Monday, March 9, 2009

Increasing Biofuel Demand and its Impacts on Markets and Poverty - the Output of Two Recent Seminars and the BIOMASS Project

In the previous Palawija News, Robin Bourgeois suggested that we should link promoting Clean Renewable Energy (CRE) to poverty alleviation (Palawija News 23(4) p. 6-11). With that idea in mind, this article describes the output of two seminars recently held in Japan. Both seminars focused on how a rising demand of biofuel would affect the international agricultural commodity market. Then, the outline of the JIRCAS and CAPSA's collaboration project (BIOMASS) will be presented. The project focuses on the effects of an increasing biomass energy market on poverty alleviation and sustainable development.

Seminar one: Agriculture market outlook - special focus on biofuel development
The seminar was organized by the Policy Research Institute of the Japanese Ministry of Agriculture, Forestry and Fisheries (PRIMAFF). It was held on 19 June 2007 in Tokyo. Dr. Loek Boonekamp, Head of the Agrifood Trade and Markets Division, Directorate for Trade and Agriculture of OECD presented the paper "The Aglink Cosimo Model " Its Use in Market Outlook and Policy Analyses". Dr. Boonekamp has been responsible for OECDs agriculture market outlook since 1995. The Aglink Cosimo model is a large-scale partial equilibrium model of global agricultural markets. The Aglink Cosimo modelling system is presently one of the most comprehensive partial equilibrium models for global agriculture. The model is one of the tools used in generating baseline projections that underlie the OECD-FAO Agricultural Outlook1.

The main conclusions of the 2007 Agricultural Outlook were presented during the seminar. They are summarized below.

Expected world commodity prices
Price expectations for major agricultural commodities were calculated as the average of world prices of the coming ten years. This year's price projection (average price 2007-2016) is significantly higher than last year's projection (average price 2006-2015). The difference between the two projections is especially large for cereals (e.g. maize: +28 per cent), dairy (e.g. cheese: +25 per cent) and animal products (e.g. beef: +20 per cent).

Cereal demands for biofuel
It is anticipated that in 2016, around 60 per cent of Brazil's sugar cane production, and more than half of the EU's oilseed production will be used for bioenergy, bio-ethanol and biodiesel respectively. The biofuel industry will become a large consumer of cereals. Cereal demands for the biofuel industry will heavily depend on future feedstock and oil prices, and on the advent of new technologies and government policies. At this moment in time, it is therefore difficult to make precise predictions for future demands of the biofuel industry. This will cause the biofuel industry to act as a major uncertainty of cereal markets.

Increased world trade in agricultural commodities
Compared to the average figures of 2004-2006, the imports of agricultural commodities in 2016 will show a large increase. Above all, beef, vegetable oils and butter will increase with more than 40 per cent. As for the export, most growth will come from developing countries, especially Argentina and Brazil. OECD countries will decrease their share of world export but they will still remain dominant traders in the international market. Very few developing countries will dominate imports, except China with its oilseeds import, which will represent more than 70 per cent of the total world import in 2016.

Projections for world market commodity prices
Projections show a trend of rising commodity prices, as mentioned before. In fact, price increases already have been observed in several oil and starch crops. Some analysts warned that this might be a negative impact of the rising biofuel demand. Before testing this hypothesis, it is useful to refer to two basic facts. Firstly, declining global stocks of agricultural commodities provide a context for more volatile markets. Secondly, extraordinary weather patterns such as El-Nino have lowered global cereal production and exports. An increased ethanol production has surely also raised wheat and coarse grain consumption. However, the drop in supplies has been much larger than the rise in demand, at least during 2006-2007 world cereal markets. Therefore, the biofuel industry cannot be taken to be solely responsible for the higher crop prices.

Long-term market and trade impacts of growing bioenergy demand
Then, what about long-term impacts? We need to remember that currently without government support, ethanol is not an economically viable option in most countries. The economics of biofuel production is highly influenced by the crude oil prices. In 2004, when the oil price was around US$40/barrel, sugar cane ethanol in Brazil was the only economically feasible option. With the oil price level of April 2006, around US$70/barrel, maize ethanol was also economically feasible in the USA. However, US$100/barrel is required for wheat and sugar beat ethanol, and rape oil biodiesel in the EU. It is anticipated that cereal based ethanol production will grow rapidly in the coming ten years and it will require a substantial quantity of maize and wheat. The consequences of this will be: (i) lower wheat and maize exports; (ii) land to be drawn out of oilseed production; and (iii) overall higher crop prices. In conclusion, crop prices are expected to be higher and more unstable on the long term. This situation will provide higher incomes for some farmers, but higher costs for others.

