Economics is about using what you got to get what you want the most. Georgians want clean water and air, efficient and sustainable use of natural resources, and economic development opportunities. Can Georgia's food and fiber production industries contribute to our energy supplies in a manner that is helpful to the environment while adding value to Georgia's economy? This was the underlying question the Center for Agribusiness and Economic Development of the College of Agricultural and Environmental Sciences attempted to illuminate in two recently released economic studies.

   Powering Diesel Engines off the "Fat of the Land"

   Georgia agriculture currently is among the leading states in animal production (poultry) and vegetable oil production (peanuts and soybeans imported for poultry). In addition, Georgia has a large population that uses vegetable oils in its many restaurants and food service industries. Unfortunately, Georgia also is on some of the national list for air quality problems. The Atlanta metro area is not currently in compliance with federal air standards and several other metro areas are close to being placed on the non-compliance list. The combination of abundant vegetable oils and animal fats in Georgia and growing air quality concerns led the Center to conduct a detailed study of the economics of producing cleaner burning diesel fuels from cooking oils and animal fats.

   The technology of converting vegetable oils and animal fats into biodiesel is a well-established process. The most commonly used process involves combining the fat/oil with methanol and sodium or potassium hydroxide. This process creates four main products - methyl ester (biodiesel), glycerin, feed quality fat and methanol that is recycled back through the system. The primary product, methyl ester, is better know as biodiesel while the glycerin and fats can be sold as well. The methyl ester process is very energy efficient in that for each unit of energy required by the process approximately 3.2 units of energy are gained. Ethanol, which enjoys federal tax advantages and mandated use in many states as a gasoline engine fuel additive, has only a 1.25 returned energy ratio. The predominant feedstock for ethanol is starch-based fuels such as corn. Since the Midwest is the dominant corn producing region in the world and several new ethanol plants have begun production in the Midwest, it was determined that biodiesel production would be more competitive under current technology in Georgia than would ethanol.

   Major feedstocks currently available in Georgia include soybean oil, cottonseed oil, peanut oil, spent restaurant fats and rendered poultry fats. It appears that there is an adequate supply of oils and fats available in or near Georgia to produce biodiesel as the total estimated production in Georgia is close to 1 billion pounds annually, of which approximately 334 million pounds were estimated to be available for alternative use.

   The Center secured the services of Frazier, Barnes & Associates of Memphis, TN, a consulting firm specializing in vegetable oil processing, to assess the capital cost of various sized biodiesel production facilities. Four different sized biodiesel production plants were evaluated for the most economical size plant. It appears the most economical sized facility is one that produces about 15 million gallons of biodiesel per year. Such a plant would cost about $9.6 million to construct.

   The actual equipment and facility costs of producing bioiesel were found to be a relatively small proportion of the total costs of production. The feedstock cost is the dominant factor in determining final production cost. Total annual operating and fixed costs for a 15 million gallon plant would be about $23 million. Actual estimated operating cost and fixed cost are about 25 percent of total cost while feedstock acquired at $0.15 per pound average cost would represent 75 percent of total cost. Clearly, the availability of low priced feedstocks is imperative to providing the most competitive biodiesel product.

   Vegetable and animal fat prices vary depending upon supply and demand for each of the products and also upon the overall supply and demand situation for the entire fat/oil complex due to substitutability between products in some uses. In general, the vegetable oils have a higher unit value than do the animal fats. The recent historical range of prices for the leading potential feedstock sources is from $0.06 to $0.50 per pound. A 15 million gallon plant in Georgia would use approximately one-third of the estimated available feedstock supply produced in Georgia.

