and Barley  And Spring barley producers would gain at most €50 per ha. per year  Winter wheat producers would lose if they converted to biomass crops  Average efficiency assumed  Risk adverse nature of farmers is important in the case of S. barley

17. Results - Competing with Wheat and Barley in 2015  And now Spring barley producers would gain €100 per ha. per year  Winter wheat producers would lose if they converted to biomass crops  Average efficiency assumed  Bioenergy looking more positive now when cereal prices are lower than they were 5 years ago

18. Summary of Competitiveness with Cereal Crops  Based on a sensitivity analysis conducted in 2011:  Green yield prices @ 20% moisture would need to be around €130 - €145 per tonne for biomass crops to begin to be viable  Spring barley producers would gain more now than they would have 5 years ago if they converted.  Winter wheat producers would lose if they converted to biomass crops

19. Competing with beef production (Finishing Farms)

20. Results - Competing with Beef Finishing Farms  If land was previously used in a store to beef system:  In the case of willow, adoption of biomass would mean €195 per hectare per year more  In the case of miscanthus, adoption of biomass would mean €245 per hectare per year more  Even a risk adverse farmer should seriously consider options  Similar story on suckling farms

21. Results - Competing with Beef Finishing Farms in 2015  If land was previously used in a store to beef system:  In the case of willow, adoption of biomass would mean €200 per hectare per year more  In the case of miscanthus, adoption of biomass would mean €235 per hectare per year more  Even a risk adverse farmer should seriously consider options  Similar story on suckling farms

22. Summary of Competitiveness with Beef Farming  Previous research on relative competitiveness:  In the case of willow, adoption of biomass would mean €195 per hectare per year more  In the case of miscanthus, adoption of biomass would mean €249 per hectare per year more  Based on a sensitivity analysis:  Even with a 10% increase in beef prices, biomass looks attractive  Even with increase in beef prices in 2015, a risk adverse farmer should seriously consider options, based on net margins from beef enterprise in 2015  Similar story on suckling farms

23. What would happen if…….…

24. But price is only one risky variable……

25. Using an economic modelling tools it is possible to look at the risk of bioenergy and ceeral crops Co-efficient of Variation WillowLand RentSpring Barley Winter Wheat 1861718

26. Using a risk based economic comparison model  Risk associated with price is not the only risk in comparison models  Risk associated with willow is greater than land rent and similar to cereal crops  Even when biomass price is linked to inflation  Due to risk associated with yield and input prices

27. Conclusions  Latest comprehensive review completed in 2011  Bioenergy not competitive with land rent or major cereal crops  Preliminary estimates based on 2015 land rent, cereal and beef economics:  Bioenergy still not competitive with land rent or major Winter cereal crops  Returns from biomass are competitive with Spring barley and beef finishing returns  Need to remember that bioenergy is a long run investment  Based on previous research, the risk associated with willow is similar to cereals, even in a guaranteed price scenario

28. Take Home Message  Risk associated with biomass crops is still high even when price risk is controlled for;  Similar risk profile to cereals and higher risk profile than land rent  Cereal prices would need to in the region of €130 per tonne for biomass to begin to look attractive to entice farmers into biomass production;  Even if beef prices increase by 10% over 2010 prices, biomass looks attractive for beef farmers;  To compete with a low risk land rent option: willow price would need to increase by about 20%