A fuel’s errand?
By Kevin Roberts
Every driver in NSW is familiar with the term E10. The ethanol-in-fuel debate emerges each time petrol prices rise, as motorists react to increased fuel bills and look for alternatives.
The debate is a complex one on how agricultural produce is used, with other questions needing consideration:
Will mandating Australian ethanol production provide
relief to rising household costs (including fuels), or
will it drive up food prices? and;
What will happen to other rural industries and
rural employment?
The Australian Lot Feeders Association (ALFA) and other livestock groups are increasingly concerned by new information on this issue. ALFA does not oppose the use of ethanol as a fuel nor ethanol production per se. Ethanol may play a role, but as an industry it must stand on its own legs.
Ethanol should not be supported by government policy in a way that risks inflationary pressures on all NSW households. So before there is further support, consumers need assurances on the perceived benefits of ethanol in fuels and more careful assessment on flow-on effects.
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Industry Profile
Since it’s inception in the 1970’s the Australian Lot Feeders Association has been the representative body for a growing industry. Lot Feeding now accounts for 1/3rd of cattle production in the country, with more than 2.6 million head turned-off in 2006. Australia has the capacity to house 1.13 million animals on feed at any one time, using over 2.5 million tones of grain annually.
ABARE report 75,000 properties produce beef on a little under half (48.5 per cent) of Australia’s total agricultural land by area. Analysts and regulators, including the ACCC have recognised that lot feeding helps support and safeguard extensive cattle breeders from drought and market fluctuations. The well documented reduction in drought impacts seen in recent droughts is due in part to changed management by NSW grass-fed producers, now economically able to manage earlier turn-off and maintain the health of pastures.
The growth has also been linked to upward demand for high quality foods. Australian’s spent $6.5 billion on beef in 2006. The national economy has benefited from this success as well; the total value of beef exports has increased 9 per cent from A$4.5 billion in 2001 to A$4.9 billion in 2006. |
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There is a reality in Australian agriculture - livestock based food industries are now grain reliant. Whether it be milk, egg, chicken meat, pork, lamb or beef, the use of grains in the production of animal proteins is critical. Given the vagaries of Australia’s climate it’s the logical way to manage production risks. Droughts and flooding rains may be romantic poetically, but they are not conducive to the regular production of consistent quality foods! Using grains ensures that Australian livestock industries can consistently meet our ever increasingly sophisticated customer specifications, both domestically and abroad.
Weather fluctuations also mean that east coast of Australian grain production varies, from year to year by as much as 50 per cent. Annual export estimates show this wide range, sometimes as high as 15 million tonnes, sometimes as low as 3.5 million. Yet these exports come only after more than 10 millions tonnes of grain is purchased by food producing livestock industries.
An E10 mandate changes, overnight, the outlook for food producing businesses (and all food consumers) in NSW. On a national basis mandating E10 would require 6 to 7 million tonnes of grain from the domestic market. This is often greater than the exportable surplus, but must be met because a mandated content necessitates a huge amount of grain for manufacture.
Ethanol manufacturers’ gain an unfair pricing advantage over other purchasers of grain if ethanol is mandated or subsidised; they can out-compete existing businesses that are not artificially supported.
Government Policies on Food vs Fuel?
The biofuels (or food vs fuel) debate has gone on for many years around the world. The US and Brazilian governments have aggressively enabled support for ethanol (from corn and sugarcane respectively), while the EU is focusing on bio-diesels. The US experience has important lessons for the industry and a vast body of information is available. For a detailed outline see:
http://www.feedlots.com.au//policy/ethanol.htm
Domestically policy development is less reactive. A white paper on energy policy was released in June 2004 by the Prime Minister. Titled ‘Securing Australia's Energy Future’ it included discussions on fuel excise reform.
In September 2005, the Prime Minister released the report of the Biofuels Taskforce which reaffirmed the federal Governments biofuels target of 350ML per annum by 2010. This target is not only ethanol – it includes all biofuels. The PM’s Taskforce also acknowledged the potential for adverse effects on feed grain prices, and that there is the potential for costs from biofuel production to be imposed on other parts of the economy.
In June 2006 the Federal government passed legislation is for domestic ethanol excise exemptions to be phased out over five years from 2011. This means E-blends will face the same overall tax regime as other fuels. Importantly it also means that exporters of biofuels from around the world may be able to import to consumers here without additional tariff costs.
A detailed policy review was prepared by the Centre for Independent Economics in 2006. In February this year the Senate Committee on Rural and Regional Affairs and Transport released it’s final report on ‘Australia’s future oil supply and alternative transport fuels’. This Committee’s two recommendations on ethanol were notable for the omission of any recommendations to mandate ethanol content in fuel.
