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The Sunday Times: Smile that spells biofuel

EXTRACT: A big hitter with a claim to the title of Mr Carbon is Garth Edward, trading manager for environmental products at Shell, the oil major, who worked at Natsource, an American company that was one of the first brokers of greenhouse-gas trades.

THE ARTICLE

July 15, 2007

Farmer Rash has a spring in his step again because of green diesel
By Jenny Davey

FARMING is in the blood for Stephen Rash. His is the fourth generation to run Hall Farm in Suffolk: 970 acres growing cereals, field beans and oilseed rape in the sleepy parish of Wortham. Rash, 51, describes himself as an eternal optimist but during the last decade it has not been easy to maintain enthusiasm as grain mountains sprouted in Europe and cereal prices plunged. Despite his working sometimes 90-hour weeks, Hall Farm barely scraped a profit.

Now, however, booming demand for biofuels – green fuels that make energy from crushed rape and wheat – has combined with global population growth to generate soaring demand for cereals just as droughts and storms have inhibited global crop production.

In Europe the grain mountains are dissipating, global wheat stocks have reached their lowest level for 25 years and cereal prices are soaring. Rash is looking forward to turning a bumper profit at Hall Farm for the first time in more than a decade.

“Farming has been through 10 miserable years, producing crops at below the cost of production, but now prices are finally looking at level where we might be able to make real profits,” he said.

He has 60 acres of oilseed rape, which will be turned into biodiesel once it is harvested. It represents Rash’s first engagement with Britain’s fledgling “food to forecourt” biofuel industry, but he thinks farmers should embrace the new source of demand from biofuels with open arms.

“I like the feeling of being able to contribute something to the wider economy and the environment. Farmers have been feeling pretty unwanted for the last few years, but we might just be coming back into fashion,” he said.

The European Union is subsi-dising farmers at a rate of €35 (£23.75) for each hectare (2.47 acres) to grow crops for fuel, but Rash claims that in practice farmers end up with less than half that in their pockets. The rest gets eaten up by administration costs and payments to intermediaries. Profit from higher cereal prices has been eroded by the rising cost of fertilisers (driven up by high oil prices) and his growing wage bills. Nevertheless, Rash says the attraction of being green and the tantalising prospect of even higher crop prices in the coming months mean other farmers should be enticed to plant crops for fuel.

Andrew Watts, 47, who manages a 2,570-acre farm at Wat-ton-at-Stone in Hertfordshire, is already convinced. During his 25 years as a farm manager, Watts has been tempted to quit farming on more than one occasion, but rising cereal prices and the prospect of a biofuel boom have given him a renewed sense of purpose.

“For the first time in many years there is a degree of optimism in farming and we are enjoying much brighter prospects. More importantly we feel wanted again. The talk is no longer about grain mountains and how we are producing things that no-one wants. Now there is a new and added market for our product,” he said.

“It’s fair to say the foreseeable future looks very healthy for arable farmers,” said Martin Redfearn, national agricultural specialist for Barclays Bank.

Biofuels are big in Brazil and Malaysia, but in Britain they are still a cottage industry. There are only a handful of cars, such as the Saab BioPower hybrid or Ford Focus Flex Fuel, that are purpose-built to use high biofuel blends and the number of dedicated biofuel petrol pumps is limited. They are mainly in Norfolk and Suffolk. Worse still, biofuel costs more than conventional fuel, a factor guaranteed to turn off customers.

Unsurprisingly, the number of biodiesel plants in Britain is limited to a handful, mainly on the northeast coast, and the first bioethanol plant does not even open until this autumn.

But next April the British biofuel industry will benefit from a big leg-up from legislation that will force fuel companies to blend petrol and diesel with biofuels. The renewable transport-fuel obligation forces oil companies to blend diesel and petrol with a minimum of 2.5% biodiesel or bioethanol by 2008-9, rising to 5% in 2010-11. The EU has set a 10% target by 2020. If fuel companies do not comply they face financial penalties.

The legislation will generate increased demand for biofuels and the National Farmers’ Union is encouraging members to cash in on the opportunity.

The Home-Grown Cereals Authority estimates that only about 247,000 acres of the 6.2m to 7.4m acres of arable land in the UK is used for fuel crops. Most of that is oilseed rape grown for biodiesel. Some of the crops are being grown on the estimated 1,267,000 acres of land “set-aside” under EU rules to limit production of food crops during the panic about grain mountains in the 1990s. Britain still exports more than 2m tonnes of surplus wheat each year to other countries in Europe and the developing world.

The National Farmers’ Union is confident Britain can easily supply enough crops to meet the 5% biofuel obligation under the new laws.

Europe produced 268m tonnes of cereals last year of which only 3.5m were used for bioethanol. The target for this year is to produce 5m tonnes for green fuel.

Nevertheless, anticipated growth in demand for biofuel has alarmed environmentalists and campaigners who fear food prices will be forced up.

Biofuels have been blamed for rising tortilla prices, which led to riots in Mexico, and in Britain biofuels have even been blamed for contributing to rising bread prices.

