FarmPolicy

December 22, 2014

EU Biofuels

Background

Recall that on March 2, 2007, EU Commissioner for Agriculture Mariann Fischer Boel posted an update to her blog, which stated in part that, “Next week, EU leaders meet for their spring summit. High on the agenda are the Commission’s proposals to set binding targets for the use of renewable energy. We want 20 percent of energy use to come from renewables by 2020 and 10 percent of transport fuel to be biofuels.

“I sincerely hope the presidents and prime ministers around the table sign up to this. Politicians have to take the lead and I for one am convinced that it is only through mandatory targets that people will be forced into changing their habits.”

And, as this document regarding the Presidency Conclusions of the Brussels European Council (8/9 March 2007) noted (page 21), this mandate was agreed to: “The European Council reaffirms the Community’s long-term commitment to the EU-wide development of renewable energies beyond 2010, underlines that all types of renewable energies, when used in a cost-efficient way, contribute simultaneously to security of supply, competitiveness and sustainability, and is convinced of the paramount importance of giving a clear signal to industry, investors, innovators and researchers. For these reasons, taking into consideration different individual circumstances, starting points and potentials, it endorses the following targets:

“− a binding target of a 20% share of renewable energies in overall EU energy consumption by 2020;

“− a 10 % binding minimum target to be achieved by all Member States for the share of biofuels in overall EU transport petrol and diesel consumption by 2020, to be introduced in a cost-efficient way. The binding character of this target is appropriate subject to production being sustainable, second-generation biofuels becoming commercially available and the Fuel Quality Directive being amended accordingly to allow for adequate levels of blending.”

Last week, Reuters writer Paul Taylor reported that, “The European Union is to set tougher environmental criteria for biofuels after acknowledging that the drive for transport fuels produced from crops has done unforeseen damage, the European Commission said on Monday.

“Environment Commissioner Stavros Dimas said in a BBC interview the EU had initially underestimated the danger to rainforests and the risk of forcing up food prices from its policy of setting binding targets for the use of biofuels.”

Mr. Taylor noted that, “EU leaders set a mandatory target last March that at least 10 percent of transport fuel should come from biofuels by 2020.

“Dimas told the BBC it would be better to miss the target than meet it by harming poor people or damaging the environment.”

And on Friday, Andrew Bounds, reported at the Financial Times Online that, “A plan to increase the use of biofuels in Europe to be outlined next week may do nothing to help fight climate change and incur costs that outweigh the benefits, says an internal European Union report.

“The unpublished study by the Joint Research Centre, the European Commission’s in-house scientific institute, may complicate the Commission’s meeting next Wednesday at which it plans to set a new biofuels target so that by 2020 they account for 10 per cent of transport fuels in the 27-member EU.

“‘The costs will almost certainly outweigh the benefits,’ says the report, a copy of which has been obtained by the Financial Times. ‘The decrease in welfare caused by imposing a biofuels target’ is between €33bn ($48bn, £25bn) and €65bn, the study says.”

Current Developments

A press release issued yesterday by the European Commission stated that, “The European Commission has today agreed on a far-reaching package of proposals that will deliver the European Council’s commitments to fight climate change and promote renewable energy. The proposals demonstrate that the targets agreed last year are technologically and economically possible and provide a unique business opportunity for thousands of European companies. These measures will dramatically increase the use of renewable energy in each country and set legally enforceable targets for governments to achieve them. All major CO2 emitters will be given an incentive to develop clean production technologies through a thorough reform of the Emissions Trading System (ETS) that will impose an EU-wide cap on emissions. The package seeks to deliver the European Union to reduce greenhouse gases by at least 20% and increases to 20% the share of renewable energies in the energy consumption by 2020, as agreed by EU leaders in March 2007. The emissions reduction will be increased to 30% by 2020 when a new global climate change agreement is reached.”

