F.O.Licht´s International Sugar and Sweetener Report

Vol.135, No.13 / 25.04.2003 © 2003 F.O.Licht GmbH

EU SUGAR SURPLUSES TO ETHANOL

The use of bioethanol as a fuel has increased in popularity around the world. Last June the German parliament voted for a total petroleum tax exemption for blended biofuels. Nevertheless there is still no ethanol blended fuel at German gas stations. Also in other European countries, with the exception of France, ethanol can be met only very rarely. On the other hand, European sugar which could serve as raw material for ethanol production is sold on the world market at low prices. This article aims to analyse economic aspects, potentials and the required political conditions of ethanol production. Having done that, the use of European sugar surpluses for ethanol production shall be considered.

Tendencies on an international level

In Germany, the consumption of biodiesel has increased considerably in recent years. Whereas in France bioethanol, in addition to biodiesel, also serves as a substitute for conventional fuel. Derived from sugar beets or starch, ethanol is firstly processed to ETBE (ethyl tertiary butyl ether). This consists of 45% of ethanol and 55% of isobutylen, a co-product of the petrol industry. Afterwards petrol fuel is blended with 15% ETBE.
In Brazil more than half of the cultivated sugar cane is processed into anhydrous ethanol. This is directly added to the petrol at 20-25%. In the USA new ethanol plants are constructed nearly every month. In the Great Plains of the Midwest, corn mostly serves as raw material. At the service station the motorist can select conventional petrol or E-10, petrol blended with 10% ethanol. Some vehicles that are suitably equipped also run with E-85 blends.



Ecological advantages

There are several reasons in favour of the use of ethanol. From the political point of view, the Kyoto Protocol looms on the horizon obliging all industrialized nations to reduce their greenhouse gas emissions. Due to its higher oxygen content, ethanol contributes to a cleaner combustion. Since it also enhances the octane number, the disadvantage of a one third lower energy content is balanced in blends with up to 10% of ethanol. Furthermore the industrial scale production of ethanol would create jobs in rural areas. This is important especially in structurally weak areas.

Costs of ethanol production

In the USA, ethanol production is subsidized via direct production aids and tax reductions. The cost structure, listed in Table 1, shows that the net production costs amount to about EUR25 per hl.
The greatest percentage of the cost is the feedstock corn which represents more than half the production costs. The corn is bought at EUR67 per tonne. The resulting co-product from the production process, Distiller's Dried Grain Solubles (DDGS), are sold to nearby livestock farmers as a protein concentrate. In undried form they can be stored for a maximum of three days. This reduces the gross costs of production by 17%.
The government in Washington encourages ethanol production of small-sized enterprises with a yearly production of up to 15 mln gallons (585,000 hl). They receive $0.10 per gallon (1 gallon = 3.78 litres). In the case of the state of South Dakota a twice as high subsidy is paid per gallon. Altogether the production costs are reduced by one fifth.
The selling of the co-products and the production aids make net production costs of EUR24.83/hl possible. The average selling price in the USA is about EUR31.5 per hl. Due to currently higher crude oil prices, it is about 20% higher. Thus profits are realistic. But without the mentioned state aids, a competitive ethanol production would not be possible. The fiscal policy is giving a sufficient incentive to the petrol industry to buy ethanol by granting a tax reduction of $5.2 per gallon of E-10 fuel.
Table 1: Absolute and relative composition of the production costs in South Dakota, USA 
Expenses for EUR/hl %
Buildings
Machinery/inventory		 0.39
3.40		 1.0
8.6
Total investment 3.79 9.6
Labour
Insurance fees, repairs
Raw material
Operating supplies		 2.83
0.61
20.93
11.31		 7.2
1.6
53.0
28.6
Gross production costs 39.47 100.0
Sale of by-products
State and federal subsidies		 -6.71
-7.93		 -17.0
-20.0
Net production costs 24.83 62.9

