Commercial viability of alternative non food crops and biomass on Scottish Farms

Transcription

1 Commercial viability of alternative non food crops and biomass on Scottish Farms - a special study supported under SEERAD Advisory Activity 211 Prepared by: Julian Bell Elaine Booth Mark Ballingall This report has been prepared exclusively for the use of SEERAD and no responsibility can be accepted for actions taken by any third party arising from their interpretation of the information contained in this document. No other party may rely on the report and if he does, then he relies upon it at his own risk. No responsibility is accepted for any interpretation which may be made of the contents of the report. Contact: Julian Bell SAC Rural Business Unit Bush Estate Penicuik Midlothian EH26 OPH julian.bell@sac.co.uk March 2007

2 Contents EXECUTIVE SUMMARY INTRODUCTION AND OBJECTIVES... 3 OBJECTIVES MARKET DRIVERS... 5 INTRODUCTION... 5 BIOMASS FOR ENERGY... 5 LIQUID BIOFUELS... 6 INDUSTRIAL USES... 7 SEWAGE SLUDGE... 7 EU ENERGY AID PAYMENT... 8 INDUSTRIAL CROPS ON SET ASIDE WILLOW SHORT ROTATION COPPICE... 9 INTRODUCTION... 9 WILLOW PRODUCTION... 9 MARKETS AND CONTRACTS GRANTS AND SUBSIDIES ECONOMICS OF WILLOW PRODUCTION BARRIERS AND SOLUTIONS SUMMARY INDUSTRIAL RAPESEED INTRODUCTION CONVENTIONAL VARIETIES FOR INDUSTRIAL USES HIGH ERUCIC ACID RAPESEED (HEAR) HIGH OLEIC OILSEED RAPE MARKETS AND CONTRACTS GRANTS AND SUBSIDIES CROP ECONOMICS BARRIERS AND SOLUTIONS INDUSTRIAL WHEAT INTRODUCTION MARKETS AND CONTRACTS GRANTS AND SUBSIDIES CROP ECONOMICS BARRIERS AND SOLUTIONS FIBRES AND SPECIALITY OILS INTRODUCTION HEMP (CANNABIS SATIVA) CRAMBE (ABYSSINIAN MUSTARD) BORAGE (STAR FLOWER) ECHIUM/VIPER BUGLOSS (BLUE CATS TAIL) GENERAL RECOMMENDATIONS FUTURE RESEARCH... 42

3 Executive Summary 1. The study sets out to examine the main factors affecting the commercial viability of non food crops in Scotland today and in the future. 2. In Scotland at present the only significant industrial combinable crop being grown is oilseed rape along with small areas of industrial wheat, hemp, crambe and linseed. The area of biomass energy crops is also small with just 300ha of willow short rotation coppice (SRC) established. 3. UK markets for willow SRC are being driven by the electricity generators who are currently co-firing biomass in coal fired power station supported by incentives under the Renewables Obligation. In Scotland demand for willow SRC is being driven by future demand from two large scale wood fired power stations in planning and construction at Glenrothes and Lockerbie. Under the Renewables Obligation the share of energy crops in co-firing is set to increase from 2009, creating demand for dedicated energy crops. In Scotland a growing forest resource may offer competition for these markets. Small scale heating schemes supported by capital grants are a potential source of strong local demand for energy crops in the future. 4. The economics of growing willow SRC on Scottish farms have improved significantly in the last year due to an increase in the establishment grant and a 5/t rise in the wood chip contract price. An increase in the rate of planting has been seen this season however, the recent sharp rise in grain prices has once again made it difficult for willow SRC to compete with arable crops. Annual returns were estimated at 116/ha/yr for willow SRC compared to 162/ha/yr for a typical arable rotation. 5. For most farm businesses willow SRC remains unattractive due to the long term commitment required, loss of cropping flexibility, limited market outlets and an incompatibility with existing farm cost structure. To overcome these issues and achieve large scale plantings willow SRC returns would have to significantly exceed those achievable in conventional arable systems. 6. For farm businesses without retained labour and machinery and on certain land classes willow SRC could become competitive again if grain prices fell especially for those farmers seeking a low input and relatively stable income stream. 7. Current woodchip contracts offer price security at index linked price levels for the next 10 years and may suit businesses seeking long term price security. Developing more flexible and transparent pricing arrangements based on the grain or energy futures markets may broaden the crops appeal to a wider number of farmers. 8. Growing willow SRC to supply a local heat market directly could offer enterprising producers the chance to increase crop returns significantly. 9. For most arable farmers the production of conventional crops for industrial markets offers the most realistic non food outlet since they already have the required machinery, labour, experience and market outlets. 10. Biofuels are the main driver of industrial demand for oilseed rape and wheat. World grain prices are currently at a 10 year high driven in part by rapid expansion of US bioethanol demand. In Europe 60% of rapeseed is destined for biodiesel production leading to higher EU rapeseed prices relative to global oilseeds markets. SAC 1

