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Agricultural Policy Options for Improving Energy Crop Economics

Agricultural Policy Options for Improving Energy Crop Economics. Daniel G. De La Torre Ugarte Agricultural Policy Analysis Center University of Tennessee. Southern Bio-Products Conference Biloxi, Mississippi March 5,2004. Synergism Between Agriculture and Energy.

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Agricultural Policy Options for Improving Energy Crop Economics

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  1. Agricultural Policy Options for Improving Energy Crop Economics Daniel G. De La Torre Ugarte Agricultural Policy Analysis Center University of Tennessee Southern Bio-Products Conference Biloxi, Mississippi March 5,2004

  2. Synergism Between Agriculture and Energy • Too many acres in crops to generate adequate market incomes. • Farmers and rural communities do not like to set aside land; they like to farm. • Bioenergy Alternative: bioenergy feedstock production as mean to increase farm prices/income.

  3. Linking Agriculture with Energy Sector • Traditional crops: Increase price of a specific commodity. • Crop residues: Increase revenue for a specific crop • Energy dedicated crops: Increase demand for cropland

  4. Traditional Crop(corn, soybeans) • Pros: • Increases farm price and income, reduce government expenditures • If corn-ethanol, industry already developed • Cons: • Direct competition with traditional uses • May not have a positive agricultural wide impact (by-products) • Limited crop and geographic impact

  5. Crop Residues (corn stover, wheat straw, rice hulls, etc.) • Pros: • Generates additional income for farmers growing the crop • Already available on the ground • Cons: • Environmental concerns and regulations limit availability • May have a negative impact on crop price • Limited agricultural wide impact

  6. Energy Dedicated Crop(switchgrass, poplars, willows) • Pros: • Alternative use of cropland • Price and income benefits across crops • Wider geographic impact • Indirect competition with traditional uses • Cons: • Industry is not developed / uncertain business environment • Institutional inertia

  7. Developing the Synergism Focus on energy dedicated crops as they offer a higher potential for: • Shifting cropland away from traditional crops and uses. • Impacting agriculture as a whole. • Impacting a wider geographic area. • Developing a larger feedstock supply.

  8. Current Structure of Government Support for AG • Counter cyclical income support:triggered if farm price below target price. Payments based on fixed production level. • Loan deficiency payments:triggered if farm price falls further below marketing loan rate. Payments based on actual production. • Direct contract payments:payments are fixed regardless of price and production level.

  9. Illustration with Corn Price Target Price Farm Price Dollars per bushel Marketing Loan Rate Years

  10. Specific Questions • Could a bioenergy crop “buy” acreage away from traditional crops? • If so, could agricultural prices and market returns be significantly enhanced? • If so, could saved government farm payments be used instead to make the bioenergy crop a cost-effective fuel for utilities?

  11. So, Let’s Suppose: • Farmers could receive $44 per dry ton for switchgrass • Switchgrass production was initiated in 2005. • Results for the year 2012

  12. Energy Dedicated Crops*Production Regions * Switchgrass, hybrid poplars, hybrid willows

  13. Dedicated Crops Changes In Crop Prices wheat c o r n s o y b e a n s co t t o n Baseline (USDA, 2003) Target Price Switchgrass @ $/dt 44.00 Marketing Loan Rate

  14. Switchgrass Estimates Year 2012

  15. Impact in Gov. Payments2012 * Maximum reduction direct payments that could be done without negatively affecting net farm income.

  16. Maximum Incentive Level2012

  17. Cost of Energy(Electricity at 10% Co-firing w/Coal)

  18. Concluding Remarks Synergism between agriculture & energy through bioenergy dedicated crops could provide: • Additional market returns for farmers • Without set aside • Land can be converted back to major crops • Competes at the land level; not the use level • Reduced government outlays • Increased reliance on domestic sources of renewable energy and most likely • Environmental benefits

  19. Corn Based Change in Market Returns1996-2000 (million $)

  20. Switchgrass Based Change in Market Returns1996-2000 (million $)

  21. Future Research Agenda • Price and supply variability • Logistics/Institutional arrangements • Environmental impacts • Limits of agriculture as source of feedstock

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