Foreword

Due to many countries having signed the Kyoto protocol, the production of biofuels, bioethanol and biodiesel in
particular, is on the rise. South Africa has in the past experienced huge maize surplusses as well as low
producer prices and this together with the SA government, being a signatory to the protocol, has been partially
responsible for the recent publishing of the draft strategy for the development of a biofuels industry within the
country. The successful establishment of the biofuels industry involves the dynamic interaction between the field
crops, livestock and fuel industries with all the inherent risks and uncertainties of each industry. The purpose of
this policy brief is to explore some of the impacts of the biofuels draft strategy that has recently been published
by government and to provide guidelines for the formulation of an alternative biofuel strategy that will assist
government to reach its targets of renewable energy, growth in the agricultural sector, and the creation of job
opportunities.

The Bureau for Food and Agricultural Policy (BFAP) acknowledges the financial assistance of the NAMC, ABSA,
Maize Trust, Eskort and THRIP. In the past few years BFAP has undertaken extensive research on this topic
and the purpose of this policy brief is to clearly indicate what the possible effects of implementing such a draft
strategy might be on specific sectors within the agricultural sector. BFAP further analyses the overall impact on
the gross value of agriculture and the possible effect on the labour market.

A set of policy recommendations are made and the effects of an alternative scenario, where the policies have a
more attractive spin-off effect on the sector, are simulated and the results illustrated. The scenarios are
compared to the latest BFAP baseline projections, which are generated under a set of basic assumptions
regarding certain macro-economic variables, policies and weather patterns. Therefore, the results that are
presented in this brief serve as a benchmark. The modelling results of the scenarios for the draft and alternative
strategy are constructed and presented in such a way that the decision-maker can form a picture of possible
future changes and what their likely effects could be.

The results of this document accentuate the importance of government policies in order to facilitate the
successful establishment of the biofuel industry. It is therefore hoped that this document will contribute towards
assisting the various government agencies in designing policies that will ensure the viability of a biofuels industry
and at the same time create employment opportunities as well as viable alternative markets for agricultural
products without compromising food security.

Bureau for Food and Agricultural Policy

University of Pretoria.

1
 Executive summary
The purpose of this policy brief is to explore some of the impacts of the biofuels draft strategy that has recently
been published by government and to provide guidelines for the formulation of an alternative biofuel strategy that
will assist government to reach its targets of renewable energy, growth in the agricultural sector, and the
creation of job opportunities. This could have major positive spin-off effects for the rural economies and improve
the livelihood of the poorest of poor. The BFAP team was able to draw on the resources of the BFAP modelling
framework that has recently been updated with a complete system that has the ability to model the impact of a
biofuel industry on the agricultural sector. Important to note is that the modelling system is based on a partial
equilibrium framework where an equilibrium is dynamically simulated over time.

The first section of the report provides a brief overview of the draft strategy document and presents the series of
assumptions about the general economy, agricultural policies, the weather, and technological change, which are
necessary to simulate a baseline with the BFAP model. The baseline can also be regarded as a “reference
scenario” that is used to benchmark/compare any shocks that a biofuel industry could have on the agricultural
sector under a certain combination of policies and support measures.

In the second section the draft strategy is summarized in the form of a possible scenario. This scenario is
presented on page 9 of the report. The scenario is simulated in the BFAP model and the deviations from the
baseline are presented.

In the third section an alternative scenario is presented (page 15). The alternative scenario is also simulated in
the BFAP model and compared to the baseline. The purpose of this scenario is to highlight some of the critical
drivers that need to be taken into consideration if a successful biofuel industry is to be established. The
combination of policies and support measures that are used in the alternative scenario are based on
international experiences and basic local requirements to make the industry feasible.

The fourth section presents the main findings and recommendations to guide the process of designing optimal
policy solutions that will ensure the viability of a biofuels industry and at the same time create employment
opportunities as well as viable alternative markets for agricultural products without compromising food security
especially that of the poor.

The modelling results and main findings for each of the sections in the report are summarized as follows:

Baseline
• Under baseline assumptions and market conditions, it becomes clear that no commercial crop will yield
positive plant profits from the production of biofuels without government support. The potential plant profits are
presented on page 7.

• The main reason for negative plant profits under the baseline conditions is the unfavourable ratio of feedstock
prices relative to fuel prices.

Scenario 1: Draft scenario

• Only very little biofuel production will take place in SA and the majority of biofuel will be imported.

• Importing biofuels on large scale in order to achieve the renewable energy goals will have a negative impact on
the balance of payments.

• The overall impact of the biofuel industry under the draft scenario on the contribution of the agricultural sector
to the economy (gross value added) is expected to be modest. The percentage change from the baseline
remains fairly constant until 2011 and increases thereafter on average by 1.6% until 2015.

2
 Executive summary
• Approximately 5000 additional jobs will be generated in the primary agricultural sector.

• Bioethanol from maize will account for most of the local production. Bioethanol from sugar only plays a small
role later on as sugarcane prices become more competitive compared to maize. Approximately 200 million litres
of bioethanol will be produced locally and 80% of domestic consumption will have to be imported.

• The production of biodiesel from soybeans and sunflower is marginal and only some on-farm production for
own use will take place. The majority (90%) of the biodiesel will be imported.

• The draft strategy presents a set of policies that are not optimal to reach the targets with respect to renewable
energy, growth in the agricultural sector, job creation and uplifting of the rural economy.

Scenario 2: Alternative scenario

• Most of the bioethanol is produced locally to make up the E8 blend and less than 10% of local requirements
are imported. The local production of biodiesel accounts for approximately 45% of local requirements.

• Under the alternative scenario the biofuel industry boost the agricultural sector’s contribution to the economy
(gross value added) by 4.3%.

• More than 10 000 new jobs are generated in the primary agricultural industry.

• The annual area planted under field crops increases by 4.65% (229 000 ha).

• The average increases in feed costs range from approximately 10% in the cattle feed market to approximately
6.5% in the pork and chicken feed market. This negatively impacts on the production of meats and dairy
products in SA. However, due to the inelastic demand, the percentage increase in price is larger than the
percentage decrease in the quantity produced and, therefore, the real gross value of animal production
increases.

