Biofuels : At the Crossroads of Agricultural and Energy Policies

Bruno Larue Canada Research Chair in International Agri-food Trade and director of

CREATE

Growing Our Future Institute for the Advanced Study of Food and Agricultural Policy

Ottawa, April 5, 2012

SPAANetworkStructure and Performance of Agriculture and Agri-products industry Network

A popular conception of biofuels

Biofuels: A bit of chemistry

Biofuels, like ethanol and biodiesel, are designed fuels derived from biological carbon fixation.

Ethanol is produced from the fermentation of carbohydrates produced by the sugar found in plants like corn and sugarcane.

Ethanol can be used as an alternative car fuel, like the E85 used in Brazil, or as a gasoline supplement, like the E10, which is common in North America.

Ethanol by-products, dry and wet distillers grains, are fed to livestock.

The ratio of energy produced by sugar cane-based ethanol over the energy needed to produce it varies between 8.3 and 10.2. For corn-based ethanol, the ratio varies between 1.3 and 1.6.

Biofuels: a bit of history

Ethanol has been with us for a surprisingly long time. The Ford model T could run on gasoline or ethanol and Henry Ford was reportedly an ethanol advocate.

The first use of sugarcane ethanol as a fuel in Brazil goes back to the 1920s. A 50% mandatory blend was imposed in 1943 as a response to threatened oil supplies during WWII.

Until the early 1970s, oil was cheap and ethanol was not competitive. Environmental issues were not in public policy discussions.

Ethanol Production (1975-2010), in millions of gallons

0

5,000

10,000

15,000

20,000

25,00019

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

9920

0120

0320

0520

0720

09

World

US

Brazil

EU

The events that changed the views on ethanol

The two oil shocks (1973 and 1979) made oil importing countries aware of the dangers of oil dependancy and willing to subsidize the production of alternative fuels.

Brazil embarked on its « Programa nacional do alcool » in 1975 and a blending mandate varying between 10% and 22% was used between 1976 and 1992.

Cars running on E100/neat ethanol were first commercialized in Brazil in 1979.

Brazil imposed a mandatory blend of 22% anhydrous ethanol in 1993. The mandated blend has varied between 20% and 25% afterward.

First Flex Fuel cars sold in 2003.

Brazilian ethanol: a case illustrating the infant industry argument? Price subsidies for ethanol producers

Low interest loans to encourage investment

Subsidized ethanol retail prices below gas prices

Private and public investments in R&D

By 2004, technological advances and economies of scale made ethanol competitive with gasoline (Goldemberg, 2008).

In 2007, Brazil exported about 20% of its production, but it has been importing from the United States recently.

Costs of production (€/1000 liters)

USA corn Germany wheat Germany sugarbeet

Brazil sugarcane

Buildings 0.39 0.82 0.82 0.21 Equipment 3.40 5.30 5.30 1.15 Labor 2.83 1.40 1.40 0.52 Insurance, taxes and other costs

0.61 1.02 1.02 0.48

Feedstock 20.93 27.75 35.10 9.80 Other operation costs

11.31 18.68 15.93 2.32

Total production cost

39.47 54.97 59.57 14.48

Sale of byproducts

6.71 6.80 7.20

Government subsidies

7.93

Net production cost

24.83 48.17 52.37 14.48

Source: Goldemberg (2008)

Recent changes in the United States The US$0.54/gallon tax on ethanol imports and the US$0.45/gallon

tax credit on blending have been terminated at the very end of 2011, saving an estimated US$6 billion/year to US taxpayers (Babcock, Barr and Carriquiry, 2010).

The 2005 Energy Policy Act required that 7.5 billion gallons of renewable fuel be used by 2012.

The 2007 Energy Independence and Security Act imposed an annual limit of 36 billion gallons for 2022, of which 44% must be advanced renewable fuel.

Ethanol as a fraction of gasoline use went from 1% in 2000 to a bit less than 10% in 2010.

Production is concentrated in the Midwest (Iowa, Nebraska, Minnesota, Illinois and Indiana).

As recently as 2009, the US was a net importer of ethanol, but it exported 940 million gallons more than it imported in 2011, from an estimated production of 13900 million gallons.

Ethanol production in Canada Canada produced 462 million gallons of ethanol in 2011.

This makes it the fifth largest producing nation in the world, behind the US, Brazil, the EU and China.

As of December 2010, Canada mandated that ethanol account for 5% of gasoline use.

