Identifying and Evaluating Risk Management Strategies for Alternative Energy Crops Joe L. Outlaw Professor & Extension Economist Co-Director, AFPC James W. Richardson Regents Professor & Co-Director, AFPC David P. Anderson Professor & Extension Economist 2011 Extension Risk Management Education National Conference St. Louis, MO April 13, 2011

Presentation Outline RFS 2 Alternative Energy Crops Major Areas of Risk Managing Risks Conclusions Energy Crops

Renewable Fuel Standard – RFS 2 Energy Independence and Security Act of billion gallons of biofuel by B gal conventional (“Corn Ethanol”) 21 B gal of 2nd generation biofuel 16 B gal of cellulosic (primarily cellulosic ethanol) 4 B gal of advanced biofuel; 1 B gal of biomass based diesel

Sources: Nebraska Ethanol Board, Lincoln, NE. Nebraska Energy Office, Lincoln, NE.

Historical and Projected Ethanol Dry Mill Net Returns Source: FAPRI January 2011 Baseline

Alternative Energy Crops Not focusing on current feedstocks with established markets –Ex. Corn, sunflowers, soybeans Partial list of other dedicated energy crops Sweet sorghum Biomass sorghum Energy caneSwitchgrass Napier grassMiscanthus MiscaneSorcane PalmSafflower CastorCamelina JatrophaAlgae**

Food vs. Fuel Land Issue Respondents to a Biofuels Digest survey in Florida –12 percent said it was immoral “to use crops that are generally used for animal feed to make energy or fuel”. –15 percent said it was immoral “to use a (human) food crop at any time to make energy or fuel” –24 percent said it was immoral “to convert land that is used for growing (human) food crops to the production of energy or fuel.” –Less than <1% thought use of ag waste for biofuel was immoral, but 5% said immoral to use forest residues if it is collected in the forest –45% voted immoral to convert land used for conservation, national parks, or forests –Only 6% said it was immoral to convert land that can grow crops to biofuel feedstock production Source: Biofuels Digest April 6, 2011

Futures Contract Closing Prices As of 4/05/11 CommodityContractClose CornDec SoybeansSep WheatJul CottonDec RiceSep

Sources: USDA-ERS and USDA-NASS, Census of Agriculture, Various Issues. U.S. Land Most Likely to be Used for Dedicated Energy Crops

Francis Epplin, “Biomass: Producer Choices, Production Costs and Potential”, presented at the Transition to a Bioeconomy: The Role of Extension in Energy Conference, June 30-July 1, 2009, Little Rock, Arkansas.

Major Areas of Risk Everyone will categorize/define differently Production - risks within the business Market/Price - risks outside the business Counterparty - risks with entities outside the business Government/Policy - risks resulting from government involvement or a change in government involvement

Francis Epplin, “Biomass: Producer Choices, Production Costs and Potential”, presented at the Transition to a Bioeconomy: The Role of Extension in Energy Conference, June 30-July 1, 2009, Little Rock, Arkansas.

Production Seed availability and suited for their soils Weather –Drought –Flood –Rain, but not timely Not when needed or at harvest Fire –Tracts (large and small) of dry matter Won’t be near a fire hydrant –Also in storage facility

Risk for Switchgrass Yields on a Typical Tennessee Farm Tons/Acre

Feedstock Availability Risk MT Camelina Yield Risk Lb./Ac

Market Input Prices Output Prices –Plant not operational –Depending on an economically viable conversion system –Whatever the business model is – that it’s profitable –Competitive position with fossil fuels –Uncertain as to how many acres will be contracted each year –Limited alternative uses for feedstock – can you feed it? How Do You Overcome the Lack of Established Markets? –Cross Hedging –Contracts Contract has to cover: –Costs of establishment –Opportunity costs

Source: Agricultural Prices, National Agricultural Statistics Service, USDA.

Contracts Contract establishes a safety net –Establishment costs –Price –Volume –Term –What happens if terms violated –Exits –Needs to be flexible Ex. Fuel clause that adjusts the contract value upwards if fuel costs increase

Counterparty The risk to each party of a contract that the counterparty will not live up to its contractual obligations. Fancy way to say default risk Ex. VeraSun, Pilgrims

Government/Policy Risk Volumetric Ethanol Excise Tax Credit (VEETC) RFS II Import Tariff Biomass Crop Assistance Program

Managing Risks Production –No government subsidized crop insurance for most dedicated energy crops – yet –Self insure Market –Contracting, hedging(if possible), etc Counterparty –Choose business partners wisely –Some state’s initiating funds Government/Policy –Don’t include incentives in business plan

Conclusions Going to have to incentivize producers to grow dedicated energy crops Will be a lot of different types of risk than producers are used to dealing with Ex. NO MARKET for my crop instead of situations of unacceptable price Relative prices between fossil fuels and ethanol/biodiesel and competing crops and dedicated energy crops will drive industry