Supplementary memorandum submitted by
National Farmers' Union (Bio 14a)
ECONOMICS OF
PRODUCING FOR
THE BIOENERGY
MARKET IN
THE UK POST—CAP
REFORM
1. With the introduction of decoupling,
farmers are able to make cropping decisions purely on economic
analysis and market signals, rather than the need to grow a certain
area of crop to claim a payment. This allows greater freedom for
farmers to seek alternative markets that might better suit their
farm circumstances. The NFU's written evidence to the EFRA Committee
showed that UK farming has the capacity to provide feedstock for
the domestic bioenergy market. The question of the current economics
behind the market was raised and whether farmers would be attracted
to produce for this market.
2. Gross Margins (crop output minus variable
costs) are traditionally used to provide comparisons of crop returns
within a farming system. This can be a blunt instrument when comparing
national averages, as conservative values are usually taken and
are not necessarily accurate for specific farm circumstances.
This is particularly true for specialist crops where less data
is available. The table below contains realistic and achievable
estimates for crop output and costs that serve as a guide to general
crop economics at current prices.
Indicative crop economics
|
Estimated yield (t/ha) |
Estimated price (£/t) |
Estimated gross income
(£/ha/year) |
Estimated variable costs
(£/ha/year) |
Estimated gross margin
(£/ha) |
| Wheat |
9 |
70 |
630 |
240 |
390 |
| Oilseed rape (OSR) |
3.25 |
150 |
487 |
220 |
267 |
| Miscanthus [9] |
13 odt
|
45 |
585 |
234 |
351 |
|
(oven dried tonnes) |
| | |
| Short Rotation Coppice (SRC) [10]
| 10 odt | 45 | 450
| 230 | 220 |
| Set-aside[11]
| — | — | —
| 30 | |
| |
| | | |
3. These figures are best estimates based on real examples
to give an illustration of the current economics involved. Actual
on-farm calculations will vary according to location, access to
contracts and the ability to reduce variable costs through extending
the use of own machinery and labour or involvement in machinery
sharing schemes.
4. At first glance the gross margin figures do not make
good reading and when average fixed costs for an arable farm (£615/ha)
are taken into consideration it paints a very bleak picture and
illustrates why the Single Farm Payment (SFP) is so important.
The biofuels market and biomass for energy markets currently make
use of very different crops and should be considered separately.
Energy crops for biofuels
5. Farmers currently growing wheat and oil seed rape
(OSR) for the food market will be able to grow these same crops
for the biofuel market. Although prices are likely to be slightly
lower (compensated by the ability to grow on set-aside land or
claim the energy aid payment) the economics will be very similar.
In order to sustain a profit at today's prices farmers need to
either reduce costs, increase price or increase yields. Producing
energy crops for biofuels offers farmers the chance to potentially
do all three.
6. Reduced costs. With low gross margins for
cereals, arable farmers are very keen to maximise the area grown
in an attempt to reduce fixed costs per hectare. The potential
to grow energy crops on set-aside using existing machinery to
provide income rather than a management cost only will be an attractive
option to those farmers that can make a net profit growing wheat
and OSR. Even with the current low margins shown above, for the
most efficient farmers the chance of growing wheat or OSR on set-aside
land for biofuels will be attractive.
7. The option of growing biofuel crops on non set-aside
land will also be an attractive option if prices offered in contracts
are comparable to the food-use alternative. The €45/ha payment
and potential to reduce crop inputs will attract some growers.
At present in the UK much of the energy aid available to farmers
is lost in merchant's administration charges which, where levied,
significantly reduces the incentive to growers. This should be
less of an issue if the domestic biofuels industry is developed
and the actual crops are processed in this country for biofuels.
The EU is set to review the energy aid payment at the end of 2006.
8. Increased prices. The UK is currently a net
exporter of wheat (2.5-3 Mt pa). Decreasing this surplus through
a domestic wheat for bioethanol market will bring the domestic
market closer to parity. As the market moves from export to import
parity the domestic wheat prices, particularly in regions able
to access these new markets will rise by approximately £10-15
per tonne (the difference in the costs of exporting rather than
importing grain). As wheat prices rise, the profitability of wheat
and the supply will increase accordingly.