Seminar two: the 9th joint biomass seminar
The seminar was held in Tsukuba, Japan on 13 June 2007 and was organized by the Consultative Assembly of Independent Administration Agency for Biofuel Research and Development. One of the papers named "Enhancement of Bioethanol and its Implication to Cereal Trade in the USA and China" presented during the seminar will be described shortly here. The paper was presented by Dr. Ruan Wei, Senior Researcher, Norinchukin Research Institute, Agricultural and Forestry Central Bank.

Transformation of US energy policies and increasing maize demand
The USA plans to reduce its reliance on Middle East oil by 75 per cent by 2025. To reach this, the government is trying to increase ethanol production to 7.5 billion gallon under the 2005's new Energy Law. Most analysts suggest, however, that the target is set too low, considering that the ethanol production in the USA already reached 4 billion gallon in 2005. This amount equals 3 per cent of total gasoline sales in the country. Maize demand for ethanol production is increasing and represented 14.4 per cent of the total maize production of 2005, while the share of maize export is 19.3 per cent. However, it is anticipated that maize demands for ethanol production will as soon as 2007 surpass export amounts.

From ‘alternative energy’ to ‘price support’
Until recently, cereal production in the USA heavily depended on the export market. Exports presented sometimes more than 40 per cent of total maize production. However, due to shrinking export market in late nineties the cereal price dropped much. The first ethanol plant led by farmers started in 1992 in Nebraska, USA. It was just after the establishment of tax incentives for small-scale ethanol producers and the compulsory use of ethanol based gasoline combustion by the Clean Air Act in 1990. Though the objective of ethanol development was to develop alternative energy, it also aided rural development and created price support through stimulating domestic maize demand. It also contributed to reducing farm subsidies. Some people however criticize that only the primary recipients of subsidies have changed from farmers to the biofuel industry.

USDA agricultural baseline projection to 2015
According to prospects made by USDA (United States Department of Agriculture) for the next decade, US maize export will continue to be only around 20 per cent of its total production. Farm gate price of maize will remain relatively high during the same period. The total planted area of major cereals will be stable, but maize will occupy a larger area mainly due to the increase of continuous maize cropping. As genetically modifies maize becomes more popular, the yield of maize will be continuously improved. The competitiveness of US maize production in the world market will be overwhelming during the prospected period. Maize production is anticipated to catch up with its growing demand due to yield increases.

Ethanol production in China
China enlarged its ethanol production in 2002, because of the increasing amount of maize in stock. In 2005, four ethanol plants supported by the government produced one million ton of ethanol from 3.3 million ton of maize, which is 2.4 per cent of the total maize production. In nine provinces of China, 8 to 12 per cent of ethanol is added to gasoline making gasohol (alcohol mixed gasoline). The total amount of gasohol consumption is around 10 million ton, which is around 20 per cent of the total gasoline consumption in the whole country. It is targeted that the ratio would reach to 50 per cent in 2010. To attain this target, 10 million ton maize will be required for ethanol production. This reflects 7.8 per cent of total maize production of 2005.

Restriction of maize based ethanol plant
Recently, the demand of maize for industrial use increased very rapidly, by more than 20 per cent per year. The reason of expansion is not only ethanol production but also growing cornstarch demand. In responds to the decreased sugar cane exports from Brazil, China is replacing sugar cane by cornstarch. In December 2006, the Chinese government restricted the establishment of new maize ethanol plants. They are now recommending using alternative raw material for ethanol production such as sweet potato, cassava and maize stalks. Government's subsidies for maize ethanol production were reduced from 1,883 yuan/ton in 2005 to 1,628 yuan/ton in 2006, and 1,373 yuan/ton in 2007.

Current food production in China and future prospects
Cereal yields in China are much lower than that of other major cereal producers like the USA. If yields can be improved, this large yield gap presents a potentially large production increase. The Chinese government declared to want to maintain its high level of self-sufficiency (approximately 95 per cent) for three major cereals (rice, maize and wheat) while it will depend on import to meet the rising soybean demand. A higher production of rice, maize and wheat will be achieved mainly through increases in yields, and not by expansion of arable land. However, USDA warns that in spite of China's effort, China will become a maize importing country and it may be a possible factor of price hike in the international market.

