Miscanthus – Economics
An important consideration with any venture is whether it can make an acceptable return on the investment. So detailing the economics of growing and using Miscanthus is obviously very important. However, as with most assessments of the economics of anything, the real answer is “It All Depends”. So when considering the economics of any project, you need to keep that in mind. The circumstances, the location, the timing and a host of other factors all contribute to create financial uncertainty so it is only when an evaluation of a specific proposed project has been carried out that you can get really relevant answers. Miscanthus New Zealand Limited (MNZ) can provide such specific evaluations.
Miscanthus is of course different from almost any other land use, because of its perennial nature and annual harvest. Once it is established and has got successfully through the first 15 months, there is almost no cost and no personal time required from the landowner. So comparing the return per hectare from Miscanthus with, for example, the return per hectare from a dairy farm is not normally realistic. This is because in the case of the dairy farm there are inevitably a whole lot of uncounted costs, including those associated with the owner of the farm putting in time that is essential to make the whole venture work. With Miscanthus, once it is established, all the landowner has to do is visit the farm once a year to watch it being harvested.
In relation to what MNZ does, there are really two main scenarios.
The first is for small areas – up to about 8 ha – where the norm is to use Miscanthus plantlets for establishment. If we are looking at the economics of a commercial operation, we are going to assume a minimum area of 2 ha. That is not really a commercial operation but if there are other Miscanthus stands in the vicinity, the cost of locating the machinery for planting and harvesting can be spread over a greater area. The return that can be expected from a small area like that could generate a sale price of perhaps $200 per tonne with the product baled and delivered. An alternative is to harvest it for the owners own use in which case the value is the cost of the alternative that it will be displacing. In Canterbury this can be wood shavings with a value of at least $20 per cubic metre. This works out to $300 per tonne.
The second scenario is for commercial scale sites with a minimum area of 10 ha. The norm here is to use Miscanthus rhizomes for establishment because the cost per hectare can be less. With these areas, the current price on truck at the paddock gate is assumed to be $300 per tonne which is the current going rate.
As an extension to that scenario, there is potential for having somewhat lower cost rhizomes and lower cost planting if the area is greater than 50 ha. On top of that, if we go up from there, if a contractor can be guaranteed a minimum area to be planted of 200 ha per year for at least three years there is further potential to significantly reduce the cost of the rhizomes and the cost of planting, using purpose-built machinery that is available internationally. We also have a contractor who has indicated that he is willing to bring into New Zealand a machine that will pelletise the Miscanthus as it is harvested which will significantly reduce the transport cost of the harvested product and will open up more markets. That will only happen if the scale of planting is 100+ hectares per year for three years or more.
If we summarise these scenarios and indicate with current costs and returns, an internal rate of return for some scenarios, they could look something like this.
Small-scale (2-8 ha); using plantlets; local sale, product $200/tonne delivered. Land rent of $1000 per ha per year. Pre-tax IRR could be 3.59%.
Small-scale (2-8 ha); using plantlets; own use; substituted product value $300/tonne. Land rent of $1300 per ha per year. Pre-tax IRR could be 18.65%.
Small commercial (10-50ha); using rhizomes; product value $250/tonne ex store or paddock. Land rent of $1500 per ha per year. Pre-tax IRR could be 18.53% – 20.23%.
Medium commercial (50-150ha); using rhizomes with a discount for scale; product $225/tonne ex store or paddock. Lower harvest cost. Land rent of $1500 per ha per year. Pre-tax IRR could be 20.97%.
Larger commercial (200+ ha); using lower cost rhizomes; product $200/tonne; lower harvest cost. Land rent of $1500 per ha per year. Pre-tax IRR could be 22.67%.
So the return on investment for growing and selling Miscanthus depends on a whole host of things but MNZ has a good financial model that can work out for your specific situation what the likely internal rate of return could be.
MNZ is also close to pinning down a large product supply agreement for what will be the first renewable diesel fuel (RDF) plant in New Zealand. Offtake agreements for the RDF plant are close to being finalised. For the first of the three products our team already has received a letter of interest indicating quantities and excellent prices for the next 10 years. The financial model includes a viable per tonne purchase price for the biomass that is better than any of those indicated above. So the future economics of growing and selling Miscanthus look as if they will be even better than the best indicated return for the scenarios given. But this better return will only be available to landowners that enter into a long term contract for supply to an RDF plant at commercial scale.