A Feed Stock Evaluation; Camelina

Transcription

1 A Feed Stock Evaluation; Camelina A White Paper Brady Irwin Whole Energy Fuels Corp. 6/15/ P a g e

2 Contents Food v fuel; an introduction to the land use debate Camelina at a glance Agronomics Policies Economics What s next Sources Cited, order of appearance Tables and figures P a g e

3 Food v fuel; an introduction to the land use debate Bio fuels hold the potential to reduce our demand for foreign oil and decreed our national carbon emissions. However, concern has been raised over the efficiency of the existing pathways of production. Particular criticism has been leveled at policies that promote the substitution of cropland used for food and feed production to be used in the production of fuel crops. Because the majority of the crop substitution that occurs involves repurposing crops and crop land used as animal feed into biofuel, isolating the real effect of these policies on food security is challenging and subject to debate. This food verses fuel debate has caused some in industry to question the ethos of the existing biofuel production system and to search for alternative options for the production of renewable fuel. One philosophy has been to analyze underutilized crops for use as biofuel feedstocks, produced in a system that is not directly competitive with existing food crop production. Of particular interest are crops that are capable of producing biomass using limited inputs, on land not currently suitable for food crop production. One crop in particular, camelina, has shown great promise as an alternative to the status quo. Camelina has been pitched as a wonder crop, with the potential of providing a sustainable solution to the food versus fuel debate in manner profitable for all stakeholders. However, historically lack luster adoption rates and sub optimal yields have left investors uncertain about the future of camelina. This white paper will review the characteristics of camelina production in terms of the production, policy, and economics that are responsible for success or failure of the crop. Strategies and mechanisms that hold the greatest potential for the promotion and proliferation of camelina will be discussed. Camelina at a glance Advantages; Short season ( days) [1] Low water requirements (7-12 ) [2] Low nutrient requirements (5 lbs N/100 lbs expected) [2] Cold weather tolerant (seeds safe to 12F) [2] High oil content (30-40%) [2] High ALA in oil (35-40%) [3] RIN recently approved (advanced biofuel) [4] Barriers to producer adoption; Only approved at 10% feed concentration [5] Limited crop insurance [6] Uncertain market conditions [7] Management limitations (Limited crop varieties and approved chemicals, lack of experience with the crop) [7] 16 P a g e

4 Agronomics Camelina s advantage over other oilseed crops stems from its low input characteristics and environmental versatility. The variable cost of production of camelina has been estimated to be 30-60% lower than comparable oil seed crops. [8] <see figure 1> Camelina can be produced in dry-land production systems with as little as 7-12 annual precipitation. Camelina utilizes nitrogen at a rate of 5 lbs N per 100 expected lbs of harvest, with yield improvement seen with increases in available phosphorous up to 60lbs/ac. [2] Camelina is resistant to blackleg, has few known insect problems, and is competitive with most weeds, with the exception of some persistent perennials. [8] Unfortunately, at this time only one post emergence herbicide has been approved, Poast, a monocot (grass) selective herbicide. This leaves producers with a very limited set of tools for dealing with pests during the growing season. It is common practice to plant following a chemical fallow to reduce competition during emergence. If camelina can get a head start on competitive weeds, it can establish a canopy that slows and even prevents in some cases the growth of weeds. Camelina s strong stand establishment characteristics make it a prime candidate for no-till production systems, which have been found to improve soil quality and reduce erosion, and decrease carbon emissions [9]. Low rainfall grain production systems stand the most to gain from a camelina rotation. The short growing season ( days) combined with a very strong cold tolerance (seeds tolerate temperatures as low as 12*F, germination at 38*f) allows camelina to be planted in the late winter/early spring even in the harsh Northern Great Plains environment[1][2]. This fits nicely into the traditional winter wheat, fallow rotation, by replacing the fallow with a low input crop creates potential for increased returns on acreage given appropriate rainfall and market price. Producing camelina does carry significant risk. Very few producers have experience growing the crop. While the crop requires no special harvesting equipment, its small seed size creates some problems. In order to maximize emergence, seeding needs to be shallow (1/4 ) and followed by a roller packer to maximize soil contact. [2] Moreover, special care must be taken during harvest to prevent spillage in field due to gaps in equipment that would not be problematic for other crops. Additionally, organized breeding for modern production systems is still in its infancy. As a result, very few cultivars are available for commercial production. Many producers may have difficulty finding a cultivar suited for their own unique production system. The lack of invested breeding indicates that camelina s yield potential may be significantly greater than even the best current cultivars. Increasing the tonnage per acre, or the oil content of the seed, will likely be a significant factor in the potential for wide spread adoption of camelina. Breeding also holds potential to decrease glucosinolate 17 P a g e