Table 2: Absolute and relative composition of the production costs in a combined plant in Germany
Capacity 500,000 hl 500,000 hl 2 mln hl 2 mln hl
Raw material wheat beet wheat beet
  EUR/hl % EUR/hl % EUR/hl % EUR/hl %
Buildings
Machinery/inventory		 1.28
8.28		 2.1
13.4		 1.28
8.28		 2.1
13.3		 0.82
5.30		 1.5
9.6		 0.82
5.30		 1.5
9.6
Fix costs of the investment  9.56 15.5 9.56 15.4 6.12 11.1 6.12 11.1
Labour
Insurance fees, repairs
Raw material( incl. transport)
Operating supplies		 4.26
1.60
27.75
18.68		 6.9
2.6
44.9
30.2		 4.26
1.60
30.89
15.93		 6.8
2.6
49.6
25.6		 1.40
1.02
27.75
16.68		 2.5
1.9
50.5
34.0		 1.40
1.02
30.89
15.93		 2.5
1.8
55.8
28.8
Gross production costs 61.85 100.0 62.24 100.0 54.96 100.0 55.36 100.0
Sale of by-products (wheat, DDGS, beet pulp) 
-6.80
-11.0
-7.20
-11.6
-6.80
-12.4
-7.20
-13.0
Net production costs 55.05 89.0 55.04 88.4 48.16 87.6 48.16 87.0

Bioethanol in Germany

Since there has not been any bioethanol production for fuel use in Germany so far, the following calculations have to be hypothetical. In the following it should be assumed that for 90 days each year, the feedstock is sugar beet with wheat being used for the rest of the annual production cycle. On this basis, 64% of the ethanol output is made from wheat and 36% from beet. This should be at a facility annexed to an existing sugar refinery.
The price for the basic material, wheat, comes from the market price for it. In this regard, a price of EUR10/tonne (excluding VAT) seems to be appropriate. Since the price difference between A, B and C quota beets is very wide, the price for ethanol from beets has to be derived from the wheat price in order to put raw materials on an equal footing. Hence the maximum payable price for beet is about EUR26 per tonne. But this price does not include premiums and compensations.
In Table 2, the estimated figures used for production costs are listed in accordance with plant capacity and the feedstock used. Here, tremendous economies of scale can be seen. By increasing the plant capacity from 0.5 to 2 mln hl, the net costs of production are reduced from EUR55 to EUR48 per hl. The most impressive economisations can be found with regard to labour costs since the manpower requirements only rise relatively slowly by an increase in capacity.
The feedstock costs account for the biggest share of total production costs. To produce 1 hl of ethanol, 267 kg of wheat or exactly one tonne of beets is required. Transport costs of EUR5.1 per tonne of raw material have to be added. Therefore, an average distance from the field to the plant of 50 km has been estimated. By selling the co-products DDGS and sugar beet pulp, the production costs are reduced by one eighth.
According to ethanol experts, it should be achievable to reduce the total costs of EUR48 per hl by EUR7. The reductions would come from technical progress at all production stages plus greater economies of scale.
It remains to be seen which raw material will turn out to be the better one. Wheat can be stored for a longer period and is, due to its higher ethanol yield per tonne, more capable of being transported over long distances. This can be the decisive factor when it comes to further increases in transport costs. On the other hand, sugar beets generate higher ethanol yields per ha. Furthermore, as C-beets they do not receive any state subsidy such as the area payment for cereals.
Various cost analyses led to the conclusion that a 2 mln hl plant is already cost efficient when an ethanol selling price of EUR55 per hl is assumed. The calculated production costs of about EUR50 per hl plus the considered costs for transport and blending of approximately EUR10 per hl have to be compared with the petrol price in Germany of EUR105 per hl. It is evident that at a given total petroleum tax exemption, adequate profit margins for ethanol producers, blenders and distributors are possible. In respect thereof, even higher wheat and beet prices could be justified. The problem is the insufficient import protection for ethanol. Particularly in Brazil it is produced on a large scale and is very cost-efficient. The production costs are about EUR30 per hl (depending on the floating exchange rate) and the costs for transport amount to an additional EUR3 per hl. With the present import duty of EUR10.2 per hl, German ethanol production will always face the pressure of price and competition.
Table 4: Total ethanol quantity, combined annex plant assumed
  Ethanol from 
sugar beets		 Ethanol
 from wheat
Total
C, B and preferential sugar to ethanol (hl)  51 000 000 91 000 000 142 000 000
EU-target 5.75 energy-% in 2010 (hl)
 required quantity in D
 required quantity in EU 		    
32 000 000
175 000 000

