When the first gasohol was refined commercially 30 years ago for the mass market, farmers realized they were in the energy business instead of just in the food business.  Within the last five years when the ethanol mandates took effect and prices rose for corn and other crops, there was more of an indication that the farm economy was based on growing energy as well as food.  New research has shown that transition may have only just begun, and the farm economy could take a more substantial jump toward energy, even at a time when land is needed for food and feed production.

Within energy circles there is frequent discussion about a Renewable Portfolio Standard (RPS), which is not something that is widely discussed in agricultural circles, but soon may be.  And with the potent potential of an RPS, agricultural organizations may soon include it in their policy books.  About half the states have policies favoring an RPS which means the utilities in their state must obtain wholesale energy from renewable sources, such as wind, biomass, hydro, or solar generating plants.  Coal, oil, natural gas, and nuclear energy are not included.  While the list of states is slowly growing the federal government does not have an RPS, but it is periodically discussed.

What an RPS would do for the farm economy is the topic of a recent study by the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri.  FAPRI analyzed the impact of a scenario in which the federal government would adopt an RPS, which requires that 10% of electricity be generated from renewable sources, rising to 20% by 2020.  That is a common goal among many of the states that currently have an RPS.  What the FAPRI analysis found was that biomass was a more likely source for renewable energy than the other sources, or at least was able to respond faster to the call.  That means a very quick installation of plants that convert corn stalks, wheat straw, and warm season grasses into heat to power boilers that produce steam-generated electricity.

While electricity costs do rise initially because of the construction increased costs, those costs level out over time for consumers.  However, the costs of the raw materials and the impact on competing crops have a significant boost for farm income, and that is why farmers may want to increase their familiarity with the concept of a Renewable Portfolio Standard.  FAPRI identified those impacts as being:
1) Based on assumed technology patterns, biomass supplies respond faster than competing renewable energy sources, so the introduction of the RPS causes biomass used for electricity nearly to double.
2) Biomass drawn into electricity use causes a slight reduction in biomass used for liquid fuel (ethanol). This result depends on whether or not the cellulosic mandate is waived and biomass market structure.
3) The increase in warm season grasses area displaces some traditional crops, particularly hay. This effect is limited if more than half of warm season grass area is drawn from land previously given to other uses.
4) The value of crop residues, such as corn stover and wheat straw, also rises, improving net returns to growing these crops.
5) The small reductions in traditional crop area lead to slightly higher crop prices.
6) Farm income is higher because of higher returns to biomass and higher crop prices. Agricultural program cost effects are very small.

The FAPRI economists found that for every 100 acres of new biomass dedicated crops, corn acreage would decline by 3 acres, wheat by 14, soybeans by 4, hay by 14, and 5 acres for other crops.  That is a decline of 40 acres of food and feed crops for every 100 acre increase in biomass fuel crops. 

The economists calculate the largest demand will be for corn stover, wheat straw, and warm season grasses, although forest matter will also contribute.  Purchase of the biomass will come from electricity generating plants and FAPRI says beginning in 2018 their willingness to pay for the biomass about doubles, increasing the market price for bio-fuels as well.  The market for the biomass would be determined locally, rather than a national price.  There would be competition between plants, impacting the value of the biomass. 

FAPRI calculates prices paid for the biomass, based on dollars per dry ton, as $111 for grasses, $104 for wheat straw, $134 for forest matter, $ 96 for corn stover.  Farm prices for biomass to be converted into liquid biofuels, would not rise much more than they are now, in the $40-$60 range.  The result in greater value for corn, wheat, and grasslands, along with higher farm income, say the University of Missouri economists.  Compared to current planted acreage, the RPS would not cause a reduction of any significance for corn, soybeans or wheat, but there would be a 43% increase in acreage of warm season grasses.  The reduction in acreage of traditional crops would cause a 1% to 3% increase in their value, with a 1% increase in overall farm income from traditional crops.

Summary:
The demand for electricity to be generated from more environmentally friendly and sustainable sources will push public policy toward adoption of a Renewable Portfolio Standard.  The policy will have a positive impact on farm owners and operators because of the expectation that biomass will be the primary source of an economic fuel that can quickly respond to the requirement.  Biomass will have an increased value, adding to increased farm income.  Some impact will be felt in food and feed production, but primarily limited to reduced hay production.

Source: FarmGate blog