challenges facing modelers of the biofuels industry in canada

Challenges Facing Modelers Challenges Facing Modelers of the Biofuels Industry in of the Biofuels Industry in

CanadaCanada

K. K. Klein and Danny G. Le RoyK. K. Klein and Danny G. Le Roy

Forestry and Agriculture Greenhouse Gas Modeling Forum, Forestry and Agriculture Greenhouse Gas Modeling Forum, Workshop #4:Workshop #4:

Modeling Ag-Forest Offsets and Bio-fuels in U.S. and Canadian Modeling Ag-Forest Offsets and Bio-fuels in U.S. and Canadian Regional and National MitigationRegional and National Mitigation

Shepherdstown, West Virginia, USAShepherdstown, West Virginia, USA

Wednesday, March 7, 2007Wednesday, March 7, 2007

OutlineOutline

Context:Context:– PolicyPolicy– OutcomesOutcomes– Economic Research QuestionsEconomic Research Questions

Modeling challenges:Modeling challenges:– Understanding the informational needs Understanding the informational needs

of model users.of model users.– How best modify existing models.How best modify existing models.

Biofuel Policy in Canada - 1Biofuel Policy in Canada - 1 Primary motivation is not energy secuPrimary motivation is not energy security.rity.

– Producers in Canada are Producers in Canada are netnet exporters: exporters: Oil, Natural gas, Uranium, Hydro-electricity, CoalOil, Natural gas, Uranium, Hydro-electricity, Coal etc. etc.

$0

$10

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1986

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2002

2004

Year

Billions Exports

Imports

Biofuel Policy in Canada - 2Biofuel Policy in Canada - 2

Motivation: Motivation: – Environmental concerns. Environmental concerns.

– The desire to improve The desire to improve

rural development. rural development.

– The desire to enhance and The desire to enhance and stabilize farm incomes. stabilize farm incomes.


EthanolBiodiesel

Biogas


Production mandates:Production mandates:

– Average renewable Average renewable contentcontent

GasolineGasoline: : 5%5% by 2010. by 2010.

DieselDiesel: : 2%2% by 2012. by 2012.

Biofuel Policy in Canada - 5Biofuel Policy in Canada - 5 Implications:Implications:

Projected Projected Demand Demand

Created by Created by MandateMandate

20062006

Production Production CapacityCapacity

Required Required Increase in Increase in CapacityCapacity

EthanolEthanol

(by 2010)(by 2010)3.1 billion litres3.1 billion litres

(819 million US (819 million US gallons)gallons)

605 million litres605 million litres(160 million US (160 million US

gallons)gallons)

2.5 billion litres2.5 billion litres(659 million US (659 million US

gallons)gallons)

(↑ 413%)(↑ 413%)BiodieseBiodiesel l

(by 2012)(by 2012)


gallons)gallons)


gallons)gallons)


gallons)gallons)

(↑ (↑ 971%)971%)

Outcomes - 1Outcomes - 1

The renewable fuels lobby The renewable fuels lobby has been very effective.has been very effective.

Widespread government Widespread government support of the biofuel support of the biofuel industry in Canada will have:industry in Canada will have:

Intentional and desirable effectsIntentional and desirable effects Inevitable and undesirable Inevitable and undesirable

effectseffects

Outcomes - 2Outcomes - 2

The ethanol frenzy in the US will have a The ethanol frenzy in the US will have a larger impact in Canada than federal and larger impact in Canada than federal and provincial government programs for provincial government programs for biofuels.biofuels.

Outcomes – 3Outcomes – 3

Higher input Higher input costs forcosts for::– BeefBeef– DairyDairy– HogsHogs– PoultryPoultry

Cereal Grains Cereal Grains and Oilseedsand Oilseeds

Mar 1, 2007Mar 1, 2007PricePrice

Mar 1, Mar 1, 20062006

PricePrice

CornCorn, , CBOT future, CBOT future, next-nearest month, next-nearest month, US$ per bushelUS$ per bushel

US$4.36US$4.36

(↑ 86%)(↑ 86%)US$2.35US$2.35

SoybeansSoybeans, , CBOT CBOT future, next-nearest future, next-nearest month, US$ per month, US$ per bushelbushel

US$7.81US$7.81

(↑ 32%)(↑ 32%)US$5.91US$5.91

OatsOats, , CBOT future, CBOT future, next-nearest month, next-nearest month, US$ per bushelUS$ per bushel

US$2.59US$2.59

(↑ 39%)(↑ 39%)US$1.86US$1.86

Feed BarleyFeed Barley, , WCE WCE future, next-nearest future, next-nearest month, C$ per tonnemonth, C$ per tonne

C$186.50C$186.50

(↑ 54%)(↑ 54%)C$120.80C$120.80

Feed WheatFeed Wheat, , WCE WCE future, next-nearest future, next-nearest month, C$ per tonnemonth, C$ per tonne

C$165.00C$165.00

(↑ 59%)(↑ 59%)C$103.50C$103.50

Research Questions - 1Research Questions - 1

With the increase in demand for With the increase in demand for grains and oilseeds as biofuel grains and oilseeds as biofuel feedstocks, how will the pattern of feedstocks, how will the pattern of crop production be affected?crop production be affected?


