An Economic Evaluation of Canola for Food and Fuel in Western Australia
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An economic evaluation of canola for food and fuel in Western Australia Ross Kingwell1,2 1Department of Agriculture & Food, Western Australia, 3 Baron-Hay Court, South Perth 6151, Australia 2University of Western Australia, Nedlands 6009, Australia, [email protected] ABSTRACT Sustained increases in diesel and petroleum prices since mid-2004 have stimulated interest in the technical and economic feasibility of both on-farm fuel production and the production of crops to service emerging biofuel markets. Local and international evidence plainly shows the technical feasibility of producing biodiesel from various oilseed crops, including canola. Less clear, especially during periods of high grain prices, is the economic wisdom of on-farm investment in biodiesel production and targeting plant breeding, agronomy and farm production towards biofuel production. Against the backdrop of developments in international markets and national bioenergy policies, this paper outlines that on-farm biodiesel production based on canola is currently uneconomic. Diesel prices are not yet high enough, relative to the price of canola, to justify many farmers investing in their own on-farm production of biodiesel. Furthermore, biodiesel production based on seed crops may only ever be an interim commercial opportunity so devoting plant breeding and agronomy resources to capitalise on any emerging opportunity may be a poor strategic use of these scarce resources. Producing canola for food rather than fuel is the currently superior economic strategy. Key words biodiesel, canola, farm economics INTRODUCTION Maintained high prices are forecast for most forms of energy in the near to medium term (EIA 2006). These high prices are fuelling cost escalation in many industries, including agriculture, and they have sparked interest in alternative fuels. In the particular case of petroleum and diesel, widespread interest has emerged regarding the production of biofuels, ethanol and biodiesel, as replacements or additives to petroleum and diesel, respectively. In many countries governments have provided incentives for farmers to grow crops (e.g. sugarcane, corn and rapeseed) that are feedstocks for biofuel production. Further, many farmers are keen to reduce their fuel bills and so are curious to know if biofuels are the answer. In broadacre regions of Australia that lack access to ethanol supplies, some farmers want to know if on-farm production of biodiesel is commercially attractive. This paper examines the relative profitability of growing canola for food or fuel (biodiesel), using broadcare farming in Western Australia as the case study. Firstly, the paper outlines briefly the importance of fuel to these broadacre farms and then considers farmers’ management options in the face of higher fuel and energy prices. Secondly, the paper examines the economic case for biodiesel production based on canola. The paper offers a set of concluding remarks. WHY FUEL PRICES MATTER TO FARMERS Since mid-2004 farmers in Western Australia have experienced a strong upward movement in fuel prices (see Figure 1). Not since the 1980s have farmers experienced such rapid and prolonged increases in their fuel prices. The increase in fuel prices has increased not only the cost of major on-farm activities such as crop establishment and grain harvesting but also has spilled over into cost increases for transport of agricultural products and inputs (animals, crops, wool, milk, feeds, fertilisers and chemicals) via all transport modes (road, rail, sea and air). Accompanying the rise in fuel prices has been an associated general rise in energy prices that - 19 - also has underpinned rises in the prices of key agricultural inputs (fertilisers and chemicals), offset to some degree by the recent appreciation of the Australian dollar that has lessened the price increases of some imported farm inputs. 160 150 ) 140 re it /l c 130 Diesel Prices from 2001 to 2007 (c/litre) ( e c ri 120 P 110 100 90 80 Jan-01 May-01 Sep-01 Table 1. Fuel use and fuel expenditureJan-0 on2 broadacre farms: 1995/6 to 2005/6 Fig. 1. DieselM pricesay-02 in the wheatbelt: Jan 2001 to July 2007 Sep-02 Jan-03 May-03 Sep-03 Year 1995/6 Jan-04 1996/7 May-04 1997/8 Litres of fuel used per Sep-04 1999/20001998/9 effective ha (l/ha) Jan-05 2000/1 May-05 2001/2 2002/3 Sep-05 Farmers are concerned about these price increases for several reasons: 17.5 2003/4 (i) 18.1 Jan-06 2004/5 a 19.5 2005/6 May-06 based on a balanced panel of 65 southern region farmers18.3 in Western Australia Fuel costs form a significant component of farm operating costs18.3 and so farmers are Sep-06 concerned about the impact on their businesses of high prices18.2 of fuel. For example, in season 2005 Western Australian broadacre farmers spent on average around $65,000 Cost of fuel per Jan-07 16.8 effective ha ($/ha) on