Biofuels: a new dawn or business as usual?

by : JULIAN BELL,

AFTER more than a decade of falling prices, declining margins and shrinking investment, there is a growing optimism in agriculture that we are entering a new era of rising demand and better prices, driven by biofuels.

Are these predictions likely to be true? Or will we find that we are entering just another commodity market where price pressures will soon return?

Scottish farmers have benefited from a tighter world market in grain and oilseeds supported by biofuel demand in other countries. In the US, almost 20 per cent of the maize crop is processed for bio-ethanol, resulting this season in a sharp fall in stocks and maize prices at a ten-year high.

Without the rapid expansion of the US bioethanol industry it is unlikely that Scottish grain prices would have returned to over £100 a tonne this season.

In the European Union, bio-diesel demand accounts for more than 50 per cent of the rapeseed crop, which has pushed it to a record premium over other oilseeds, with a knock-on benefit for prices in Scotland. Based on current policies, global demand for bio-fuels (and the crops required to produce them) is set for a period of sustained expansion.

In the UK, the introduction of the Renewable Transport Fuels Obligation (RTFO) is expected to result in a 20-fold increase in UK bio-fuels demand by 2010.

This is good news for agriculture. But how important is it that the biofuel processing industry is based in Scotland? The country is already deficit in wheat, so a direct investment in bio-ethanol production is unlikely.

While Scottish wheat is unlikely to find its way to any English plants that are built, Scottish grain prices might still benefit. By reducing the UK's exportable surplus of wheat, such plants could result in a £3 to £8 per tonne relative price gain in Scottish ex-farm wheat prices.

Scotland, however, does have a surplus of around 130,000 tonnes of rapeseed and if plans for a 250,000 tonne rapeseed crushing plant at Rosyth go ahead, there could be potential price gains of around £5 to £8 per tonne for local producers due to savings in transport cost.

However, the small scale of such a plant could make it vulnerable to international competition, particularly from imports of processed vegetable oils.

The extent to which Scottish rapeseed values benefit in practice will depend on local supply and demand along with the scale and feedstock preference of any new crushing plants.

While price gains of £5 to £8 per tonne would be welcomed by Scottish arable farmers, they are not large enough on their own to achieve more than a modest improvement to farm profitability. With modulation expected to take an increasing share of the single farm payment, higher prices will be needed just to stand still and, therefore, the development of a domestic biofuels industry will not on its own guarantee the future of arable farming.

In the short to medium term, Scottish agriculture may continue to benefit from higher global commodity prices supported by biofuels. However, as with other any other commodity, producers will be under pressure to drive down costs.

Maximising yield is essential to achieve lower costs and with German oilseed rape yields regularly 10-15 per cent higher than in Scotland, significant room for improvement remains.

Longer term, although strong growth in global biofuel demand is expected, this is also likely to elicit a supply response from currently under-utilised producing regions of the world.

A stronger global market in the short term might also make it more politically acceptable to dismantle the EU system of market support, including cereals intervention which is up for discussion in 2008.

The UK government has made it clear under the RTFO proposals that it is looking to favour those biofuels that can demonstrate the best carbon savings. It is not, however, a given that UK-produced biofuels will have an inherently lower carbon footprint than imported products.

The challenge for Scottish producers will be to improve the carbon balance of their crops. Considerable scope remains for research in this area.

If Scottish agriculture does not have the scale to compete directly in biofuel production, should we still view it as a missed opportunity?

By diverting land out of food production in other countries, biofuels could open up new markets for Scotland's established value-added brands, such as Scotch whisky and Scotch beef.

This growth in demand could help producers secure longer-term contracts at better prices for traditional crops such as malting barley - a litre of bio-ethanol is worth a lot more in a bottle of whisky than it is in the tank of a car.

Whether or not large-scale biofuels production develops in Scotland, our industry will still need to understand the implications of developments on the global market and react accordingly. Developing innovative ways of reducing the carbon footprint not just of biofuels but also of food in general could offer significant challenges and opportunities in this new era.