9. Increased yields. The dual purpose and annual
nature of these crops is an important factor as this gives flexibility
in planning and should provide a link between prices for crops
grown for food and energy uses. At present the economics of producing
crops for food or for biofuels are very similar, the varieties,
agronomy and yields will vary little. In the future as more research
and development is invested specific varieties could be introduced
offering the potential of lower inputs and greater starch or oil
yields, improving the economics of production.
10. The option of growing energy crops for biofuels will
therefore be attractive to many UK farmers. They are already used
to growing such crops for food and have the technical skills and
knowledge to grow them for fuel.
11. The importance of developing a domestic biofuels
industry can not be understated. Whilst the economics at present
are marginal and support is needed to help develop the industry,
as oil prices rise and the industry becomes more efficient at
producing fuel from biomass the economics will improve. If the
UK fails to take this opportunity we will become reliant on imports
of both biofuels and fossil fuels, thereby losing control over
fuel supply, carbon savings and environmental sustainability.
Biomass crops
12. It is harder to estimate the adoption of biomass
energy crops using standard economic analysis. The biomass
market must be demand led and availability to suitable markets
will be the key for any farmer. The significant investment
of establishing biomass crops needs to be reinforced with long-term
demand for the crop at a suitable price. Growing short rotation
coppice (SRC) and Miscanthus is a long term commitment for a farmer;
the crop must be in the ground for a number of years before any
economic return is shown.
13. The figures given in the table show biomass prices
that are available on some contracts today. A long term contract
at these prices will be attractive to some farmers. The decision
to grow biomass for these markets will depend on individual farm
circumstances. It may offer the chance to reduce fixed costs,
or a more profitable margin than other crops on less productive
land or set-aside.
14. The economics of biomass production vary depending
on end market location, type of energy generation and any processing
required. Location is very important; transport costs for biomass
can be expensive and excessive distance will seriously erode profit
margins. Processing costs can also be prohibitive in some biomass
projects. Where the raw material needs to be processed before
use, such as by pelleting, the overall costs are greatly increased.
Machinery and contractor costs are another major consideration
and can be reduced by machinery rings and dedicated producer groups
to provide feedstock for particular projects.
15. The economic figures in the table show estimated
returns for SRC and Miscanthus once the crop is established. Both
crops have high establishment costs and have low yields in the
first few years which needs to be taken into consideration. Establishment
costs are in the region of £1,200-£1,700/ha and the
current grants available are essential to help cover some of these
costs (£1,000, £920 respectively). In recent years establishment
costs have decreased as equipment and planting techniques have
improved whilst costs of the planting stock has also reduced.
Although establishment costs should continue to decrease it is
very important that these grants remain in place for the foreseeable
future.
16. Where there is sufficient long term demand for a
dedicated supply of biomass, farmers will grow to supply that
demand with the most appropriate energy crop as long as the transport,
processing and storage costs are not prohibitive. Farmers are
unlikely to grow without first identifying a market and ensuring
a long term contract is in place. The most successful biomass
projects in the country have shown that the economics can be right
when sufficient attention is devoted to planning. These successful
projects need to be replicated. The most attractive projects will
be those that are local and require a constant and reliable supply
that can be guaranteed only through secure supply arrangements
for local dedicated energy crops, which follow investor confidence.
Regional development agencies could play a useful role in bringing
together suitable supply and demand requirements in the local
context.
17. It is worth stressing again that this industry is
in its infancy and that whilst it requires support at this development
stage to compete with the established energy markets, the potential
to improve efficiency of production, energy and carbon savings
is considerable. Synergy between biomass crops and other renewables
such as biofuels has yet to be fully explored in this country.
These two markets should not be viewed as competing uses but as
complementary parts of the renewable energy package.
18. The bioenergy industry needs support today to help
development so that as new technology emerges in the future and
fossil fuel prices rise the UK can take advantage of an efficient,
reliable and environmentally sustainable energy industry. Given
sufficient demand for energy crops either biomass or biofuels,
farmers will be able and willing to provide for the energy market
as well as the food market.
National Farmers' Union
March 2006
9
Estimated figures once crop established. Back
10
Estimated figures once crop established, yield averaged per year
over three-year harvest period. Back
11
Estimated costs for establishing and destroying green cover on
set-aside. Back
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