APCA 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 Biloxi, Mississippi March 5,2004

APCA 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.

APCA 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

APCA 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

APCA 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

APCA 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

APCA 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.

APCA 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.

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

APCA 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?

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

APCA Energy Dedicated Crops * Production Regions * Switchgrass, hybrid poplars, hybrid willows

APCA cottoncotton wheatwheat corncorn soybeanssoybeans Baseline (USDA, 2003) $/dt Dedicated Crops Changes In Crop Prices Target Price Marketing Loan Rate

APCA Switchgrass Estimates Year 2012 Variableunits2012 Farm Gate Price$/dton44.00 Planted Acreagemil. acres20.88 Yielddtons/acre4.90 Productionmil. dtons Returns from Switchgrassbil. $1.42 Increased Market Revenuesbil. $3.77 Increased Net Farm Incomebil. $4.00

APCA Impact in Gov. Payments 2012 Variableunit 2012 Loan Deficiency Paymentsmil. $258 Counter Cyclical Paymentsmil. $935 Direct Payments*mil. $4,000 Savings in Gov. Paymentsmil. $5,193 * Maximum reduction direct payments that could be done without negatively affecting net farm income.

APCA Maximum Incentive Level 2012 Variableunit2012 Production mil. dtons Savings in Gov. Paymentsmil. $5,193 Maximum energy incentive$/dton50.90

APCA Cost of Energy (Electricity at 10% Co-firing w/Coal) CoalSwitchgrass Feedstock delivered price ($/dton) Energy incentive ($/dton) Fuel cost ($/Mbtu) 1.68 Fuel cost ($/MWh) Transformation cost ($/MWh) Credits ( Renewables, CO2 ) ($/MWh) Cost of Energy ($/MWh)

APCA Concluding Remarks 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 Synergism between agriculture & energy through bioenergy dedicated crops could provide:

APCA

APCA Change in Market Returns (million $) Corn Based

APCA Change in Market Returns (million $) Switchgrass Based

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