Political guidelines

From the economic standpoint, the conditions for ethanol production in Germany are currently very favourable. But legislation envisages an adjustment of the total tax exemption for biofuels to the market situation. Therefore it can be expected that the tax exemption might be reduced from 2005. The stated cost calculations have led to the result that, from the current point of view, a minimum tax exemption of 65% is required for ensuring profitable ethanol production. Given a present petroleum tax rate of EUR65.45 per hl, a reduction of about EUR40 would be necessary. Compared to the produced energy unit, this would be comparable to the support level of wind power.
The European Commission has so far recommended a maximum tax exemption of 50%. According to the above mentioned analyses, this would not be sufficient to give incentives to start ethanol production. Furthermore, there hasn't been any decision on this directive yet. According to session document A5-0057/2003 of the European Parliament, there is no opposition to the directive agreed for the tax exemption. But the veto of some member states is being maintained in order to obtain concessions on mandatory blending. Pursuant to the European Commission, a compromise proposal shall be negotiated. This proposal envisages an excise tax exemption to the amount of the difference between the production costs of fossil and biofuels in order to avoid overcompensation. In addition the last mentioned directive is based on a share of 5.75% of biofuels by energy content in 2010. That means that in Germany a yearly amount of 32.5 mln hl of ethanol would be required in order to achieve the expressed aim concerning petrol fuels.
Consequently, 16 ethanol plants with a capacity of 2 mln hl would be required. Assuming that one third of the ethanol should derive from beet and the rest from wheat, the area required would be 805,000 ha, of which 200,000 ha would be beet.
At present it is allowed to cultivate ethanol raw materials on set aside land but if sugar beet is grown, there is no area payment. Nevertheless the area is valid with regard to set aside obligations. Hence the above shown comparison of the ethanol feedstocks is a little biased.

Why not ethanol instead of C- and B-sugar?

There are three approaches to produce ethanol from sugar beets without extending the area cultivated (Table 3). First C-beets whose sugar is sold at the world market price could be used for ethanol production. Accordingly B-sugar, that is also sold on the world market by export refunds, could serve as a raw material. Moreover these export subsidies are a controversial issue in WTO negotiations. In a final step, an amount of sugar beets that is equivalent to preferential sugar imports could be the raw material for bioethanol production. The following calculations are based on an average sugar beet yield of 54.7 tonnes per ha.
Table 3: Potential ethanol production from sugar beet without expansion of area in the EU
  C-sugar B-sugar exports preferential sugar total
Area cultivated (ha)  531 000 170 000 225 000 935 000
Sugar beets quantity (tonnes)  29 000 000 9 800 000 12 300 000 51 100 000
Replaced quantity of white sugar (tonnes)  3 776 000 1 274 000 1 600 000 6 650 000
Ethanol (hl)  29 000 000 9 800 000 12 300 000 51 100 000

Ethanol from C-beets

In 2001, 3.78 mln tonnes of C-sugar, that could not be transferred to the following financial year, were produced in the EU and sold on the world market. Since 1 tonne of white sugar equals to 7.7 tonnes of beets, a total of 30 mln tonnes of beets can be assumed. The beet growers received EUR16 per tonne of C-beets. If those beets were processed to ethanol it would be a quantity of 30 mln hl. That means that only the German ethanol demand to meet the conditions of the EU target concerning petrol fuels could be supplied by European C-beets that are produced. Furthermore a price of EUR26 per hl could have been paid to the farmers. In this manner C-sugar production would be much more profitable. In the next 10 years a yearly increasing quantity of C-beets is anticipated. Since the world market price is not expected to go up, the use of sugar beets for ethanol should seriously be taken into consideration.