   The cost of producing a gallon of methyl ester depends upon the average cost of the feedstock. If feedstock costs $0.10 per pound, production costs were estimated to be about $1.11 per gallon. If feedstock costs rise to $0.25, costs soar to $ 2.21 per gallon. At current average feedstock prices of about $0.15, production costs would be near $1.48 per gallon (Graph 1). In late 2003 diesel fuel production prices were about $.83 per gallon. Thus biodiesel is not competitive with petroleum-based diesel at current prices. However, seldom is biodiesel used in the pure form. Most commonly it is mixed with petroleum diesel to form either a 2 or 20 percent blend. Thus, the added cost to the blended price would be about one cent at current diesel prices for a 2 percent blend and about 13 cents for a 20 percent blend.

   The economic and environmental benefits to Georgia were also found to be significant. Of the polluting emissions from diesel engines running regular diesel, all but Nitrogen Oxides (which were unchanged) were found to be reduced by 10 percent or more when compared to those using a 20 percent biodiesel blend. So the likely environmental impacts of replacing even 75 million gallons (total output of a 15 million gallon biodiesel plant if blended at 20%) of Georgia's estimated 1.5 billion gallon diesel market could be significant. In addition, the economic impact of one 15 million gallon/year Georgia biodiesel plant would be an additional $34 million per year in output in the Georgia economy, 132 more jobs, and an additional $4.5 million in Georgia tax revenues produced per year.

   Lacking government mandates or subsidies, a feedstock cost of 10 cents per pound or less is needed for biodiesel to be cost competitive at current diesel fuel prices. However, the difference in production cost is within a range that could be managed by a Georgia policy that would subsidize the production process and/or eliminate state taxes on Georgia produced biodiesel utilizing Georgia produced feedstock. The result could be good for Georgia's economy and environment.

Making Electricity From Poultry Poop?

   According to the Energy Information Administration, Georgia's electrical energy supply relies primarily on fossil fuel and nuclear power. In 1999, 64% of electrical power was generated by coal, 27% by nuclear, and 4% by natural gas and petroleum fuels. Hydroelectric sources generated 2.3% of Georgia's electrical supply. Other fuels, such as municipal solid waste and agricultural biomass, generated the remaining 2.6% of electricity.

   Research suggests the generating potential from non-hydro renewables, particularly biomass, could be much greater than current use trends. In addition, the potential environmental and economic benefits may exceed traditional generation methods. Accordingly, the possibility of using Georgia's biomass resources as a potential fuel source has the interest of Georgia's farmers, the electric power industry, environmentalists, as well as the legislative community.

   The main concern relies on whether biomass-fueled power generation can be economically feasible, given current generation technology. As a result, the Center for Agribusiness and Economic Development, at the University of Georgia College of Agriculture and Environmental Sciences, set out to determine the feasibility of electrical power generation from Georgia's farm produced biomass resources with partial funding by an appropriation of the Georgia legislature. This study analyzes four generation technologies in use today: direct-fire, co-fire, gasification, and pyrolysis. To determine the economy of scale impact, each technology was evaluated for three facilities that increased in size, biomass input used, and electricity generated.

   In order to evaluate the potential for farm-produced biomass in electrical production, the supply of biomass had to be evaluated by county. Biomass is not a dense product and therefore cannot be transported across great distances. So supplies within relatively small areas are important to the feasibility of an electrical plant fueled by biomass. The supply, likely cost, and fuel characteristics of 14 biomass farm produced products were estimated. Most of the biomass products evaluated were by-products of a primary enterprise (cotton stalks and gin trash, peanut and pecan hulls, poultry litter, pine bark, wood harvest residue and chips, corn stalks and excess grass hay) while a few were crops that have been suggested for energy production (switchgrass and kenaf). Of the 14 biomass products evaluated, 2 were found to have a lower BTU cost than the lowest cost fossil fuel, coal (pecan hulls and gin trash); an additional 3 were found to have lower BTU cost than the second lowest cost fossil fuel, natural gas (pine bark, poultry litter, peanut hulls; and finally an additional 4 were found to have lower BTU cost than petroleum, the highest fossil fuel source (wood chips, wood residue, grass hay, cotton stalks). The estimated total farm produced biomass expressed in BTUs per county is shown in Figure 1.

