BIOCOST: A SOFTWARE PROGRAM TO ESTIMATE THE COST OF PRODUCING BIOENERGY CROPS

Proc., BIOENERGY '96 - The Seventh National Bioenergy Conference: Partnerships to Develop and Apply Biomass Technologies, September 15-20, 1996, Nashville, Tennessee.

A key component in assessing the economic competitiveness of bioenergy crops is an estimation of the cost of producing these crops. BIOCOST is an EXCEL-based software program that can be used to estimate the cost of producing hybrid poplar and switchgrass in seven regions of the United States. The default mode of BIOCOST estimates a full-economic cost, but users can calculate combinations of variable cash, fixed, and owned resource costs to fit their needs. Users can also change yields, land rents, discount rate, prices, and quantities of chemicals, fertilizers, fuel, labor, and seeds (spacing for hybrid poplars). BIOCOST output includes yearly estimates of all economic costs and the calcu- lated net present value cost by acre and by ton.

Keywords: biomass production costs, biomass energy crops

In the United States, biomass energy systems are increasingly being viewed as means to mitigate greenhouse gases, decrease dependence on foreign energy supplies, provide alternative environmentally-friendly crops for agriculture, and enhance rural development opportunities. Urban, industrial, and agricultural wastes can be used as biomass energy feedstocks, but supplies at reasonable prices are limited. If biomass energy systems are to provide a significant portion of the energy used in the United States, production of energy crops will be required. Since 1978, the U.S. Department of Energy has supported biomass energy crop development through the Biofuels Feedstock Development Program (BFDP) at Oak Ridge National Laboratory (ORNL).

The BFDP is developing bioenergy crops that can be used to produce power, liquid fuels, and chemicals. Switchgrass and hybrid poplars have been chosen as representative her- baceous and short rotation woody crops because of their high yield potential and wide geographical distribution, and because the production methods used to produce them are typical of those that will be used to produce many other potential energy crops resulting in similar production costs. Other energy crops can be produced, and may be preferable in some areas.

Successful commercialization of biomass energy systems will require that these systems be economically competitive with systems currently in use. The feedstock price and cost of converting cellulosic materials to power, fuel, and chemicals must be competitive with conventional energy sources to be attractive to utilities and chemical companies. To ensure adequate supplies of biomass feedstocks, these crops must also be attractive to farmers. Farmers will be asked to convert agricultural cropland from the production of conventional crops (e.g., corn, soybeans, and wheat) to the production of energy crops. For this to occur, the biomass price offered to farmers must be sufficiently high to ensure a profitability comparable to that which the farmer could earn using the land for other uses.

A key component in determining the economic feasibility of bioenergy crops is an assess- ment of the costs of producing these crops. The BFDP has developed models to estimate the costs of producing hybrid poplar and switchgrass in seven regions of the United States (Walsh, 1994a;1994b). An user-friendly version of these production cost models, called BIOCOST, has been developed. BIOCOST is written for EXCEL, and features pop-up windows that allow the user to change selected parameters. BIOCOST is being demonstrated at the BFDP booth and is available to interested parties. This paper describes the BIOCOST software. It begins with a description of the approach and methods used by BIOCOST to estimate bioenergy crop production costs, and summarizes the key management assumptions used as defaults by BIOCOST. Next, a description of the parameters that can be changed by the user are presented. The paper concludes with a discussion of the outputs produced by BIOCOST and how the outputs can be used to evaluate the economic feasibility of bioenergy crops.

Our knowledge of the cost of producing bioenergy crops is limited due to their lack of widespread commercial production in the United States. Production costs must be estimated using reasonable assumptions about the management practices that will be used. This section of the paper summarizes the methods used to estimate production costs and summarizes the key management assumptions used as defaults in BIOCOST.

BIOCOST allows users to estimate bioenergy crop production costs for seven U.S. regions—the Lake States (Michigan, Minnesota, and Wisconsin); the Corn Belt (Iowa, Illinois, Indiana, Missouri, and Ohio); Appalachia (Kentucky, North Carolina, Tennessee, Virginia, and West Virginia); the Southeast (Alabama, Georgia, and South Carolina); the North Plains (Kansas, Nebraska, North Dakota, and South Dakota); the South Plains (Oklahoma and Texas), and the Pacific Northwest (Oregon and Washington—hybrid poplar only). Energy crops can be produced in other regions; the regions selected correspond to the production regions for major U.S. agricultural crops. The estimated default production costs for each region vary due to differences in assumed labor rates, fuel costs, machinery complement, variety planted, level of chemical and fertilizer inputs used, fixed costs, expected yields, and land rental rates.