Grier, Mussell and Rajcan (2012) evaluate government support at $250 million/year.

Some provinces, like Quebec, have decided NOT to expand their production capacity of corn-based ethanol, but invested $27 million to help Enerkem and Greenfield Ethanol build a full-scale commercial cellulosic ethanol plant.

Canada’s biggest ethanol plants

Table 2. Canada’s largest ethanol plants

Ethanol Plant Location Feedstock Capacity (Mmly)

Suncor St. Clair Ethanol Plant Sarnia, Ontario corn 400 GreenField Ethanol Inc. Johnstown, Ontario Corn 230 GreenField Ethanol Inc. Chatham, Ontario Corn 195 IGPC Ethanol Inc. Aylmer, Ontario Corn 162 GreenField Ethanol Inc. Varennes, Quebec Corn 155 Terra Grain Fuels Inc. Belle Plaine, Sask. Wheat 150 Husky Energy Inc. Minnedosa, Manitoba Wheat and corn 130 Husky Energy Inc. Lloydminster, Sask. Wheat 130 Source: http://www.greenfuels.org/en/industry-information/plants.aspx

The economics of mandates

Ethanol S

PE

PB

AveP

PG

D D

0 2 4 6 8 100

2

4

6

8

10

What if the mandate is increased? What if the price of corn increases?

Biodiesel: production trends

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

1,000

2,000

3,000

4,000

5,000

6,000

WorldUSEU

Biodiesel in Canada and elsewhere In Canada, renewable fuel regulations mandate that biodiesel be

blended to represent 2% of all diesel fuel sold, or over 1.5 billion litres of biodiesel.

Current production and production capacity are low, but Alberta, Ontario and Quebec have projects for larger plants.

Mixes of biodiesel and petrodiesel commonly marketed include B100 (100% biodiesel), B20 (20% biodiesel, 80% petrodiesel), B5 and B2. The last three can be used in standard diesel engines.

In France, buses equipped with special engines run on a 50% blend.

Land diversion: US Corn acreage over time

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

20000000

40000000

60000000

80000000

100000000

120000000

US Corn planted acres

Corn acreage in Canada (1990-2011)

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

CanadaQuebecOntario

Consequences of ethanol boom

US corn demand for ethanol is up, but exports and feed use are down. Rising feedgrain prices in the United States and Canada made livestock

producers angry at ethnanol policies, but made land owners happy. The average price for an acre of cropland in the US was around $1600 in 2003 compared to $3200 in 2011.

0

50

100

150

200

250

300

350

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Production

Feed

Ethanol

Exports

Corn and oil prices

Feb-

02

Aug-0

2

Feb-

03

Aug-0

3

Feb-

04

Aug-0

4

Feb-

05

Aug-0

5

Feb-

06

Aug-0

6

Feb-

07

Aug-0

7

Feb-

08

Aug-0

8

Feb-

09

Aug-0

9

Feb-

10

Aug-1

0

Feb-

11

Aug-1

1

Feb-

120

50

100

150

200

250

300

350

Crude Oil Price

Corn Price

Is ethanol responsible for the high and volatile price of corn? Mitchell (2008) said « yes ». OECD (2008) said « some » Baffes and Haniotis (2010) said “not really” Effect on food prices differ between poor and rich

countries.

Many causes: - Strong aggregate demand stemming from economic

growth in the developping world, low inventories and inelastic supply and demand functions;

- Weather and other exogenous shocks;- Peculiar policies (Tangermann, 2011);- Speculators;- Commodity prices are not more volatile than before.

Is the price of corn more « exposed » to oil price shocks than before? The relationship between corn and oil prices

has evolved over time. 3 structural breaks: 2nd oil price shock, end of

export subsidy war between the US and the EU and the ethanol boom.

The corn price systematically adjusts to oil price shocks in recent years only. The converse is not true: the oil price does not systematically adjust to shocks to the price of corn (El Marzougui and Larue, 2012).

Conclusion Biofuels are a response to concerns about dependency on

foreign fossil fuels, a desire to curb GHG emissions and a desire to redistribute wealth with a specific regional/commodity focus.

A more efficient way to internalize the environmental externality would be to tax sources of GHG emissions.

Canada’s mandates on ethanol and biodiesel are relatively low and hence not too distorting.

Ag prices are more than ever affected by oil price shocks. Arable land endowments are trending downward in many

parts of the world, pressure to get better yields (more bushels/acre, more ethanol per bushel).

How will demand for fuels and food change in the future?