Understanding biomass supply for a territorial biorefinery

This study aims at identifying key contractual provisions that may encourage farmers to introduce some biomass cropping on farm, to support decision-makers when deciding on setting-up a territorial biorefinery. The research uses a principal-agent model to mitigate the inefficiencies of incentive design. Mathematical programming is used for finding a practical solution to the principal-agent problem. Farm types are built via cluster analysis over official data from the last Italian census of agriculture. Agents’ marginal costs for adopting biomass cropping are estimated using real world data from Tuscany. Results show that the menu of contracts cannot completely avoid rent extraction by agents, but can reduce the extent of the rent that agents can extract by making a false statement about their cost-profile. First-best conditions allow the principal to have a larger procurement area to meet industry’s demand. A risk averse principal would design the menu of contracts to secure the plant with a minimum procurement area to allow continuous and profitable plant operations or, like here, to allow biorefinery’s start-up. Few farmers would find it profitable to introduce hemp within their crop mix, given the difference in production costs. Especially, transaction cost turn to be a significant component of principal’s profit function, thereby reducing the number of contracts that can potentially be stipulated. Larger farmer types seem to benefit more from contract participation, in terms of increased profit, by taking advantage of economies of scale and perhaps investing in additional facilities to pre-treat biomass, which would raise products’ value added at the farm gate.