   The next step in the study was to evaluate different technologies for converting biomass to electricity and the economies of size in each technology. The four types of technology ranged from directly burning biomass to a more experimental system called pyrolysis. A brief explanation of the process studied and the three size operations of each follow.

   Direct Fire- Direct fire combustion involves the burning of biomass with excess air, producing hot flue gases, which then produce steam in the heat exchange section of a boiler. The steam is then passed through a steam turbine generator to produce electric power. The direct fire technology was evaluated for 120, 200, and 400 wet tons per day (WTPD) of biomass input. Total capital for equipment and buildings t for the three size plants were $5.1, $7.2, and $11.6 million respectively.

   Co-fire- Co-firing refers to the practice of introducing biomass as a supplementary energy source in high efficiency boilers. The flue gases are then used to produce steam and/or electric power as in a direct fire technology. Co-fire is used when either the moisture content of the biomass is high or when the supply of biomass is intermittent. In each of the co-fire cases the biomass fuel supply deficit was supplemented with enough natural gas, measured in thousand cubic feet (MCF), to generate the same amount of power as in the direct fire cases. The corresponding levels of fuel are 60, 100, and 200 WTPD of biomass and 523, 872, and 1744 MCF of natural gas for Case 1, 2, and 3, respectively. Total building and equipment cost for constructing the three units were estimated to be $4.6, $6.1, and $9.8 million respectively.

Gasification- Gasification for power production involves the chemical conversion of biomass in an atmosphere of steam or air to produce a medium or low calorific gas. This "biogas" is then used as a fuel in a power generation plant that includes a gas turbine generator for power production and a waste heat boiler for steam production. The steam can then be used to generate power. For this study the only heat available for power generation is assumed to be the heat content of the biogas. All other heat generated by the gasification process is used to dry the feedstock. The gasification technology was evaluated for 160, 267, and 533 WTPD of biomass input. Total building and equipment costs were $19.1, $28.6 for cases 1, 2 and 3, respectively.    Pyrolysis- Pyrolysis is a process by which biomass is heated in the absence of oxygen. For this study the feedstock is assumed to be dried via heat generated by the pyrolysis process. As a result the biomass decomposes to generate mostly vapors, aerosols, and some charcoal. After cooling and condensation, a transportable dark brown liquid oil is formed which has approximately one half the heat content of conventional fuel oil. Bio-oil, is approximately 20% heavier than water and is both transportable and storable. The bio-oil can be fed directly to a turbine and combusted. Both power and steam can be generated from this process. Energy from all bio-oil produced is saleable. Commercialization of the pyrolysis process is in its initial stages, although technology suppliers typically have small-scale pilot plants and are working to build full size facilities. The pyrolysis process assumes biomass inputs at 160, 320, and 480 WTPD for case 1, 2, and 3, respectively. Capital cost was estimated to be $13.9, $23.0, and $31.8 million respectively.

   As can be seen, only the large-scale gasification unit with the lowest biomass price comes close to a competitive situation without further subsidy or incentive. However, some states offer additional tax incentives for biomass production. In addition, most states, including Georgia, allow power companies to collect premium payments from consumers wishing to consume "green" power. Such green power programs allow those consumers who wish to support renewable fuels a financial option. Unfortunately, biomass is not included in the current green power programs in Georgia.

   This study indicates that large gasification units are currently on the verge of becoming competitive and that Georgia has sufficient farm produced biomass in several location to power such units. Each large-scale gasification unit can produce about 167 million kWh per year, enough to power more than 140,000 homes. In all, Georgia has enough farm-produced biomass to supply 50 such generating plants. Farm produced biomass could supply about 12% of the total electrical demand in Georgia or 31% of the State's residential demand. Each biomass gasification power plant was found to add about 10 million dollars to the local economy either through direct sales or indirectly through its impact on the local economy, 69 total jobs and over $700,000 in new tax receipts. While not calculated for this study, further benefits are likely to be derived from replacing non-renewable energy sources with renewable sources grown in Georgia. Furthermore, the so called "green house emissions" of power produced from biomass can be less than those produced from fossil fuels. Economic development, a cleaner environment, and sustainable natural resource use - that's killing three birds (and their poop) with one stone! Or as an economist would say - using what you got to get what you want the most!