BIOCOST estimates the full economic cost of producing bioenergy crops ($1993). Vari- able cash expenses (e.g., seeds, chemicals, fertilizer, fuel, repairs, and hired labor), fixed cash costs (e.g., overhead, taxes, interest payments), and the costs of owned resources (e.g., producer's own labor, equipment depreciation, land rents, the opportunity cost of capital investments) are included in the estimated production costs. The approach is consistent with the methods used by USDA to estimate the cost of producing field crops (USDA, 1995), and thus facilitates comparison of bioenergy crop economics with those of conventional agricultural crops.

Seed, chemical, and fertilizer expenses are calculated as the product of the pounds of active ingredient used per acre and the price per unit of active ingredient. Fixed cash costs (general farm overhead, taxes, insurance, real estate interest) are assumed to be the weighted (by total revenues) average fixed costs of the most commonly produced conventional crops in each region.

An engineering approach is used to calculate production costs associated with machinery use. Machinery and equipment engineering specifications are used to estimate the number of hours needed to cover one acre of land with each machine used in the production of bioenergy crops. This estimate, combined with estimated per hour costs for depreciation, non-land capital, repairs, labor, and fuel can be used to determine the per acre costs of activities requiring the use of equipment. BIOCOST assumes, for switchgrass, a small-scale equipment complement typical of commercial farms in the Southeast and Appalachia. A large scale equipment complement is used in the other regions for switchgrass production and in all regions for hybrid poplar production.

Site preparation is a critical factor in the establishment of bioenergy crops. The default mode of BIOCOST assumes that farmers prepare the site by moldboard plowing and two diskings using standard farm equipment that they own. Weeds are controlled in the establishment year by applications of herbicides (hybrid poplar—1X of glyphosate and 2X of linuron; switchgrass—1X of 2,4-D and 1X of atrazine). Weed control in year 2 includes an additional application of herbicides for switchgrass (2,4-D). Mechanical cultivation is also used to control weeds in hybrid poplar (2X in year 2 and 1X in year 3).

BIOCOST default fertilizer assumptions for switchgrass include an application of phos- phorous (P₂ O₅), potassium (K₂O), lime, and nitrogen in the establishment year. Phosphorous, potassium, and nitrogen are applied in each subsequent year of the rotation. P, K, and lime quantities vary by region. Nitrogen is applied at a rate of 7.5 kg/Mg (15 lb/ton) expected yields in all regions except the South Plains where the rate is 12.5 kg/Mg (25 lbs/ton). Hybrid poplar receives a P, K, and lime application in the establishment year and biennial applications of nitrogen beginning in year 2 of the rotation (101 kg/ha; 90 lb/ac).

In BIOCOST, switchgrass is assumed to be planted at a rate of 8.3 kg/ha (7.5 lb/ac). The Alamo variety is planted in the Southeast, Appalachia, and South Plains, and the Cave-in- Rock variety is planted in the Corn Belt, Lake States, and North Plains. Hybrid poplars are planted at a 1.8 x 2.4 m (6 x 8 ft) spacing (2248 trees/ha; 910 trees/ac, with an approximately 2% replant) with planting by custom operation.

Switchgrass stands are assumed to remain in production for 10 years before replanting, with harvest in years 2–10. Harvest uses readily available hay equipment and consists of mowing, raking, and round baling. Equipment productivity is varied by yield, allowing estimated harvesting costs to be a function of expected yield.

Hybrid poplar harvest is by custom operation in BIOCOST, and occurs in the year 7 of production. Harvest involves felling and bunching trees, skidding the bunched trees to the edge of the field, and chipping at the site with direct loading into a van. Equipment productivity (hrs/acre) is adjusted for yield by varying tree diameter (Stokes et al., 1986; Whitesell, et al., 1988). Additional business costs incurred by a custom operation, such as transporting equipment to the harvest site, storing equipment when not used, labor costs for mechanics and supervisory personnel, general overhead costs not already covered, a profit margin, and income taxes are included in the estimated harvesting costs.

Land rents, a significant component of the cost of producing bioenergy crops, vary substantially by region. Debate exists regarding the appropriate farm rental rate to use. BIOCOST uses a weighted average net cash rental rate for each region. The state average rental rates (net of the real estate interest payment) are weighted by total crop acres to attain the regional average rental rate.

Estimated bioenergy crop production costs are a function of expected yield. Yields vary by region. Table 1 presents the default yields assumed by BIOCOST for each region and bioenergy crop.

BIOCOST models on-farm production costs only. Per-ton transportation costs can be included in the cost estimates, but are not modeled as a function of distance, speed, or load size. Typical transportation costs to the user facility are expected to be $5.50–$11/ dry Mg ($5–$10/dry ton) for distances less than 120 km (75 mi).

Because bioenergy crops remain in production for several years, production costs are estimated for each year of a rotation. The per acre cost of production over the lifetime of the rotation is estimated as a net present value (6.5 percent interest). Estimated per-ton costs are also net present values, and are based on the expected annual yields over the life of the rotation.