• Approximately 870 million litres of bioethanol are produced locally, with 440 million litres coming from maize
and 430 million litres coming from sugar.

• Biodiesel production from soybeans accounts for 60 million litres of local production, while biodiesel from
sunflowers accounts for 15 million litres of local production.

• Under the alternative scenario, SA is competitive in the production of bioethanol from maize and sugar since
both commodities are frequently trading at export parity levels. The production of biodiesel from vegetable oil is
less favourable due to the high value of the vegetable in the human market and the commodity markets
frequently trading at import parity levels. Only major improvements in the efficiency of oilseed production in SA
or a sharp decrease in vegetable oil prices will influence the economic feasibility of biodiesel production in SA.

Recommendations
• Without any government policies, it is highly unlikely that any production of biofuels can be economically viable
and, therefore, government needs an accurate estimate of the costs of establishing a successful biofuel industry
in South Africa and weigh that up against the benefits.

3
 Executive summary
• No country in the world uses a staple to produce biofuels. Therefore, policy alternatives have to be carefully
considered to understand the impact on food security. With approximately 1 million tons of maize required for the
production of ethanol under the alternative scenario, the projected increase in maize prices is moderate, but the
probability of the maize market trading at import parity levels, if weather conditions are below normal, is very high,
thus putting pressure on food security to be maintained.

• The biofuel industry around the world is highly subsidized and protected from competition. The least cost and
most efficient producer of bioethanol, Brazil, also safeguards the industry by applying a 20% import levy and
maintaining a tax differential. Taking into consideration that Brazil has undergone a learning curve in the successful
establishment of a biofuel industry over the past three decades, it is apparent that the South African biofuel industry
will struggle to remain competitive without due trade protection and support.

• It appears as if trade policies are one of the critical drivers in determining the successful establishment of the
biofuel industry in SA. However, there exists a disjoint between trade policies and domestic policies. Following the
process of aggressive market reform, South African agriculture finds itself in a position where only a few
mechanisms are left through which the industry can be supported to achieve sector-level development goals.
Government has only two options of intervention and support; either through trade policies or domestic support
mechanisms.

• The positive effects of an established biofuel industry are apparent in the modelling results of the alternative
scenario. Apart from boosting agriculture’s contribution to GDP, the positive upstream and downstream effects also
need to be taken into consideration. Future research should focus on the economy-wide effects of a biofuel industry
and estimate the positive impact of rural economies.

• The cost of information in the biofuel industry is very high because of the risk and uncertainty inherent in the
industry. It is an infant industry and more time is needed to analyse various policy alternatives and to get a sense of
the tradeoffs that accompany different policy packages. Some role players are already paying the price of
uninformed decision making. The government needs to allow for more time to research the initiative and for policy
makers to find the optimal policy by means of the harmonization of various policy targets and developmental goals.

• The following factors that will definitely influence the nature of the ultimate SA biofuel industry, are not taken into
consideration in this study: the locations and size of biofuel plants, the improvement in farming practices to reduce
the costs of production, the drastic increase in the yield of commercial field crops, climate change, the development
of alternative crops, improved efficiency of the production of biofuels and the development of an alternative market
for by-products.

4
 Background and Assumptions
In the draft strategy on the biofuels industry recommendations are made regarding the mandatory blending
levels, the prices at which biofuels should be sold, the structure of tariffs, the depreciation allowance and the
possibility of implementing an equalisation fund.

The draft strategy proposes a number of policy options which the government can follow and describes a
number of goals which the government has set out to reach in a specified time period. The government has set
out to achieve its goals of producing 10 000 GWh of renewable energy by the year 2013. The draft strategy
highlights the biofuels initiative as being one of the major drivers to achieving the 2013 target. A 4.5% blend, for
example, will translate into 75% of the 10 000 GWh target being reached.

The strategy proposes that “incentives and regulations be developed that enable biofuels producers to supply
the refineries, which then blend up to E10 and B5 at market penetration levels.” The task team that wrote the
draft strategy does however recommend that an E8 and a B2 blend should rather be implemented for bioethanol
and biodiesel respectively. The team also recommended that this implementation be done on a regional basis
such that the targets are reached in 5 years’ time.

The Basic Fuel Price, also referred to as the BFP, is the price it would cost a South African importer of petrol to
buy petrol from an international refinery, transport that petrol from that refinery, insure the petrol against losses
at sea and land the product on South African shores. The biofuels strategy proposes that bioethanol, or fuel
ethanol be sold at 95% and biodiesel is to be sold at 100% of the basic fuel price. The reason why bioethanol be
sold at 95% of the BFP is that the 5% margin, which oil depots retain, helps to cover ethanol handling costs. The
same principle does not apply to the biodiesel price since biodiesel is proposed to sell at 100% of the BFP.
However, the ultimate price discovery of the biofuel prices can largely depend on the location of the plants. Plant
locations have not been factored into the model. A possible formulation for the basic fuel price can include
elements of the basic fuel price, tax exemption and location differentials. Thus, a typical calculation of the biofuel
price can be as follows: BFP plus location differentials plus tax exemption less transport costs to the depots. The
same principle can be applied for the costs of feedstock. Depending on the location of the plant, feedstock
prices can vary considerably.

In the draft strategy, import tariffs on energy crops are not advised as it is argued by the national biofuels task
team that tariffs normally degenerate into artificially shaped economic structures that may spill over to other
agricultural sub-sectors. The main argument is that such tariffs may discriminate against biofuel producers
compared to oil refiners, as crude oil, for example, carries no import tariff and produces a directly sustainable
product. The team further recommended that fuel tax reductions and hedge mechanisms should only be applied
to biofuels produced locally from South African feedstock. There is very little mention of import tariffs being
applied directly to biofuels. Specific sections of the task team document seem to suggest that no tariffs will be
applied to any biofuel product as this creates an unfair advantage in relation to the oil industry.

Currently a fuel levy tax exemption of 40% for biodiesel is regulatory. It is proposed that bioethanol receives 70%
of the 40% of the fuel levy tax exemption as it only contains 70% of the energy of biodiesel. The draft strategy
proposes that the fuel levy tax exemption of biodiesel be increased to 50%. It is mentioned that this 50%
appears justified based on various job related criteria. The draft makes provision that this fuel levy tax exemption
be raised to 75% if production needs to be stimulated.