4 11. UK demand for biofuels has been slow to date with just 0.25% of UK fuel supplies coming from renewable sources in 2005, well behind EU targets of 2%. Existing incentives of 20ppl duty reduction for biofuels have mainly supported the use of imported biofuels and feedstock and no significant quantity of UK grain and oilseeds are currently processed in the UK to make biofuels. 12. The introduction of the Renewable Transport Fuels Obligation in 2008 would require the equivalent of 3mt of rapeseed and 3mt of wheat though much of this would be supplied by imports. This is supporting proposals to build a large number of biofuel plants focused on bioethanol in England and biodiesel in Scotland. Uncertainty over long term government policy and volatile oil and agricultural commodity markets make biofuels a high risk investment and it is unlikely that all these proposals will proceed. 13. Development of a domestic biofuels processing industry in the UK and Scotland would have a positive impact on relative price levels in the UK grain market, however the main drivers of price fluctuations will continue to be EU policy towards cereal market support, exchange rates and the world market. 14. Returns from growing wheat and rape for industrial uses are closely linked to the fortunes of the wider grain and oilseeds market. However the Energy Aid Payment and ability to plant on set aside offer some additional benefits, though this payment may fall as the EU biofuel crop area increases. The potential reform of EU grain market support in 2008 could lead to the removal of set aside which would benefit arable growers but at the same time would remove an important incentive for growing crops on industrial contracts. 15. The development of a UK biofuels industry is leading to the introduction of a range of innovative long term supply agreements from both biofuel investors and conventional buyers concerned about future supplies. It is important for farmers to gain a good understanding of contracts and risk management in order that they can make the most of these opportunities. 16. A wide range of specialist fibre and oil crops could potentially be grown in Scotland although at present commercial contracts are only available for hemp, crambe, borage and echium. 17. Opportunities to utilise industrial crops for the recycling of waste water and sewage sludge offer the potential to enhance the returns from industrial cropping while offering a competitive means of waste disposal. 18. Biogas could offer a route for the use of a wider range of crops to be used to supply renewable heat and electricity but commercial viability in the UK has not yet been proven. SAC 2

5 1. Introduction and Objectives Following several years of low commodity prices and declining farm profitability, Scottish farmers have been increasingly questioning their current cropping patterns based on traditional crops and existing markets. In addition, high energy prices and increasing government support for renewable energy have helped to open up potential new energy markets for farmers to supply. At the same time, decoupling of subsidies from production has given producers greater flexibility to grow a wider range of non-traditional crops. Opportunities include growing new crops such as willow coppice for energy production as well as growing existing crops for new non food markets such as rapeseed for bio-diesel. In practice the uptake of non food and industrial crops in Scotland has been slow and dominated almost entirely by oilseed rape, which made up over 99% of the 15,000ha planted in The only other industrial crops that have featured in the last 2 years have been small areas of linseed, wheat, barley, crambe and hemp. Table 1 Scottish industrial crop areas ha Note excludes willow SRC Industrial crops on set aside Oilseed rape 5,210 5,528 Wheat 27 - Barley 9 - Crambe 5 - Other - 16 Sub total 5,251 5,544 Energy Aid Payment scheme Winter oilseed rape 4,015 9,404 Spring oilseed rape Other crops - - Hemp 57 - Linseed 35 9 Sub total 4,264 9,441 Total 9,515 14,985 Source: SEERAD To the individual farmer the uptake of a novel crop or market outlet must be justified by enhanced returns, reduced risk or lower costs. So far few new crops have consistently met these criteria but growing government support and demand especially for biofuels may improve prospects in the future. The need to undertake a study in this area was outlined in A Forward Strategy for Scottish Agriculture, Action Point (9) Promote research into the commercial viability of alternative crops and biomass. SAC 3

6 Objectives The overarching objective is to gain an understanding of the current commercial viability of existing and new alternative non food and biomass crops in Scotland. The specific objectives are to: 1. Investigate current and projected market demand and prices for the different crops. This will help determine which crops show the most potential today and what factors will help determine the future uptake of these crops by Scottish farmers. 2. Identify the main barriers to uptake of non food and biomass crops in Scotland. 3. Develop practical recommendations for farm businesses to follow when considering the commercial production of alternative non food and biomass crops. 4. Make recommendations for areas of future research to help overcome these barriers. The most relevant crops in Scotland currently are willow SRC, rapeseed for biodiesel/industrial use and wheat for bioethanol. Other crops of relevance elsewhere in the UK include miscanthus, hemp and flax. There are also a number of minor speciality oil crops with industrial applications that have been grown on a small scale including borage, camelina, crambe and echium though not all of these are currently being grown commercially in Scotland. This report will concentrate on the relative viability of willow short rotation coppice compared to conventional arable cropping along with examining the opportunities for industrial rapeseed and wheat. There will be less emphasis on the speciality fibre and oil crops reflecting their lower importance in Scotland at present. SAC 4