Ethanol instead of B-sugar exports

In 2002, within the limits of the WTO-regulations, the EU was permitted to give export refunds for 1.274 mln tonnes of white sugar. This is equivalent to 10 mln tonnes of beets. These exports were financed by B production levies paid by beet producers and processors. Thereby EUR400 per tonne of sugar were spent. Here in particular it would make sense to make ethanol from the corresponding maximum quantity of beets. This would account for 10 mln hl of ethanol produced on 180,000 ha of land.
It is also conceivable to spend the monetary quantity of export refunds (paid by beet producers and processors) for pushing ethanol production. Instead of subsidising exports, it would advantage to all parties to continue paying B-prices to farmers. The difference to the ethanol beet price could be financed by the economised export refunds.
According to the latest WTO-proposals on agriculture, export refunds should be phased out within the next 9 years. If the land used for beet production is not reduced, alternative uses have to be found. Is there any better solution to achieve a harmony of aims regarding Kyoto Protocol, WTO and multifunctional agriculture without unaffordable costs of administration?

Ethanol and preferential sugar

In the future higher quantities of sugar from developing countries are expected to enter the European Union. Up to now, this sugar has been re-exported at high cost. In return, yearly export refunds of about EUR1.5 bln had to be EU-financed or paid by the sugar industry. In the coming years a tremendous increase in preferential imports is expected. Since the WTO aims at reducing authorised re-exports, this sugar requires an alternative use if a quota cut is to be prevented. The use of an alternative quantity of beets would stand for another 33 mln hl of ethanol.
It would also be possible to establish ethanol production in the developing countries in order to export it to Europe for fuel use. But then the complete risk of the investment in a new technology would be imposed on those countries.

Total potential of the ethanol production

Without extending beet cultivation and by maintaining the sugar market regime it would be possible to produce 50 mln hl of ethanol in Europe.
Starting from the mentioned combined annex facility, 64% of the ethanol could be derived from wheat. This means that a further 91 mln hl of alcohol would be produced. Therefore 24 mln tonnes of wheat would be required and subsidised exports of intervention wheat would become unnecessary. The overall quantity of 142 mln hl of ethanol would come very close to the total European need of 175 mln to meet the EU conditions of 5.75% biofuels in 2010.

Uncertainties for investors

Three uncertainties put potential investors off. Europe only has a low import protection of EUR10.2 per hl of denatured ethanol. Production costs in the US are more than EUR10.2 lower than in Germany, even if additional transport costs of EUR3 per hl are assumed. The enormous Brazilian ethanol production of 120 mln hl each year at very low cost and the weak Brazilian Real pose the threat of the EU being glutted by cheap ethanol from South America. It is not statutory that the required biofuels have to be of European origin. However, it is certain in the context of the WTO negotiations that a higher tariff would only be permitted if ethanol production were put in the ”green box”. This has not been realised so far. In contrast, according to the latest WTO proposals the green box has to be tested. But anyway it is a legitimate question why, after several months of tax exemption, ethanol imports for fuel use have not increased considerably.
A further uncertainty results from the waiving of mandatory blending for petrol companies. Thus the sale of ethanol is not guaranteed. The uncertainties about the future fiscal policy in Germany and the EU and their allocation of rights and duties follow from that. As long as the legal framework in Germany and Europe is not well-defined for the purpose of biofuel use, potential investors will keep hesitating to start ethanol production. Nevertheless, given that biofuels are exempt from taxation, C-sugar exports and production levy subsidised exports of B-sugar are no longer maintainable.
1    Oliver Henniges, Institute for Farm Economics, University of Stuttgart/Germany. Contact: henniges@uni-hohenheim.de
Prof. Dr. Drs. h.c. Jürgen Zeddies, Institute of Farm Economics, University of Stuttgart/Germany. Contact: i410@uni-hohenheim.de