The economic feasibility of non-farm biodiesel production in KwaZulu-Natal, South Africa.

Abstract

Recent years have seen an unprecedented global increase in the production and use of biofuels. This has been driven primarily by government support for biofuel industries. Soybeans are the only field crop produced in sufficient quantities in the province of KwaZulu- Natal (KZN) that the South African (SA) industrial biofuel strategy identifies as a potential biodiesel feedstock. Thus, this study is an evaluation of the economic feasibility of producing biodiesel on farms from soybeans in the main soybean-producing regions of KZN, using batch processing biodiesel plants. A mixed integer linear programming model was developed to simulate observed agricultural land rental rates (estimated at 4.48% of the market value of land) and cropping behaviour of commercial crop farms in the study regions. The model incorporates various alternative crops, crop rotations, tillage techniques, arable land categories and variance-covariance matrices to account for risk in production. All data are on a real 2009/10 basis. The model is used to predict possible farmer investment behaviour and determine the minimum biodiesel subsidy required to stimulate soybean-based biodiesel production in the study areas. Results suggest that biodiesel production is currently not an economically viable alternative to fossil fuel, and that the incentives and commitments outlined by the current industrial biofuel strategy are inadequate to both establish and sustain a domestic biodiesel industry. Under baseline assumptions, a realistic minimum implicit subsidy of R4.37 per litre of biodiesel is required to draw soybean-based biodiesel production into the optimum solution for commercial farms. The economic feasibility of on-farm biodiesel production is highly dependent on the soybean price (i.e., the feedstock input cost) and the soybean oilcake price (i.e., the highest valued byproduct). Thus, future promotion of biodiesel ventures could primarily target a reduction of feedstock costs through the development of new technologies which increase yields of available feedstocks and/or permit the use of lower cost alternatives. Higher subsidy levels are anticipated for: (i) small-scale initiatives (particularly in the absence of a rental market for cropland); (ii) soybean-based biodiesel production in areas with less suitable growing conditions for cultivating soybeans; and (iii) using sunflower and/or canola as biodiesel feedstock. To the author’s knowledge no other previous studies have attempted to quantify the minimum level of support needed to stimulate biodiesel production in South Africa. The SA industrial biofuels strategy promotes a development-oriented strategy with feedstock produced by smallholders and processed by traditional producer-owned cooperatives. However, traditional cooperatives suffer from a myriad of institutional problems that are associated with ill-defined property rights. As such, it is argued that these initiatives will fail to attract the capital and expertise needed to process biodiesel. This research, therefore, highlights the need for South Africa’s current Cooperatives Act to be amended. Accordingly, this also infers a need to revise the proposed SA industrial biofuels strategy. It is concluded that smallholder participation in biodiesel ventures would require a rental market for cropland, co-ownership of the processing plant in a non-traditional cooperative or investor-owned firm, information and training, and a high level of government subsidy. This research advocates that government consider promoting soybean oil extrusion ventures as a means of stimulating rural development for small-scale farming initiatives rather than soybean-based biodiesel production, as they will likely require less government assistance, whilst potentially combating the food versus fuel debate against biofuels. This is compounded by the fact that South Africa has historically been a net importer of both soybean oilcake and soybean oil. Importantly, however, the proliferation of such initiatives should not be based on the current notion of traditional cooperatives. The need for government to play a proactive role in such ventures through facilitating the development of appropriate business models which stimulate private investment in feedstock and processing facilities is clearly evident.