Over the past year, BFAP has developed the capacity to model the biofuels industry in a system of equations
which interacts directly with the crops and livestock industries. The new BFAP sector model now has the ability
to simulate the impact of various policy scenarios and macro-economic factors on the potential biofuel industry
in South Africa.

5
 Background and Assumptions
In order to compare various scenarios and policy options a “reference scenario” needs to be simulated that can
serve as a benchmark or the most likely outcome if no major shocks occur. This reference scenario is called a
baseline. A baseline is a simulation of the sector model under agreed policy and certain assumptions with respect
to macro-economics, the weather and technological change.

The baseline projections, which the draft scenario and the alternative scenario are compared to in this policy brief,
are grounded on a series of assumptions about the general economy, agricultural policies, weather and
technological change. Macro-economic assumptions are based on forecasts prepared by a number of institutions,
such as Global Insight, the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri,
ABSA bank and the Actuarial Society of South Africa (for projections on population). Tables 1 and 2 present the
baseline projections for key economic indicators and world commodity prices in the model.

Table 1: Economic indicators – Baseline projections.

Item 2007 2008 2009 2010 2011 2012
Crude Oil Persian Gulf: fob $/barrel 63.22 60.79 57.01 53.44 51.41 50.33
Population Millions 47.68 47.65 47.54 47.39 47.22 47.04
Exchange Rate SA c/US$ 715.96 754.65 785.38 811.13 828.40 844.66
Real per capita GDP R/capita 17600.81 18390.69 19233.4 20120.7 21042.24 22017.87
CPIF (Inflation) Index (‘00) 217.55 227.28 237.37 247.18 257.23 267.53
Source: Global Insight, FAPRI, Actuarial Society, ABSA, as quoted in the 2006 BFAP baseline.
Table 2: World prices – Baseline projections.
Item 2007 2008 2009 2010 2011 2012
Yellow maize, US No.2, fob,
US$/t
Gulf 168.00 143.01 145.66 145.87 146.33 145.44
Wheat US No2 HRW fob Gulf US$/t 188.82 187.64 191.03 192.71 195.00 196.68
Sorghum, US No.2, fob, Gulf US$/t 177.55 177.66 180.93 182.09 183.61 183.74
Sunflower Seed, EU CIF
US$/t
Lower Rhine 338.24 343.53 348.44 343.27 335.93 331.01
Sunflower cake (pell 37/38%) ,
US$/t
Arg CIF Rott 122.32 120.86 120.28 119.49 118.89 117.51
Sunflower oil, EU FOB NW
US$/t
Europe 726.01 729.93 732.82 737.66 743.40 747.45
Soya Beans seed: Arg. CIF
US$/t
Rott 328.30 343.84 343.82 340.34 335.77 333.66
Soya Bean Cake(pell
US$/t
44/45%): Arg CIF Rott 245.49 249.36 244.55 236.84 231.76 228.98
Soya Bean Oil: Arg. FOB US$/t 648.43 684.69 698.42 712.77 714.35 716.18
Source: FAPRI, 2006, BFAP

The figures above have been sourced from the mentioned organisations. Each set of figures is based on a number
of assumptions which the various institutions have published. BFAP has made some adjustments to the 2007 world
prices of selected commodities based on certain assumptions.

Apart from the series of assumptions necessary to generate the baseline projections, a number of assumptions are
made on the production processes of biofuels. These assumptions are based on the inputs by industry. The
technical factors with respect to extraction rates of ethanol, vegetable oil and by-products have been benchmarked
by using data and norms received from industry role players and international experience. An ethanol from sugar
cane extraction rate of 76 litres, an ethanol from maize extraction rate of 402 litres per ton, a biodiesel from
soybean extraction rate of 194 litres and a biodiesel from sunflower seed extraction rate of 398 litres are applied in
the model. DDGs from maize has an extraction rate of 304 kilograms per ton, soy cake an extraction rate of 800
kilograms per ton of soybeans and sunflower cake, a rate of 420 kilograms per ton of sunflower seed. An average
quality of DDGs is assumed for this model.

The BFAP model only takes commercial agricultural commodities into account but it is acknowledged that there are
other commodities that could also contribute to the production of biofuels. Apart from the technical factors, a set of
prices and costs are required to calculate plant profits.
6
 Background and Assumptions
Table 3 presents an example of the calculation of possible plant profits in 2006. These plant profits change over
time as projected prices and costs change according to the baseline projections. Under baseline simulations
ethanol is selling at 95% of the basic fuel price and biodiesel selling at 100% of the basic fuel price. This is,
however, not the case for the scenario analyses where factors of demand, supply and world prices determine the
local biofuel prices.

Table 3: Plant profit calculations, 2006 average prices.

Cost of Income from by- Income from sales Total costs of Profit
Commodity* feedstock product (R/ton) (c/litre) production (c/litre)
(R/ton) (c/litre)
Sugar cane (Eth) 193 - 312.91 165.59 -89.87
Yellow maize (Eth) 1310 1092 312.91 171.54 -101.80
Soybeans (BIOD) 1959 2076 336.45 212.67 -29.87
Sunflowers (BIOD) 2338 1505 336.45 170.47 -262.27
* Abbreviations of bio fuels: Eth – Ethanol; and BIOD – Biodiesel.

Due to the sensitive nature of the costs of production, only the total costs of production are provided in cents per
litre, which include variable costs and capital costs. These costs were collected from technology providers,
financial institutions and refineries. Another important assumption is that these costs are representative for an
“average sized plant” and the researchers acknowledge that the costs structures for different sized plants will differ
from the values that are presented table 3.

