Fat vs Fuel: Biofuels Digest special report on Indirect Land Use Change and biofuels emissions: first in a series

For some time, the phrase “indirect land use change” has been floating around the biofuels industry. It represents a proposition that increased biofuels production in the United States, by causing prices to rise, encourages increased planting of biofuel crops.

By doing so, according to the theorem, other uses are displaced — for example, land for grazing or for growing animal feed — and to replace the supply of feed or grazing land,  Amazonian (or other) forest is ultimately displaced. The resulting emissions are charged to biofuels as an indirect emission from a land-use change.

The analysis and debate has been carried out at universities and in academic journals for some time. But now that California has decided to incorporate ILUC impacts in its Low Carbon Fuel Standard, all hell has broken loose.

A large group of scientists have protested the inclusion of ILUCs, saying that in effect that we don’t know enough about indirect land-use change modeling to enshrine the analysis in policy. Advocates for ILUC say that the current models are a good start, and good enough, and better than not accounting for indirect emissions at all.

In short, we’re arguing about whether the models make for a good forecast. A problem is that we haven’t backcast – that is, checked the predictions of the model against known outcomes in the past to see if the predictions were accurate.

Problems with the ILUC world-view

The problem with the ILUC model is that it imagines a unified market in which there are two main actors, growers and users. Higher prices for the grower, goes the analysis, create profit motives. With more profit and revenue to chase from say, corn instead of wheat or cattle, growers are incentivized to change the land-use mix.

But there are two markets and three actors. There is the market between growers and processors, and there is the market between processors and users.  The difference between the feedstock price and the refined fuel price is known as the “crush spread”. That is the critical dynamic that drives the market for biofuels. When the crush spread is high, biofuel production increases.

When the crush spread collapses, as happened in the commodities bull market of 2008, high feedstock prices did not prompt diversion of land for feedstock production.

Rather, they prompted wholesale bankruptcy of ethanol producers — trapped between falling oil prices and high feedstock costs.  Producer after producer has gone to the wall. Production has not gone increased – in fact it has fallen 17-20 percent by most calculations since feedstock prices soared. Land use is changing, perhaps, but not in the predicted direction.

For proof positive, look to lobbying efforts in Washington. Producers are in Washington right now, but they are not begging to open up more land for corn production. They are requesting mandated increases in ethanol demand and for emergency loans to keep the industry afloat. In short, they are responding on the demand side instead of the supply side.

The National Corn Growers Association is not currently responding to high corn prices with an all-out supply-side effort to convince farmers to plant corn on corn; rather, their key announcement this week was the formation of a climate change committee to deal with the  Low Carbon Fuel Standard and prop up the demand-side.

Biofuel production changes because of crush spreads, not feedstock prices or other opportunities in the land

Biofuels exist in the margin between oil prices and crop prices. Land use change does not require rising feedstock prices, but rising crush spreads. That will happen when feedstock prices are falling faster than falling oil prices, or oil prices are rising faster than rising feedstock prices.

Let’s also keep in mind the importance of crop rotation. Planting corn after corn, as any farmer knows, is at best a short term gain with long term pain from soil exhaustion. The vast majority in variations in planting acreage comes from the need to rest the soil or plant soy after corn, for example, to improve soil nitrogen.

Planting camelina as a biofuel crop is not, necessarily, a response to high prices for camelina oil from biofuels producers. Studies have shown that wheat-camelina-wheat rotations perform better than wheat-fallow-wheat. Planting of energy crops can be a means of responding to opportunities in the food market, not the fuel market.

About mandates

Let’s now look at mandates, which attempt to create artificial markets for renewable fuels. The ILUC argument is that the power of mandates disrupts the market and forces a land use conversion to meet the mandated demand.

We are now four years into expanded mandates since the 2005 energy bill, and looking at price and production of ethanol, the curve looks at lot more like the oil price curve than a steady unbroken ray of renewable energy sunshine as envisioned by the mandates.

Ethanol production stalled in sync with the fall in oil prices. According to the ILUC theory, with high demand, prices rise. In fact, with rising demand ensured by mandate, corn and ethanol prices collapsed. The reason? Oil prices.

The crush spread is vital to understand — that is, the relation between the underlying prices of feedstocks and fuel rather than price itself — because crush spreads drive what we can call “producer panic” as biofuels processors scramble to escape imminent doom.

Looking at the data: what happened in 2008 when feedstock prices rose?

The effect is easier to see in biodiesel production. When the crush spread between soy and biodiesel prices collapsed, soy prices were still rising and yet we did not see expanded planting of soy, and more soy biodiesel plants.

A tour of the Biofuels Digest database of stories tells the tale. In recent months, we have seen the cosmetic surgeon who converted liposuctioned human fat to biodiesel, we have seen jatropha, algae, camelina, emulsified SVO, straight vegetable oil, waste veggie oil, multi feedstock, tallow, fuel cubes. But since last summer, when soy went to Pluto, we have seen just one (yes, one) soy biodiesel plant, the Blackhawk plant in Illinois. Meanwhile soy biodiesel processors have reduced capacity everywhere.

What drove all that innovation? Had the margins remained wide as a barn door as they were early in the decade, I have no doubt that  we would have seen soy, soy, soy, soy, baked beans, soy, soy, soy and soy.

The National Biodiesel Board, characterized by several Digest sources as “the soy guys”, would have been delighted to oblige.

Falling spreads created innovation as actors sought to reduce costs, the only variable that impacts crush spread they had to some extent in their control.

Rising soy prices do not drive land use change. Rising crush spreads might.

More in part II, here.

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