Biofuel value chains

Biofuel Value Chains:
Drawing Lessons from
the US for Newcomers

Siwa Msangi and Simla Tokgoz
II. World Congress of Agroforestry
Nairobi, Kenya
August 23-28, 2009

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Motivation
 Global biofuel production has expanded rapidly,
changing the dynamics of the agricultural and
energy markets.
 This expansion is being led by U.S. & Brazil (for
ethanol), and the EU (for biodiesel)
 A number of other developed and developing
countries have started their own domestic
biofuel programs.
 However, uncertainty remains as to how viable
value chains might develop in these countries.
 Try to draw lessons from the experiences of
other countries.

Outline
 Start with the U.S. ethanol value chain
• Describe the characteristics
 Discuss jatropha as a feedstock for biodiesel
 Compare and contrast corn-based ethanol,
seed-based biodiesel, and jatropha-based
biodiesel value chains
 Conclusions


U.S. Experience
 There has been ethanol production in the
U.S. for decades, though it has increased
sharply recently, with the Energy Bill of 2005
and the EISA of 2007 expanding the market
for ethanol producers.
 Ethanol is currently produced from edible
crops, such as corn, sorghum, wheat, with
corn leading the others as the major
feedstock.


U.S. Ethanol Production

Source: DOE

U.S. Ethanol Industry Structure
 There are 214 plants in different locations
either operation or in construction
• 204 of them are using corn
• 65 of them are at or above 100 million gallons
capacity
• 176 of them are in the Midwest where the
majority of corn production is.
 Operating production is about 11,057 million
gallons, with 1,837 million gallons capacity
under construction or expanding refineries.


U.S. Experience
 Since corn is an edible commodity, this leads
to “intensified” competition between feed,
fuel, export demand for corn in the U.S.
 Furthermore, corn is produced on land that is
suitable for other crops. This in turn
generates competition for land.
 By-products of the ethanol sector
• Dry mills: DDG
• Wet mills: corn oil, gluten feed, gluten meal


U.S. Corn Utilization

Source: USDA

U.S. Ethanol Profit Margins
 Existence of by-products adds to the value of
the ethanol product by increasing the profit
margins.
 DDG replaces some of the corn used in
ethanol production in the feedstock rations of
animals.
DDG links the ethanol and the livestock
sector value chains.


U.S. Dry-Mill Profit Margins

Source: Author Computation

By-Products Market
 DDG replaces other feedstocks in mostly dairy
and cattle feeding operations (ruminant
animals).
• Monogastric animals such as hogs and poultry
are more limited in their ability to use distillers
grains.
 They are mostly used for their energy content
(similar to feed grains), though sometimes for
protein.


Location of Plants
 Location of ethanol plants depends on
• where feedstock is produced
• where by-product (DDG) demand is by the
livestock sector
• where ethanol demand is by the refiners
 Transportation costs impact the value chain
through the location of biofuel plants.


Location of Plants
 Yu and Fuller (2007) suggest that “it may not
be cost efficient to locate the bulk of future
production expansion in the Midwest.
Instead, locating some ethanol plants in the
southwestern and eastern U.S. can generate
substantial cost savings by reducing the
shipping distance for both ethanol and DDG.”


U.S. Ethanol Value Chain

Cost of Cost of Tax Credit
Production Production

Feedstock Biofuel Gasoline
producers Processing Refiners
Plants

Feed Use DDG Use

Livestock
Producers


Jatropha
 Jatropha is a non-edible crop used for
biodiesel production. So, biodiesel sector
does not compete with food and feed use of
this crop.
 Other feedstocks used for biodiesel
production are rapeseed, soybean, coconut,
and palm.
 Jatropha and its cousin varieties (e.g. castor)
are found mostly in Asia and Africa, and tend
to survive well in semi-arid environments.


Jatropha
 It is adaptable to semi-arid lands which are
less productive.
• It lessens the area competition, but it does
not eliminate it completely.
• More productive and better irrigated lands may
be used for jatropha production in the future
when the biodiesel industry expands and higher
yields are needed to maintain profitability. This
may intensify the land competition among crops
and draw away resources.
• We still see the food vs. fuel debate – even if
the pathway of impact may be more indirect.


Jatropha
 It is expected to be a less expensive
feedstock for biodiesel production and thus
may help increase profitability of biodiesel
plants.
• However, it has a non-edible by-product.
 Yields depend on a range of factors such as
water and soil conditions among others. So,
this may introduce variability in the profits of
the biodiesel industry in different locations.