7 2. Market Drivers Introduction The main driver of increased demand for non food crops stems from EU and UK commitment to the Kyoto Convention and the need to reduce the impact of climate change. This commits the UK to reducing greenhouse gas emissions by 12.5% between 1990 and 2008/2012. Specifically, CO2 emissions should be reduced by 20% between 1990 and 2010, and reduced by 60% by In addition, rising oil and energy prices have raised fuel security concerns and lowered the cost of using crops for renewable energy and industrial materials. An outline of the main drivers of non food crop demand within the UK energy, fuel and industrial markets is given below. Biomass for energy The largest UK market for biomass so far has been for co-firing in coal fired power stations driven by UK legislation which promotes the use of a minimum percentage of renewable energy. The UK Renewable Obligation requires all UK electricity providers to meet a minimum percentage of their sales from renewable sources. The obligation started in 2002 at 3.0% of electricity, rising to 5.5% by 2005/06 and 15.4% by 2016 and lasts until The obligation benefits producers of renewable electricity who are able to trade Renewable Obligation Certificates (ROCs) to other power companies for returns of between 4p/kwhr and 5p/kwhr. This extra income can offset the generally higher costs of using renewable energy sources compared to fossil fuels. Wind power and methane from landfill sites have been the main sources of renewable electricity to date but co-firing of biomass in existing coal powered fire stations has become increasingly important. In 2005 co-firing using biomass fuels accounted for 20% of UK renewable electricity produced. Most of this is supplied at present from imported crop residues such as palm kernel meal, but changes to the Renewables Obligation regulations will increasingly favour the use of purpose grown energy crop such as willow SRC. At present there is no obligation to use purpose grown energy crops in co-firing however starting in April 2009 a minimum level of these crops will be required. The requirement rises from 25% in 2009 to reach 75% by Co-firing of biomass ceases to be eligible for ROCs after 31 March 2016 though electricity produced from dedicated biomass power plants is expected to remain eligible. Demand for energy crops is therefore set to grow strongly from 2009 onwards. Another significant incentive for UK industrial users has come from Climate Change Levy which the government introduced in This sets carbon quotas and taxes for large energy users to encourage a reduction in carbon emissions. Companies who replace the burning of fossil fuels with renewable energy sources are able to sell or lease their carbon allocation to other polluters. This can bring a return of up to 1.5p/kwhr for every unit of electricity generated from renewable sources. Across Europe the introduction of the Emissions Trading Scheme (ETS) on 1 January 2005 offers a market to trade carbon. The value of carbon within the ETS fluctuates according to supply and demand but has collapsed recently to just over 1 euro/t. The value of carbon however is expected to rise in the future as emissions quotas are progressively reduced. This offers another potential income stream for producers of renewable energy. Turning to wood energy the main means of support has been through grant aid for the installation of biomass boilers and grants from a number of government agencies. Biomass boilers are generally more expensive than those running on fossil fuels so these incentives are important in increasing demand for biomass fuels. Currently Forestry Commission Scotland is offering capital grants for the installation of boilers and other infrastructure under SAC 5

8 the Scottish Biomass Support Scheme. A total of 7.5m is available up until March A number of other initiatives are also promoting biomass heating developments on a number of levels across the country. In Scotland although market demand may be set to grow in the years ahead so will the available supply of biomass from timber harvesting and sawmill residues. The production profile of Scottish forests is set to increase available timber supplies to the point that they may exceed domestic demand by 5mt by This could offer strong competition for willow SRC particularly if efforts to broaden the definition of energy crops to include UK grown forest products are successful. A new area of growing importance in Germany is the use of crops and waste product to produce biogas for heat and electricity production. The level of government support for this is strong in Germany and has led to a rapid expansion in the use of crops such as maize purely as a whole crop source of bio energy. By utilising the whole crop an increase in energy yields and a reduction in the carbon foot print of the energy produced are possible. Liquid biofuels In the EU, biodiesel demand now accounts for over 60% of the 16mt rapeseed crop which has pushed rape oil to a record premium over other vegetable oils and benefited Scottish rapeseed prices which haven risen 35/t in the last year to 175/t delivered. Looking to the future overall demand for bio-diesel within the EU is expected to continue to grow strongly, raising forward prices and boosting EU plantings of winter oilseed rape for harvest On the world market grain prices have rocketed to a 10 year high this season driven by weather problems and a rapid growth of ethanol demand in the US. Without global bioethanol demand Scottish wheat prices would not have returned to over 100/t this season. Looking beyond next harvest if US ethanol demand grows as projected then the US could be using 110mt of maize for ethanol by 2012, double current levels. Whether farmers are growing grain for conventional or industrial markets the fact remains that industrial demand for biofuels are now a major driver of world grain prices and ultimately farm profitability. Turning to biofuels in the UK, use is small relative to many other EU states equating to 0.24% of all road fuels in 2005 and so far has been driven entirely by a 20p/l fuel duty reduction. Biodiesel and bioethanol are currently taxed at 28.35p/l (20p/l less than fossil petrol and diesel) with the biodiesel incentive in place since July 2002 and bioethanol since January The current most widely used biofuels are biodiesel which is derived from feed stocks such as vegetable oil, tallow or used cooking oil, and bioethanol obtained from the fermentation of starch or sugar crops. UK biofuel usage in road fuel comprised 35m litres of biodiesel and 90m litres of bioethanol in The European Commission (EC) introduced the Biofuels Directive in November 2001 setting out voluntary targets for the percentage of road fuels to be sourced from renewable fuels. The targets commenced in 2005 at 2% rising to 5.75% by So far only a handful of EU states have met these targets and the pressure is growing to make these targets obligatory. In the UK the duty incentive on its own has not proved a strong enough incentive to greatly increase biofuel use and as result the UK has fallen well behind the EU targets. To help address this, the UK introduced the Renewable Transport Fuels Obligation (RTFO) in November The RTFO comes into effect on 1 April 2008, and requires all transport 1 Promoting and accelerating the market penetration of biomass technology in Scotland, Scottish Executive, 2005 SAC 6

