identifying and evaluating risk management strategies for alternative energy crops joe l. outlaw...
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Identifying and Evaluating Risk Identifying and Evaluating Risk Management Strategies for Management Strategies for Alternative Energy Crops Alternative Energy Crops
Joe L. OutlawProfessor & Extension Economist
Co-Director, AFPC
James W. RichardsonRegents Professor &
Co-Director, AFPC
David P. AndersonProfessor & Extension Economist
2011 Extension Risk Management Education National ConferenceSt. Louis, MO
April 13, 2011
Presentation OutlinePresentation Outline
• RFS 2• Alternative Energy Crops• Major Areas of Risk• Managing Risks• Conclusions
Energy CropsEnergy Crops
Renewable Fuel Standard – Renewable Fuel Standard – RFS 2RFS 2
• Energy Independence and Security Act of 2007
• 36 billion gallons of biofuel by 2022 15 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
Historical and Projected Historical and Projected Ethanol Dry Mill Net ReturnsEthanol Dry Mill Net Returns
Source: FAPRI January 2011 Baseline
Alternative Energy CropsAlternative 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 cane Switchgrass
Napier grass Miscanthus
Miscane Sorcane
Palm Safflower
Castor Camelina
Jatropha Algae**
Food vs. Fuel Land Food vs. Fuel Land IssueIssue
• 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 PricesFutures Contract Closing Prices
As of 4/05/11
Commodity Contract Close
Corn Dec-2011 6.46
Soybeans Sep-2011 13.83
Wheat Jul-2011 8.22
Cotton Dec-2011 1.3776
Rice Sep-2011 15.165
Sources: USDA-ERS and USDA-NASS, Census of Agriculture, Various Issues.
U.S. Land Most Likely to be U.S. Land Most Likely to be Used for Dedicated Energy Used for Dedicated Energy
CropsCrops
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 RiskMajor 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.
ProductionProduction
• 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 Risk for Switchgrass Yields on a Typical Tennessee on a Typical Tennessee
Farm Farm
4 5 6 7 8 9 10 11 12 13
Tons/Acre
Feedstock Availability Feedstock Availability RiskRisk
200 700 1200 1700 2200 2700 3200
MT Camelina Yield Risk Lb./Ac
MarketMarket• 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
ContractsContracts
•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
CounterpartyCounterparty
• 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 RiskGovernment/Policy Risk
• Volumetric Ethanol Excise Tax Credit (VEETC)
• RFS II• Import Tariff• Biomass Crop Assistance Program
Managing RisksManaging 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
ConclusionsConclusions
•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