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Australia: Biofuels take off overseas

Published on 26 July, 2006, Last updated at 08:38 GMT

26th July, 2006: SYDNEY, AUSTRALIA - Home-grown industry stalled but Australian canola growers cash in as high oil prices drive up global demand

Over just the past couple of years, WA grain trader Josh Roberts has observed what he calls a seachange in world agricultural trade. The shift is complex but one example he gives goes some way to capturing it. Sugar is now worth a lot more put into a car than a cup of coffee.

Australia may not yet reflect it but elsewhere in the Western world, “biofuels” are booming.

Record high oil prices have given extra impetus to an industry that was already growing rapidly in the United States, Europe and Brazil because of government policies mandating or encouraging the use of renewable fuel.

Their motives vary, from cleaning up their air to reducing the vulnerability of their economies to oil imports from the Middle East to keeping their powerful farming lobby groups happy.

But the impact has been huge and it already stretches into the heart of WA’s Wheatbelt.

Europe’s demand for canola to feed its biodiesel industry — and its continuing insistence on only importing non-genetically modified grain — is estimated to have added up to $20 a tonne to the current price of Australian canola.

Next year, it is estimated 25 per cent of the huge US corn crop, traditionally fed to cattle, pigs and poultry, will be turned into ethanol, with spillover effects to other grains because US corn sets the pace for most global feed grains.

Australia’s own biofuels production industry may be about to stall before it gets started, thanks to a Federal Government which has chosen to stick to its dry economic principles and not give it the big hand-up other governments have provided.

But for Australia’s farmers, whose fates are largely shaped by global markets, biofuels are still set to change their world even if barely a litre ends up being made here.

Mr Roberts, senior trading manager at Grain Pool, WA’s main exporter of canola, barley and lupins, said biofuels had introduced a whole new segment of demand to a finely balanced market. And the new buyers were valuing crops based on completely different dynamics to the food or stockfeed sectors, namely oil prices.

“The fact is the energy market, because of very high oil prices, can pay up for these agricultural products and it’s out of proportion with what people will pay for them as food or feed,” Mr Roberts said.

“The market is going to spend the next 10 years digesting this new fundamental factor.”

Mr Roberts points out the impacts are not all positive. While it may mean higher prices for some crops, prices for some stockfeed crops could fall because of bigger supplies of competing canola meal, a byproduct of oil processing. Livestock producers also face higher prices for many grains.

Interestingly, Mr Roberts also believes the EU’s thirst for canola could ultimately force it to drop its insistence on importing only non-GM grain so it can again tap into Canada’s vast and cheaper supplies.

Richard Koch, from advisory group Profarmer, similarly agrees biofuels have rapidly moved from the periphery to the mainstream of agriculture. “Biofuels promise to positively change the shape of agriculture as we know it,” he said.

Biofuels basically fall into two distinct types, biodiesel and ethanol.

Biodiesel is made from oil or fats with the most common ingredients waste cooking oil, tallow or vegetable oils, such as canola oil, palm oil or coconut oil. It is usually blended with petroleum diesel but can make up 100 per cent of fuel. Ethanol is made from the starch in crops like sugar and cereals. It is blended with petrol, most commonly at 10 per cent but up to 85 per cent in so-called “flex-fuel” vehicles.

Europe’s biofuels industry is almost totally focused on biodiesel while the US and Brazil almost exclusively produce ethanol, the US based on corn and Brazil on sugar.

The European Union has fostered its industry through a range of incentives including excise relief and treating energy crops more favourably under its Common Agricultural Policy.

It just missed its target of biofuels accounting for 2 per cent of fuel use by 2005 but is expected to hit its next one of 5.75 per cent by 2010.

In the US, the industry was given further impetus recently by US President George Bush’s new target of replacing 75 per cent of US oil imports from the Middle East by 2025. In the interim, the US has mandated the use of 18 billion litres of renewable fuels by 2010 or around 4.5 per cent of total consumption. Meanwhile, Australia’s home-grown biofuels industry is in limbo.

Over the past year barely a month has passed without an announcement of a new biofuel plant or the public listing of a biofuel company.

But new federal fuel tax laws passed in June have delivered future investment in the industry a significant setback.

by Cathy Bolt


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