Can India Meet Biofuel Policy Targets? Implications for Food and Fuel Prices

Madhu Khanna, Hayri Onal, Christine L. Crago, and Kiyoshi MinoUniversity of Illinois at Urbana-Champaign

Berkeley Bioeconomy ConferenceMarch 28, 2012

Berkeley, CA

BackgroundMotivation for biofuels in India• Fuel consumption

has 0.5% of world’s oil reserves, consumes 3.4% of oil production

Demand growing at 7.5% per year

Crude oil imports: 75% in 2008, 90% projected by 2025 (graph)

• Rural employment• Lower GHG emissions

Background

Ethanol Policy• 20% blending by 2017 (5.7 billion liters)• Price: 27 Rs/liter

• Feedstock : molasses and sugarcane Limited to molasses to avoid food vs. fuel

Molasses : by-product of sugar production alcohol Direct production from sugarcane allowed recently

This paper

• Analyzes the cost-effective mix of feedstocks (molasses and sugarcane) to meet the 20% blend mandate in 2017 Food production and prices Fuel prices Alcohol production and price

• Examine the viability of meeting the mandate under current fuel pricing policy

Research Framework• Develop a static, multi-market partial equilibrium model of the

agricultural sector with major crops

• Objective: Maximize consumer and producer surplus in markets for crops, sugar and alcohol by choosing the optimal allocation of land and irrigation water

land availability water availability and irrigation constraints technology for ethanol production from molasses and sugarcane technology for crop production: costs, yields, crop calendar world market conditions: exports/imports

Numerical Simulation Model

• State level data on: acreage, yields, production costs, water availability, cropping patterns, land availability

• 15 of the most agriculturally productive states in India

• 8 primary agricultural commodities: wheat, rice, sorghum, corn, groundnut, rapeseed, cotton, soybean, + sugarcane• Data obtained from Directorate of Economics and Statistics (India), FAOSTAT; FAPRI World Agricultural Outlook projections, INDIASTAT, Sugar Mills Assoc

Numerical Simulation Model

• 2006-08 market data for calibration • 2017 projections based assumed growth in

demand for crops, fuel, sugar and alcohol, and growth in yields and irrigation

• Model endogenously determines: Commodity production and prices Feedstock mix for ethanol production Implicit cost of ethanol production Land and water allocation for crops

Numerical Simulation Model

Sugarcane

Sugar

Ethanol

Molasses Alcohol

Conversion parameters Efficiency CostSugarcane to sugar 0.1 mt/mt 4.2 Rs/kgSugarcane to ethanol 70 L/mt 8.9 Rs/LMolasses to ethanol 220 L/mt 6.4 Rs/L

Molasses to alcohol 214 L/mt 6.4 Rs/L

Considering feedstock cost, direct conversion of sugarcane to ethanol is less costly

Model Validation: 2006-2008

Rice Wheat Sugarcane0.00

10.0020.0030.0040.0050.00

Land Use

Mill

ion

ha

Rice Wheat Sugarcane0.00

5000.00

10000.00

15000.00

20000.00

Prices

ModelObservedRs

/ton

Rice Wheat Sugarcane0.00

50.00100.00150.00200.00250.00300.00350.00

Production

Mill

ion

met

ric t

ons

Policy Scenarios• Scenario 1: 20% Blend mandate, baseline conversion costs

• Scenario 2: 20% Blend mandate, 50% higher conversion cost of sugarcane to ethanol

• Scenario 3: 20% blend mandate baseline conversion costs government requires 50% of molasses be used for ethanol price of molasses for ethanol set to 3,000 Rs/ton

Results I : 2017

• Without the mandate: sugarcane is planted on 4% of agricultural land All molasses (14.5 M tons) are used in alcohol

production imports of alcohol are .5% of production

• Using all molasses produced in 2017 for ethanol production will only meet 57% of the mandate

Results II: Fuel and Feedstock Mix

Scenario 1 Scenario 2

High CC

Scenario 3

50/50

% Ethanol from Molasses 5.0% 13.5% 28.0%

% Molasses for ethanol 9.5% 24.9% 50.0%

% Cane for ethanol 20.2% 18.5% 15.4%

Price of ethanol (Rs/liter) 27.8 32.7 25

Results II: Prices

Scenario 1 Scenario 2 High CC

Scenario 3 50/50

Rice Price 5.6% 5.4% 5.5%

Wheat Price 1.4% 1.3% 1.3%

Sugarcane Price 23.4% 23.0% 23.2%

Molasses Price 36.6% 68.3% 121.3%

Sugar Price 13.8% 9.9% 1.8%

Alcohol Price 25.5% 47.5% 84.4%

Results IV: Production and Land UseScenario 1 Scenario 2

High CCScenario 3

50/50

Rice production -1.6% -1.6% -1.6%

Wheat production -0.8% -0.8% -0.8%

Sugarcane production 17.4% 17.1% 17.2%

Sugar production -6.4% -4.6% -0.8%

Alcohol production -15.2% -28.4% -50.4%

Land under Rice -1.2% -1.1% -1.1%

Land under Wheat -1.3% -1.2% -1.3%

Land under Sugarcane 15.0% 14.7% 14.8%

Results V:

• Marginal cost of ethanol ranges from 28-33 Rs/liter (no molasses subsidy)

• Given gasoline price of 28 Rs/liter, blenders would be willing to pay 19 Rs/liter for ethanol

• With fixed procurement price of 27 Rs/liter, there is no economic incentive for mills to produce or blenders to buy ethanol

Results VI• Enforcing 27 Rs/liter procurement price will cost both ethanol

producers and blenders Cost can be passed on to consumers, raising blended fuel

price by 10-15%

• Government can provide a subsidy to blenders Subsidies will range from 9-14 Rs/liter, which will cost 51 to 81 billion Rs/year

• Government can fix the allocation of molasses and price of molasses for ethanol production (Scenario 3) Sugar and alcohol industries subsidize ethanol industry

Limitations

• Government interventions, including minimum support prices and output levies are not considered

• Gasoline consumption is fixed in 2017

Summary and Conclusions

• A mix of molasses and sugarcane feedstocks is necessary to meet 20% blending mandate for ethanol

• Trade-offs Crop production, prices and land use small

1 M ha of additional land for sugarcane Sugar Alcohol Fuel

Summary and Conclusions

• Meeting the mandate in 2017 Mills retro-fitted to enable direct conversion of

sugarcane to ethanol Government subsidies to blenders Reduced profits for mills and blenders OR higher

fuel prices• Distributional effects

Thank you! Questions?

Christine Lasco CragoEnergy Biosciences Institute

mlasco2@illinois.edu

2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08*0

20406080

100120140160180 Trends in Crude Oil Market: India (2000-2008)

Consumption Production Imports

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