9 fuel suppliers to ensure that, by 2010, 5% of their total aggregate fuel sales are made up of biofuels. Compliance will be delivered through a tradable system of certificates and a buy out mechanism similar to that operating in the electricity market. The RTFO will run in tandem with the existing fuel duty discount until 2009, after which there are no guarantees over the level of duty reduction that will be in force 2. The government has pledged that the combined incentive of duty reduction and buy out price will be 35p/l in 2009/10 and 30p/l in 2010/11 though no indication has been given of how this incentive will be split between the two mechanisms. The lack of a clear framework beyond 2011 is in sharp contrast to the commitment through to 2027 under the Renewable Obligations for electrical power. This uncertainty is a deterrent to those investors considering investing in the UK biofuels industry. Based on the RTFO target of 5% by 2010 this indicates a 20-fold increase in UK biofuels demand and a feedstock requirement of 3mt of wheat and 3mt of rapeseed. Currently there is only one UK biofuel processing plants being built that will be based on UK produced feedstock; the British Sugar bioethanol plant in Norfolk. There is also a small market for on farm processing of oilseed rape to make biodiesel. However there are a large number of UK biofuel plant proposals on the table at the moment. The difficulty lies in assessing how many of these will make it into production and what level of demand will be met by imports. Carbon accreditation of biofuels will be essential to ensure genuine environmental benefits are achieved. Companies participating in the RTFO scheme will have to report on the carbon savings achieved by their renewable transport fuels according to the system determined by the Department for Transport (DfT). Companies will also have to report on the wider sustainability of their renewable transport fuels including environmental and social aspects. This requirement may represent a competitive advantage for UK farmers who already have many of the assurance schemes and recording systems in place to meet this demand. It will therefore be essential that UK farmers minimise the carbon footprint and environmental footprint of the crops they produce. Industrial Uses Demand for specialty oils and fibres for industrial use in the UK is seen as relatively limited at present but a number of issues are supporting demand growth. The EU end of life directive is driving a substantial biocomposite market within the automotive industry and raising demand for fibres such as hemp. This directive aims to achieve ambitious increases in the rate of re-use and recovery of vehicles. New car models containing biocomposite press moulded parts have shown good technical advantages and car manufacturers are adopting such materials, offering good potential for market expansion for fibre crops. New health care and pharmaceutical products are driving the demand for crops such as echium which is being used to produce skin care products to help in the treatment of eczema and sunburn. Sewage Sludge Commercial reluctance to contract food crops from land to which sewage sludge has been applied is restricting the land available on which to apply it. This has created demand for land growing non-food crops upon which the sewage sludge can be more readily applied. The payment of gate fees by the waste disposal companies can significantly improve returns 2 Biofuels market Intelligence Briefing, report prepared by SAC for Forestry Commission Scotland, January 2007 SAC 7

10 for industrial crops and help provide a cost effective means of disposing of waste and recycling nutrients. EU Energy Aid Payment Since 2005 an Energy Aid Payment of 45/ha has been available to encourage the production of recognised energy crops under the Single Farm Payment scheme. This payment can only be made on non set side land. This scheme has been subject to a Maximum Guaranteed Area (MGA) of 1.5m ha with payments reduced pro rata if this level is exceeded. In 2006 farmers in the EU-15 grew energy crops on around 1.2mha of land. This scheme has until recently only applied to EU 15 member states however, on 19 December 2006 it was agreed to extend the scheme to farmers in the New Member States including Romania and Bulgaria, starting in However, the benefit of this decision will be limited by the fact the MGA has only been increased from the current 1.5mha for the EU-15 to 2mha for the EU-25. In Scotland the importance of the Energy Aid Payment scheme has grown with a substantial increase in the areas claimed in Looking to the future as the demand for biofuels and other non food uses continues to grow across the EU it seems likely that the MGA s for this scheme will be exceeded leading to a reduction in the value of the payment per ha. Industrial Crops on Set Aside The planting of designated crops for industrial use on set aside has long been permitted and has continued under the Single Farm Payment scheme. By allowing farmers to spread their fixed costs over a larger area the use of set aside has helped improve the economics of arable production. How much longer this will continue is uncertain mainly because the EC are proposing the abolition of set aside as one of their proposals in the 2008 health check of the CAP. While this would be an undoubted benefit for farmers it would reduce the attractiveness of many industrial crops. Even now the possibility that set aside might be removed is a major disincentive to farmers considering planting their current set aside with perennial crops such as willow SRC. SAC 8