From table 3 it becomes clear that under 2006-market conditions, no commercial crop would have yielded a
positive plant profit producing biofuels. The main reason for this being the unfavourable ratio of feedstock prices
relative to fuel prices. Important to note is that plant profits are dynamically simulated over the baseline projection
period. Thus, the projected loss of biofuel plants is even higher under the current high levels of commodity prices. It
is projected that with the current policies in place, biofuel production plants will consistently make a loss over the
baseline projection period. It is crucial to note that the production of vegetable oil for the human market is and
remains profitable under the baseline projection period. This is due to very high prices of vegetable oil in the human
market. Thus, incentives in the biodiesel industry will have to be large enough to divert vegetable oil from the
human market to the biofuels market. The figure below, illustrates the dynamic interaction between the fuel, field
crops and livestock industry in the model. The figure also indicates at which levels the various tariffs and proposed
incentives under the draft strategy and the alternative scenario will influence the local industries.

Alternative
Draft
Scenario:
Scenario: Yellow maize: Variable levy
35% tariff
NO White maize: Variable levy
on Ethanol
Import Draft Scenario: Wheat: 2%
and
tariffs! E8 and B2 Sunflower oil: 10%
Biodiesel Alternative Sunflower seed: 9.4%
Scenario: Sunflower cake: 6.6%
E 8 and B 2 Soybean oil: 10%
Biofuel Soybeans: 8%
imports / Soybean cake: 6.6%
exports
SA GRAIN, LIVESTOCK
and BIOFUELS
Domestic SECTOR MODEL
biofuel
production
Domestic DDGS /
biofuel Mandatory
blending oilcake
use consumption
Custom &
Excise Oil price
Road accident BIOFUELS CROPS LIVESTOCK
fund

Fuel tax:
116 c/l on Fuel tax
7 Feb 2007 Taxes
for Petrol DDGS /
and 100 oilcake
c/l for production
Diesel. Draft Scenario: 75% fuel levy
reduction for biodiesel and 70%
thereof for ethanol, i.o.w 52.3%.
Alternative Scenario: 40% fuel levy
tax reduction ~ 60% of the fuel levy
still applies.

7
 Acronyms
Acronyms
BFAP – Bureau for Food and Agricultural Policy
FAPRI – Food and Agricultural Policy Research Institute
BFP – Basic Fuel Price
E8 – 8% bioethanol blend in petrol
B2 – 2% biodiesel blend in diesel
Eth – Ethanol
BIOD – Biodiesel
Sce- Scenario
Bsl – Baseline

8
 Draft strategy: Scenario
The following section presents a scenario on what the possible impact of the current draft strategy could be given
the policy options as set out in the document. The "background environment" in which this analysis is done is
presented by means of a scenario, after which the simulated results are presented on pages 5 to 8. The scenario
reads as follows:

The government is set on achieving its 2013 goals on renewable energy. Mandatory blending incentives of 8%
bioethanol and 2% biodiesel have been imposed and implementation of these levels will be phased in gradually
from 2009 onwards. The government understands that the infant ethanol industry will need some time to get
production capacity established and therefore it announces the blending levels at an early stage but only makes it
mandatory later on so to avoid too many foreign firms taking up most of the market share before the South African
industry is established.

The government does not impose import tariffs on energy crops which are to be used for the production of biofuels.
Import tariffs are also not imposed on direct imports of both refined bioethanol and biodiesel.

Government decides to increase the fuel levy tax exemption to 50% for biodiesel and the exemption of bioethanol
to 70% of the 50% of biodiesel. This exemption is increased to 75% in 2010 to ensure that the 2013 renewable
energy targets will be met.

9
 Draft strategy: Total agriculture
Biofuel Composition
Biofuel balance, 2012-2015 averages
It is projected that with a E8 and B2 mandatory 1000
blending policy, approximately 950 million litres 900
of bioethanol and 180 million litres of biodiesel 800
700
will be required to meet the local blending

million litres
600
requirements for the period 2012 - 2015. Given 500
the draft scenario assumptions, it seems like 400
300
bioethanol from maize will account for most of 200
the local production. Bioethanol from sugar only 100
0
plays a small role later on as sugarcane prices
become more competitive compared to maize.

ts

ts
ar
rts
b

fl

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s
rt
oy

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en
ug
ai
po

po
-s

-s

-m
Very small quantities of biodiesel are produced

m
m

-s
im

im
ire

ire
el

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l

no
el

l
no
es

es

qu

qu
no
from both sunflowers and soybeans. 80% of

es

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di

ha
di

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re
ha
di
io

io

Et
Et
2

E8
Et
io
B

B
bioethanol and 90% of biodiesel will be

B
imported.
Real Gross Value of Field Crops
Real Gross Value of Fieldcrops
120
The proposed draft strategy will augment the
100
real gross value of field crops modestly. It
80
increases the value by 2.88 percent above the
Index

60
baseline between 2011-2015.
40
20
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Baseline Scenario

Real Gross Value of Animals Real Gross Value of Animal Production

The impact of the draft strategy on real gross 160
140
value of animal production is relatively small. 120
Production in the livestock sector decreases due 100
Index

to higher feed costs. However, the percentage 80

60
increase in prices is larger than the percentage
40
decrease in production due to inelastic demand. 20
Thus, the real gross value increases by 0.64 0
percent above the baseline during 2011 to 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

2015. Baseline Scenario

Real Gross Value Added Real Gross Value Added of Agricultural Sector
The overall impact of the biofuel industry on the 140
contribution of the agricultural sector to the 120
economy (gross value added) under the draft 100
strategy is expected to be modest. It increases 80
Index

the value by 1.36% above the baseline from 60

2011-2015. 40
20
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Baseline Scenario

10
 Draft strategy: Ethanol
Maize prices White and yellow maize producer prices
Given the policy proposals made in the draft 1700
strategy it can be expected that the maize price 1500
is likely to increase due to the increased 1300

R/ton
demand for maize. Taking 2012 to 2015 1100
averages, the white maize price is expected to 900
increase by 4.19% and the yellow maize price 700
by 6.67%. 500
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

White maize prod price (sce) Yellow maize prod price (sce)

White maize prod price (bsl) Yellow maize prod price (bsl)

DDGS
The DDGS prices are expected to increase with Yellow maize, DDGS prices and DDGS production
the yellow maize price, given the feed ration 1800 800

composition and nutritional value of DDGS and 1600 700

1400
its potential use in the different livestock 600
1200

1000 tons
industries. DDGS production will start up 500
R/ton

1000
relatively slowly and then reach a level of 800
400
approximately 150 000 tons. 600
300

