Financial

Considering financial factors is an important step in evaluating an alternative crop. For biomass sorghum, farmers should understand the potential risk and return involved in planting and growing the crop. Is the selling price high enough to cover my production costs and provide an economic return? Is the market for selling biomass sorghum stable, and will it be available for multiple years? These and other key financial issues should be thoroughly researched when deciding whether to adopt biomass sorghum as a crop for your farm.

Cost of Production and Returns

The economic viability of raising biomass sorghum depends on users like anaerobic digesters and cellulosic ethanol facilities locating in Missouri. Otherwise, a market won’t exist for the biomass sorghum being produced. With regard to yield, which drives revenue assumptions, biomass sorghum grown in southern locations may yield better because these areas have an extended growing season. The Environmental Protection Agency reports research that 2012 biomass sorghum yields averaged 11 dry tons per acre given varying growing conditions in trials from nine states, but by 2022, average yields in the southern U.S. are projected to reach 13 dry tons per acre.

Of the costs incurred to produce biomass sorghum, the most significant investments are related to harvesting and transportation, nitrogen fertilizer and non-machinery labor. Although nitrogen fertilizer represents one of the greater biomass sorghum production expenses, total fertilizer investments may be less significant for biomass sorghum than those for forage sorghum, and biomass sorghum would require less nitrogen than corn. However, fertilizer requirements for biomass sorghum may be greater than the requirements for perennial energy crops. On an annual basis, biomass sorghum production costs are high relative to those of perennials such as switchgrass and miscanthus.

As an annual crop, biomass sorghum offers several financial-related benefits. Stakeholders like bioenergy processors, producers and bankers are already familiar with annual crop models. Perennials may have establishment challenges and less production stability. Planting a perennial may make capturing genetic improvements more difficult. Adopting an annual instead of a perennial also allows producers to maintain a traditional annual rotation; make a relatively short-term commitment to the crop; and preserve their opportunity to easily switch to another crop if conditions, like the economy, warrant. Because biomass sorghum is an annual, it doesn’t require producers to make establishment investments at least a year before they have an opportunity to begin collecting revenue; however, producers would incur planting costs each year when raising an annual like biomass sorghum.

Biomass sorghum may contain high moisture levels. Thus, drying harvested material would be an opportunity to make transportation and storage more cost-efficient. From a logistical perspective, producers may have an opportunity to harvest biomass sorghum and then ship it to aggregation sites, such as grain elevators, using rail transportation. At these aggregation sites, sorghum could undergo the first processing stage and then be shipped to a refinery for further processing.

Accessible at the link below, a cost-return budget for biomass sorghum will allow you to conduct a customized biomass sorghum analysis for your farm.

Biomass Sorghum Cost-Return Budget

Crop Insurance

In the 2014 Farm Bill, the Noninsured Crop Disaster Assistance Program created coverage options for crops that hadn’t previously qualified for federal crop insurance. The new program includes biomass sorghum as a crop eligible for protection. The Noninsured Crop Disaster Assistance Program enables applicants to cover as much as 65 percent of projected production at 100 percent of the average market price. As 2014 Farm Bill programs are implemented, look for more information about biomass sorghum coverage opportunities.

Contract Considerations

Before growing biomass sorghum for bioenergy purposes, first secure a contract with an end-market or end-user to guarantee that you’ll have a market for the harvested crop. End-markets for biomass sorghum as a bioenergy feedstock will likely evolve. As opportunities present themselves, remember to contract with a party that will fulfill its obligations for the contract’s entire duration. Below are some key issues to consider in a biomass contract between the buyer and seller.

• Terms and time of pickup or delivery
• Selling price and payment terms
• Quantities and required product specifications
• Contract length and termination clauses
• Harvest, transportation and storage functions

Sources

Cross, Jennifer. 2014. A New Sorghum For Biofuels. Hay & Forage Grower. Minneapolis, MN 55425.

Environmental Protection Agency. 2014. Notice of Opportunity To Comment on the Lifecycle Greenhouse Gas Emissions for Renewable Fuels Produced From Biomass Sorghum. Justia Regulations. Mountain View, CA 94043.

Oak Ridge National Laboratory. 2011. U.S. Billion-Ton Update: Biomass Supply for a Bioenergy and Bioproducts Industry. U.S. Department of Energy. Washington, DC 20585.

Office of Communications. 2014. USDA Provides Greater Protection for Fruit, Vegetable and Other Specialty Crop Growers. USDA Farm Service Agency. Washington, DC 20250-9410.

Purdue University. 2012. Researchers: Sorghum should be in the mix as a biofuel crop. Purdue University. West Lafayette, IN 47907.

Tiller, Kelly. 2014. Optimising the biomass supply chain. Bioenergy Insight. Morden, Surrey, England.

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

Measuring and Analyzing Farm Financial Performance (Purdue)

Worksheets for Measuring and Analyzing Farm Financial Performance (Purdue)

Farm Finance Scorecard (Minnesota)

Establishing and Using a Farm Financial Record-Keeping System (eXtension)

Farm Analysis Solutions Tools (FAST) (Illinois)