Fueling a trend

by Meyer Sosland
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Europeans eye ethanol as the way to reduce wheat surpluses

by Chris Lyddon

The European milling and baking industry may find itself competing with the energy market for raw materials. Ethanol made from wheat is starting to take off as governments look for ways of cutting carbon dioxide emissions.

Ethanol has been much slower to develop in Europe than in the U.S. Europeans like their diesel cars, and oilseed rape (canola) is easy to grow, producing oil that is relatively easy to turn into biodiesel.

But with a surplus of wheat and a growing insistence by European governments that renewable fuels be developed, attention is turning to ethanol.

Britain’s government, for example, has put in place a Renewable Transport Fuels Obligation (RTFO) requiring that 5% of transport fuel come from renewable sources by 2010. This could involve huge tonnages of wheat.

As an extreme example, if the industry were trying to meet the commitment using ethanol, it would need an extra 7.3 million tonnes of wheat, according to Julian Bell, senior economist at the Home Grown Cereals Authority (HGCA). "It’s a massive increase the governments are committed to," he said. "It seems unlikely that we will be able to meet them from our own production."

Britain produces an exportable surplus of around 2.5 million tonnes of wheat. "In theory, we could use up most of that surplus," he said. Between increased demand for wheat for ethanol and the effect on production from E.U. subsidy cuts, it could disappear. The immediate effect would be an increase in prices, with U.K. wheat moving to parity with imports, instead of prices being set on the basis of having to be competitive on export markets. Bell estimates the extra cost — even if everything else stays the same — will be around £15 (U.S.$26) a tonne.

Everything else will not stay the same. Increased ethanol production means the wheat market could be tied to movements in oil prices. "We’re seeing the energy industry starting to become a real competitor for the very ingredients that processors need," he said. "We are actually behind many other countries, particularly America, Brazil and other parts of Europe." The U.S., he pointed out, already uses 40 million tonnes of maize to make ethanol.

British farmers are looking forward to the new market. At another recent conference held by the HGCA, Arthur Hill, chairman of the National Farmers Union’s Combinable Crops Board, warned that farmers might not want to produce milling wheat. "The millers now realize that it’s potentially going to become more difficult to source in the U.K. because of these alternatives," he told the meeting. "We could have a food shortage."

HGCA Director of Crop Marketing Alastair Dickie raised the possibility of the U.K. milling industry going abroad wholesale, to operate in countries where milling wheat is available. "The miller is making a product to serve a domestic market," he said. "If it’s not economical to grow milling wheat in this country in order to service the demand for cakes and flour, they will have to import wheat."

He added, "Importing wheat may well open the door to flour imports and potentially also to bakery products. Somewhere the milling industry will be able to get together with growers to produce the crop they need."

In Germany, the emphasis has been on biodiesel production, spurred on by a tax exemption that has had companies rushing into the market. Dieter Bockey of the Union for the Promotion of Oil and Protein Plants (UPOPP) explained to journalists in Berlin recently one reason why this is occurring.

"The gasoline market is going down very fast," he said. German consumption is likely to fall from the current level of around 24 million tonnes to less than 20 million by 2015, which will mean problems for ethanol production.

The other problem is with the mineral oil industry. "We have an overshoot of gasoline in the E.U. This is one of the arguments against ethanol from the mineral oil industry," Bockey said.

Because Europe wants diesel fuel, it has plenty of petroleum. Producing ethanol would put Europe in the position of having to export gasoline.

Even so, European companies are producing ethanol. In Germany, for example, E85 ethanol (85% ethanol produced from wheat, 15% from mineral oil) went on sale in February under the brand name CropPower85. It is produced by Suedzucker Bioethanol GmbH at its Zeitz, Germany plant, using wheat as a raw material. The plant will process 700,000 tonnes of wheat a year. The fuel is being sold in filling stations belonging to a company called OIL!

Germany’s slow adoption of ethanol — only three plants are operational — contrasts with its rush to use biodiesel. Germany was the only E.U. country to take advantage of a change in E.U. rules to allow a zero tax rate on an unlimited amount of biofuel. But while investors have rushed to build biodiesel plants, they are running up against the limits on crushing capacity, which are a major constraint on the European oilseeds industry.

The result is that the companies with the crushing plants — ADM, Bunge and Cargill — have between 60% and 70% of the biodiesel capacity in Germany. "Companies which don’t have a crushing plant have to buy from them," Bockey pointed out. "We recommend that biodiesel plants have their own crushing plant."

He noted the U.S. dominance of investment in the sector. "We are dependent on biodiesel companies, which are American," he said.

Bockey wants the German government to do more to promote ethanol. "We have more than enough raw materials," he said. "We have an overshoot of 15 to 20 million tonnes of cereals."

The answer was for Germany to follow Britain’s example. "We need to have a mandatory inclusion for biofuels," he said. The great advantage is that it would not cost the government anything. "The finance ministry has nothing to do with it," he said. He is expecting the German government to reintroduce a tax on biofuels this summer. "The government needs the money," he said.

Two companies in Britain are planning ethanol plants. British Sugar is building a plant designed to use sugar beet, which would once have been exported. "This is the U.K.’s first ethanol production facility; the beginning of an exciting new industry," said British Sugar Chief Executive Officer Mark Carr. "It is a clear demonstration of our innovative approach to the changing business environment in which we operate."

The plant is expected to be operational in early 2007, but British Sugar has made it clear that using sugar to make ethanol is not its long-term strategy. "I don’t believe sugar is the answer," Karl Carter, agriculture and operations director, told an industry conference on biofuels last year. "I actually believe the answer is cereals. It’s going to be feed wheat."

The other company getting into the market is Green Spirit Fuels, launched in June 2005 by grain trader Wessex Grain, which also plans to have its first plant in production in 2007. "Green Spirit Fuels will be the first company to have a plant producing ethanol from wheat in the U.K.," spokesman Peter Crowe told World Grain. "Green Spirit Fuels will have more than one plant in the U.K. At some point this year we will announce where these will be. It’s a question of where the feed stock comes from."

Bell agreed with Bockey that a minimum inclusion rate, rather than tax incentives, was the way to go. "The RTFO makes ethanol immune to the oil price," he said. "If you try to lure people with incentives, you end up at the mercy of the oil market."

Germany had been too successful with its tax concession. "It’s killing them on tax," he said.

Bell is concerned about the supply of wheat. "The U.K. wheat crop has been going down," he said. He blamed low prices and the reform of E.U. farm policy with payments to farmers no longer connected directly to production, a change known as decoupling.

"Farmers are not wildly happy with £65 (U.S. $112) a tonne," he said. "If you’re going to pile into biofuels, you need a supply. Before decoupling, farmers were giving it to them on a plate."

The result was that potential ethanol producers were looking for long-term supply deals from farmers. "There’s a big drive to get forward prices," Bell said. "They want something like fiveyear deals. If you’re an investor, you want those first few years to be reasonably safe."

Compared with biodiesel, the cost of that investment was high. "Biodiesel plants aren’t expensive. It’s the crushing plants that are expensive," he said

A crusher could still sell oil, even if he found the biodiesel market could not take his production. Investors in ethanol will need more certainty. "If you’ve got an ethanol plant and there’s no final demand, what are you going to do with it? You need assurances from government," he said. WG

Chris Lyddon is World Grain’s European editor. He may be contacted at: chris.lyddon@ntlworld.com.

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