Miscanthus Financial Guide
Financial considerations are important to evaluate when assessing alternative crops. For miscanthus, farmers should understand a crop’s risk and return. Are financial incentive programs available to help subsidize costs? Is the selling price high enough to cover my production costs and provide an economic return for planting this crop? Is the market for selling miscanthus stable, and will it be available for multiple years? These and other key financial issues should be thoroughly researched when deciding whether to plant miscanthus on your farm.
Government programs and incentives strongly influence the emerging biomass industry. The Biomass Crop Assistance Program (BCAP) was created in the 2008 Farm Bill to provide financial incentives to landowners and farmers who establish and produce perennial biomass crops. For approved BCAP project areas, financial incentives include:
- Establishment payments of 75 percent of the eligible planting costs
- Annual rental payments for the land enrolled for the first five years of production,
- Matching payments for biomass delivered to a qualified biomass conversion facility
For miscanthus, approved project areas can be found in 16 counties in southwest and central Missouri. Learn more about BCAP in Missouri through the following resources.
Costs of Production and Return
It is important to understand and evaluate production costs when looking at a new crop. Evaluating energy crops is challenging because the crops involve a significant establishment cost, and they don’t realize their full yield potential until years later. Miscanthus is becoming established in the first season and can’t be harvested. In the second year, the crop produces 40 percent to 50 percent of its yield potential, and in each year thereafter, the crop reaches 100 percent of its yield potential. A mature stand could last 25 years. In determining the time frame for financial planning purposes, 10 years is standard, though it most likely underestimates the longevity of the crop’s yield potential and net return.
Miscanthus requires minimal inputs and operations compared to annual row crops. Soil amendments like potassium, phosphorus and lime may be required before planting, depending on field conditions. After the establishment year, fertilizer rates will be based on the nutrients removed from harvesting miscanthus. Herbicides may be required during establishment years, and after that, an established stand should outcompete any weeds.
Harvesting miscanthus occurs by mowing and baling. The entity – yourself, custom hire operator, end market – that provides this function will affect the cost structure. Transportation costs will occur from moving bales from the field to storage to the end market and may be significant to the overall profitability. Basic logistical efficiency, control of shrink and capital investment and operating cost minimization are critical to financial success in growing miscanthus. Selling prices that are negotiated with the end-market must cover production costs and provide a financial return to the enterprise.
A cost-return budget tool for miscanthus has been developed that allows you to perform a customized analysis for your farm.
Miscanthus Cost-Return Budget (Missouri)
The end-market for miscanthus is evolving. Farmers will work with biomass aggregators and/or end-users to sell miscanthus in the future. Biomass feedstock arrangements will most likely be made using a contractual relationship. It is important to contract with a party that will fulfill its obligations for the entire contract duration. Below are some key issues that should be considered in a biomass contract between the buyer and seller.
- Terms and time of pickup or delivery
- Selling price and terms of payment
- Quantities and required product specifications
- Length of contract and termination clauses
- Ownership of the rhizomes or plants
- Harvest, transportation and storage functions
Dolginow, Joseph and Ray Massey. 2013. Switchgrass and Miscanthus: Economics of Perennial Grasses Grown for Bioenergy. Publication G4980. Columbia: University of Missouri Extension.
Farm Financial Assessment
Farm financial performance and records are important to consider when evaluating a new alternative crop. Past financial performance, current financial condition and the capacity to take on risk influence alternative crop adoption viability. If you need external financing to kick start your entry into alternative crop production, then your lender will likely want to see a good business plan and, if available, financial and production histories.
Financial recordkeeping systems are important for tracking financial performance and making decisions. You can keep records manually through a written system or electronically through a computerized system such as Quicken or Quickbooks. For you to make sound decisions, financial records need to be kept current and accurate.
Information from financial statements and income tax records can measure a farm’s financial position and performance. The balance sheet, statement of cash flows and income statement are three important financial statements. Balance sheets communicate the financial condition of a farming business on a specific day, such as the beginning or end of the year. They share detailed information about a farm’s assets, liabilities and equity. The statement of cash flows (cash in, cash out) shows cash receipts and cash expenditures during a certain time period. The income statement reports the revenue, expenses and profit during a given time period. Historical balance sheets, statements of cash flows and income statements demonstrate how the business has performed. Additionally, these statements can be used to project the business’ future performance. IRS Schedule F and 4797 tax forms are important to existing producers for accurately conducting accrual-adjusted financial analysis.
Key financial measures also help to evaluate a farm’s financial condition. Numerous financial measures can help with evaluating a farm. Usually, these measures tend to look at the profitability, financial efficiency, liquidity and solvency of the business. Examples include return on assets, the operating expense ratio and the debt-to-asset ratio. Lenders typically use a set of key measures when they evaluate loan applicants. Key financial measures can also help with benchmarking your farm relative to other operations. Benchmarking data can be obtained through developing good relationships with other local farmers who are willing to share some of their key financial measures. Alternatively, you may try contacting state recordkeeping business associations, universities or extension services.
Many tools and spreadsheets available online may assist producers in developing financial statements, keeping records and conducting financial analysis. Additionally, accountants, bankers and other business specialists are good resources who may assist with assessing farm financial performance.
For More Information
Farm Finance Scorecard (Minnesota)
Farm Analysis Solutions Tools (FAST) (Illinois)
Ryan Milhollin and Joseph Dolginow
University of Missouri Extension
Page last updated: November 19, 2014