Figure 2. Electrical production cost comparisons for biomass in alternative technologies and sizes of operation with 1.8 cent federal credit.

John C. McKissick
Professor and Director of Center for
Agribusiness and Economic Development
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   Section 10816 of the Farm Security and Rural Investment Act of 2002 establishes the country of origin labeling (COOL) requirement which retailers and suppliers of farm products are mandated to comply with effective September 30, 2004. Interim guidelines for the COOL program have been released in October last year which generated a lot of discussion among government and industry representatives. Last month, the U.S. Department of Agriculture (USDA) released a set of proposed regulations for the implementation of COOL which shall be finalized and approved before its implementation date next year.

The USDA Proposed COOL Regulations

    The COOL law covers a wide range of agricultural operations that include perishable agricultural commodities (fresh and frozen fruits and vegetables), muscle and ground meat (beef, pork and lamb), seafood (fresh and frozen, farm-raised or wild caught), and peanuts, which is largely grown in the state. The law requires that these products be labeled at retail to indicate their country of origin. The recently released regulations stipulate the following specific requirements/provisions:

• " Labels for fish and shellfish must distinguish between wild and farm-raised fish and shellfish;
  
• " Exclusion from the mandatory labeling requirement of covered commodities if these were ingredients in a processed food item (such as bacon, orange juice, mixed nuts and fruit/vegetable party trays)
  
• " Exemption from this requirement of food service establishments, such as restaurants, lunchrooms, cafeterias, food stands, bars, lounges and similar enterprises.
  

   Moreover, USDA's proposed regulations clarify that a covered commodity can only bear a "United States country of origin" declaration under the following conditions applicable to certain farm commodities:

• Beef: covered commodity must be derived exclusively from animals born, raised and slaughtered in the United States, including animals that were born and raised in Alaska or Hawaii and transported for a period not to exceed 60 days through Canada to the United States and slaughtered in the United States;
  
• Lamb and Pork: covered commodity must be derived exclusively from an animal that was born, raised and slaughtered in the United States;
  
• Farm-Raised Fish and Shellfish: Covered commodity must be derived exclusively from fish or shellfish hatched, raised, harvested and processed in the United States;
  
• Wild Fish and Shellfish: Covered commodity must be derived from fish or shellfish harvested in the waters of the United States or by a U. S. flagged vessel and processed in the United States or aboard a U.S. flagged vessel.
  
• Perishable Agricultural Commodities and Peanuts: Covered commodity must be derived exclusively from produce or peanuts grown in the United States.
  

   The USDA's proposed rule also outlines requirements for labeling blended products as well as products of mixed origin, including products produced in both local and foreign markets. There are also record keeping requirements for retailers and suppliers that have been established by the recently released set of COOL regulations.

The Economics of the COOL Law

   The original intent of this legislation is for U.S. farmers to gain financial benefits from the mandatory labels, which are envisioned to encourage consumers to choose domestic over imported products. A rise in demand for local farm products would lead to an increase in the prices of these domestic commodities, which consequently would increase their market share at the expense of imports (Kuchler, USDA-ERS).

   Analysts, however, contend that such could be a lofty expectation. Specifically, the Food Marketing Institute (FMI) claims that the consumer surveys they conducted during the last 20 years do not really establish country of origin labeling as a factor in the consumers' grocery shopping decisions. Instead, quality, value and convenience are the commonly cited concerns of grocery shoppers surveyed. Recently, FMI commissioned Wilson Research Strategies to conduct a survey on the COOL Law. The results, which were released in mid-October, indicate that 53 percent are not confident that the law will increase sales of domestic products.