5 levels, allowing for increased ration percentages for livestock feeders, furthering the marketability of the meal. Production and quality goals can potentially be achieved by utilizing both transgenic and traditional breeding practices. At this time two major firms, Grate Pains LLC and Sustainable Oils are believed to be the largest breeders of new camelina varieties, and crop trials are in progress at land grant universities throughout the greater Pacific North West and Great Plains. Policies Policy has worked jointly to support and suppresses the adoption of camelina. Over the last five years, changes in policy have been made to advance camelina production, but this progress has come on the back of a significant investment and has been slow in being realized. Camelina has very recently been assigned RIN designation under RFS2, allowing the proper accounting of tax credits to producers and formalizing its carbon efficiency for future bio fuel policies [4]. This is significant as it allow the camelina based biodiesel to be blended with biodiesel from other feedstocks and accounted for properly in the labyrinth of biofuel support payment and tax credits. This improves camelina oil s value at every level of production and distribution and was one of the largest obstacles yet navigated. Camelina meal has been approved by the USDA for beef and poultry rations up to 10% and swine rations up to 2%. This is significant as it allows the marketing of camelina meal adding a second source of value for the crop. Camelina is high in α-linolenic acid (ALA), the omega-3 fatty acid found in flax. Early research suggest that feeding camelina meal to laying hens increases omega-3 content in their eggs without reducing the quality of the eggs or harming the health of the hens.[10] As highlighted in the February 2012 report by the Washington State University IMPACT Center, one of the primary barriers to the adoption of camelina to conventional farming systems was a lack of subsidized crop insurance. They found that the lack of a crop insurance program combined with lack of confidence in the existing marketing infrastructure and production practices accounted for as much as a 20% risk premium, meaning that 20 of the price received by producer can be thought of compensation for the risk of production [7]. An alternative way of viewing this figure is that 20% of the revenue generated by a camelina crop goes toward the expectation of loss. Crop insurance mitigates the risk premium. When that premium is subsidized by the government, it increases incentive for risk adverse producers to enter the market. Crop insurance is currently available for all other common crops grown in dry-land production system. The availability of crop insurance for camelina allows for accurate cross crop comparison. The first crop insurance for camelina was made available as a pilot project for select Montana 18 P a g e

6 counties for the 2012 cropping season [6]. It is still too early to tell what impact crop insurance has made on producer s decisions. It is likely that an increase in availability of this insurance would lead to an increase in production in future years. Cropping decisions depend not only on subsidized insurance, but also on direct payments to producers. Camelina has had some attention from the Biomass Crop Assistance Program (BCAP). The BCAP provided payments to farmers that enrolled in the program for a five year contract. Farmers that enrolled were required to produce bio based products or energy sources, including but not limited to advanced bio fuels, which camelina is classified under. Participation in the program was lower than expected. It has been suggested that the lack of participation can be attributed to a short entry window, lack of promotion, and for certain areas, more profitable alternative cropping choices. [7] The most successful government support program so far for camelina has been the research and development of it use as drop-in aviation fuel for the US military. Camelina s unique oil properties and land use characteristics allow for the production of a high quality bio jet fuel with very low lifecycle carbon emissions. [11] Whatever success that exists for camelina today can be attributed, at least in part, to the government program. Research is continuing in this area, but early results have been favorable Economics For a farmer to be willing to produce camelina, it must be at least as profitable per ac/labor hour as the next best alternative. In the arid regions where camelina show the most promise, this means out competing the increased yields for the cash crop (wheat) from a complete fallow cycle, or the annual returns from the conservation reserve program. In higher rainfall zones this means out competing alternative crop options, particularly canola in medium rainfall zones and legumes in high rain fall zones. As it stands, camelina has little competitive advantage with the available alternatives. The price per ton is well below its alternative and, with the exception of the lowest rainfall areas, lower yields. In a competitive production environment where farmers are rational and profit maximizing, camelina is simply out classed by its competitors despite lower input requirements than many of the alternatives. The market price of camelina, like all oil seeds is a composite of the value of its meal and oil. The meal is sold primarily as livestock feed and the oil, in the case of camelina, is marketed to biodiesel refineries. The crush ratio for camelina is roughly equal to canola. A traditional mechanical press will yield approximately 25% of the seed weight in oil. Camelina price data is limited. Only one recent year, 2011, has been published. As such our ability to estimate the properties of the camelina market are limited. However, using a simplified composite pricing model we can roughly estimate the market value of 19 P a g e