400 200

200 100
0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Yellow maize prod price (sce) R/ton DDG price (sce) R/ton
DDG prod (sce) 1000 t

Sugar Sugar exports and average cane prices

Only a very small quantity of ethanol is
1300 300
produced from sugar. Ethanol production from 250
1000 tons

sugar will be sourced from sugar that is being 1100

200
exported. The sugarcane production area is
R/ton
900 150
limited in SA and the area under production will 700
100
increase marginally. The local sugar cane price 50
500 0
in the scenario remains relatively stable
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
compared to the baseline price.
Sugar exports (sce) 1000 tons Sugar exports (bsl) 1000 tons

Sugar cane avg pr (sce) R/ton Sugar cane avg pr (bsl) R/ton

Plant Profits: 2012 - 2015

Although there are some years where the Plant profits, 2012-2015 averages
production of ethanol from sugar will be
profitable, the average plant profit for the period 40
2012-2015 is negative. The average plant profit 30
for ethanol production from maize is projected to
20
c/litre

be 30c/litre. Positive plant profits are induced by

the higher ethanol prices that are simulatd in the 10
model. Bioethanol prices rise because 0
mandatory blending requirements shift the -10
demand for ethanol. -20
Ethanol-sugar Ethanol-maize

11
 Draft strategy: Biodiesel
Soybean Seed Soybean production and net imports
Soybean seed production is not stimulated 500 200
significantly by the incentives in the draft 450
400 150
strategy, hence the increase in the area 350
harvested is insignificant. Soybean imports are 300 100

1000 tons

1000 tons
projected to grow as the domestic demand for 250
200 50
soybeans in the feed market grows. 150
100 0
50
0 -50
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Soybean production (bsl) 1000 tons Soybean production (sce) 1000 tons
Soybean net imports (bsl) 1000 tons Soybean net imports (sce) 1000 tons

Soybean cake Soycake prices and production

250 700
Overtime there is a slight decrease in the 600

Imports (1000 tons)

200
Prod (1000 tons)

imports of soybean cake due to the marginal 500

increase in the local production of soybean 150 400
cakes. 100 300
200
50
100
0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Soybean Cake Production (bsl) Soybean Cake Production (sce)

Soybean Cake Imports (bsl) Soybean Cake Imports (sce)

Sunflower cake Sunflower cake production and net imports

Under the baseline assumptions, sunflower 400
cake production increases by 12% from 2006 to 300
2012. As a result sunoil imports decline slightly
1000 tons

over time. The production of biodiesel from 200

sunflowers is marginal and has a very some 100
effect on the sunflower industry. 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sunflower Cake Production (scenario) Sunflower Oil Net Imports

Plant profit Plant profits, 2012-2015 averages

Despite higher biodiesel prices due to
0
mandatory blending requirements that shift the
local demand for biodiesel, production of -50
biodiesel is not commercially viable and it is Biodiesel-soybeans Biodiesel - sunflower
projected that only some on-farm production for -100
c/litre

own use will take place.

-150

-200

-250

12
 Draft Strategy: Farm Labour
The introduction of a biofuels industry will effect prices and profitability within the markets for grains and livestock.
As a result of these changes, production patterns, especially of feedstocks used for the production of biofuels, are
likely to change, which ultimately has consequences for employment patterns. The table 4 presents the possible
impacts on employment given the simulated changes in production as a result of the policies as assumed in the
draft strategy.

The proposed changes in the labour market for the various grains are based on two coefficients. The first
coefficient, namely 0,1 is taken from the draft biofuels strategy document. The 0,1 implies that for every hectare
expansion in grain production 0,1 permament employment opportunities are created. The second coefficient was
taken from the literature (Kirsten & Vink, 2001) on employment in agriculture. The coefficient (0,03) is much lower
than that used in the draft strategy. Hence, the idea of using both coefficients is to give an indication of the possible
upper and lower limit in terms of creation or destruction of employment opportunities in the various grain industries
as a result of the policies being followed. In using these coefficients, no assumption is made whatsoever on whether
feedstocks for biofuel plants will be sourced from emerging farmers or commercial farmers or both, hence just a
simple calculation is done to give some idea on potential employment impacts. The feedstock procurement models
that will eventually be used by the biofuel industry, are likely to change the employment impacts significantly from
what is presented below.

It must be noted that these potential employment impacts are only calculated at farm level, and therefore exclude
direct employment opportunities at plant level, other levels of the economy, as well is indirect employment
opportunities.

Table 4: Potential Employment impacts of draft biofuel strategy

Industry Coeffient Change in Employment opportunities
White maize 0.03 -789
Yellow maize 0.03 2812
Wheat 0.03 -299
Barley 0.03 -4
Canola 0.03 -1
Sorghum 0.03 -7
Soybeans 0.03 65
Sunflower 0.03 -237
Sugar 0.08 5
Potential Net effect 1543

White maize 0.1 -2656

Yellow maize 0.1 9459
Wheat 0.1 -1007
Barley 0.1 -14
Canola 0.1 -3
Sorghum 0.1 -24
Soybeans 0.1 217
Sunflower 0.1 -797
Sugar 0.1 6
Potential Net effect 5181

Attempting to understand the employment effect, one needs to look at the potential net effect, since employment
opportunities are not necessarily "destroyed" in practise, since labour is used to produce alternative products that
are more profitable on the farm due to its uptake in the biofuels market.

13
 Draft Strategy: Conclusion
The simulation results, presented in pages 8 to 11, indicate that the likely impacts of a potential biofuel industry,
established under the policies and incentives of the draft stratgy are likely to be small in terms of production,
prices, contribution to economic growth, and employment. Only very little biofuel production will take place in SA
and the majority of biofuel will be imported. This will have a negative impact on the balance of payments. 5000
additional employment opportunities are created on primary (farm) level and the agriculture' s contribution to the
economy increases on average by 1.6% above baseline projections.

To conclude, the draft strategy presents a set of policies that are not optimal to reach the targets with respect to
renewable energy, growth in the agricultural sector, job creation and uplifting of the rural economy.The question,
therefore, arises of what is required to make the production of biofuels in SA economically viable? In the following
section an alternative scenario is presented.