11 3. Willow Short Rotation Coppice Introduction Short Rotation Coppice (SRC) is a crop based on the use of fast growing tree species repeatedly cut back (coppiced) and harvested for energy use at regular intervals through the crops lifespan of 15 to 20 years. Several species are potentially suitable in the UK but to date the only one to have developed commercially is willow. The commercialisation of willow coppice developed in Sweden in the early 1990 s when around 15,000ha were planted and this is where much of the breeding and technology has been developed. Willow SRC has been planted commercially in the UK since the mid 90 s concentrated near the failed ARBRE power station project in Yorkshire. More recently an increase in plantings has occurred across the UK although so far the scale has been limited. In Great Britain the area planted to date is estimated at around 2,800ha based on recent NNFCC figures 3. There have also been significant plantings in Northern Ireland. In Scotland the area planted or approved for planting up until the end of 2006 is estimated at just under 300ha. It is understood that current applications for planting in 2007 and 2008 amount to around 600ha with further applications expected in the pipeline. To meet the expected demand for the two main power plants being built in Scotland and some additional co-firing would require an estimated area of up to 30,000ha of willow by Willow Production Site and yield Willow coppice is suitable for a range of arable soils but performs best on the more productive soils with good moisture availability and a sheltered position. To facilitate economic harvesting a certain minimum area (10ha) and the avoidance of waterlogged sites are preferred. Rabbits and deer are a serious pest and problem sites are best avoided. The bulky nature and low value of the harvested wood chip also necessitates that the crop is planted as close to the end market as possible. Currently in Scotland that means within 50 miles of Lockerbie or Glenrothes where the main market outlets are located. However with new market outlets being developed cultivation in other areas is starting to be considered. One of the main uncertainties is the level of yield that can be achieved in commercial production with no independently assessed commercial scale yield data available in Scotland. Yields are measured on a dry matter basis in oven dry tonnes (odt) per ha. Commercial scale yields are reported at between 6odt and 11 odt/ha/yr though yields as low as 3odt/ha/yr have been reported on poor sites. Newly harvested crop yields will be double these levels since the crop is cut at between 50% to 55% moisture. Trials have shown the yield potential can be considerably higher under ideal growing conditions up to 18odt/ha/yr. It has also been found that trial yields have tended to overestimate the level of commercial yields achievable. At the same time new varieties and improved cultivation techniques mean that more recently planted crops are likely to have higher yield potential than data from historic trials data might suggest. Yields also tend to rise in second and subsequent harvest before starting to tail off gradually as the crop enters the second half of its life. While a lifespan of up to 30 years is possible the commercial life span is expected to be around 16 years or five harvests. Not only is some yield decline then expected but improvements in varieties are also likely to warrant replanting Farmers Weekly, 28 July 2006 SAC 9

12 Establishment The crop is planted between February and June, dependant on soil conditions, into a well cultivated firm seedbed. The cultivations are generally carried out by the farmer and the planting by a specialist contractor using purpose built planters. The willow sets (unrooted cuttings) are taken from cold store and planted at around 15,000 sets/ha. If rabbits are present then fencing may be required. Experience has shown that the first year of growth is the most critical and the preparation of a good seedbed and adequate weed control are essential for satisfactory establishment. Maintenance In the winter after planting the crop is cut back to encourage coppicing. Further weed control will be required at the start of the second year but after that no further spraying should be necessary following canopy closure. No serious pests and disease have been reported in Scotland though problems with fungal attacks (willow rust) and insect pests have been reported elsewhere. At planting leatherjackets can be an issue if the site has been in pasture and occasionally some insect damage is reported to the growing crop. However once established the application of insecticide or fungicide is generally not necessary and can be impractical due to the height of the crop. Artificial fertiliser is generally applied at planting and after each harvest to support crop growth although the nutrient requirements of the crop are not clearly understood. Sewage sludge applications can also be used with reports that it delivers a significant yield response. Harvesting After cut back in the first year, the crop is usually harvested on a three year cycle so the first harvest will not take place until year four. On the more productive sites harvesting has been conducted on a two year cycle. A number of harvesting techniques have been developed however in commercial terms the main method is to use modified forage harvesters fitted with specialised cutting attachments. By spreading the workload of existing forage contractors this method has helped bring the harvesting costs down to an economic level. Post harvest The high moisture content of the harvested material (50% to 55%) reduces its energy value and raises relative transport costs. It is possible to cut willow as whole stems, into batons approximately 30 cm long or into woodchips at harvest. Chipping at harvest gives some advantages in terms of materials handling. Using artificial means to dry the woodchips down to ambient moisture levels (15%) greatly increases their energy and market value however generally the cost of achieving this is not economic. Currently the general practice is to store the woodchips in a steeply banked heap close to the harvest site on a suitable area of hard standing on the farm. Over an extended period of 6 to 8 weeks the woodchips will heat up and start to dry out lowering the moisture content to between 30% and 40%. This moisture level is low enough for co-firing or burning in larger scale commercial condensing boilers. A downside of this natural drying process is that fungal spores are likely to be produced and hence care must be taken in subsequent handling. When supplying smaller scale high value energy markets it may be worthwhile drying the chips down using modified grain drying floors. Land re-instatement The land can be returned to agricultural production at any point in the willow life cycle. The most common approach is to harvest the crop in the winter and then allow the willow shoots to re-grow to around 15cm in length. The crop is then sprayed with glyphosate to kill the growing plant. After around 6 weeks the land is cultivated using heavy discs to break up the willow roots and a following spring crop, usually spring barley is then broadcast. Following harvest in the autumn conventional cultivations can then resume. These operations are relatively straightforward and low cost. The main uncertainty over the costs of re- SAC 10

