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
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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 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
•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 cane
Switchgrass
Napier grass
Miscanthus
Miscane
Sorcane
Palm
Safflower
Castor
Camelina
Jatropha
Algae**
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
Commodity
Contract
Close
Corn
Dec-2011
6.46
Soybeans
Sep-2011
13.83
Wheat
Jul-2011
Cotton
Dec-2011
1.3776
Rice
Sep-2011
15.165
8.22
U.S. Land Most Likely to be Used
for Dedicated Energy Crops
Sources: USDA-ERS and USDA-NASS, Census of Agriculture, Various Issues.
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
4
5
6
7
8
Tons/Acre
9
10
11
12
13
Feedstock Availability Risk
200
700
1200
1700
2200
2700
3200
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
U.S. Fertilizer Prices, 1990-2010
900
800
700
$/ton
600
500
400
300
200
100
0
1990
1992
1994
1996
1998
2000
2002
Anhydrous ammonia
Urea 44-46% nitrogen
Sulfate of ammonium
Super-phosphate 44-46% phosphate
Source: Agricultural Prices, National Agricultural Statistics Service, USDA.
2004
2006
2008
Ammonium nitrate
Potassium chloride 60% potassium
2010
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