With the increase in demand for grains With the increase in demand for grains and oilseeds as biofuel feedstocks, and oilseeds as biofuel feedstocks, what will be the impact on the level what will be the impact on the level and pattern of livestock production?and pattern of livestock production?


What are the impacts of the What are the impacts of the increase in the supply of DDGs on increase in the supply of DDGs on the composition of feed rations, the composition of feed rations, logistics and enterprise profitability?logistics and enterprise profitability?


How might commodity markets How might commodity markets adjust as cellulosic ethanol adjust as cellulosic ethanol becomes economic?becomes economic?

Modeling Challenges - 1Modeling Challenges - 1

There is a need in Canada to develop There is a need in Canada to develop a a systems modelsystems model to help answer to help answer these types of research questions.these types of research questions.

– i.e., one that deals with the i.e., one that deals with the productionproduction, , distributiondistribution and and consumptionconsumption of goods of goods within and across sectorswithin and across sectors

… … with linkages to foreign sources of with linkages to foreign sources of demand and supply.demand and supply.

Criteria For a Systems Criteria For a Systems ModelModel

1.1. Consumer driven.Consumer driven.

2.2. Spatial distribution of production.Spatial distribution of production.

3.3. Clear separation of stages of production.Clear separation of stages of production.

4.4. Stages of production occur Stages of production occur in timein time..

5.5. Price and product risk.Price and product risk.

6.6. Capacity to change crop types.Capacity to change crop types.

7.7. Linkages to horizontal markets.Linkages to horizontal markets.

8.8. Linkages to foreign markets.Linkages to foreign markets.

9.9. Capacity to analyze market Capacity to analyze market interventions.interventions.

An Obvious Choice…An Obvious Choice…

CRAMCRAM– Mathematical programming modelMathematical programming model– Used many Used many times to assess many policy times to assess many policy

alternatives: alternatives: Statutory freight rates on prairie grains and oilseeds Statutory freight rates on prairie grains and oilseeds Feed Freight Assistance program Feed Freight Assistance program Effects of trade agreements (CUSTA and NAFTA) Effects of trade agreements (CUSTA and NAFTA) Effects of agricultural program changes (direct Effects of agricultural program changes (direct

assistance to beef and hogs, WGTA) assistance to beef and hogs, WGTA) Impacts of possible technological change (rBST) Impacts of possible technological change (rBST) Effectiveness of crop insurance Effectiveness of crop insurance Returns generated through publicly funded research Returns generated through publicly funded research

on several agricultural commoditieson several agricultural commodities

– Recently updated !!Recently updated !!

FARMFARM– Structural econometric model.Structural econometric model.– Used by Agriculture and Agri-Food Canada to Used by Agriculture and Agri-Food Canada to

generate medium term outlook forecasts.generate medium term outlook forecasts.

– 11 key components:11 key components: Beef, pork, poultry and eggs (3)Beef, pork, poultry and eggs (3) Milk and dairy products (1)Milk and dairy products (1) Crops (excl. horticulture) (1)Crops (excl. horticulture) (1) Consumer prices for food and retail food (1)Consumer prices for food and retail food (1) Farm input prices and quantities (2)Farm input prices and quantities (2) Farm income, agri-food trade, and manufacturing Farm income, agri-food trade, and manufacturing

shipments (3)shipments (3)

Another Obvious ChoiceAnother Obvious Choice

Suitability Comparison - 1Suitability Comparison - 1

CriteriaCriteria CRAMCRAM FARMFARM1. Consumer driven.1. Consumer driven. LIMITEDLIMITED

But it does capture But it does capture changes in demand and changes in demand and supplysupply

NONOTrade is calculated Trade is calculated as a residual.as a residual.

2. Spatial 2. Spatial distribution of distribution of production.production.

YESYESBC (8); Prairies (22); ON BC (8); Prairies (22); ON (10); QC (11); Maritimes (10); QC (11); Maritimes (4)(4)

LIMITEDLIMITEDEast-West for the East-West for the supplies of beef, supplies of beef, hogs and crops.hogs and crops.

3. Clear separation 3. Clear separation of stages of of stages of production.production.

NONOLower order products Lower order products (cattle) are sinks for (cattle) are sinks for higher order products higher order products (feed grains)(feed grains)

YESYESLinking equations.Linking equations.


CriteriaCriteria CRAMCRAM FARMFARM4. Stages of 4. Stages of production occur production occur in in time.time.