13 instatement relate to drainage costs. Willow has the potential to damage drainage systems though the extent of this depends on a wide range of factors including soil type, drainage system and the intensity of the coppicing cycle. Crops cut on shorter rotations are reported to be less damaging. Careful consideration of this issue is essential when considering which land to commit to willow production with a preference for land that may require re drainage anyway. Markets and Contracts The main market outlet is wood chips for use in heating and electrical power generation. At present there are two companies offering contracts for the planting of willow SRC based around the two main power stations being planned and constructed. At Lockerbie, Renewable Fuels Ltd are working with EON UK Ltd to develop a supply of willow SRC to supply the 44MW dedicated biomass plant that EON are building at Steven s Croft. The plant will open in 2007 and consume 220,000t per year of biomass based largely on forest and sawmill residue but an increasing tonnage of willow will be sought from 2009 onwards. Renewable Fuels Ltd offer a full contracting service for the farmer to plant, manage and harvest the crop based on 10 year supply agreements with prices linked to the retail price index. At Glenrothes, Scottish Biofuels, a division of Scottish Coal are working with the Tullis Russell paper mill to develop a supply of willow SRC for a planned dedicated biomass power plant that will also provide steam for the adjoining paper mill. Planning permission has been approved for the plant and a grid connection is in place. Scottish Biofuels offer contracts for the supply of woodchip but have subcontracted the planting, management and harvesting of the crop to Coppice Resources Ltd. A new operator in Scotland is Rural Generation Ltd from Northern Ireland who are working in conjunction with Oran Group to develop willow SRC for bio-filtration and heat energy production. They are expected to start planting and the development of wood processing and other facilities in early There are also a number of smaller scale markets for woodchips developing around the country supplying large country houses, schools, hotels and others. The contracts available for the large power generators are mostly based on a 10 year supply agreement linked to the Retail Price Index. The minimum length of contract is 7 years based on two harvests. This fulfils the conditions of the establishment grant, which require that the crop is contracted or has an end market identified for at least the first 5 years of production. Current market values available in Scotland equate to around 31/odt/ex-farm. Once harvesting costs are deducted this leaves net returns at around 21/odt for the standing crop. The two main contractors differ in their payment terms: Scottish Biofuels pay a net price for the standing crop in the field based on final moisture content as measured at the end user which currently equates to around 21/odt. They therefore assume all harvesting, handling and transport costs from the field to the power station. Renewable Fuels Ltd pay a price for the harvested crop on final moisture content as measured at the end user which currently equates to 31/odt. They then deduct charges for harvesting and handling which currently stand at 10/odt. This also leaves the farmer with around 21/odt. SAC 11

14 While the two main buyers differ in the basis of payment the net return per tonne of dry matter produced to the farmer are currently similar. Where the farmer has available labour and machinery to assist with carting from the field to the storage site and handling and loading the crop then it may be possible to save costs by undertaking the work themselves following negotiation with the contractor. There is also a potential market for willow to act as a bio-filter to process waste water and bio-solids (sewage sludge) where the landowner is paid a gate fee per tonne of waste disposed. This has been a significant source of income for farmers planting the crop in Northern Ireland. Much depends on the local regulations governing the types and quantities of waste that can be spread on the crop whilst the level of gate fees largely reflects the cost of alternative means of disposal. Grants and Subsidies Establishment The crop has been eligible for payments of 1,000/ha under the Scottish Forestry Grants Scheme. Applications under this scheme closed in December However applications can still be made through the two main contractors in Scotland; Scottish Biofuels and Renewable Fuels Ltd as long as landowners register their land by spring Forestry Commission Scotland agreed to ring fence the available funds to allow these operators to continue to plant while the details of the new Scottish Forestry Grant Scheme become known. The level of funding and other details of the new Scottish Forestry Grant Scheme remain dependant on the outcome of the UK s discussions with Brussels over the Rural Development Programme. It is intended to have the new scheme operational before autumn Energy Aid Payment Willow SRC qualifies as an industrial crop for annual payments of 45 /ha (~ 30/ha) under the EU Energy Aid Payment scheme if the planting is made on conventionally cropped land registered under the Single Payment Scheme. Crops grown on set aside are not eligible. Set Aside The crop can be planted on set aside and counts as an eligible crop under Single Payment Scheme rules. Contracts for the end product from the willow crop need to be in place for it to be eligible as an energy crop on set aside. Forthcoming proposals for reform of the CAP create uncertainty over the long term future of set aside. This reduces the attractiveness of using set aside to plant a perennial crop such as willow SRC. SAC 12