7 camelina seed in any period. The intuition is simple, break the product down into core marketable products (the oil and the meal) and compare to the nearest substitute. Historic soybean oil prices will be substituted for Camelina oil. Soy bean oil and camelina oil can be thought of as direct substitutes for the production of biodiesel. As such, their value in an established market should be roughly equal. Camelina meal and canola meal both contain similar nutritional characteristics that determine their demand by feeders. As such, their market price should be roughly similar. To recognize the fact that seed prices are lower than the composite price of the oil and the meal, we must also estimate the marketing margin of the crusher. This margin can be thought of as the value received by the crusher to compensate for the labor, time, and risk in processing the product. We estimate this discount rate by calculating the known composite value of a crop with similar crush characteristics (canola in this case, also a 25/75% crush) and comparing the calculated value with the market price, then finding the average percent discount. Canola s processing margin can be estimated as Camelina is also estimated as 25% oil 75% meal. Due to the unique nature of the camelina Market, we are severely limited as to available price data. We are limited to the 2011 of $15.12/cwt. We estimate the composite value of camelina to be equal to 25% oil and 75 % meal, products with quality parity to soy oil and rape meal accordingly. On average, between cropping years 2007/08 and 2012/13, canola traded at 79% of its composite value. As camelina will be grown in similar regions and likely crushed by the same firm that crush canola, we can assume that camelina has a similar processing margin. Using 2011 as our soul year of price data we calculate a rough expected price of camelina to be; E(Price of camelina) = [.25(Price soy oil 2011 ) +.75 (price canola meal) 2011 ] *.79 This formula gives an expected value of $18.33/cwt, compared to the actual price received of $15.12/cwt. This 17.5% discount can be attributed to a risk premium on the part of the crusher. It is important to point out that two major market changes in the last two years are likely to reduce that risk premium, bringing the actual price closer to the discounted composite price. Primarily, government approval for use as livestock feed secures the marketability of the meal. Additionally, the approval of a RIN allows camelina to be marketed 20 P a g e

8 homogenously with other biofuel feedstocks. As such, it is likely that as the market matures, camelina price will approach canola in value. Additionally, camelina has a very limited market as cooking oil. The lack of marketing opportunities for human consumption, severely limits the consumer pool. As a result, prices would likely be suppressed bellow canola, even in a mature market. The government certifications will likely increase the price somewhat, however it can be expected that the value of camelina will remain depressed bellow its optimal for some time, due largely to the uncertainties in its supply. This uncertainty stems from the small producer base producing in arid environments that are prone to crop disasters and an uncertain political future. Additionally the largest consumer of camelina is the US military for testing of camelina a feed stock for a drop in bio jet fuel. This market is experimental in nature, and its long term continuation contains significant policy risk. At this point in time, the availability of price and production data for camelina is extremely limited. These back of the envelope calculations give a rough estimate of how camelina should perform should it reach market saturation. While the methods are crude, the results do shine light on the nature of the crop. Further research, with deeper data, will likely help to more accurately characterize the camelina market. For long term market establishment and success, camelina needs a directed marketing strategy aimed at both consumers and producers. Prices could be raised if additional marketing opportunities were allowed. Primarily, the marketing of camelina as a omega-3 friendly cooking oil, and promotion of its long term stability properties could be potential areas of value added. This could increase the consumer group and diversify price risk for producers. Of course to execute an effective promotional campaign, the industry would require a marketing board. Such organizations do require significant investment, and an industry as small as camelina lacks the scale to establish and utilize properly. What s next The net result is a chicken and the egg scenario. The growth of the industry depends on a mechanism reserved for larger industries. In the short term, some growth is to be expected as a result of the recently passed policies. The assignment of RINs, the approval for animal consumption, and the availability of crop insurance are massive victories for the fledgling market. But these victories fall short of launching the crop to commodity status. The fight is nearly won on the political front. Camelina is now established as a bona fide oil seed crop under the EPA and USDA, open to many of the same supports and advantages as its competitors. The next hurdle is to even the marketing playing field. This means finding ways to increase dollars per acre for growers by adding productivity at the field level and value to processing chain. 21 P a g e