As part of this aggregate plan on climate change, a “Memo on the Renewable Energy and Climate Change Package,” was also released yesterday by the EC, and specifically highlighted some issues associated with biofuels: “The 10% target for renewable energy in transport has been set at the same level for each Member State in order to ensure consistency in transport fuel specifications and availability. Member States which do not have the relevant resources to produce biofuels will easily be able to obtain renewable transport fuels from elsewhere. While it would technically be possible for the European Union to meet its biofuel needs solely from domestic production, it is both likely and desirable that these needs will in fact be met through a combination of domestic EU production and imports from third countries.

“Concerns have been raised about whether biofuel production is sustainable. Whilst biofuels are a crucial part of renewable energy policy and a key solution to growing emissions in the transport sector, they must not be promoted unless they are produced sustainably. Although the majority of biofuels currently consumed in the EU are produced in a sustainable manner, the concerns are legitimate and need to be addressed. The Directive therefore sets out stringent environmental sustainability criteria to ensure that biofuels that are to count towards the European targets are sustainable and that they are not in conflict with our overall environmental goals. This means that they must achieve at least a minimum level of greenhouse gas savings and respect a number of requirements related to biodiversity. Among other things this will prevent the use of land with high biodiversity value, such as natural forests and protected areas, being used for the production of raw materials for biofuels.

“Biofuels cost more than other forms of renewable energy and without a separate minimum target for biofuels, they will not be developed. This matters because greenhouse gas trends are worst in transport, and biofuels are one of the few measures – alongside vehicle fuel efficiency – realistically capable of making a significant impact on greenhouse gas emissions from transport. In addition, the oil dependence of the transport sector is the most serious security of supply problem of all. And finally, we must remember to send the right signals for the future: the old cars of 2020 are being built today. Vehicle manufacturers need to know what fuel to design for,” the Memo said.

An item posted yesterday at The Parliament.com stated that, “One of the most contentious issues in the package, especially in the light of last week’s leaked joint research centre report, is the 10 per cent target on biofuels.

“ALDE [Alliance of Liberals and Democrats for Europe] deputy Chris Davies warned that without making sure the biofuels we use are sustainable, we risk doing more harm than good.

“‘We might risk tropical forest destruction and force up world food prices just to take the pressure off our car manufacturers,’ he said.”

Associated Press writer Aoife White reported yesterday that, “Europe’s coming biofuel boom shouldn’t come at the expense of tropical rain forests or nature reserves, the European Commission said Wednesday as it set out strict environmental rules for the type of fuel it wants to put into cars.

“Aiming to slash greenhouse gas emissions and its reliance on imported oil, the European Union last year set a goal to replace 10 percent of its transport fuel with biofuels made from crops by 2020.”

The AP article added that, “Biofuels sold in the EU –the world’s biggest consumer market with 490 million people –must show that they generate at least 35 percent less greenhouse gas than gasoline and cannot come from land ‘with recognized high biodiversity value.’

“That includes forests or wetlands that are largely untouched by humans, nature reserves and grassland areas with plentiful wildlife.”

And Reuters news reported yesterday that, “European Energy Commissioner Andris Piebalgs told a news conference the EU executive proposed four criteria to ensure biofuels were environmentally sustainable.

“Biofuels would have to give a real saving in carbon dioxide emissions of 35 percent compared to oil, must not be produced on ‘land of high biodiversity’, may not be produced from land with high carbon stocks, and must use best agricultural practices, Piebalgs said, adding member states would monitor compliance.”

Dow Jones writer Matthew Dalton reported yesterday that, “As part of the renewable energy target, each country will have to mix at least 10% ‘sustainable’ biofuels into their transportation fuel by 2020.

“The E.U. rules will only sanction biofuels that cut greenhouse gases by at least 35% relative to petroleum-based fuels, potentially making corn-based ethanol ineligible to satisfy the E.U. renewables targets. Also ineligible are biofuels derived from crops planted on land with a high carbon content or a high level of biodiversity.