15 Economics of Willow Production For most farmers the decision of whether or not to plant any crop hinges on how profitable it will be relative to other land uses. With the advent of decoupling this decision is largely unconnected with subsidy since the Single Farm Payment will be paid irrespective of the cropping choices made. In this study comparisons were made using enterprise margins rather than gross or net margins. Enterprise margins in this study have been determined as follows: ENTERPRISE MARGIN = CROP OUTPUT less CROP COSTS CROP OUTPUT = market return (yield * price) plus crop related subsidy payments (Energy Aid) CROP COSTS = variable costs, contract charges and cropping related fixed costs EXCLUDED - land related costs such as rent, borrowings on land, land maintenance costs and land related returns including the Single Farm Payment When comparing willow SRC with conventional arable crops the issue is complicated by the perennial nature of the willow crop. The four year delay before the first harvest has significant cash flow and interest charge implications for a typical arable farm business. This issue is not readily accounted for in a gross margin analysis and neither is the fact that willow has a very different fixed cost profile to combinable crops. For this reason a discounted cash flow analysis was carried out to compare the relative benefit in today s monetary terms of planting willow SRC compared to continuing with arable cropping. Based on discounted cash flows, Net Present Values (NPV) were calculated to give the return for planting willow SRC over its entire life. Annualised values were then determined using Annual Equivalent Values (AEV). The AEV combines all costs and benefits into a single annual sum that is equivalent to all cash flows during an analysis period spread uniformly over the period 5. AEV s are most useful when comparing a forestry investment with an alternative that typically yields annual returns, such as agricultural crops. AEV s are directly comparable with enterprise margins resulting from an annual crop grown on a contract basis or from letting land. Enterprise returns from willow SRC A simple farm cash flow model was constructed using estimates of standard costs and return s over the 16 year investment time frame for willow production based on the approach taken in previous SAC studies 6. A summary of the cash flow and the assumptions are detailed in the following pages. This shows a closing bank balance in year 16 of 2,121/ha. To take account of time and its impact on future values, the cash flow was converted to net present values (NPV) using discount factors and assuming a real interest rate of 7%. The NPV of the project over the life of the project (16yrs) was 1,096/ha, giving an annual enterprise margin equivalent of 116/ha/yr and an internal rate of return (IRR) of 79%. 5 Note AEV s are also known as Equal Annual Equivalents (EAV) Comparing Values of Timber Production to Agricultural Crop Production, Michael Jacobson, Feasibility of alternative non-food crops in Fife, for Fife Council by SAC E Booth, J Booth, 2005 SAC 13

16 Table 2: Investment appraisal for the budgeted willow SRC model Closing bank balance 2,121/ha (after 16yrs) NPV 1,096 (at a real interest rate of 7%) IRR 78% (when NPV = 0) Pay back 1yr 3 months Enterprise Margin (AEV) 116/ha/yr An investment return of 78% looks extremely attractive but this is misleading and results largely from the fact that the initial level of investment required is very low rather than the fact that returns are especially high. Also these figures do not include any returns to land. Nonetheless this does illustrate that planting willow SRC has become a more attractive investment following the increase in the level of the establishment grant. Farmers looking to invest in the crop no longer need to invest significant funds in the planting of the crop as was the case only a couple of years ago. A key question will be how does the enterprise margin for willow SRC of 116/ha/yr compare with the alternative of remaining in conventional arable cropping? SAC 14

17 Assumptions used in willow SRC cash flow model 1 Average yield is 8 oven dried (odt) per ha. 2 Production period is 16 yrs, comprising 1yr of establishment and 5 harvest cycles of 3 yrs. 3 Price of wood chips is 31 odt ex-farm. 4 The biomass power plant is responsible for transport costs. 5 Specialised operations (planting 200/ha & harvesting 10/t) are charged at contractors rates. 6 Willow cuttings are charged at 600/ha 7 Soil preparation consists of ploughing power harrow and roll charged at contractors rates from the SAC Farm Management Handbook (FMH) 2006/07. 8 The energy crop supplement of 45 per ha remains constant but is only paid on 92% of the land and not on the 8% set aside. 9 The site is eligible for the Scottish Forestry Grant Scheme at 1,000 per ha. 10 The use of inorganic fertiliser has been costed. 11 No allowance has been made for rabbit fencing. 12 Herbicide costs include glyphosate autumn 15/ha and pre-emergence post planting 15/ha. 13 Miscellaneous includes an annual allowance for the management of the crop. 14 No allowance has been made for a grass headland which would reduce the effective area. 15 Bank interest rate is assumed at 7%. 16 A reinstatement charge of 100/ha is included at the end of the project. 17 All drainage costs have been excluded. 18 The opportunity cost of the land is excluded. SAC 15

18 Table 3 Estimated cashflow for willow SRC PER HA YEAR Total Chip sales 8 odt@ 31/t) ,720 Energy crop supplement ( 45) Forestry grant 1,000 1,000 Total Income 1, ,161 Establishment costs Soil preparation Cuttings (15,000 / ha) Fertiliser Herbicide Contractor planting Miscellaneous sub-total 1, ,220 Topping Yr Herbicide Harvesting ,200 Miscellaneous Total Costs 1, ,040 Net Cashflow ,121 Opening bank balance ,278 1,285 1,293 1,750 1,757 1,765 1,765 Closing bank balance ,278 1,285 1,293 1,750 1,757 1,765 2,121 2,121 SAC 16

19 Comparison with arable cropping Another simple farm cash flow model was constructed using estimates of standard costs and returns for a typical arable rotation over the 16 year investment time frame. A summary of the cash flow and the assumptions used are detailed in the following pages. Operating a conventional arable rotation on the model farm for the 16 year period results in a closing bank balance in year 16 of 2,590/ha. Again to take account of time value the net present values (NPV) was calculated at a real interest rate of 7%. Over the life of the project (16yrs) the NPV was 1,529/ha with an enterprise margin of 162/ha/yr. This compares favourably with the willow SRC enterprise margin of 116/ha/yr. At current forward prices for harvest 2007 arable cropping offers significantly better returns than even high yielding crops of willow SRC. However, it must be recognised that high grain prices make conventional arable cropping appear especially profitable at the present time whilst only six months ago the picture was very different. Since it is not possible to determine which direction grain markets will move in the future for comparison the arable model was run under a number of different price scenarios as follows; 1. CURRENT forward prices for 2007 harvest. 2. AVERAGE prices over the last 5 years ( ). 3. HIGH prices at a 10/t premium to current 2007 levels (reflecting the current strength of forward markets for 2008 and beyond). 4. LOW prices 10/t below the 5 year average (one possible outcome of any future reduction in EU cereal market support). The other main driver of arable crop margins is yield and so the model was also run at different yield levels; unchanged, 10% lower and 10% higher. With grain prices at the five year average willow SRC appears significantly more attractive than the arable rotation except where above average cereal yields can be achieved. Where high grain yields are being achieved then current forward prices for harvest 2007 would generate returns of 216/ha, almost double that of willow SRC. The higher yielding arable rotation remains more attractive than willow SRC except at lower grain prices. Table 4: Enterprise margin of the arable rotation model at different price and yield levels Price scenario /ha/yr Yield levels 1) Current 2) Average 3) High 4) Low -10% Unchanged % SAC 17

