Agricultural Policy Options for Improving Energy Crop Economics

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Agricultural Policy Agricultural Policy Options for Improving Options for Improving

Energy Crop Economics Energy Crop Economics

Daniel G. De La Torre UgarteDaniel G. De La Torre UgarteAgricultural Policy Analysis Center

University of Tennessee

Southern Bio-Products ConferenceSouthern Bio-Products Conference Biloxi, MississippiBiloxi, Mississippi

March 5,2004March 5,2004

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Synergism Between Synergism Between Agriculture and EnergyAgriculture and Energy

• Too many acres in crops to generate

adequate market incomes.

• Farmers and rural communities do not like

to set aside land; they like to farm.

• Bioenergy Alternative: bioenergy feedstock

production as mean to increase farm

prices/income.

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Linking Agriculture with Linking Agriculture with Energy SectorEnergy Sector

• Traditional crops: Increase price of a specific commodity.

• Crop residues: Increase revenue for a specific crop

• Energy dedicated crops: Increase demand for cropland

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Traditional CropTraditional Crop(corn, soybeans)(corn, soybeans)

• Pros:– Increases farm price and income, reduce

government expenditures– If corn-ethanol, industry already developed

• Cons:– Direct competition with traditional uses– May not have a positive agricultural wide

impact (by-products)– Limited crop and geographic impact

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Crop Residues Crop Residues (corn stover, wheat straw, rice hulls, etc.)(corn stover, wheat straw, rice hulls, etc.)

• Pros:– Generates additional income for farmers

growing the crop– Already available on the ground

• Cons:– Environmental concerns and regulations

limit availability– May have a negative impact on crop price– Limited agricultural wide impact

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Energy Dedicated CropEnergy Dedicated Crop(switchgrass, poplars, willows)(switchgrass, poplars, willows)

• Pros:– Alternative use of cropland – Price and income benefits across crops– Wider geographic impact– Indirect competition with traditional uses

• Cons:– Industry is not developed / uncertain

business environment– Institutional inertia

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Developing the SynergismDeveloping the Synergism

Focus on energy dedicated crops as they offer a higher potential for:

– Shifting cropland away from traditional

crops and uses.

– Impacting agriculture as a whole.

– Impacting a wider geographic area.

– Developing a larger feedstock supply.

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Current Structure of Current Structure of Government Support for Government Support for

AGAG• Counter cyclical income support: triggered if farm

price below target price. Payments based on fixed production

level.

• Loan deficiency payments: triggered if farm price falls

further below marketing loan rate. Payments based on actual

production.

• Direct contract payments: payments are fixed

regardless of price and production level.

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Illustration with Corn Illustration with Corn PricePrice

1.50

1.70

1.90

2.10

2.30

2.50

2.70

2004 2005 2006 2007 2008 2009 2010 2011 2012

Target Price

Marketing Loan Rate

Farm Price

Do

llar

s p

er b

ush

el

Years

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Specific QuestionsSpecific Questions

• Could a bioenergy crop “buy” acreage away

from traditional crops?

• If so, could agricultural prices and market

returns be significantly enhanced?

• If so, could saved government farm payments

be used instead to make the bioenergy crop a

cost-effective fuel for utilities?

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So, Let’s Suppose:So, Let’s Suppose:

• Farmers could receive $44 per dry ton for

switchgrass

• Switchgrass production was initiated in

2005.

• Results for the year 2012

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Energy Dedicated CropsEnergy Dedicated Crops**

Production RegionsProduction Regions

* Switchgrass, hybrid poplars, hybrid willows* Switchgrass, hybrid poplars, hybrid willows

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cotton

wheat

corn

soybeans

Baseline (USDA, 2003)

Switchgrass @ $/dt 44.00

Dedicated CropsDedicated CropsChanges In Crop PricesChanges In Crop Prices

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2004 2006 2008 2010 2012

0.20

0.30

0.40

0.50

0.60

0.70

2004 2006 2008 2010 2012

2.00

3.00

4.00

5.00

6.00

7.00

2004 2006 2008 2010 2012

1.00

1.40

1.80

2.20

2.60

3.00

2004 2006 2008 2010 2012

`

Target Price

Marketing Loan Rate

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Switchgrass EstimatesSwitchgrass Estimates Year 2012 Year 2012

VariableVariable unitsunits 20122012

Farm Gate Price $/dton 44.00

Planted Acreage mil. acres 20.88

Yield dtons/acre 4.90

Production mil. dtons 102.00

Returns from Switchgrass bil. $ 1.42

Increased Market Revenues bil. $ 3.77

Increased Net Farm Income bil. $ 4.00

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Impact in Impact in Gov. PaymentsGov. Payments20122012

VariableVariable unitunit 20122012

Loan Deficiency Payments mil. $ 258

Counter Cyclical Payments mil. $ 935

Direct Payments* mil. $ 4,000

Savings in Gov. Payments mil. $ 5,193

* Maximum reduction direct payments that could be done without negatively affecting net farm income.

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Maximum Incentive LevelMaximum Incentive Level20122012

VariableVariable unitunit 20122012

Productionmil. dtons

102.00

Savings in Gov. Payments mil. $ 5,193

Maximum energy incentive $/dton 50.90

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Cost of EnergyCost of Energy(Electricity at 10% Co-firing w/Coal)(Electricity at 10% Co-firing w/Coal)

CoalCoal SwitchgrassSwitchgrass

Feedstock delivered price ($/dton)Feedstock delivered price ($/dton) 54.00

Energy incentive ($/dton)Energy incentive ($/dton) 28.00

Fuel cost ($/Mbtu)Fuel cost ($/Mbtu) 1.68

Fuel cost ($/MWh)Fuel cost ($/MWh) 17.61

Transformation cost ($/MWh)Transformation cost ($/MWh) 17.58

Credits (Credits (Renewables, CO2Renewables, CO2) ($/MWh)) ($/MWh) -23.10

Cost of Energy ($/MWh)Cost of Energy ($/MWh) 12.50 12.09

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Concluding RemarksConcluding Remarks

• Additional market returns for farmers– Without set aside– Land can be converted back to major crops– Competes at the land level; not the use level

• Reduced government outlays

• Increased reliance on domestic sources of renewable energy and most likely

• Environmental benefits

Synergism between agriculture & energy through bioenergy dedicated crops could provide:

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Agricultural Policy Analysis Center The University of Tennessee 310 Morgan Hall 2621 Morgan Circle Knoxville, TN 37996-4519

www.agpolicy.org

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01 - 2425 - 4950 -99100 - 149150 - 299300 and above

Change in Market ReturnsChange in Market Returns1996-2000 (million $)1996-2000 (million $)

Corn BasedCorn Based

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01 - 2425 - 4950 - 99100 - 149150 - 299300 and above

Change in Market ReturnsChange in Market Returns1996-2000 (million $)1996-2000 (million $)

Switchgrass BasedSwitchgrass Based

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Future Research AgendaFuture Research Agenda

• Price and supply variability

• Logistics/Institutional arrangements

• Environmental impacts

• Limits of agriculture as source of feedstock