Risk assessment for herbaceous biomass crops: The case of perennial grasses

The production of two perennial grasses, tall fescue and switchgrass, for biomass energy were included as alternative activities in a single-index model (SIM) of portfolio selection for an agricultural enterprise. Results indicate that, from the risk efficiency point of view, switchgrass is a good alternative and is included in a risk efficient farm enterprise, while tall fescue, due to its low expected return, is not included. The correlation of returns of the grass crops with those of the conventional activities was low or negative, suggesting that the energy crops may be good candidates for diversification. However, the high correlation between the returns on the two grass crops indicates that only one of them would be included in a risk efficient farm enterprise. The SIM regression estimates seemed sufficient to determine the risk characteristics of the new energy crops. The SIM quadratic-programming results added little additional information; thus, this stage of the analysis can be obviated without great loss of information.