20 Assumptions used in arable rotation cash flow model 1. Farm of ha with 200ha cropping and 17.4 ha set aside. 2. Arable rotation comprising winter barley, winter rapeseed, winter wheat followed by two spring barleys 3. Production period is 16 years, comprising 16 harvests 4. Grain prices are ex-farm harvest values based on forward values for harvest 2007 plus other price scenarios. 5. Drying charges are levied on all grain at commercial rates except spring malting barley which is sold wet. 6. All operations are carried out by a contractor at 225/ha on a stubble to stubble contract. 7. Variable costs, drying costs, grain and straw yields and straw prices are from the SAC Farm Management Handbook 2006/ Enterprise margins exclude rent and interest and general property and farm business expenses which are put against the land. 9. The opportunity cost of land is excluded. SAC 18

21 Table 5 Comparison of costs and returns used in the arable cash flow analysis Wheat W. barley S. feed barley S. malt barley W. OSR Set aside Rotation average Grain Yield (t/ha) Price ( ) Straw value ( ) Total output Variable costs Drying Total variable costs Gross Margin Fixed Costs Contract stubble to stubble Total fixed costs Enterprise margin 2007 prices NOTES Enterprise margin - excludes rent and interest and general property and farm business expenses Price scenarios Wheat W. barley S. feed barley S. malt barley /t 1) CURRENT forward prices for 2007 harvest ) AVERAGE prices over the last 5 years ( ) ) FUTURE HIGH prices at a 10/t premium to current 2007 levels ) LOW prices 10/t below the 5 year average W. OSR Yield scenarios Wheat W. barley S. feed barley S. malt barley t/ha 1) -10% lower ) Standard ) +10% higher W. OSR SAC 19

22 Table 6 Estimated cashflow for arable rotation PER HA /ha YEAR Total Total Income ,220 Total variable costs ,318 Total fixed costs ,312 Total Costs ,630 Enterprise margin ,590 Net Cashflow ,590 Opening bank balance ,133 1,295 1,457 1,619 1,781 1,943 2,105 2,266 2,428 2,428 Closing bank balance ,133 1,295 1,457 1,619 1,781 1,943 2,105 2,266 2,428 2,590 2,590 SAC 20

23 Opportunity cost of land The cash flow models used have excluded all land costs and so the returns that have been generated have all been before rent (and interest). A simple way to determine whether willow represents a competitive form of land use to is to compare the potential returns with that obtainable simply by letting the land. Currently let land values remain relatively strong despite the recent lack of profitability of many farm enterprises. Rotational grazing and cereal land is currently being let at values between 150 and 200/ha with significantly higher values being offered for potatoes or vegetables. Willow SRC at an enterprise margin of 116/ha can not compete with today s let land market though there is no certainty that rental values will continue at current levels. Willow SRC sensitivity analysis The two main factors affecting the returns from the crop are wood chip price and crop yield which have been compared in the following sensitivity analysis. Net returns from the crop are especially sensitive to price and less so to yield. A 5/t change in price leads to a 34/ha change in enterprise margin while a 1t/ha change in yield results in an 18/ha change in enterprise margin. Sites that are high yielding for willow are also likely to be high yielding for other crops. Therefore changes to the price of wood chip have the greatest bearing on the competitiveness of willow SRC relative to other crops. Table 7: Impact of yield and price on willow SRC enterprise margins odt/ha/yr Price /t exfarm Yield The important issue for the farmer is not the headline contract price but the final price achieved on the farm after all harvesting, transport and handling charges have been deducted. Prices on an oven dried basis are also influenced by the moisture content of the woodchip due to higher transport costs and lower energy values of higher moisture samples. In this example harvesting charges are assumed to be 10/t which leaves the farmer with a net price of 21/t ex-farm. For farmers considering the crop it is essential that they are clear on the net price they will receive. Relatively small increases in transport or handling charges for instance could greatly reduce returns. Negotiating even a small increase in ex-farm prices could also greatly enhance returns. Current contracts for supplying woodchips to power stations across the UK equate to between 30/odt and 35/odt ex-farm however higher prices have been obtained in supplying local heat markets. Where an efficient wood fuel supply chain is in place based on oil at 20ppl wood chip values of over 40/odt are achievable and to higher levels if energy markets are stronger. Most plantings are currently taking place under fixed price contracts (in this case 31/odt) and so the farmer is not faced with price uncertainty over the life of the contract. However not only will contracts expire before the end of the crop lifespan but if a local contracted SAC 21