Will bio-ethanol bring revival to the sorghum industry?

WESSEL LEMMER, SENIOR ECONOMIST: MARKET RESEARCH, GRAIN SA

In the Government Gazette dated 16 September, the Department of Energy requested comments by 18 November on the draft regulations regarding the mandatory blending of biofuels with petrol and diesel. Hopefully this is an early indication of a possible economic revival that is due for the sorghum industry.

Food security is not an issue

Since the inception of the biofuels industry, the world is taking note of the associated benefits for job creation, poverty alleviation and food security. Previous generalisations about the alleged negative impact of the biofuels industry on food security are not acceptable, because circumstances between countries differ. If managed well through good management practices and policy, a lucrative biofuels industry can be a significant asset to any economy.

With regard to the food security debate in South Africa, the grain production sector has proven capacity to produce sufficient feedstock without compromising food security and this is already evident noting the increase in grain and oilseed exports.

Sorghum is a suitable feedstock

Sorghum is for example a suitable alternative to maize with promising yield increases according to plant breeders. The strong public and labour union support in favour of the Industrial Policy Action Plan, underscore government policies in favour of biofuel production, job creation and rural economic development, especially in areas where sugar cane cannot be grown.

The fact that cabinet allowed the use of sorghum as feedstock and by addressing the limiting factors of bio-ethanol production in the current IPAP combined with other supportive policies such as ASGISA, is promising.

Driven by a clean fuels policy

The successful development of the bio-ethanol industry, including the benefits for South Africa, may at last be underway. It is interesting to note that the current drive to establish a successful domestic biofuel industry stems primarily from a Cleaner Fuel Policy and a need for rural economic development. Thus, the publishing of the draft regulations for comment on the compulsory blending of biofuel in the petroleum pool in the Government Gazette on 19 September 2011, is very supportive.

Addressing food security concerns

In order to address food security concerns, Grain SA requested BFAP to analyse the realistic, practical impact of additional sorghum requirements at a likely E2-scenario on food security.

Availability of food at a 2% blending rate

The impact of bio-ethanol production on food security in terms of the availability of food derived from grain and oilseed commodities at the 2% and even a 5% compulsory blending rate for bio-ethanol, will in terms of food availability not be significant.

Mandatory blending of 10% – a possibility

It is possible that the potential increase in hectares to levels cultivated historically (+ 5%), the switch from surplus maize to sorghum (+ 2,8%) and the expected increase of 1 ton/ha in sorghum yield (2,8%), will comfortably cover a mandatory blend of up to 10% without compromising food security in terms of food availability. The potential production of sorghum in the former homeland areas is not considered in these numbers and still needs to be included.

Without the implementation of a mandatory blend for bio-ethanol, the sorghum industry will remain relatively stagnant with marginal growth in the total demand for sorghum. The area under sorghum production is also not expected to expand with yields staying relatively constant. Under present circumstances South Africa is expected to meet its local needs and export small quantities mainly across the borders to neighbouring countries. Sorghum prices are also expected to trade near export parity price levels.

E2 require 600 000 tons of sorghum

However, by increasing the domestic demand for sorghum by the amount required as feedstock to meet the E2 blending rate, the additional amount of sorghum required in 2012 is 600 000 tons and grows as the demand for fuel increases. Yet, a slightly reduced net increase in local consumption of 574 000 tons due to the sharp increase in local sorghum prices is expected when the local market moves from export to import parity.

In other words, human and feed consumption will decline due to higher market prices. Over time, the area under sorghum is projected to increase and by 2020 the total net increase will amount to 153 000 ha. This will bring the total area under sorghum to 234 000 ha and production to 948 900 tons.

Required sorghum imports

It is expected that sorghum will be imported for a number of years. Over time, imports will drop as the local production of sorghum increases. Local sorghum prices will increase to import parity levels as soon as ethanol production commences.

Yet, in the outlying years (2018 - 2020) the local price is projected to break away from import parity as local production meets local demand and prices are expected to be only R200/ton higher than under the current conditions without mandatory blending.

Negligible impact on maize prices

The total decline in the area under maize amounts to 73 000 ha by 2020 and the price impact on both white and yellow maize seems negligible. The impacts on supply and demand fundamentals are relatively small and yellow and white maize prices remain at export parity levels.

The drop in production due to less plantings will mainly be absorbed by less feed demand and lower levels of exports. Feed demand for maize is projected to decline due to the introduction of DDGS from the production of ethanol. The average rate of replacement of maize by DDGS is approximately 40%. Apart from maize, DDGS will also replace soybean and sunflower cake.

Increase in sorghum yields required

The increase in the area under production of sorghum will not only be driven by significantly higher prices, but also by the introduction of higher yields. Whereas sorghum yields are projected to reach only 3 tons/ha by 2020 under current conditions, yields are boosted to more than 4 tons/ha by 2020 under this scenario. Higher yields are essential to support the switch from maize to sorghum production.

It is evident that more than just a growth in yields is required to make sorghum market returns competitive to yellow maize market returns. Once ethanol is introduced on top of improved yields, the market returns for sorghum are higher than for maize and a shift to sorghum production is more likely to occur. Sorghum is inherently more drought tolerant than maize and therefore it can lower the production risk for producers if sorghum becomes economically more attractive to plant.

Positive impact on production of summer grains

The impact on the total area of summer grains under production is positive. Although the total area under sorghum production increases by 153 000 ha, only 73 000 ha less maize is planted. Hence, there is a net increase in the total area under summer grains of approximately 80 000 ha due to a boost in profitability of sorghum production.

Conclusion

As food security is based on three pillars namely food availability, food affordability and access to clean and safe food, it can be concluded that the introduction of a 2% mandatory blending level will not impact on food affordability, with the exemption of sorghum products.

Note specifically that the affordability of maize and maize products will not be affected. With reference to a 5% mandatory blending level it can be concluded that food security in terms of the availability of food will not be compromised.

Contrary to views in the past, it is perceived that policymakers changed their focus from food security to the pursuance of a Clean Fuels Policy, industrial development and job creation.

Source