Managing Feedstock Supply Risk for the Development of a US Stover Biofuel Industry

Feedstock supply risk is one of the key concerns limiting cellulosic biofuel expansion. We use an economic model of corn stover-based ethanol production to investigate strategies to manage stover supply uncertainty, including three contract arrangements that vary according to risk-sharing between the processor and farmers. Applying this model to corn stover-based ethanol in the USA, we find that a greater quantity of biofuel is supplied at lower cost under right-of-access contracts than a delivered quantity contract. The processor can manage some of the risk borne under the right-of-access contracts by contracting excess acreage and, if available, by purchasing deficit stover from a spot market. Contracting excess acreage increases the expected biofuel cost but results in lower uncertainty surrounding cellulosic biofuel supply. A biomass spot market provides a source of biomass during low yielding years, but can also create competition for the processor as an alternative outlet for farmers to supply stover under favorable spot market prices. In general, farmers’ contract preferences are responsive to the basic structure of incentives, which could provide flexibility to processors as the industry develops and market uncertainties change.