14
 Alternative scenario
This section illustrates the positive impacts that a successful biofuel industry could have on the agricultural sectors
if the necessary measures of support and protection are put in place. In order to illustrate this point, the approach
used in this document is to scetch an alternative scenario where the policies differ from the ones proposed in the
draft strategy document. The purpose of this excercise is to inform policymakers what combination of policies and
suport is likely to support the viability of biofuels production in SA. The scenario reads as follows:

In the government’s paper on renewable energy, the government has set standards of achieving 10 000 GWh of
renewable energy by 2013. The aim is to have biofuels account for 40% of this quota. The government implements
an E8, 8% bioethanol blend, and a B2, 2% biodiesel blend, mandatory blending policy in 2008. It is keen on
achieving its 2013 renewable energy goals and expects that its policy on renewable energy will uplift the emerging
and small scale farmers, if managed correctly. The mandatory blending policies for bioethanol and biodiesel differ
considerably in that the quantities of petrol and diesel consumed in South Africa are so different. In 2005 petrol
consumption in South Africa amounted to approximately 11.1 billion litres, while diesel consumption in 2005
amounted to approxminately 8.1 billion litres (SAPIA, 2006). The bioethanol policy is gradually phased in, changing
with 2% blending every year until a 8% blend is achieved. The biodiesel mandate is also systematically phased in
from 2008 onwards with a 1% blending mandate at first and this is then upgraded to a 2% mandate from 2010
onwards. The government is very conscious as to what is happening within the global biofuel industry and
understands that it is nearly impossible for such an infant industry to survive without any government support.

Currently a fuel levy tax exemption of 40% for biodiesel is regulatory. It is proposed that bioethanol receives 70% of
the 40% of the fuel levy tax exemption as it only contains 70% of the energy of biodiesel. The draft strategy
proposes that this fuel levy tax exemption of biodiesel be increased to 50%. It is mentioned that this 50% appears
justified based on various job related criteria. The draft makes provision that this fuel levy tax exemption be raised
to 75% if production needs to be stimulated.

On the biodiesel side, supply of feedstock seems to be the biggest concern for the South African biofuels industry.
The past 5 years’ averages indicate that South Africa has produced 686 thousand tons of sunflower seed and 245
thousand tons of soybeans, but consumed an average of 717 thousand tons of sunflower seed and 258 thousand
tons of soybeans. This means that South Africa is on average a net importer of both of these commodities. SA is
also a net imported of soybean cake with 80% - 90% of soybean cake being imported. World soybean prices could
also be expected to follow an upward trend as the European Union and countries like the US start to increase their
biodiesel capacity, which in turn goes hand in hand with a reduction in exports and a potential supply squeeze on
the international market.

On the bioethanol side, ethanol prices rise as the demand has to be satisfied and there are just not enough plants
producing ethanol. Internationally, the developed countries are moving towards a biofuel blend in their local
transport fuels. This increase in the world demand for ethanol leads to the steady increase in the price of ethanol on
the world market and as a result of this an increase in the South African ethanol import parity price. On top of the
increase in the import parity prices, the financial survivability of the local industry is further supported by the
introduction of import tariffs (35% on bioethanol and 35% on biodiesel) in 2010. The local industry only starts to
make a real contribution to the mandatory requirements of ethanol once the import tariffs are in place. The local
biodiesel industry struggles to remain competitive compared to the local vegetable oil market. Biodiesel will only be
produced from vegetable oil where full tax concessions are applicable (like on-farm use). The bulk volume of
vegetable oil produced locally is still consumed in the human market.

15
 Alternative scenario: Total agriculture
Biofuel Composition
Bio fue l b a la nce , 2012 - 2015 a ve ra g e s
In the alternative scenario, maize and sugar
1000
supply almost the whole market with equal
amounts of bioethanol. On the biodiesel side, 800

soyoil produces the largest quantity,

million litres
600
approximately 60 million liters, while sunflower
400
oil produces only 17 million liters. Local
production is induced by positive plant profits. 200

Real Gross Value of Field Crops

Real Gross Value of Field Crops
120
The alternative scenario expands the real gross
100
value of field crops by 9 percent above the
80
baseline from 2011 to 2015; a comparable
Index

60
difference to the 2.88% increment in the case of
40
the draft strategy.
20
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Baseline Scenario

Real Gross Value of Animals Real Gross Value of Animal Production

The impact of the alternative scenario on the 200
livestock industry is also larger than the impact 150
under the draft strategy. This scenario
Index

augments the real gross value of animal 100

production by 2.88 percent above the baseline 50

between 2011-2015. This is caused by a larger
0
increase in the prices and a smaller decrease in
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
production due to inelastic demand.
Baseline Scenario

Real Gross Value Added of Agricultural Sector

Real Gross Value Added 140
Under the alternative scenario, the biofuel 120
industry will boost the real gross value added of 100
80
Index

the agricultural sector by 4.3 percent above the

60
baseline from 2011 to 2015. 40
20
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Baseline Scenario

16
 Alternative scenario: Ethanol
Maize prices White and yellow maize producer prices
Due to the higher demand for yellow maize, the 1800
price of yellow maize is above that of white, 1600
1400
especially after the import tariff on biofuels is
1200
applied in 2011. This induces an increase in the

R/ton
1000
area planted under yellow maize and a 800
600
decrease in the area planted to white maize. On
400
average yellow maize prices increase by 200
15.57% and white maize prices increase by 0
8.71% above baseline projections. Long-run

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015
equilibrium in reached in 2014 and 2015 when
white maize and yellow maize prices are trading White maize prod price (sce) Yellow maize prod price (sce)

at comparable levels. White maize prod price (bsl) Yellow maize prod price (bsl)

DDGS
DDGS prices, Yellow maize prices and DDGS production
The total production of DDGS is projected to
1800 700
reach approximately 330 000 tons. The higher
1600
levels of production will cause DDGS prices to 600
1400
trade at lower levels than the yellow maize 1200
500
R/ton

prices, as the critical up-take level in the

1000 ton
1000 400
feedmarket is reached. This critical level of 800 300
uptake is determined by an optimization model 600
200
which shows how prices of DDGS will have to 400
100
decrease to ensure uptake of the product in 200
0 0
feed rations.
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Yellow maize producer price (sce) DDG price (sce)