“The commission said in a statement that a ‘majority’ of the biofuels currently produced in the E.U. satisfy the new sustainability criteria.”

An item posted yesterday at FarmersWeekly noted that, “‘Part of our mandate was the 10% target for biofuels, so that transport plays a part in emission cuts,’ EU Commission president, Jose Barroso told the European parliament. ‘But I want to be clear that, in putting forward proposals on biofuels, we have also fully respected the need for environmental sustainability.’”

Documenting additional reaction to the biofuels proposal, an AFP article from yesterday stated that, “‘Growing crops to fuel our thirsty and inefficient cars will be a disaster for the environment and is a false solution to climate change,’ [Friends of the Earth agrofuels campaign coordinator Adrian Bebb] said. ‘Any claims that biofuels are sustainable will be a sour note for the world’s poor who will be forced to pay more for their food’”.

“Oxfam argued while biofuels ‘could be part of a solution’ the costs of the E.U.’s plan outweigh the benefits,” the article said.

Crop Prices

Interestingly, with respect to the price of key program crops, the Associated Press reported yesterday that, March corn lost 19.75 cents to $4.6925 a bushel,” and, “March soybeans plunged 50 cents to $11.895 a bushel.”

A market summary item posted yesterday at the Chicago Board of Trade Online alluded to the idea that sustained increased in demand for some commodities may yet be a concern: “Fears of a slowdown in the global economy have become very pronounced among investors in all markets as has the sentiment that yesterday’s package of economic stimuli will not be enough to prevent that slowdown.”

Meanwhile, Associated Press writer Christopher Leonard reported today that, “Oil prices are falling, which might be bad news for U.S. farmers and agribusiness firms because of their growing dependence on selling biofuels.

“Traditionally, a drop in petroleum prices would mean that farmers paid less to grow their crops, helping boost production and increase supplies for big corporations like Archer-Daniels-Midland Co. More crops also meant higher demand for seeds and other herbicides from the likes of Monsanto Co.

“But the growing market for biofuels means that dropping energy prices can pull the rug out from under the agricultural sector. Demand for fuels like ethanol has pushed corn prices to near-record highs this year. But if oil gets cheaper, ethanol might lose its status as rock star of the energy world, and corn prices could drop.

“‘The agricultural sector and the energy sector are much more closely tied than they have been before,’ said Pat Westoff, research associate professor with the Food and Agricultural Policy Research Institute in Columbia, Mo.”

Additional analysis regarding commodity price levels was also provided recently by Iowa State University Agricultural Economist Bruce A. Babcock, who noted in a recent update in the Iowa Ag Review (“When Will the Bubble Burst?”) that, “High prices are their own worst enemy. Increased profit margins entice entrepreneurial investment, which results in increased production. Lower market prices inevitably follow. The magic hand of Adam Smith ensures that winners’ gains and losers’ losses will be temporary, as entrepreneurs correct market imbalances.

“The temporary nature of high prices is well known to corn, soybean, and wheat farmers. Over the last 50 years there have been only two corn price increases that have been sustained for more than two years. The first was from 1973 to 1975 when a combination of short crops around the world and increased export demand dramatically increased prices. The second was from 1979 to 1984 when high corn prices were sustained by supply controls, government-defended floor prices, and drought. Farmers in the United States and around the world have always been able to out-produce the market and government policy.”

Later in the article, Dr. Babcock explored the commodity price level issue in more detail, noting that, “The last period of high prices was in 1995 when the season-average price of corn rose to $3.24 per bushel. At the height of concern that 1996 production would not be sufficient to meet demand, 1996 new-crop futures rose as high as $3.83 in July before beginning a five-year decline. It is noteworthy that Chicago Board of Trade corn prices did not indicate that such high prices were permanently with us. Futures prices for the 1997 crop never rose above $3.08 and futures prices for the 1998 crop never rose above $3.00 per bushel. It is clear that traders believed that the high prices in 1995 and 1996 were unsustainable in that a return to normal crop conditions would result in lower prices. A drop in demand caused by the late-1990s Asian financial crises caused prices to drop even further than traders thought likely.

