Global biofuel growth Implications for agricultural markets and policies

Global biofuel growth Implications for agricultural markets and policies Martin von Lampe Trade and Agriculture Directorate OECD Regional Meeting on Agricultural Policy Reform Bucharest, Romania 24-26 September 2007

What s new? "The fuel of the future is going to come from fruit, weeds, sawdust -- almost anything. There s enough alcohol in an acre of potatoes to drive the machinery necessary to cultivate the field for a hundred years." Henry Ford, 1925 2

Why biofuels? Reduced fossil energy use and GHG emission Farmers market prospects National security Prospects for developing countries and rural areas 3

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006e million tonnes US$(2006)/barrel Changing interests in biofuels: Ethanol production and crude oil prices Brazil USA China India EU(25) Others Crude oil, real price 50 45 40 35 30 25 20 15 10 5 0 100 90 80 70 60 50 40 30 20 10 0 Source: FAOSTAT (non-food only) Source: F.O. Licht s 4

Feedstock demand share in domestic crop production Market shares of biofuels: Small in fuels, but large in feedstocks Biofuel shares in transport fuel consumption (2004): USA 1,6% Brazil 21,6% EU 0,8% 60% 50% 40% 30% 20% 10% 0% 2004 2005 2006 USA, maize Brazil, sugar cane EU, grainseu, sugar beet EU, veg. oil Region / Product 5

US$/l gasoline equivalent A major challenge: Production costs 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00-0.20-0.40 '04 '05 '06 '07 '04 '05 '06 '07 '04 '05 '06 '07 '04 '05 '06 '07 '04 '05 '06 '07 Ethanol Ethanol Biodiesel Ethanol Ethanol Sugar cane Maize Rape oil Sugar beet Wheat Brazil USA EU EU EU Year, fuel type, country Energy costs Processing costs Feedstock costs Co-product value Net price gasoline Net costs, total 6

US$ / barrel crude oil Economics of biofuel production Threshold prices crude oil, 2004 100 80 60 40 20 0 Wheat ethanol, EU Maize ethanol, USA Threshold price crude oil Oil price 2004 Oil price July 2007 Sugar beet ethanol, EU Sugar cane ethanol, Brazil Rape oil biodiesel, EU 8

Share of cereal, oilseed and sugar area for biofuel production Large area requirements for higher biofuel shares in total fuel consumption 60% 50% 40% Actual area requirement in 2004 Area requirement for 10% biofuel share 52% (18% of arable land for 5.75% biofuel share) 30% 20% 10% 0% USA Canada EU-15 EU-10 Brazil 9

Year-to-year change 06/07, mio. t Not all of the recent price increase is due to biofuels 20 10 Wheat production Coarse grains production Cereals used for biofuels 0-10 -20-30 -40 Australia USA Canada EU Total 10

Method used for impact assessment Modelling agricultural commodity markets Partial equilibrium modelling framework. Combined OECD s Aglink and sugar models with FAOs Cosimo model. Biodiesel and ethanol production included in the model 11

Market impacts three main scenarios (based on 2005 Agricultural Outlook) Constant biofuels scenario Base of comparison Policy-target scenario Expected growth following public objectives Higher oil price scenario 60 US$ (instead of 46-34 US$ assumed in 2005 Outlook) Higher production costs in agriculture Increased biofuel production due to higher fuel prices 12

Biofuel-driven demand growth Wheat Coarse grains Sugar beet Vegetable oils Wheat Coarse grains Vegetable oils Wheat Coarse grains Vegetable oils Sugar cane Growth in crop demand for biofuels 2004 to 2014, in % of total consumption in 2004 60% 40% 20% 0% EU Canada USA Brazil Country / product 13

Product Noticeable impacts on world market prices (2014) Sugar Maize Wheat Vegetable oils Oilseed cakes Oilseeds -10% 0% 10% 20% 30% 40% 50% 60% 70% Impact on world market prices relative to constant biofuel production at 2004 levels 14

High oil price scenario Principal results Higher crude oil prices have important effects on agricultural markets Higher production costs reduce global crop supply by 1-3% in the medium term Higher biofuel production stimulates crop demand Higher world crop prices: up 12-17% compared to lower oil prices Dominated by ag production cost changes? 15

High oil price scenario 2014 world price impact of higher crude oil prices relative to policy target scenario 25% 20% Agr. Production Cost Effect Biofuels Effect 15% 10% 5% 0% -5% Wheat Coarse grains Oilseeds Vegetable oils Oil meals Sugar 16

Concluding remarks This study shows: Large variations in bio fuel production costs Large differences in land shares required for a given bio fuel output The comparative advantage of Brazil on both counts That in many countries bio fuel production is not profitable without public support 17

This study ignores: Concluding remarks Participation in bio fuel markets of other countries with similar potential advantages as Brazil That the future may be in advanced biofuels, which could raise biofuel yields and lower production costs, and shift feed stock demand to cellulosic and other biomass materials The environmental and sustainability issues But other OECD work underway on these issues 18

Some important policy issues (1) Wide range of policy objectives Sometimes conflicting High priority set for expanding alternative energy Varying types and degrees of policy measures: Direct support, trade control, R&D etc Challenge of internalising environmental costs More than GHGs involved Lots of uncertainties remain Risk of locked-in policies While creating new distortions 19

Policies need to be targeted Demand side prime focus for most objectives Peak oil, energy security Climate change, urban air quality Other objectives require different measures Inappropriateness of price support for farm income Focus on efficiency: Some work remains on supply side Bioheat, biopower Second generation biofuels 20

OECD Regional Meeting on Agricultural Policy Reform Bucharest, Romania Thank you! www.oecd.org/tad Martin.vonLampe@oecd.org 21