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Biofuel value chains

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Biofuel value chains

  1. 1. Biofuel Value Chains: Drawing Lessons from the US for Newcomers Siwa Msangi and Simla Tokgoz II. World Congress of Agroforestry Nairobi, Kenya August 23-28, 2009INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  2. 2. Motivation Global biofuel production has expanded rapidly, changing the dynamics of the agricultural and energy markets. This expansion is being led by U.S. & Brazil (for ethanol), and the EU (for biodiesel) A number of other developed and developing countries have started their own domestic biofuel programs. However, uncertainty remains as to how viable value chains might develop in these countries. Try to draw lessons from the experiences of other countries. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  3. 3. Outline Start with the U.S. ethanol value chain • Describe the characteristics Discuss jatropha as a feedstock for biodiesel Compare and contrast corn-based ethanol, seed-based biodiesel, and jatropha-based biodiesel value chains ConclusionsINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  4. 4. U.S. Experience There has been ethanol production in the U.S. for decades, though it has increased sharply recently, with the Energy Bill of 2005 and the EISA of 2007 expanding the market for ethanol producers. Ethanol is currently produced from edible crops, such as corn, sorghum, wheat, with corn leading the others as the major feedstock.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  6. 6. U.S. Ethanol Industry Structure There are 214 plants in different locations either operation or in construction • 204 of them are using corn • 65 of them are at or above 100 million gallons capacity • 176 of them are in the Midwest where the majority of corn production is. Operating production is about 11,057 million gallons, with 1,837 million gallons capacity under construction or expanding refineries.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  7. 7. U.S. Experience Since corn is an edible commodity, this leads to “intensified” competition between feed, fuel, export demand for corn in the U.S. Furthermore, corn is produced on land that is suitable for other crops. This in turn generates competition for land. By-products of the ethanol sector • Dry mills: DDG • Wet mills: corn oil, gluten feed, gluten mealINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  9. 9. U.S. Ethanol Profit Margins Existence of by-products adds to the value of the ethanol product by increasing the profit margins. DDG replaces some of the corn used in ethanol production in the feedstock rations of animals. DDG links the ethanol and the livestock sector value chains.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  10. 10. U.S. Dry-Mill Profit Margins Source: Author ComputationINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  11. 11. By-Products Market DDG replaces other feedstocks in mostly dairy and cattle feeding operations (ruminant animals). • Monogastric animals such as hogs and poultry are more limited in their ability to use distillers grains. They are mostly used for their energy content (similar to feed grains), though sometimes for protein.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  12. 12. Location of Plants Location of ethanol plants depends on • where feedstock is produced • where by-product (DDG) demand is by the livestock sector • where ethanol demand is by the refiners Transportation costs impact the value chain through the location of biofuel plants.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  13. 13. Location of Plants Yu and Fuller (2007) suggest that “it may not be cost efficient to locate the bulk of future production expansion in the Midwest. Instead, locating some ethanol plants in the southwestern and eastern U.S. can generate substantial cost savings by reducing the shipping distance for both ethanol and DDG.”INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  14. 14. U.S. Ethanol Value Chain Cost of Cost of Tax Credit Production Production Feedstock Biofuel Gasoline producers Processing Refiners PlantsFeed Use DDG Use Livestock Producers INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  15. 15. Jatropha Jatropha is a non-edible crop used for biodiesel production. So, biodiesel sector does not compete with food and feed use of this crop. Other feedstocks used for biodiesel production are rapeseed, soybean, coconut, and palm. Jatropha and its cousin varieties (e.g. castor) are found mostly in Asia and Africa, and tend to survive well in semi-arid environments.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  16. 16. Jatropha It is adaptable to semi-arid lands which are less productive. • It lessens the area competition, but it does not eliminate it completely. • More productive and better irrigated lands may be used for jatropha production in the future when the biodiesel industry expands and higher yields are needed to maintain profitability. This may intensify the land competition among crops and draw away resources. • We still see the food vs. fuel debate – even if the pathway of impact may be more indirect.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  17. 17. Jatropha It is expected to be a less expensive feedstock for biodiesel production and thus may help increase profitability of biodiesel plants. • However, it has a non-edible by-product. Yields depend on a range of factors such as water and soil conditions among others. So, this may introduce variability in the profits of the biodiesel industry in different locations.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  18. 