Outline of the BIOMASS-project
The above two seminars reported the emerging biofuel production and suggested possible disturbances to the international market in the long run. Though the tangible proof of this impact is not yet given. For poor rural households in developing countries, both positive and negative impacts of expanding biofuel are anticipated. These households commonly produce secondary crops, which are the major stockpiles for biofuel production. Therefore, they might enjoy better prices and a better income due to a raise in commodity demand. Rising food staple prices will however harm small-scale farmers who are net food consumers.

In 2006, JIRCAS and CAPSA started a collaborative research project "Impact Analysis of Expanding Biomass Energy Use to Rural Poverty in Tropical Asia (BIOMASS)" through Special Co-ordination Funds for Promoting Science and Technology of the Ministry of Education, Culture, Sports, Science and Technology of the Japanese Government. Before the start of the project, some data was collected to determine the focus of the project. This determined that the project will focus on socio-economic aspects of biofuel development, especially its implication to poverty alleviation and sustainable development.

After the Kyoto Protocol came into effect in 2005, more attention has been paid to the development of the biofuel industry. This was not only seen in industrialized countries that have an obligation to reduce green house gas emission under the Kyoto Protocol, but also in developing countries such as Indonesia. Indonesia became a net oil importer and suffers from a huge burden of subsidies for transportation fuels.

Various mechanisms approved under the Kyoto Protocol are planned to initiate a capital flow to developing countries for investments in renewable energy projects. The Clean Development Mechanism (CDM) is proposed as a part of the 'flexibility mechanisms' of the Kyoto Protocol. CDM is expected to promote investments in the development of renewable energy in developing countries, especially in disadvantaged areas where secondary crops, the raw materials for biomass energy, are produced.

The tropical countries in Asia have a large potential for biomass production. It is expected that various large-scale projects concerning the production of some major energy crops (e.g. cassava, oil palm, sugar cane etc.) will be implemented in near future. Initiatives are expected to be taken by both industrialized countries through CDM schemes and by tropical Asian countries themselves. The Indonesian government targets for biofuel to account for about 10 per cent of the country's energy portfolio by 2010. They also expect the sector to create around 3 million jobs and cut foreign-exchange expenditure from importing fuel by US$10 billion by 201022.

Since most of the energy crops are mainly produced by small-scale farmers, we can say that the expanding use of biofuel will probably provide precious opportunities for rural people to improve their welfare. An increased demand for energy crops can contribute to increase the price of these products. Moreover, the installation of biofuel plants will create job opportunities especially for the rural population. The bulkiness of the raw material makes transportation to processing sides expensive. Therefore processing sites are commonly placed near the production sites, meaning that jobs created are mainly for rural people.

On the other hand, if the government fails to manage the biomass development appropriately, some negative impacts will occur such as deforestation, conflicts with food production and negative effects such as water contamination of an increased use of chemical inputs.

To ensure sustainable biofuel development, which is compatible with rural poverty alleviation, it is crucial to analyse how the expanding demand of biomass energy will affect rural society, especially small-scale farmers and poor people who are the potential beneficiaries. The Indonesian government has established a national body in charge for issuing an approval of a CDM project in Indonesia, based on the Environmental Ministry Decree of 2005, namely the National Commission for CDM in Indonesia. Once the application of CDM is submitted, the commission evaluates the project proposal. The evaluation is based on national sustainable development criteria and indicators, which reflect environmental, economic, social and technological aspects. These criteria and indicators can work as practical benchmarks to design the sustainable biomass resource management systems. Estimating possible impacts of biomass energy use in some specific areas will provide useful information and lessons. Lessons that can be used in the policy formulation process to support more sustainable use of local resources and larger contribution to poverty alleviation.

After the completion of the BIOMASS study, all findings will be integrated and published as a working paper. It will be disseminated to policymakers through CAPSA's channels such as country seminars and CAPSA's website. At regional level, the outcome is expected to feed into current regional studies of JIRCAS. JIRCAS has been co-ordinating a research project that aims at developing analytical tools for biomass resource management systems in tropical Asia. Such tools enable policy planners in Asia's developing regions to design sustainable and pro-poor biomass resource management policies. JIRCAS has also been one of the co-organizers of the Asian Biomass Workshops, which have been held three times since 2004. The information collected in the project will be delivered to the participants of these workshops. Participants include researchers and policy planners in Asia's developing countries that work for rural poverty alleviation by expanding the production of biomas raw material.

* Senior Researcher, Japan International Research Center for Agricultural Sciences (JIRCAS), Tsukuba, Japan.
2 The Jakarta Post, 25 July 2006.

by Tomohide Sugino,

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