Risk Versus Reward, a Financial Analysis of Alternative Contract Specifications for the Miscanthus Lignocellulosic Supply Chain

We evaluate how different contract designs impact risk sharing along the supply chain for the dedicated energy crop miscanthus. We model the full production and transportation system of the miscanthus supply chain because a sustainable supply chain must procure biomass in a cost-effective manner. Using this model, we estimate the financial returns and risks for both a farmer producing miscanthus and the biofuels plant purchasing miscanthus. We evaluate differences among contracts that are designed to address the miscanthus investment cost and the farmers’ opportunity costs. We find that risk can be reduced to both the farmer and the plant by offering a dollar per acre base payment combined with a dollar per ton payment. The farmer faces the lowest risk when the contract combines a dollar per acre and dollar per ton payment. Lastly, we find that indexed contracts designed to reduce annual counter-party risk associated with the risk of farmers opting out of the contract to produce competing crops actually increases overall financial risk to the farmer and plant.