   The apprehension over the less encouraging market effect of the COOL law is compounded by USDA's estimates of projected costs associated with the implementation of the mandatory labels. These expenses are associated with, among others, modifying record keeping systems, segregating products, printing labels, employee training, and performing COOL audits. Each business facility of affected farm business will incur estimated costs ranging from $180-$443 for producers, $4,048 - $50,086 for intermediaries (such as handlers, importers, processors, and wholesalers), and $49,581-$396-089 for retailers.

No Choice!

   Despite the strong criticisms of this "severely flawed law," the COOL law will take into effect by the end of September next year. Affected farm businesses do not really have a choice but to comply with the regulations. According to the law, non-compliant businesses will be fined up to $10,000 if the labeling requirement has been willfully violated even after a 30-day warning has been issued to the violators.

   This labeling law that brings about unexpected cost burdens, along with uncertain market and financial gains, could threaten the survival of small growers and ranchers as well undermine the competitiveness of U. S. products in international markets. These unfortunate consequences, as predicted by most economists, would likely prevail unless the labeling law is either repealed or replaced with a new law that would ensure that more realizable financial gains would outweigh the inevitable costs of compliance.

   Note: This compilation/summary is based on press releases, economic studies and commentaries from the websites of the Food Marketing Institute (http://www.fmi.org) and the Economic Research Service of the U. S. Department of Agriculture (http://www.ers.usda.gov).

Cesar L. Escalante
Assistant Extension Professor
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Calendar/Announcements/Recent Publications

For more information, contact your local county extension agent. We can be reached at:

Agricultural Economics Extension Offices

Conner Hall, Athens, GA 30602
Tel. No. 706-542-1861
Fax No. 706-542-4131

Rural Development Center
PO Box 1209,
Tifton, GA 31793
Tel. No. 229-386-3512
Fax No. 229-386-3440

Georgia Southern University, Landrum
Box 8112, Statesboro, GA 30460
Tel. No. 912-681-5653
Fax No. 912-681-0376

The Center for Agribusiness and Economic Development
202 Lumpkin House, Athens, GA
30602-7509; Tel. No. 706-542-0760

All this and more on the Web!

¨       http://www.ces.uga.edu/Agriculture/agecon/agecon.html

        For our extension programs, publications, commodity outlook reports, presentations, decision tools

¨       http://www.agecon.uga.edu/~caed/

        For feasibility, marketing, policy studies, as well as agricultural, natural resource and demographic data prepared by the Center for Agribusiness and Economic Development

• AGECON 03-86: "Carribean Basin Markets: New Opportunities for Georgia Fruits and Vegetables" by G. Fonsah
• AGECON 03-87: "Beef Cattle Marketing Alternatives for Fall 2003" by C. Lacy
• CR-03-04: "Fort Creek Farm Customer Satisfaction Study Results" by K. Wolfe
• CR-03-05": "Marketing Handbook" by K. Wolfe
• CR-03-06: "Economic Status and Benefits of the Georgia Forestry and BioMass Industry" by D. Waters, K. Wolfe and J. McKissick
• CR-03-07: "Understanding and Targeting School Groups for Agritainment Enterprises: Georgia Elementary Schoolteachers Survey Results" by K. Wolfe
• CR-03-08: "Considerations for Getting Started in the Horse Trail Riding Business" by K. Wolfe and C. Ferland
• CR-03-09: "Investigating the Potential for Farm-to-School Program in Georgia: Food Service Directors Survey" by K. Wolfe
• FR-03-03: "Feasibility of Green Boiled Peanuts in Georgia" by C. Ferland and J. McKissick
• FR-03-04: "Feasibility of Marine Shrimp Production in Georgia" by C. Ferland and K. Wolfe
• FR-03-05: "Economic and Financial Feasibility of a New Generation Cooperative Cotton Gin in Mitchell County" by D. Shurley and J. McKissick
• FR-03-06: "The Feasibility of Generating Electricity from BioMass Fuel Sources in Georgia" by T. Curtis, Jr., C. Ferland, J. McKissick and W. Barnes