DDG production (sce)

Sugar
Sugar exports and average cane prices
As in the previous scenario, exported sugar is
1400 300
diverted to ethanol production. Interestingly
1200
enough this only occurs once the import tariff is 250
1000
1000 tons

implemented in 2011. The sudden diversion 200

R/ton
800
from exports forces the local sugar cane price 150
600
up and it increases on average by 4.9%. 100
400
200 50

0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sugar exports (sce) 1000 tons Sugar exports (bsl) 1000 tons

Sugar cane avg pr (sce) R/ton Sugar cane avg pr (bsl) R/ton

Ethanol vs Petrol prices Ethanol, Petrol plant and retail prices

The bioethanol prices flow in tandem to the 1000

petrol price until a mandatory blending policy is 800

SA cents/ litre

enforced. The inclusion of import tariffs gives 600

the prices another boost and from then onwards 400

biofuels trade at a premium to the petrol price. 200

0
The higher bioethanol prices bring on positive
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
plant profits.
Ethanol price, plant SA cents/l Ethanol price, retail SA cents/l

Petrol price - plant (bfp) SA cents/l Petrol, retail price SA cents/l

17
 Alternative scenario: Biodiesel
Soybean seed Soybean production and net imports
In the alternative scenario soybean production 500 350
increases slightly due to the more protective 450 300
tariffs implemented on biofuel imports. Soybean 400
250

Imports (1000 tons)

Prod (1000 tons)
350
imports also increase from the level of the 300 200
baseline. These imports even out at around 300 250 150
000 tons compared to the 170 000 tons which 200 100
150
would have entered the country had biodiesel 100
50

policy incentives not been taken into 50 0

0 -50
consideration.
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Soybean production (bsl) 1000 tons Soybean production (sce) 1000 tons
Soybean net imports (bsl) 1000 tons Soybean net imports (sce) 1000 tons

Soybean cake Soybean production and imports

Local soybean cake production increases 350 700
dramatically from the baseline as the imported 300 600
soybeans are crushed and biodiesel, soybean 250 500

1000 tons
1000 tons

cake and oil are the by-products. Soybean cake 200 400
150 300
imports also decrease as domestic production
100 200
increases.
50 100
0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Soybean Cake Production (bsl) Soybean Cake Production (sce)
Soybean Cake Imports (bsl) Soybean Cake Imports (sce)

Oilcake production and net imports Sunflower cake production and net imports
Sunflower oil imports increase as very little
sunflower oil is used for biodiesel production. 400
350
The bulk of the sunflower oil is still used for
300
consumption in the food industry.
1000 tons

250
200
150
100
50
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sunflower Cake Production (sce) Sunflower Oil Net Imp

Biodiesel versus Diesel prices

As there is a relative shortage of biodiesel
feedstock in SA, one can expect the price of Biodiesel prices vs Diesel price (retail and plant)
biodiesel to trade well above the wholesale price 1200
1000
of fossil diesel. If government were to fix the
SA cents / litre

800
biodiesel price to the fossil diesel price this
600
would create a disequilibrium associated with 400
welfare losses which would have to be born by 200
either producers or consumers. Positive plant 0
profits for biodiesel production from soybeans 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

are projected due to the high biodiesel prices. Biodiesel price, plant (sce) Biodiesel price, retail (sce)
Diesel price - plant (bfp) (sce) Diesel, retail price (sce)

18
 Alternative scenario: Farm Labour
The potential employment impacts of the alternative scenario is presented in Table 5. The same coeffients were
used as in Table 5. Again it must be noted that these potential employment impacts are only calculated at farm
level, and therefore exclude direct employment opportunities at plant level, other levels of the economy, as well as
indirect employment opportunities.

Table 5: Potential Employment Impacts under Alternative Scenario

Industry Coeffient Change in Employment opportunities
White maize 0.03 -1574
Yellow maize 0.03 5585
Wheat 0.03 -606
Barley 0.03 -8
Canola 0.03 -2
Sorghum 0.03 9
Soybeans 0.03 146
Sunflower 0.03 -446
Sugar 0.08 256
Potential Net effect 3360

White maize 0.1 -5295

Yellow maize 0.1 18789
Wheat 0.1 -2040
Barley 0.1 -26
Canola 0.1 -7
Sorghum 0.1 31
Soybeans 0.1 490
Sunflower 0.1 -1501
Sugar 0.1 320
Potential Net effect 10761

The potential employment impacts of the alternative scenario differ significantly from the results of the draft
strategic document' s simulation results. The reason for the significant increase in employment opportunities is an
increase in the area of field crops production. The increase in area usage is due to higher profitability as a result of
higher feedstock prices received by the farmers. Feedstock prices are higher because of higher demand for
feedstocks to be used for production of biofuels. The downside in terms of employment opportunities is the
"destruction" of employment opportunities in some of the grain industries as a result of substitution of products
being produced on the farm. However, one can argue that since substitution takes place on the farm, the
employment opportunities are not destroyed in practice since labour is just used to produce the alternative product
on the farm. Therefore, the most basic figure to look at when attempting to understand the employment effect is the
potential net effect.