18. Jatropha Tomomatsu and Swallow (2007) compare canola with biodiesel as a feedstock for biodiesel in Kenya. Canola produces an edible oil so that food demand competes with biodiesel demand. Its by-product is used for animal feed which helps profit margins. Jatropha has a non-edible by-product which has a market value, but less. The value chain will be different since feedlots will not be set up in proximity to jatropha-based biodiesel as a complementary industry.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  19. 19. Jatropha and Risk Since its production on a large scale is still risky for farmers, there may have to be other policies in place to make jatropha worthwhile. One option is long-term contracting between biodiesel plants and farmers • Epplin et al. (2007) mentions for biofuel processors to either contract with individual growers or with a group of growers through a cooperative arrangement. Government policies that will guarantee a certain level of demand for biodiesel will reduce the risk for farmers.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  20. 20. Jatropha and Risk For example, many Indian corporations are venturing into biodiesel production by initiating a memorandum of understanding with state governments to establish Jatropha plantations on government wasteland or contract farming with small and medium farmers (Attaché Reports India Biofuels 2008). Financial instruments made available to smallholder farmers may reduce their perceived risk.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  21. 21. Jatropha and Risk However, even if there are risk-reducing instruments available to farmers, not all farmers will benefit. Given the imperfect markets for insurance in many developing countries, and the particular types of risks faced by small-holders – some farmers will be “rationed out” of the market, because of risk. They can’t accept the contracts because they’re too risky. This may have distributional consequences.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  22. 22. Comparison of value chains Corn-based Seed-based Jatropha- Ethanol Biodiesel based BiodieselCompetition Yes (both food Yes (food) Nowith food use and feed)By-products There is a There is a There is noas feed market. market. market.Land It competes with It competes with It competescompetition other crops. other crops. much less with other crops since it is grown on marginal land.Productivity Investments in Investments in Experiments are crop yield is crop yield is continuing. Crop extensive. extensive. yields vary significantly.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  23. 23. Comparison of value chains Corn-based Seed-based Jatropha- Ethanol Biodiesel based BiodieselTransportation Established so Established so Newinfrastructure lower costs lower costs infrastructure necessary since on marginal land. Costs are higher.Farmers’ Higher demand Higher demand An establishmentplanting may change crop may change crop period for rotation rotation jatropha before the first harvests can be realized (3-5 years).INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  24. 24. Biofuels and poverty Arndt et al. (2008) show the positive impacts of biofuels on economic growth and poverty reduction in Mozambique. They discuss the relative benefits generated by alternative production structures, i.e. plantation versus outgrower. Jatropha with an outgrower scheme is more pro-poor. If such outgrower schemes can be designed to provide technology spillovers for smallholders, giving higher productivity for staple crops – the benefits could be greater.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  25. 25. Conclusions Newcomers to the biofuels industry can learn from the experience of other countries. For newcomers, securing a stable and consistent biomass supply is crucial for favorable feedstock costs and profit margins. • Long-term contracts with farmers or cooperatives will guarantee demand for the farmers and lower feedstock costs for the biofuel processors. Policy incentives and risk-reducing financial instruments may be necessary for new crops like jatropha.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  26. 26. Conclusions Multiple factors impact the biofuel value chains. Choice of technology (wet vs. dry) and choice of commodity (edible vs. non-edible) will impact the final value chain created • Through markets for by-products • Through competition between fuel and food demands for the feedstock • Through land competition among cropsINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  27. 27. QUESTIONS? S. Msangi IFPRI (s.msangi@cgiar.org) S. Tokgoz IFPRI (s.tokgoz@cgiar.org)INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  30. 30. By-Products Market Where ethanol plants and larger cattle feedlots are in close proximity, co-product inclusion in feed rations is more widely practiced (Matthews and McConnell 2009). Most U.S. livestock producers buy their co- products on the spot market and prefer not to buy under contracts (USDA, NASS, 2007).INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  31. 31. Securing biomass supply Epplin et al. (2007) discusses various options for biofuel processors to obtain a reliable flow of feedstock in the absence of spot markets • contracting with individual growers • contracting with a group of growers through a cooperative arrangement • arranging long-term land leases similar to the U.S. Conservation Reserve Program (CRP) leases • acquiring landINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  32. 32. Policy Incentives Demand side policies that generate a floor for demand • Energy Bill of 2005 • EISA of 2007 • Tax credits for refiners blending ethanol with gasoline • Cellulosic ethanol tax credit Supply side policies that encourage biomass productionINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE