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Food prices: fact versus fiction

Feature

The UN Food and Agriculture Organisation (FAO) and International Food Policy Research Institute (IFPRI) have both published damning reports in recent months in which biofuels are portrayed as the main culprit for the 2007 and 2008 crop price hikes.

Both organisations argue that governments should (urgently) review their biofuel policy because of the devastating effect biofuels production is... having on food prices and increased world hunger. These reports were published at a time when prices for maize and wheat were at levels lower to what they were at the beginning of 2007.

Around 12 months ago prices went as high as nearly €250/tonne for wheat and maize. And prices for cereals have now reached such a level that the European Commission is restarting its policy of intervention.

Biofuels have been made a scapegoat for rising commodity prices but price hikes are common in agricultural markets due to a combination of relatively inelastic demand and volatile supply. Historical data shows that real (infl ation-adjusted) world wheat prices were 15% higher in 1995 and 1996 than the 2007 price spike. Moreover, EU production of bioethanol from wheat only began in earnest in 2003. Therefore there must be a number of factors affecting commodity prices, some of which are cyclical and some of which are structural in nature.

On the one hand, among structural factors are the growing demand from emerging economies, the historically low levels of investment in agriculture and agricultural research which have slowed down productivity, the rising biofuels production and higher oil prices. In particular, the Sustainable Development Commission suggests that an increase in oil price from $50 (€38) to $100 a barrel could cause a 13% increase in production costs in commodity prices for crops and 3-5% for livestock products.

Cyclical factors also affect commodity prices, such as adverse weather conditions resulting in bad harvests in key production areas of the world, limited international commodity trade due to the imposition of export restrictions in various countries and, it seems now above all, speculative investment in agricultural commodity markets.

In summary, growing demand and sluggish productivity growth led to the change from a surplus to a shortage era and set the stage for commodity price increases. When weather and crop disease shocks hit commodity markets in 2006 and 2007, stocks of many agricultural commodities were already low, thus exacerbating the price impacts. The policy actions of some countries to isolate their domestic markets through export restraints made the situation even worse, particularly for rice.

Rising biofuel production has had a very modest impact on commodity prices. [read more]

An ethanol project to rival Brazil

Feature

Emerging energy company Stratos Renewables is set to become one of Latin America’s key ethanol producers, and the lowest cost sugarcane-based ethanol producer in the world.

The company plans to use the under-developed coastal region of Peru to cultivate and produce 90% of its sugarcane in order to minimise commodity price volatility. Stratos Renewables will then benefit from tariff-free... [read more]

What to consider when modifying a plant

Feature

In the face of the current credit and financial market instability, owners of existing biofuel refineries that may have considered plant expansions are now looking at ways to reduce costs and boost revenues by optimising their current facilities. Plant managers are now finding themselves considering whether or not to incorporate new technologies and equipment into existing facilities so as to... increase yields and, in some instances, create additional revenue streams from new byproducts. Whether such modifications involve cavitation or catalyst/ resin enhancements in the case of biodiesel refineries or energy optimisation packages, ammonia/enzyme upgrades, gas separation, oil extraction or corn/ biomass fractionation in the case of ethanol refineries, management should consider the impact such activities have on operational documents such as previously-executed financing or development agreements, technology licenses, or permits. Financing documents Existing plant lenders and other capital providers will, in most instances, encourage optimising activities that clearly show cost benefits to the plant’s operations, whether it improves efficiencies or adds new revenue streams. Discussions of any of the aforementioned modifications should include a dialogue with the company’s lenders and other strategic capital funding sources. For example, for companies still subject to construction, term and/or working capital loans, there are likely several loan document restrictions that require lender consent to any significant changes to the plant. In addition, any existing sub-debt or convertible debt providers and/or preferred equity holders are likely to have rights under their relevant agreements to be considered before undertaking certain plant optimisation improvements. A review of all financial and operational lender covenants, as well as any rights and preferences under preferred equity arrangements, is warranted, as a number of provisions might be triggered by such proposed investments in optimising a facility. For example, investing capital for such activities may trigger equity holder rights of participation in any equity offering, and most likely would implicate loan covenants such as debt/leverage ratios, new debt restrictions, capital expenditure limits, cash flow sweeps and/or other use restrictions on cash flows from earnings. More importantly, and especially given the current turmoil in the world financial markets, before approving new capital investment, lenders and other stakeholders will want to review all background materials and information about the proposed project, including revenue enhancing and payback projections to ensure such figures are based on sound and reasonable assumptions. The last thing any lender will approve is a capital project that costs more than it should or one that will not provide the projected financial enhancements to the plant because of flawed assumptions. [read more]

The impact of the financial crisis

Feature

The financial crisis in the global banking sector, which started last year, has become more intense in the past couple of months with the downfall of established banks like Lehman Brothers and the bailout of many other financial institutions around the world. But what effect will this have on the biofuels sector? Pre-crisis investment boom The renewable energy sector has been characterised in the... [read more]

Technology for a changing market

Feature

No-one could dispute the fact that operating ethanol and biodiesel companies brings risks as well as rewards. Not only do companies have to manage the risks associated with traditional energy trading, they must also take into account the volatility and supply complexities in the agricultural commodities markets. Management need to be able to factor in farm procurement, all transportation modes... [read more]

Biofuels in full bloom

Feature

With its tropical climate, large landmass, abundant fertility and proximity to the energyhungry US, South America has plenty of potential for growth in biofuels. In the case of Brazil, with a solid and mature three decades of ethanol development already under its belt, it is a matter of adapting to maintain its leading position as a key producer of lowcost and sustainable biofuels and regain its... crown from the US as the world’s biggest ethanol producer. Peru and Colombia are progressing new biodiesel and ethanol projects at a steady pace while nations such as Ecuador are in the early stages of developing viable biofuels markets. According to figures from New Energy Finance, a research company focused on renewable energy, Latin America accounted for well over a third of total global investment in biofuels in 2007. ‘What we saw in 2007 was $19.5 billion (€15 billion) of investment globally in biofuels projects,’ says New Energy Finance’s São Paulo-based analyst, Camila Ramos. ‘Investment in bioenergy in Latin America was $7.9 billion in 2007, and in the first half of 2008 alone investment in the region totalled $5.1 billion. This is stronger than 2007 already, and the majority of the investment has been in Brazil and in developing the sugarcane sector.’ In fact, while the overall rate of global investment in biofuels has slowed, Brazil topped a list compiled by Ernst and Young of the most attractive countries for biofuels investment in the first and second quarters of 2008, regaining that leading position from the US, which headed the 2007 list. Annual Brazilian ethanol production is forecast to reach 26 billion litres in 2008, and 38 billion litres by 2012. Brazil has some 400 plants, and uses close to 80% of this production domestically, exporting a modest 15-20%. Almost 90% of the cars in Brazil are now flex-fuel cars taking an ethanol blend, and ethanol now accounts for 52% of all fuel for passenger vehicles in Brazil, its use having surpassed petrol for the first time in March 2008. In Brazil, experience counts, and the country has had plenty of it. Efficiency levels are impressive. World Bank figures show that Brazil produces almost 10 times more energy from sugarcane than the US produces from corn, and that while the US uses over 10 million hectares to grow its ethanoldestined corn, Brazil uses just 3.6 million hectares. Brazil has had it made for 30 years, ever since the 1970s oil shocks saw it look for alternatives. After having independently developed its strong ethanol industry in a very single-minded and selfcontained way over the past three decades, Brazil now finds itself having to deal with the global surge in criticism of the biofuels sector in general and has to step up its game. [read more]

Barriers and opportunities

Feature

Development of fuel ethanol in Argentina began in 1922, supported by the government, but it was not until the late ?70s that large scale production began. In 1979 the Government launched the Alconafta programme, aimed at promoting the use of anhydrous ethanol for fuel, in blends with petroleum. The initial objective of the programme was to develop a new market for the surplus of ethanol from... [read more]

Plant construction update - South America

Feature

Brazil has long been rooted in the history of ethanol production for transport fuel, but last year the US knocked it off the top spot. However Brazil intends to crawl its way back. In May Renewable Energy (Brenco) announced plans to invest $1 billion (€650 million) to build a 1,100km, 4 million litre a year ethanol pipeline. This will extend from Alto Taquari in Mato Grosso to Santos, the... [read more]

Breaking away from potassium hydroxide

Feature

There are four groups of catalysts in use or under development in the biodiesel industry: base catalysts such as sodium (NaOH), potassium hydroxide (KOH), and sodium methylate (2CH3ONa); acid catalysts such as sulphuric acid (H2SO4), phosphoric acid (H3PO4), and calcium carbonate (CaCO3); and solid catalysts and enzymes. There are also non-catalyst systems under investigation such as... [read more]

A slow second

Feature

European regulations in particular are in the process of changing to provide much more support for second generation biofuels. In September this year Members of the European Parliament (MEPs) on the industry committee of the European Parliament issued a new requirement for the Renewable Energy Directive for 40% of those renewable fuels to come from either second generation biofuels, electricity... [read more]

Enzymes in ethanol production

Feature

Every known organism, including humans, makes enzymes. They conduct all the biochemical reactions needed for life by acting as catalysts for a myriad of reactions inside and outside cells. As catalysts they work by lowering the energy input, such as heat, needed for a chemical reaction to occur, usually by providing a place where the reacting molecules can rest together during the split second... [read more]

Turning straw into gold

Feature

If ethanol could be fermented from agricultural waste as cheaply as petrol can be refined from crude oil, high-polluting, fossil fuel-guzzling cars could become fossils themselves. UK farmers produce 10 million tonnes of straw each year, but only need 4 million tonnes for bedding and animal feed. This leaves 6 million tonnes that must either be ploughed in or burnt as fuel. Current EU... [read more]

Biofuel from fishwaste

Feature

Several headlinegrabbing reports in the last few months have highlighted that commodities such as corn, rapeseed, palm oil and soya are often being grown and harvested in a way that could have negative economic, social and environmental effects. Countries like Haiti, Bangladesh and Egypt have already seen riots as a result of soaring food prices. One way to alleviate the pressure of biofuels and... [read more]

Price analysis

Feature

The recent unprecedented turmoil in the banking and global financial markets has left most people confused and fearful, not least those involved in the renewable energy sector. With bank liquidity paralysed and stock markets tumbling, many companies have found their share prices dropping and the prospect of money for investing in new projects simply drying up. Despite early signs that the... [read more]

Algae investments

Feature

Over $300 million (€233 million) has been invested in algae so far in 2008. The initial findings from a new study, Algae 2020 identify three key trends or waves of investments now emerging in the path towards the commercialisation of the algae biofuels industry. First wave: investment in public-private partnerships (PPPs) The first wave of algae investment is coming from public-private... [read more]

Volume 2, Issue 5

Food prices: fact versus fiction

An ethanol project to rival Brazil

What to consider when modifying a plant

The impact of the financial crisis

Technology for a changing market

Biofuels in full bloom

Barriers and opportunities

Plant construction update - South America

Breaking away from potassium hydroxide

A slow second

Enzymes in ethanol production

Turning straw into gold

Biofuel from fishwaste

Price analysis

Algae investments

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