fuel, with the fuel bill comprising around 11 per cent of farm operating costs or 25 per May-07 cent of variable costs of crop production (BankWest 2006). Another18.9 illustration of the importance of fuel expenses is shown in Table 1 for a sample18.8 of 65 farms in the southern agricultural region of Western Australia. These mixed20.6 enterprise businesses 11.4 a 18.7 12.5 13.1 12.4 12.4 16.3 15.2 17.0 17.0 18.5 16.8 - 20 - used roughly the same amount of fuel per effective hectare of farmland over the 11 year period, although the expenditure on fuel per effective hectare increased over the period due to the rise in the price of fuel. In 1995 fuel was 65 c/l rising to 90 c/L in 2002. In 2005 and subsequent seasons the price of fuel has increased further to be over 130 c/l in mid 2007. On average over the period the farms became more crop dominant with the average percentage of farm in crop increasing from 46 to over 55 per cent. Although cropping relies on greater fuel input than pasture production, nonetheless farmers over the period improved slightly the efficiency of their fuel use in cropping operations such that expenditure on fuel per effective hectare of farmland changed little. (ii) The main broadacre agricultural industries in Western Australia are export-orientated and have a limited capacity to pass on their fuel costs directly and fully to overseas’ buyers. Most of the State’s production of major agricultural commodities, wheat, barley, wool, canola and live sheep, are exported overseas. As such most farmers are price- takers and are in direct competition with other agricultural suppliers across the globe. If increases in fuel and energy prices worsen the comparative advantage of Western Australian farmers, then they will face a worsened cost-price squeeze and a real decline in farm profits. Any production region that will be less affected by fuel and energy price increases (for example, due to their greater proximity to markets or greater natural endowment of natural resources) relative to Western Australia is likely to increase their market share or be less susceptible to profit decline. The Western Australian farm sector does have some characteristics that make it less vulnerable to the impacts of high fuel prices relative to some other production regions. It has sea freight advantages for sales into south-east Asia, southern China and Middle East markets. It has modern grain freight, handling and storage facilities. Farm production is based on fuel-efficient, large scale, often relatively low input crop and animal production systems. For example, farmers have switched from the multiple pass crop establishment systems of the early 1980s to single pass, minimal disturbance systems that per hectare use less fuel. However, farmers in Western Australia face competition in some markets from an expanding agricultural sector in South America and eastern Europe. These other regions have access to cheaper labour, more fertile soils, access to relatively cheap energy sources and, in the case of South America, widely employ GM technologies that offer cost and yield advantages (Greenville and Keogh 2005). The fact that most broadacre farmers have already adopted fairly fuel efficient crop establishment and crop harvesting methods means the technical option of changing crop establishment methods to lessen fuel costs is not an option for the current generation of farmers, unlike in the 1980s. So many farmers will need to look elsewhere for other options. (iii) There is evidence that the natural environment for agricultural production in Western Australia is worsening, exacerbating the adverse impacts of high prices for fuel and energy. Recent studies of climate change document a current drying and warming of the environment in the south-west of Western Australia (Sadler 2002, Pittock 2003) with predictions of a further deterioration (CSIRO 2001, Howden and Jones 2004). Excluding any impact of fuel price rises, climate change alone represents a great challenge to the profitability of broadacre farming in the south-west of Western Australia (John et al. 2005, Kokic et al. 2005, van Gool and Vernon 2005, Kingwell 2006a). If the rise in fuel prices since 2004 is prolonged and if there is no off-setting rise in commodity prices then broadacre farming in this State faces some serious commercial challenges from climate variability and climate change. In responding to those challenges farmers will need access to innovation and R&D services to deliver the needed productivity improvement (Mullen 2002, Kingwell and Pannell 2005). Support for such innovation will be one way that farmers and - 21 - government can jointly ameliorate the likely adverse impacts of a sustained period of high fuel prices and a worsening trend in the natural environment. (iv) Unlike some of their international and inter-state rivals, Western Australian farmers are unlikely to receive high levels of financial support from government.