Select Committee on Science and Technology First Report


CHAPTER 5: ECONOMIC PROSPECTS FOR GROWING NON­FOOD CROPS

5.1 The area of non-food crops being grown in the United Kingdom is currently very small (see Chapter 2). With the over-supply of food crops in the EU and the current low prices for agricultural food products, it might be thought that non-food crops would provide an attractive option to farmers. However, non-food crops have first to overcome the barrier of support provided to food crops. In some cases this barrier has been partially removed by providing comparable support for the non-food crop. But Agenda 2000 has ruled out any support for new crops and, although such crops might well be competitive if support to all enterprises were removed, this effectively inhibits the development of these crops. In addition, the non­crop­specific payments will have a significant impact on the margins for oilseeds.

5.2 Niche markets, where the raw material requires very specific growing conditions and a high level of expertise and where the end product is of high value, provide valuable diversification for farmers on small areas of land. However, for the less specialised larger non­food crop markets, competition is likely to hold down the prices paid to farmers whose decisions will then depend significantly on the support available.

Short Rotation Coppice (SRC)

5.3 A number of witnesses (e.g. MAFF Q 4) told us that short rotation coppice (SRC) for electricity generation represents one of the more important new opportunities for non-food crops. Evidence provided by ARBRE Energy Ltd described how, under a Growing Agreement, the Company is contracted to establish a crop of SRC on condition that the grower prepares a clean seedbed and agrees to keep the crop free of weeds and to maintain fences. Under the Woodland Grant Scheme (see paragraph 4.11), £400/ha on set aside land, and £600/ha on other land, is available towards the planting of SRC. Project ARBRE growers qualify for a supplement provided by the United Kingdom Government so that a total of £1,000/ha is available on land within a 40 mile radius catchment area. Of this, the farmer retains £367/ha, and £633/ha is paid to ARBRE Energy Ltd to offset some of the establishment costs, estimated at £1,500­£2,000/ha. Under a Storage and Supply Agreement, ARBRE Energy Ltd agrees to harvest the crop and to pay the farmer £20/oven dried tonne (odt), index-linked to the Retail Prices Index.

5.4 Farmers who grow SRC on land that qualifies for arable area payments will also receive the annual set aside payment, currently some £305/ha. Assuming a yield of 10 odt/ha/year, this effectively provides growers of SRC with a gross margin of some £505/ha ((10x£20) + (£305)). This is only slightly less than average margins on wheat in 1998 and, to the extent that fixed costs such as labour, machinery and buildings (depreciation or maintenance) could be reduced over the medium term, SRC will become more attractive to farmers. Added to this, the price of SRC is index-linked over the length of the agreement and yields are likely to become more predictable and to increase as expertise in managing the crop accumulates.

5.5 Nevertheless, the current support mechanism may discourage the planting of SRC on the most suitable land. For instance, low yielding grassland in marginal areas with higher rainfall and fewer economic options may be more suitable for growing the crop (MAFF Q 7) but the area payment is only made if SRC is grown on set aside land (i.e. not grassland).

5.6 The price that electricity generators are able to pay for energy crops is clearly critical to farmers' decisions; but this price is largely determined by policies designed to meet the Government's target of 5 per cent of electricity from renewable sources by 2003 (10 per cent by 2010) and to reduce emissions of greenhouse gases under the Kyoto agreement. Under the Non Fossil Fuel Obligation (NFFO), electricity companies are required to obtain a proportion of their power from renewable sources. Generators using renewable resources compete for contracts to supply energy under NFFO orders and successful projects are awarded contracts at the bid price[17]. The difference in cost is met from the Fossil Fuel Levy of 0.3 per cent paid by consumers which raises about £40m to meet the above-market cost of projects with a NFFO contract for renewable energy.

5.7 In qualifying under the third NFFO round, Project ARBRE will receive about 8.65p/kWh for its electricity, compared with an average supply cost of electricity based on fossil fuel in the region of 2.5p-3p/kWh. Over a 15 year period and delivering 8MW for 8,000 hours per year, the cost of this support would be of the order of £55-£60m. In addition, a grant of some £25m was available from the EU (Thermie) towards the capital cost of the processing plant.