Agricultural analysts insist that is ridiculous. Mariann Fischer Boel, the agriculture commissioner in Brussels, estimates a 10% inclusion rate for biofuels would lift raw material prices in the EU 3%-6% for cereals and 5%-18% for major oil seeds, but that does not translate into a similar percentage rise in the cost of food.

“Only somewhere between 1% and 5% of the cost of bread

NOW ‘HARD-NOSED TRADERS’ AIM TO CLEAN UP ON THE CARBON CREDITS MARKET

IN 2004, Louis Redshaw, a trader in his early thirties, trudged around the London offices of some of the world’s biggest investment banks with a bright idea: how to make pots of money from trading carbon.

Some were sceptical; others rejected the idea outright. Only Barclays Capital took the bait.

Today just about every sizeable investment bank – from Goldman Sachs to JP Morgan and the French bank Calyon – has plunged into trading carbon credits and emissions certificates in what some have dubbed a ‘green gold rush’. The market, at about €40 billion (£27 billion) a year, may be small compared with foreign currency or bond trading, but it is hot. With many predicting that the carbon-trading market will grow explosively to top $1,000 billion (£492 billion) within the decade, no investment bank can afford to sit on the sidelines.

Top traders are among the rising stars of the City, earning hundreds of thousands of pounds in pay and bonuses. In the close-knit world of about 150 carbon traders in London, Redshaw, who worked as a trader for Enron, the collapsed energy giant, and EDF Energy, is seen as one of the pioneers.

A big hitter with a claim to the title of Mr Carbon is Garth Edward, trading manager for environmental products at Shell, the oil major, who worked at Natsource, an American company that was one of the first brokers of greenhouse-gas trades. Another is Seb Walhain, head of carbon trading at the Belgian bank Fortis, one of the largest players in the market. Other leading lights include Imtiaz Ahmad, who quit his job as an energy trader at the mining giant BHP Billiton in 2005 to stake his professional future on carbon trading at Morgan Stanley.

A few years ago, carbon trading was seen as a niche business. But the boom has caught the attention of what Redshaw calls ‘hard-nosed traders’ looking to cash in on one of the fastest-growing financial markets. Hedge funds have piled in. Meanwhile, a series of specialist investment banks, such as Climate Change Capital, have sprung up to finance clean energy or emissions-reduction projects, such as harnessing methane gas from landfill sites, in developing countries.

Carbon traders may not be earning the really big bucks in the City just yet, but the potential is huge. ‘In my view, carbon trading is set to become the world’s biggest commodity market. It could even be the world’s biggest market overall,’ said Redshaw.

‘There’s a buzz about the market. People frequently call me to ask how they can get into carbon trading,’ said Nick Fowler of the headhunter Huxley Associates. Traders with experience are scarce, leading investment banks to poach staff from oil companies or utilities.

London has dominated carbon trading since the launch of the European Union’s pioneering Emissions Trading Scheme (ETS) in 2005. The scheme imposed a limit on the amount of carbon that companies in energy-intensive sectors could produce in a bid to curb emissions. This created a price for carbon and allowed companies to buy or sell permits if they breached or undershot their limits. Trading of these permits account for the bulk of the market. There is also an active trade in permits under the Clean Development Mechanism – the Kyoto Protocol’s mechanism where carbon credits are created in developing countries and sold to the developed world.

The markets can be highly volatile – a trader’s nightmare or dream. In April 2006, the price of carbon under the ETS plummeted after it emerged that permits had been overallocated, particularly to German power generators.

The scheme is set to enter a second phase in 2008 with much tighter quotas, pushing up the price of carbon. Meanwhile, the market is being fuelled by schemes in several US states. However, the biggest boost to the already booming carbon market would be the creation of a federal scheme in America – something President Bush has so far resisted.

Grant Ringshaw on the shelf is affected by wheat prices, the rest is processing, transportation and supermarket margins. You could double the price of wheat and the change in the value of a loaf of bread would be marginal,” said Redfearn.

He points out that in real terms farmers’ prices have been falling for more than a century. If wheat prices had risen in line with inflation they would be closer to £600 a tonne than the £115 they hit last month.

Panic is also growing over the environmental impact of biofuels in developing countries. Critics, including Friends of the Earth, say swathes of rainforest in Brazil and Malaysia are being laid to waste as trees are felled to make way for palm-oil plantations to make biodiesel.

All too quickly the debate has switched from biofuels offeringa climate-friendly alternative to dwindling reserves of fossil fuels to biofuels being portrayed as the “great green con”, which will cause environmental devastation and world poverty.

But the National Farmers’ Union hopes British farmers will fare better than most from a panic over the sustainability of biofuel production. They cannot hope to compete on price with Brazilian farmers who benefit from 365 growing days a year, compared with the 150 to 200 or so in Britain. But they are better used to regulation and certification. They should also be better placed to gain competitive advantage by taking a lead in biofuel innovation. Environmental technologists and energy companies are already talking enthusiastically about the potential for “next-generation biofuels” made from feed stocks such as whole wheat, maize, perennial grasses or trees.

British farmers have the advantage that crops will be grown on land that has been farmed for more than 2,000 years. “We are not in favour of biofuels at any cost, but land here has been in cultivation for centuries. We really are renewable,” Rash says.

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article2075030.ece

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