BIOCOST allows users to tailor the production cost estimates to their situation by allow- ing them to change several parameters. The user first selects the bioenergy crop and region for which estimated production costs are needed. Then, the user can alter several input values. The default version of BIOCOST assumes that site preparation is by mold- board plowing and disking. This method may be used on all crop acreage and is likely to be the method of choice for former CRP, forage, or pasture acres. However, many farmers have adopted conservation tillage practices and BIOCOST allows the user to choose chisel plowing or no- till site preparation options. The user can change the land rental rate, the expected yield, and the discount rate. The costs of various management strategies can be estimated by changing the quantity and/or prices of fertilizer, chemicals, seeds (spacing for hybrid poplars), labor, and fuels. Addi- tionally, the hybrid poplar rotation length and spacing can be adjusted. The user is also allowed to override the estimated harvesting costs.

BIOCOST estimates the per-acre and the per-ton production costs based on full economic costs. However, a full economic cost estimate may not be needed for all applications. For example, producers frequently decide which crop to produce based on a comparison of variable cash costs. Other economic costs are assumed to remain the same regardless of crop produced. Therefore, BIOCOST allows the user to calculate combinations of costs by adding individual elements of fixed and owned resource costs to the variable cash costs. In this manner, costs relevant to the situation under analysis can be estimated.

Considerable flexibility has been built into BIOCOST. The user can change several para- meters within reason—built into BIOCOST are upper and lower bounds that cannot be exceeded. However, it is important to note that there are no equations in BIOCOST that automatically predict new yields if fertilizer levels are changed nor are there equations that adjust rotation length to correspond to a change in tree spacing. BIOCOST also does not include equations that explicitly link yields with land rental rates. Thus it is possible, for example, to estimate switchgrass production costs using very high yields and very low land rental rates and fertilizer levels; however, the estimated cost may not be very realistic. Therefore, it is incumbent upon the user to change input levels in ways that make sense from a physiological and economic perspective. The computer adage of garbage in, garbage out holds.

The output page includes the yields assumed, the per-acre production costs (i.e., the net present value cost over the entire rotation), and the per ton cost. The net present value costs are based on the costs included by the user and can be a full economic cost or some subset of the full economic costs. Also included in the output page are the quantities of fertilizers, chemicals, fuels, and labor used in production. Scrolling through the model allows the user to see the estimated costs by input category for each year. Table 2 presents an example production cost budget for hybrid poplar.

The default mode of BIOCOST estimates the full economic costs of producing bioenergy crops. This approach is conservative, and leads to higher estimated costs than if only variable cash expenses are used. The approach is most useful for policy analysis such as to analyze national agricultural income, regional and international competitiveness, and agricultural productivity, however, even for farmers who base year-to-year planting decisions on variable costs, a full cost accounting is useful in determining long-term survival and expansion potential and to evaluate quality of life issues. However, because the user can include various combinations of all input costs, BIOCOST allows the user to estimate relevant costs.

The default mode of BIOCOST is designed to provide a reasonable approximation of the average production costs in a region. By changing input levels and prices, the user can adapt the model to more closely approximate production costs for any given site. In this way, the model can be used as a screening tool and as a framework for conducting a site-specific assessment. When combined with data readily available from USDA (USDA, 1995) the model can also be used to roughly estimate the bioenergy crop price needed to provide to producers, profits that are comparable to those of conventional crops. Thus, the model can be helpful to crop producers, state energy departments, and industry who are interested in evaluating the potential of bioenergy crops and technologies. The inclusion of the quantities of fertilizers, chemicals, and fuels in the output page extends the usefulness of BIOCOST to those interested in calculating net energy balances.

BIOCOST is an EXCEL-based software program that allows users to estimate the cost of producing hybrid poplar and switchgrass in seven U.S. regions. The users can rely on the default values of the program or can change most of the key assumptions. This flexibility allows the user to tailor the program to his or her needs. Output sheets provide a year-by- year summary of all cost categories and calculate the net present value production costs on a per acre and per ton basis.

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2. U.S. Department of Agriculture, Economic Research Service. Economic Indicators of the Farm Sector: Costs of Production--Major Field Crops and Livestock and Dairy, 1993, Washington, D.C., November 1995.
3. Walsh, M. "The Cost of Producing Switchgrass as a Dedicated Energy Crop.", Oak Ridge National Laboratory, Oak Ridge, Tennessee, June 1994a.
4. Walsh, M. "The Cost of Producing Hybrid Poplar as a Dedicated Energy Crop.", Oak Ridge National Laboratory, Oak Ridge, Tennessee, June 1994b.
5. Whitesell, C. D., S.C. Miyasaka, R.F. Strand, T.H. Schubert, and K.E. McDuffie. "Equations for Predicting Biomass in 2-6 year old Eucalyptus saligna in Hawaii." USDA, Forest Service Research Note PSW-402, November 1988.