5.8 Even with this degree of support, it is unclear whether Project ARBRE can continue to cover its full commercial cost. With improvements in processing technology and economies of size, substantial reductions in costs are likely (Biogen Q 179, Shell Q 233), but the extent to which the very substantial gap between the full cost of this form of renewable energy and that of energy derived from fossil fuels can be bridged is uncertain. In his pre-Budget statement on 9 November, the Chancellor of the Exchequer announced that renewable energy sources will be exempt from the Government's proposed Climate Change Levy, a new tax on energy designed to reduce emissions of greenhouse gases.[18] This will enhance the viability of non-fossil fuels for electricity generation; but biomass may still fail to be competitive within this category.

5.9 Assumptions about the costs of production and yields of SRC, the prices paid, and the margins on competing farm enterprises, are critical to the analysis. A study by MAFF[19], which assumed that farmers would receive payments of £40/odt, concluded that a total subsidy to growers (including area payments) of £410m would be required over the period 1998-2024 (equivalent to a net present value (NPV) of £155m if discounted at 8 per cent) to support a total area reaching 125,000 ha in 2004. When, as part of a sensitivity analysis, a price of £30/odt was taken, the total subsidy required over the period rose to £520m (equivalent to a NPV of approximately £190m at 8 per cent)[20]. A price of £20/odt would raise the cost of support by a further £110m.

5.10 An area of SRC of 125,000 ha would be sufficient to provide some 750 MW of electricity, which is about a quarter of the energy needed to increase the proportion from renewable sources from 5 per cent to 10 per cent. This would require 20-25 of the next generation of power plants (30-40 MW each).

FIBRE CROPS

5.11 Under European Union policies, the area payment on flax and hemp is designed to enable these crops to compete with fibres available on world markets. The cost of these measures is high; in 1997, European Union support for the 21,000 ha of flax and hemp in the United Kingdom was over £12m (MAFF p188) and represented over 70 per cent of the total value of the output.

5.12 However, hemp and flax have received little attention from plant breeding programmes designed to increase fibre yields. Improved varieties, and more efficient processing techniques, may make the crops more competitive in the future. We received evidence of the potential of many new markets for hemp and flax products, and of the highly desirable performance characteristics of these materials (paragraphs 3.23-3.27). Nevertheless, proposals for changes to the EU regime[21] are expected which would reduce payments and could discriminate against the short fibre output that predominates in the United Kingdom. Such changes would inhibit the new technologies being introduced to meet new markets. The outcome would be margins that were insufficient to encourage the growing of fibre crops in the United Kingdom, and the existing area could decline. Reduced support and continuing uncertainty would also limit further investment in processing capacity. In the United Kingdom, there is an additional, specific disincentive for hemp in the form of a £300 licence fee which must be paid by each grower.

OILSEEDS FOR INDUSTRIAL PURPOSES

5.13 The current market for rapeseed for industrial use is small, which means that the crop is seldom grown without a processing contract. As long as set aside remains, and the crops which can be grown on set aside continue to be restricted, United Kingdom processors should be able to obtain adequate supplies of high erucic acid oil from domestic sources.

5.14 The situation may be rather different for linseed where the area payment will be halved by 2002. Unless margins for cereals and rapeseed fall substantially, the area of linseed grown in the United Kingdom is expected to decline sharply.

5.15 Overall, it is unlikely that there is significant scope for increasing the area of oilseeds grown for industrial purposes in the United Kingdom in the short or medium term and the existing area is vulnerable to policy changes which could, increasingly, put United Kingdom growers and processors at a competitive disadvantage. More importantly, the absence of a level playing field, or of any support for new crops, inhibits the growing of these crops by farmers and the development of new products.

