In the search for alternatives to fossil fuels, a prominent contender is switchgrass, a perennial grass that is native to the U.S. plains states. The principal advantage of switchgrass and other cellulosic feed stocks for biofuels are their small carbon footprint. At what price will farmers convert their fields to switch grass?
A recent study estimates the break-even price for growing switchgrass in North Dakota. The price per ton varies with the fertility of the land, from $56 on the least fertile land to $95 on the most fertile, or $76 on average. To compute the break-even price, the researchers started by adding up the explicit costs of production, including the costs of capital (machinery and equipment), labor, and raw materials. Then they added the opportunity cost of using land for switchgrass rather than another crop, for example, alfalfa, wheat, or soybeans.
We can illustrate the calculations with a simple example. Suppose the most profitable alternative to switchgrass is alfalfa, and the implicit rent on land used to grow alfalfa is $120 per acre that s how much a farmer can earn in alfalfa production. If the switchgrass yield is 3 tons per acre, the opportunity cost of land per ton of switchgrass is $40 per ton (equal to $120 / 3). If the explicit cost of a ton of switchgrass (for capital, labor, and raw materials) is $36, the break-even switchgrass price is $76 = $36 + $40. What are the implications for switchgrass biofuel? To get some North Dakota farmers to switch their crops to switchgrass, the price must be at least $56 per ton. And the higher the price, the larger the acreage devoted to switchgrass. To get the most fertile land in North Dakota switched to switchgrass, the price must be $95.