19
 Alternative scenario: Aggregate agriculture
Average plant profits
Plant profit: 2012-2015 averages
Under the alternative scenario, plant profits
increase to economically viable levels for
60
bioethanol from maize, bioethanol from sugar
and biodiesel from soybeans. Initial plant profits 40

cents / litre
for biodiesel from soybeans are larger, but as 20
the prices of soybeans increase due to 0
increased demand and the prices of soybean
-20
cake decrease due to an increase in local
production, plant profits dwindle over time. -40 Ethanol-sugar Ethanol-maize Biodiesel- Biodiesel -
-60 soybeans sunflower

-80

Total land use in SA Total area under production

On average, the total area planted to 5400
commercial field crops that have been included 5200
in the model, increases by 4.65% under the
Thousand ha

5000
alternative scenario compared to 2.89% under
4800
the draft scenario.
4600
4400
4200
4000
2010 2011 2012 2013 2014 2015

Baseline Scenario

Costs of feed rations

Percentage rise in feed costs
The average increases in feed costs range from
approximately 10% in the cattle feed market to 12.00
approximately 6.5% in the pork and chicken 10.00
feed market. This negatively impacts on the 8.00
production of meats and dairy products in SA.
6.00
%

4.00
2.00
0.00
Cattle feed Pork feed cost Chicken feed Dairy feed
cost cost costs

20
 Conclusion: Alternative Scenario
The combination of policies and support measures that are used in the alternative scenario are based on
international experiences and basic local requirements to make the industry feasible. Under this combination of
policies and support measures most of the bioethanol is produced locally to make up the E8 blend with less than
10% of local requirements being imported. The local production of biodiesel accounts for approximately 45% of
local requirements. Under the alternative scenario, the biofuel industry expands the real gross value of field crops
by 9 percent above the baseline from 2011 to 2015 and boost the real gross value added of the agricultural sector
by 4.3 percent above the baseline from 2011 to 2015. The positive impact of a successfull biofuel industry can also
be related to more than 10 000 new jobs on farm-level.

The alternative scenario represents only one possible combination of policies that can be implemented to support
the infant industry. There are many more options and support measures that can be looked at. However, following
the process of aggressive market reform, South African agriculture finds itself in a position where only a few
mechanisms are left through which the industry can be supported to achieve sector-level development goals.The
policy gap that exists to support the local biofuel industry needs to be established.

Government can support the local industry on two levels, namely by means of trade policies and domestic policies.
Domestic support can be justified under article 6.2 of the WTO regulations. Trade policies can also be justified
when the import tariffs on bioethanol that are imposed by major bioethanol producers are taken into consideration
(table 6). The 35% import tariff on bioethanol and biodiesel was discovered by testing the model to find a break-
even point for the production of biofuels. A 35% tariff on bioethanol implies that plants make a small profit, and a
35% tariff on biodiesel implies that biodiesel plants just break even.

Table 6: Import tariffs of selected countries on ethanol.

Country Ethanol Import Tariff
USA 2.5% + 54 cents per gallon (approx. 45%)
Brazil 20%
Argentina 20%
Thailand 30%
India 186%
Canada 4.92 cents per liter = 19 cents per gallon
European Union 19.2 cents per liter = 87 cents per gallon
China 30%
Source: RFA (2006), Latner et.al. (2006) and Elabeid and Tokgoz (2006).

21
 Main findings and recommendations
The simulation results presented, clearly underline various key factors and policies that are likely to support the
viable production of biofuels in South Africa. Firstly, it needs to be considered when it comes to the viable
production of biofuels in South Africa that nowhere in the world has biofuel production been stimulated and
developed without some form of government support, be it in a large or small degree. The degree of the fuel tax
levy reduction, the level of import tariff protection and the efficiency and power of regulations governing these
policies have a huge impact on how local biofuels production is stimulated and developed. What needs to be
emphasized is that an early level of government support is vital as this will determine the sustainability of the
industry until it reaches the required economies of scale. Similar levels of government support have been
implemented in other countries with the result that biofuel production in those countries is feasible. Examples of
countries where these policies have created a viable biofuels industry are the USA and Brazil.

The selection of crops is also crucial. Multi feedstock plant technology already exists. The question is in what
crops SA will be competitive if support measures are put in place. The modelling results under the alternative
scenario show that SA is competitive in the production of ethanol from maize and sugar since both commodities
are frequently trading at export parity levels. The production of biodiesel from vegetable oil is less favourable due
to the high value of the vegetable in the human market and the commodity markets frequently trading at import
parity levels. Major improvements in the efficiency of oilseed production in SA or the sharp decrease in vegetable
oil prices will influence the economic feasibility of biodiesel production.

No country in the world uses a staple to produce biofuels. Therefore, policy alternatives have to be carefully
considered to understand the impact on food security. With approximately 1 million tons of maize required for the
production of ethanol under the alternative scenario, the projected increase in maize prices is moderate, but the
probability of the maize market trading at import parity levels, if weather conditions are below normal, is very high.

Even though the policy of minimal tariff protection is in place, the emphasis of the entire draft strategy document is
still very much on locally produced commodities and fuels. The fuel levy tax exemption, for example, only applies
to the locally produced products and importers cannot benefit from these. There is a problem with this policy in
that biofuel producers, especially biodiesel producers who cannot source the product locally since local production
is too small, will not qualify for the fuel levy exemption and will as a result struggle to produce biofuels viably.

The equalization fund proposed in the draft strategy was not taken into account. The proposed equalization fund is
based on the movement of the oil price. This will, however not be suffcient to cover the exposure to price risk as
the swing in feedstock prices also will have a major impact on the profitability of the biofuel plants.

The location of biofuel plants can have a substantial impact on profitability. This model presents a general picture
and does not take specific plant locations into account. Thus, the location of the plant needs to be carefully
considered. The proposed equalization fund in the draft strategy is based on the movement of oil prices only. It is
recommended that the equalization fund is not only based on the movement of oil prices, but on the ratio of
feedstock and crude oil prices.

22
 Main findings and recommendations
It appears as if trade policies are one of the critical drivers in determining the successful establishment of the
biofuel industry in SA. However, there exists a disjoint between trade policies and the domestic policies. Following
the process of aggressive market reform, South African agriculture finds itself in a position where only a few
mechanisms are left through which the industry can be supported to achieve sector-level development goals.The
policy gap that exists to support the local biofuel industry needs to be established. Government can support that
local industry on two levels, namely by means of trade policies and domestic policies. Domestic support can be
justified under article 6.2 of the WTO regulations.

Lastly, it needs to be mentioned that the results presented in this study take the information and technology that is
currently available and applied in the market into account. Thus, it has to be regarded as a benchmark under
current conditions, rather than a forecast. It does not take into consideration factors like the improvement in farming
practices to reduce the costs of production, the drastic increase in the yield of commercial field crops, the
development of alternative crops that could be grown specifically for the production of biofuels, improved efficiency
in the production of biofuels and the development of an alternative market for bioproducts.

23