“The futures market is telling us a very different story today. Although we are coming off a record corn harvest, the 2008 new-crop corn harvest is more than $5.00 per bushel. The new-crop soybean futures price is more than $12.50 per bushel. In contrast to the 1995/96 high price period, the markets today are not indicating that these record prices are temporary. Farmers can sell their 2009 and 2010 crops for about the same price.”

In reference to the recently passed Energy Bill, Dr. Babcock stated that, “Congress adopted new corn ethanol and biodiesel mandates during a time when world supplies of corn, wheat, and oilseeds are tight. Thus, the markets quickly responded by signaling the world’s farmers to increase production. How quickly production can ramp up internationally will determine when commodity prices start retreating. The key countries and regions to watch are the United States, Brazil, Argentina, the European Union, Ukraine, and Russia.

“The 2008 supply picture in South America indicates at most a small increase in production. U.S. production capacity can be quickly increased only by good growing conditions or a significant drop in acreage enrolled in the Conservation Reserve Program. The ability of Ukraine and Russia to expand production quickly is questionable given how far their agricultural sectors have fallen. And any expansion of E.U. acreage will likely be devoted to meeting their own biofuels mandates. An anticipated slow ramp-up in production combined with the need to meet new demand from biofuels mandates is why Board of Trade prices are so high for the next three crop years.

“Over time, however, yield increases, infrastructure investments, and expansion of crop acreage will all work to increase world supplies; the profit signals are just too high for these price levels to be sustainable over the long term. Even so, the demand expansion from U.S. and other countries’ biofuels mandates is so large that it is likely that meeting food and fuel demand will require higher-cost production practices and cultivation of lower-yielding acreage. In economic terms, this expansion of demand will push world agriculture up its long-run supply curve, which means that future price levels will be permanently higher.”

The article went on to include “Three Scenarios for Price Projections,” as well as a few “Cautionary Notes.” The article should be read in its entirety for full and complete context.

Crop Prices- Budget Implications

Reuters news reported yesterday (via DTN) that, “After peaking at $30 billion in recent years, U.S. farm subsidies will be a comparatively low $7 billion-$8 billion a year through fiscal 2018 due to high crop prices, congressional economists said on Wednesday.

“The Congressional Budget Office said spending on farm and income support programs by the Agriculture Department over the next decade would be about 9 percent, or $1 billion, less than its previous forecast in August.

“But crop insurance subsidies will rise and nearly offset the effect of lower crop outlays, CBO said in a semi-annual ‘budget outlook.’”

The CBO report can be viewed by clicking here.

Note specifically on page 64, the CBO report stated that, “In general, federal farm and income support programs guarantee the producers of a range of commodities a certain minimum price for their crops. When the prices in the marketplace top those amounts, federal spending falls for farm and income support programs. The higher prices for certain commodities assumed in the January baseline are the result of current and projected market conditions and a provision of the Energy Independence and Security Act of 2007 (Public Law 110-40) that requires increased use of alternative fuels for motor vehicles. That requirement will boost demand for corn and soybeans, which are the primary feedstocks used to produce biomass-based fuel. CBO therefore projects reduced spending on farm and income support programs over the next decade—about 9 percent less than it anticipated in August.

“ At the same time, however, higher commodity prices are leading to greater spending for the federal crop insurance program because of the increased value of insured crops. Under the terms of that program, the federal government pays administrative expenses and about 60 percent of the indemnity costs for producers who purchase coverage. The higher the value of those crops, the higher those costs. As a result, CBO’s forecast for lower-cost farm price and income support programs is mostly offset by higher government costs for crop insurance.” (See related table from page 65 of the CBO report).

Keith Good

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