9 Strategies for advancement include, but are not limited to, improved yields through crop breeding, coordinated industry promotion, and at least in the short term, producer assistance and price supports. The product is good, the production systems are available, but the returns per acre must increase to the returns from comparable production options before camelina can be considered economically feasible, let alone sustainable. 22 P a g e

10 Sources Cited, order of appearance [1] Hunter, J., & Greg, R. (2010). Camelina production and potential in Pennsylvania. In Agronomy Facts 72. The Pennsylvania State University. Retrieved from [2] Fleenor, R. USDA, Natural Resources Conservation Service. (2011). Plant guide for camelina (camelina sativa). Retrieved from: [3] Crowley, J., & Fröhlich, A. (1998). Factors affecting the composition and use of camelina. Dublin: Teagasc. Retrieved from [4] Environmental Protection Agency (EPA), (2013). Regulation of fuels and fuel additives: Identification of additional qualifying renewable fuel pathways under the renewable fuel standard program, RIN 2060 ar07 (Federal Register/ Vol. 78, No. 43). Retrieved from website: [5] Montana Department of Agriculture, (2012). Approved uses of camelina meal in feed. Retrieved from website: [6] Daly, J. (2011, December 05). U.S. biofuel camelina production set to soar. OilPrice.com, Retrieved from Biofuel-Camelina-Production-Set-To-Soar.html [7] Young, D., Galinato, S., & Marsh, T. (2012). Feasibility of camelina as a biofuels feedstock in Washington. IMPACT Center, Washington State University, School of Economic Sciences, Pullman, Retrieved from [8] Jaeger, W., & Siegel, R. (2008). Special report 1081, economics of oilseed crops and their biodiesel potential in Oregon s Willamette Valley. Department of Agricultural and Resource Economics, Oregon State University, Retrieved from [9] Grandy, A. S., Robertson, G. P., & Thelen, K. D. (2006). Do productivity and environmental trade-offs justify periodically cultivating no-till cropping systems?. Agronomy Journal, 98, doi: /agronj P a g e

11 [10] Kakani, R., Fowler, J., Haq, A., Murphy, E. J., Rosenberger, T. A., Berhow, M., & Baily, C. A. (2012). Camelina meal increases egg n-3 fatty acid content without altering quality or production in laying hens. Lipids, 47, doi: /s [11] Sustainable Oils. (2010, December 1). Peer-reviewed life cycle analysis shows camelinabased renewable jet fuel reduces emissions by 75 percent. Retrieved from 24 P a g e

12 Tables and figures Camelina Acreage in Montana'07-'12 25,000 20,000 Acreage 15,000 10,000 Planted Harvested 5, Estimated production in the state of Montana, m Variable cost (per ac) comparison of oil seed enterprise budgets in the Willamette valley [8] Camelina a Canola b Canola c Flax b Flax d Yellow M c Safflower d Sunflower e Variable cost $ $ $ $ $ $ $ $ ($/acre) % of VC 41% 41% 55% 70% 41% 70% 54% a Spring planted; broadcast over grass seed sod; no irrigation b Winter planted; regular tillage; no irrigation. c Spring planted; regular tillage; no irrigation. d Spring planted; no tillage; no irrigation. 25 P a g e