NONOStatic single time Static single time periodperiod

NONOStatic single time Static single time periodperiod

5. Price and product 5. Price and product risk.risk. NONO

Deterministic, not Deterministic, not stochasticstochastic

NONODeterministic, not Deterministic, not stochasticstochastic

6. Capacity to 6. Capacity to change crop types.change crop types. YESYES

But this is a complex But this is a complex processprocess

LIMITEDLIMITEDRequires econometric Requires econometric estimation dependant estimation dependant on price, quantity and on price, quantity and technical data that technical data that may be unavailable.may be unavailable.


CriteriaCriteria CRAMCRAM FARMFARM7. Linkages to 7. Linkages to horizontal horizontal markets.markets.

YESYESLivestock (cattle, hogs, etc)Grains (wheat, barley etc)Oilseeds (canola, soybeans)Special crops, forages, etc

YESYESWheat, canola, beef, pork and feed.

8. Linkages to 8. Linkages to foreign markets.foreign markets. YESYES

Exogenous linkagesExogenous linkages

YESYESForeign demand and Foreign demand and supply equations for supply equations for wheat, canola, beef, wheat, canola, beef, pork and feed.pork and feed.

9. Capacity to 9. Capacity to analyze market analyze market interventions.interventions.

YESYES YESYES

Modeling Challenges - 2Modeling Challenges - 2

Both CRAM and FARM have Both CRAM and FARM have advantages and disadvantages.advantages and disadvantages.

– But for most questions, the spatial But for most questions, the spatial advantages of CRAM make it a advantages of CRAM make it a preferable means of analysis. preferable means of analysis.

Model Modifications - 1Model Modifications - 1 With the increase in demand for grains and With the increase in demand for grains and

oilseeds as biofuel feedstocks, how will the oilseeds as biofuel feedstocks, how will the pattern of crop production be affected?pattern of crop production be affected?

RequiresRequires:: Specific biofuels be included as Specific biofuels be included as a competing end use for identified crops.a competing end use for identified crops.

– quantities demanded of biofuel, location of quantities demanded of biofuel, location of plantsplants

– crop varieties, methods.crop varieties, methods.– biofuel pricesbiofuel prices– technical coefficientstechnical coefficients

Model Modifications - 2Model Modifications - 2 With the increase in demand for grains and With the increase in demand for grains and

oilseeds as biofuel feedstocks, what will be oilseeds as biofuel feedstocks, what will be the impact on the level and pattern of the impact on the level and pattern of livestock production?livestock production?

RequiresRequires:: Important modifications to the Important modifications to the livestock component in CRAM, esp. cattlelivestock component in CRAM, esp. cattle

– two period modeltwo period model– endogenously determined size and location of endogenously determined size and location of

industryindustry

– DDGs pose a very complex modelling problem….DDGs pose a very complex modelling problem….

Model Modifications - 3Model Modifications - 3

What are the impacts of the increase in What are the impacts of the increase in the supply of DDGs on the composition of the supply of DDGs on the composition of feed rations, logistics and enterprise feed rations, logistics and enterprise profitability?profitability?

RequiresRequires:: the composition of rations be the composition of rations be determined endogenously within CRAM.determined endogenously within CRAM.

– This plays a big role in the pattern of resource This plays a big role in the pattern of resource allocation and location of livestock production.allocation and location of livestock production.

– Involves several dimensions which are not Involves several dimensions which are not scientifically well understood.scientifically well understood.

Model Modifications - 4Model Modifications - 4 Physical challenges of DDGsPhysical challenges of DDGs

– Moisture content for shipping Moisture content for shipping – Consistent nutritive contentConsistent nutritive content

Levels of fat, protein, amino acidsLevels of fat, protein, amino acids How to incorporate in rations for:How to incorporate in rations for:

– RuminantsRuminants Dairy and beef, by sex, age, stage of growthDairy and beef, by sex, age, stage of growth

– MonogastricsMonogastrics Hogs and poultry, by sHogs and poultry, by sex and ageex and age

– Price elasticities of demand and supplyPrice elasticities of demand and supply– Elasticities of substitution within rations and Elasticities of substitution within rations and

across livestock types.across livestock types.

Model Modifications - 5Model Modifications - 5

How might commodity markets adjust as How might commodity markets adjust as cellulosic ethanol becomes economic?cellulosic ethanol becomes economic?

RequiresRequires:: Specific biofuels be included as Specific biofuels be included as a competing end use for identified crops.a competing end use for identified crops.

– quantities demanded of biofuel, location of quantities demanded of biofuel, location of plantsplants

– feedstock varieties, methodsfeedstock varieties, methods– biofuel pricesbiofuel prices– technical coefficientstechnical coefficients

Concluding RemarksConcluding Remarks

Need a suitable economic systems Need a suitable economic systems model for major agricultural model for major agricultural industries, industries, particularly those that are particularly those that are vulnerable to rapidly changing supply vulnerable to rapidly changing supply and demand conditionsand demand conditions. .

– This would allow rapid analysis of major This would allow rapid analysis of major policy, production and investment policy, production and investment options. options.

challenges facing modelers of the biofuels industry in canada

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