Impact of government biofuel policy on intensive livestock industries.

Summary

Ethanol has been produced in Australia for potential use as a fuel additive for decades. It is a product of the distillation of organic material. Over the past two years ethanol has been advocated by various interest groups, including some industry bodies, as a partial solution to the balance of payments and petrol price penalties inherent in Australia's growing reliance on imported crude oil, as well as fostering regional development. Pressure for government intervention to subsidy the fledgling Australian ethanol industry resulted in extension of the excise exemption for ethanol until 2011 and calls for ethanol mandating, or compulsory usage. This public debate about the potential role of ethanol has been driven by the following factors:

An assumption that the supply of ethanol feedstock, in particular grains which represent 80% of feedstock inputs in proposed plants, can readily increase in response to increased demand.
A view that overseas government subsidisation of ethanol production offers useful precedents for Australia. ?
Ethanol has been described as environmentally friendly and ecologically sustainable. ? It has also been portrayed as a new growth industry for regional Australia.
This pressure for ethanol mandating, and the associated debate about the merits of biofuels in Australian industrial usage, was brought to a head by the appointment by the Prime Minister in May 2005 of a Biofuels Task Force to report to him on various aspects of biofuels policy. The Task Force called for inputs from interested parties. Until May 2005, the interests of the beef industry in ensuring that biofuels policy did not lead to a distorted grains market, by the artificial ratcheting up of grain prices, had not been protected by active industry participation in this debate. This project commenced in May 2005 with the objectives of preparing, and assisting the preparation of analytical material that assessed linkages between ethanol policy options and beef industry performance, and ensuring that this analytical material was available in timely and useable form for peak council use.

The following work was carried out by the consultant:

Preparation of a submission to the Biofuels Task Force. This document was supported by other grain dependent livestock industries.

Assistance in following up the submission with the Task Force.

Input of analytical material into a paper explaining beef industry views that was circulated to members of parliament.

Participation in an industry meeting convened by MLA Chairman to discuss industry contribution to analysis of ethanol policy impacts on beef industry.

Working with MLA, ALFA and Centre of International Cost analysis (CIE) to scope a report by CIE which was to quantify the effect on beef industry output, exports and prices received from various levels of grain based ethanol mandating.

Acting as an industry reference point with CIE in the preparation of its report.

Active scrutiny of biofuels related material in Australia, and in other countries through website review.

The CIE report was a ground breaking exercise. It provided the first quantification of how, for example, ethanol mandating at the E10 (10%) level would impact on the beef industry. This report played a major role in objectively refuting some key assumptions about the beneficial effects of subsidised ethanol production on the rural economy. The report factored in the major importance of competitively priced feedgrains in intensive meat production, and the risks to the beef industry from ethanol related distortions in the domestic feedgrain market. The Prime Minister announced in September 2005 that the government would work with oil companies to encourage ethanol uptake; however, the government did not agree to any level of ethanol mandating. This decision was based on the concurrently released report of the Task Force which did not recommend mandating and which also drew attention to the likelihood of regional feedgrain prices being abnormally increased by subsidised ethanol plants.

This finding was consistent with the CIE report finding that the convergence of drought and ethanol mandating at the E10 level would result in feedgrain prices reaching $450 per tonne. The announcement by the Prime Minister averts a serious danger to the beef industry, at least in the short term. The project outputs show that with the markedly changed structure of the beef industry over the past decade (about one third of Australia's beef output is now grainfed) there is a strong nexus between industry performance and grain market dynamics, and that consequently the industry must have the analytical tools to be an effective participant in the debate about the role of biofuels in the energy market. In this context, the report identifies opportunities to enhance industry biofuel analytical capabilities through further issues monitoring and enhancement of existing industry models.