In 2006 the NSW government announced its own taskforce (to report in August 2007). Yet despite no report, and counter to the previous recommendations by industry and the Federal government, in early 2007 the state debate turned again to an enforced E10 standard. |
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This distortion of this impact, pitting one industry against another, is the real failure of current policies for E10 mandating.
At the time of writing a CSIRO / MLA report on this aspect of the debate is expected, and should clarify potential market and supply issues in greater depth.
E10 Drought
The livestock industry submission to a recent Senate Inquiry stated ‘Subsidised ethanol plants may, in the short term create regional grain shortages, and force up local prices as grain has to be freighted in for livestock customers. This instability would be accentuated in drought years, and is at the heart of our opposition to ethanol subsidies.’
It’s ironic that 2007 - one of our State’s most severe drought years - saw the debate reignite. From an intensive animal production perspective drought acts very much like mandated E10. Both E10 and drought reduce the availability of cereals and grains in Australia.
Does this affect consumers? The current drought has for instance pushed up the price of eggs as the costs for feeding laying hens becomes too high for producers to absorb. NSW households are feeling a new pressure on family food budgets – an inflationary impact not limited to eggs.
In 2007 the ACCC released the ‘Examination of the prices paid to farmers for livestock and the prices paid by Australian consumers for Red Meat’. Discussing the composition of the costs of production, and thus the price for consumers, the ACCC states: ‘One of these costs, the price of feed grain for the finishing of livestock seems to be of particular importance in the current conditions.' Rural Communities
There is another flow on from the cost-squeeze feedback on the whole beef production chain. Higher costs also influence the extensive grazing cattle sector - as part suppliers of cattle to feedlots. The graph shows an inverse relationship between the prices that cattle producers receive and feed grain prices as the Eastern Young Cattle Indicator (EYCI) and grain prices have typically moved in opposite directions since 1998.
A distorted grain market that is elevated will artificially degrade the productivity of feedlots and directly flow on to damage the profitability of grazing cattle enterprises. The Centre for International Economics, a Canberra based think-tank, analysed this in 2005. The report showed that mandated content could potentially drop cattle prices by more than 70c/kg liveweight – or more than 40 per cent. |
It is therefore clear that the most common agricultural practice in NSW – cattle production – will be damaged by E10, which would affect all rural communities. There is the potential to render livestock operations unprofitable. It is especially pertinent in NSW where there are a large number of small enterprises whose continuation is more susceptible to price fluctuations.
The argument that ethanol plants generate more rural jobs is flawed. Given the limited supply of grain, ethanol will displace, not enhance, existing businesses and employment. Feedlots employ more staff per tonne of grain used than ethanol plants. Roughly speaking a feedlot of 40,000 head will employ 75 people, using 200,000 tonnes of grain where an ethanol plant of with the same consumption would only employ 30. There is also a significant multiplication factor (for more information see FLOT 404 from MLA) as feedlots also purchase livestock, hay and other commodities.
Any form of government intervention has some externalities, but it would be appalling for a government to claim policies help rural businesses and communities when in fact it damages them!
Conclusion - Other Options
ALFA simply opposes artificial supports for grain derived ethanol manufacture. Using current technology the most economic way to manufacture ethanol is from grains (not sugar-cane as is sometimes proposed). Other forms of ‘blue-sky’ manufacture, like from lignin or cellulose may one day change the economics of production. ALFA therefore supports the investigation of viable energy alternatives.
The Senate Committee recognised some future options; ‘It appears that production from lignocellulose is the only realistic way to make ethanol a mainstream fuel.’
The report went on to give advice ‘The Committee recommends that the Government examine the adequacy of funding for lignocellulose ethanol research and demonstration facilities in Australia, and increase funding where appropriate.’
Based on the Committee’s recommendations it would be presumptive to jump into a mandated E10 using current grain derived technology. The existing technology probably has fewer greenhouse gas emissions than mineral petrol, but the net effect emissions is less clear, and the capacity of other systems is unknown. The potential for cellulose (2nd generation) or even 3rd generation systems is not yet well enough understood.
In the current environment mandated ethanol will disadvantage many NSW businesses, and result in the propping up of an essentially non-viable industry at the expense of successful industries.
More detailed information is online at: www.feedlots.com.au
About the Author / Need More Information?
Kevin Roberts has been involved in the lot feeding industry for 22 years, and currently operates the Sandalwood feedlot in Dalby, Queensland. He joined ALFA in 1989 and was President from 1992-94. He has been the Vice-President since 2005.
His wealth of experience in the drivers of growth for beef markets, including food safety, led him to be appointed as Chair of the LPA Standards and Accreditation Committee in 2004. In 2006 he traveled to the US to investigate first hand the impact of ethanol policies on that country’s beef industry, with a study report published by Meat and Livestock Australia in March. For more information on the tour and on ALFA see: www.feedlots.com.au
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