EVIDENCE OF DEMAND

5.16 We have looked throughout our inquiry for evidence of industrial interest in, and demand for, products from non-food crops; and such evidence has not been hard to find. ICI told us, "At present, products based on renewable raw materials per se do not generally command a premium in the market and customers are demanding competitive prices and better environmental performance"; but, they added, "This may change" (p186). In oral evidence, the Technical and Operations Director of Uniqema told us that, as ICI moves from bulk to speciality chemicals, "non-food crops will become increasingly important to it" (Q 473). Following restructuring, around 25 per cent of ICI's raw materials will consist of renewable materials for non-food uses (Q 474). ICI is "interested" in exploiting plants modified by conventional breeding or biotechnology, subject to appropriate regulatory control (Q 509). The main inhibitors, according to ICI, are the cost of registering new products (Q 490) and the "rollercoaster" of supply and price created by the CAP (Q 518).

5.17 Dr Phil Taylor, a Senior Research Associate with ICI Paints, who gave evidence for ACTIN, told us that he expects land use to supply commodity chemicals to grow over the next few years, "as the consumer begins to realise this is an important area" (Q 41). "The market is there but it is under the surface…Our biggest customers in the UK, the B&Qs, the Do-It-Alls, the Homebases of this world, are very keen for us to push this work forward, because they see that as a strong selling platform…the far side of the Millennium" (Q 46).

5.18 ICI is one of the major industrial sponsors of ACTIN; another is DuPont, the United States-based global materials company. DuPont currently derives 5 per cent of its revenues from renewable raw materials; it aims to increase this to 25 per cent by 2010. It has a Cereals Innovation Centre in Cambridge (acquired in 1998 from Dalgety), researching applications of materials from major cereal crops in composite materials, medicine, crop protection, and "biorefining as a means of producing raw materials and functional products (e.g. for paints, adhesives, oil industry, detergents, cosmetics and adsorbents)" (p158). The Centre's External Affairs Manager told us that he sees "potentially a very high volume and overall high-value use" for crops replacing fossil fuels as sources of chemical feedstocks; and even greater potential value in crops as sources of completely new materials (Q 366). In his view, "If the economics became easier, there are things that could be brought to market…well within five years…We are confident that there are big opportunities…This is not a sideshow; this is a serious matter for DuPont" (QQ 368, 411, 416). DuPont is researching applications of biotechnology in this area, though in the United States of America rather than the United Kingdom (Q 381).

5.19 Mobil Oil is a leader in environmentally friendly lubricants. It sees an assured future for rapeseed oil as a cutting fluid for aluminium cutting, and good potential for it as an expensive but environmentally friendly oil for chain saws, though the biggest potential application, in hydraulic equipment, is better served by synthetics (p196).

5.20 Finally, Appendix 3 records our meeting with the Managing Directors of Croda Universal and John L Seatons, which are doing good business in high erucic acid rapeseed oil and refined linseed oil respectively.

5.21 The Chemical Industries Association told us, "Chemicals from crops offer an exciting possibility for the future success of the chemical industry" (p157). They reported increasing interest in industry, encouraged by advances in enzyme chemistry and crop technology, and by the drive towards sustainability. In their view, progress will depend on research, and on cost, which in turn depends on reform of the CAP.

Conclusion

5.22 It is very clear that, under current policies, non-food crops must compete for land with food crops that receive considerable support. This, combined with the reduction in area payments under Agenda 2000 and the fact that farmers can grow only certain crops on set aside land without losing set aside payments, will limit innovation in the non-food crop sector, in spite of the evident demand. The uncertainty about future CAP and national policy means that long-term investment by farmers and processors is a considerable gamble even for those non-food crops which are currently supported. This is, itself, a powerful argument for further reform of the CAP.


17   Under the NFFO-2 round the premium price paid to all schemes was the highest contracted price in each technology band. Back

18   Commons Hansard col. 889. Back

19   The Economics of Short Rotation Coppice (Willow) in the UK by John Walsh and Tracy Brown, Government Economic Service Working Paper No.135, April 1999. Back

20   Ibid, Annex 8. Back

21   See Lords Hansard 23 November 1999 col. 314. Back


 
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