Jatropha
 Tomomatsu and Swallow (2007) compare
canola with biodiesel as a feedstock for
biodiesel in Kenya. Canola produces an edible
oil so that food demand competes with
biodiesel demand. Its by-product is used for
animal feed which helps profit margins.
 Jatropha has a non-edible by-product which
has a market value, but less. The value chain
will be different since feedlots will not be set
up in proximity to jatropha-based biodiesel as
a complementary industry.


Jatropha and Risk
 Since its production on a large scale is still
risky for farmers, there may have to be other
policies in place to make jatropha worthwhile.
 One option is long-term contracting between
biodiesel plants and farmers
• Epplin et al. (2007) mentions for biofuel
processors to either contract with individual
growers or with a group of growers through a
cooperative arrangement.
 Government policies that will guarantee a
certain level of demand for biodiesel will
reduce the risk for farmers.

Jatropha and Risk
 For example, many Indian corporations are
venturing into biodiesel production by
initiating a memorandum of understanding
with state governments to establish Jatropha
plantations on government wasteland or
contract farming with small and medium
farmers (Attaché Reports India Biofuels
2008).
 Financial instruments made available to
smallholder farmers may reduce their
perceived risk.


Jatropha and Risk
 However, even if there are risk-reducing
instruments available to farmers, not all
farmers will benefit.
 Given the imperfect markets for insurance in
many developing countries, and the particular
types of risks faced by small-holders – some
farmers will be “rationed out” of the market,
because of risk. They can’t accept the
contracts because they’re too risky. This may
have distributional consequences.


Comparison of value chains

Corn-based Seed-based Jatropha-
Ethanol Biodiesel based Biodiesel
Competition Yes (both food Yes (food) No
with food use and feed)
By-products There is a There is a There is no
as feed market. market. market.
Land It competes with It competes with It competes
competition other crops. other crops. much less with
other crops since
it is grown on
marginal land.
Productivity Investments in Investments in Experiments are
crop yield is crop yield is continuing. Crop
extensive. extensive. yields vary
significantly.


Comparison of value chains

Corn-based Seed-based Jatropha-
Ethanol Biodiesel based
Biodiesel
Transportation Established so Established so New
infrastructure lower costs lower costs infrastructure
necessary since
on marginal land.
Costs are higher.
Farmers’ Higher demand Higher demand An establishment
planting may change crop may change crop period for
rotation rotation jatropha before
the first harvests
can be realized
(3-5 years).


Biofuels and poverty
 Arndt et al. (2008) show the positive impacts
of biofuels on economic growth and poverty
reduction in Mozambique.
 They discuss the relative benefits generated
by alternative production structures, i.e.
plantation versus outgrower. Jatropha with
an outgrower scheme is more pro-poor.
 If such outgrower schemes can be designed
to provide technology spillovers for
smallholders, giving higher productivity for
staple crops – the benefits could be greater.


Conclusions
 Newcomers to the biofuels industry can learn
from the experience of other countries.
 For newcomers, securing a stable and
consistent biomass supply is crucial for
favorable feedstock costs and profit margins.
• Long-term contracts with farmers or
cooperatives will guarantee demand for the
farmers and lower feedstock costs for the
biofuel processors.
 Policy incentives and risk-reducing financial
instruments may be necessary for new crops
like jatropha.

Conclusions
 Multiple factors impact the biofuel value
chains.
 Choice of technology (wet vs. dry) and choice
of commodity (edible vs. non-edible) will
impact the final value chain created
• Through markets for by-products
• Through competition between fuel and food
demands for the feedstock
• Through land competition among crops


QUESTIONS?

S. Msangi IFPRI (s.msangi@cgiar.org)
S. Tokgoz IFPRI (s.tokgoz@cgiar.org)


U.S. Ethanol Capacity

Source: RFA

By-Products Market

Source: FAPRI

By-Products Market
 Where ethanol plants and larger cattle
feedlots are in close proximity, co-product
inclusion in feed rations is more widely
practiced (Matthews and McConnell 2009).
 Most U.S. livestock producers buy their co-
products on the spot market and prefer not
to buy under contracts (USDA, NASS, 2007).


Securing biomass supply
 Epplin et al. (2007) discusses various options
for biofuel processors to obtain a reliable flow
of feedstock in the absence of spot markets
• contracting with individual growers
• contracting with a group of growers through a
cooperative arrangement
• arranging long-term land leases similar to the
U.S. Conservation Reserve Program (CRP)
leases
• acquiring land


Policy Incentives
 Demand side policies that generate a floor for
demand
• Energy Bill of 2005
• EISA of 2007
• Tax credits for refiners blending ethanol with
gasoline
• Cellulosic ethanol tax credit
 Supply side policies that encourage biomass
production


Biofuel value chains

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