Tag Archives: risks
Sharing The Risks And Costs Of Biomass Crops
October 30, 2013 Farmers who grow corn and soybeans can take advantage of government price support programs and crop insurance, but similar programs are not available for those who grow biomass crops such as Miscanthus. A University of Illinois study recommends a framework for contracts between growers and biorefineries to help spell out expectations for sustainability practices and designate who will assume the risks and costs associated with these new perennial energy crops. “The current biomass market operates more along the lines of a take-it-or-leave-it contract, but in order to encourage enhanced participation and promote a more sustainable, stable biomass supply, a new kind of contract needs to be created,” said Jody Endres, a University of Illinois professor of energy and environmental law. Endres said that a good contract gives everyone more certainty. “Incomplete contracts are the hazard,” she said. “We need to develop contracts that nail down all of the details and are transparent about who’s taking on the risk and who’s paying for it. If we get these considerations into the contracts, those who finance this new biomass crop industry will have more certainty to invest.” The study identifies considerations that should be included in the framework for a biomass contract, including a control for moral hazard, risk incentive tradeoff, existing agricultural practices, and risk and management tools to make the industry more sustainable financially and environmentally. Endres said that if biorefineries receive money in the form of carbon credits for reducing pollution, incentives for farmers should be included in contracts because they are the ones who are bearing the risks associated with sustainability practices. “Suppose a sustainability contract lists that the default should be integrated pest management rather than application of traditional pesticides,” Endres said. “The farmer takes on some risk to provide a sustainable product, but the biorefinery gets carbon credit for those sustainable practices. This should be worked into the contract—that if the farmer assumes the risk of IPM as opposed to traditional pesticide options, there has to be some sort of up-front payment or incentive in the contract to account for this risk. Due to the power relationships in this industry, the onus is on the biorefinery to be the leader in developing contracts in this new landscape.” The perennial nature of biomass crops also makes developing contracts challenging. “We’re in a unique environment, and traditional agricultural contracting structures just don’t apply,” Endres said. “Crop insurance is not currently available for farmers who grow biomass crops so they take on additional risk. Likewise, landowners see high prices for traditional commodity crops and do not want to be locked into a multi-year contract with a lessee to grow a perennial biomass crop. It’s complicated.” Endres said that although sustainability requirements are important, having an adequate supply of biomass is important as well. “We’re trying to envision a future in which we have a lot of biomass and one way to secure that is to recognize all of the risks and costs, especially when it comes to sustainability practices. It’s unique, and we do not yet have contracts for this aspect of the industry,” she said. A newly forming biomass standards group, in which Endres holds a leadership role, is looking at how the value of sustainability practices can be measured at the watershed, eco-shed or air-shed level rather than on the scale of individual farms. Endres said that the working group will examine how to ensure that balance is achieved between producers and consumers of biomass, including through contracts. “I’m optimistic that it can be done,” she said. “Growers and refiners right now are concerned with the industry being financially sound.” “There’s also a real need for education in both developed and underdeveloped countries about biomass contracting,” Endres said. “We’re trying to shift the paradigm from traditional agriculture to something that’s more sustainable–and that takes knowledge. If we don’t have that knowledge here in the United States and we’re trying to draft contracts in our very developed system, how is this going to be rolled out in say, Africa, or other areas where the use of production contracts are much more rare, especially in the small farm context?” Continue reading
Russian Farming ‘Better Bet Than Romanian’
The yield risks of farming in Russia may actually be less than those of Romania, SovEcon said, amid a widespread debate over the two countries’ merits sparked by Velcourt claims over “dishonesty” and climatic volatility. Velcourt, the UK-based agricultural consultancy and investor, sparked a heated reaction in Russia’s agriculture sector by claiming that the “endemic” dishonesty was “a major issue” in the industry, whose fortunes were also rendered “volatile” by a difficult climate. Velcourt, which manages more than 50,000 hectares in the UK, has opted for Romania as a target for a move into eastern European farm investment, terming it “one of the world’s foremost agricultural investment opportunities”. However, yields in Romania are actually more variable than those in Russia, Moscow-based SovEcon said, using wheat, a widespread crop in both countries, as the comparator. ‘Significantly more volatile in Romania’ In Russia, the average wheat yield, between 2008 and 2012, varied between 1.84 tonnes per hectare and 2.39 tonnes per hectare, on World Bank figures, with the data giving a so-called standard deviation, a much-used measure of volatility, of 0.26. For Romania, the wheat yield varied between 2.36 tonnes per hectare and 3.99 tonnes per hectare, giving a standard deviation more than twice as big, at 0.61. “If you included data from this year, when it looks like Romania achieved a very good yield, the volatility would likely look even higher,” SovEcon managing director Andrey Sizov said. “It looks like wheat yields are significantly more volatile in Romania than Russia.” Spring vs winter This may be down, at least in part, to two agricultural advantages of investing in Russia, the first being the more even spread of winter and spring crops in farms’ growing schedules. “If we have a poor winter crop, this can be partly offset by the spring crop. In Romania, they mainly plant winter crop,” Mr Sizov told Agrimoney.com. Furthermore, Russia allows more easily the purchase of huge areas which enable more efficient farming, and at prices of some $500-600 per hectare for black earth land, compared with $3,000-4,000 per hectare for comparable farmland in Romania. “In Romania, it is hard to control much land. A large farm will be one of more than 5,000 hectares. “In Russia, a big farm would be more than 50,000 hectares, with the largest at 500,000 hectares. “If you want to invest in large-scale farming in Europe or the Black Sea countries, of 50,000-100,000 hectares or more, the only options are Russia & Ukraine.” Soviet hangover Not that having a large farm is all upside, with Mr Sizov acknowledging that having a huge enterprise made it “harder to control” theft, which was “an issue” for the country, as elsewhere in Eastern Europe. “Partly, we can blame our Soviet past,” and collectivised farms, owned and run by the state under the communist regime in operation until 1990. “Then, there was an attitude that ‘everything belongs to collective farms. So everything belongs to me’. That still remains the case for some people.” However, “that will not be such a big issue in the future, because the mentality of people is changing”, with the retirement of workers remaining from the Soviet era. ‘Trusted partners’ Velcourt, which has flagged Romania’s place within the European Union as a reason to invest, has acknowledged the risks of the country’s variable weather, and said it has included results from 30 years of climatic information in its modelling. “Working with trusted partners, allied with farm soil selection, will mitigate risk to some degree,” Richard Williamson, the group’s farms director, told Global Trader. Continue reading
