Category: Carbon Opportunity

Innovators delight, Courageous insight

Deciding to be or not to be – agricultural production

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In a rural neck of the woods trouble is brewing, land values are going too high! A farmer was willing to participate in CFI, albeit for a modest return. In light of stock holdings being low in the district the idea of leasing the neighbours land was attractive. Until someone decided the Internet was a good place to advertise an enthusiastically priced land sale.

Why is this important? Because everyone then develops higher wealth expectations and the issue is the inputs become higher and the price consumers are willing to pay for the agricultural and livestock remains low.

If we accept this will happen regardless, we need to re-evaluate the purpose and future in terms of commitment to incentives. But first we need to determine the price that could be and what the market will withstand. Beef and Central (www.beefcentral.com) ran an excellent story on: What value is a fair market price to pay for rural land? Written by Michael J. Vail, Tre Ponte Corporate, Brisbane 26 Oct 2012. Verbatum “Capital Budgeting for Investment, using the Discounted Cash-Flow (DCF) Method, and Net Present Value (NPV)”

Quoting: “It is important to understand the methods used by sophisticated and experienced business-people in the world of finance and economics, both here in Australia and overseas, when making large-scale capital expenditure budgeting decisions; whether it be for investments below one million dollars or up to several hundred million dollars.

One excellent method which is technically sound, and is supported by courts when deciding cases, is the Expected Net Present Value of a Future Expected Cash-Flow Income-Stream, also called Discounted Cash-Flow (DCF) Analysis.

When finance and economic analysis is in

progress, the concept of ‘flows’ is used, to show where the money goes. Money flows ‘in’ or ‘out’, with Net Cash-Flow available to pay dividends to owners of capital.

The basic premise is as follows, you:

1. Understand a business’ past cash-flows (both in and out),

2. Understand the nature of the income cycle,

3. Understand the cost structure of the business,

4. Understand what influences (both internal and external) the business model is sensitive towards,

5. Understand the accounting and economic break-even points, for sales dollars and sales quantity,

6. Understand supply and demand issues, at the micro and macro level, for this type of business, and

7. Have a view of the future, and for the business.

8. Make assumptions (which are documented), for each line of the cash-flow.

9. Project the cash-flow forward in time for three years, using zero-based budgeting; with the balance of the current year, plus one full year, shown month-by-month, and then two further years shown on an annual basis.

10. Identify and understand the risks of the project, and, whilst mitigating where you may, come to a conclusion whether the business is more or less risky than the market (using a proxy company where you can).

11. Derive a Before-Tax, Discount Rate, which fully describes the expected risk in the project going forward over the life of the project (eg Opportunity Cost of Capital).

12. Do not use the Weighted Average Cost of Capital (WACC) method to derive the Discount Rate, unless there is an appropriate amount of equity ‘hurt-money’ on the table, and the owner’s residential property is not being used as collateral for any loans; as evidenced in the balance sheet. Otherwise use an Opportunity Cost of Capital proxy, such as the Borrowing Rate plus a Margin-of-Safety.

13. Insert the Discount Rate into the Present Value (PV) formula applicable to the circumstance, and derive a Multiple.

14. Apply this Multiple to the Earnings Before Interest and Taxes (EBIT) figure from the cash-flows above, bringing these future cash-flows back to a single number, as it would be in the present-day, discounting for time and risk.

15. A way to think about it is; if I was offered a dollar today, or a dollar in one year’s time, and the opportunity cost of not taking the dollar today is 10pc, which will I prefer? If I take the dollar today, and put it in the bank, where I can earn 10pc, I will have $1.10 in one year’s time. So, if I wait, I will be $0.10 out of pocket. Conversely, how much would I have to invest today to receive a dollar in one year’s time? The answer is $0.91 ($1.00 / 1.1). A rational person will choose to take the dollar today.

16. This is similar to what is termed a ‘perpetuity’; where an amount is “grossed-up” to what it might look like ‘at the end-of-time’.

17. Take one dollar and invest it ‘perpetually’ at 10pc per annum, and it becomes $10.00 ($1.00/ 0.1); however, when you calculate the number of years (n) to ‘perpetuity’ ($10 = $1 x (1.1)n), it is only 24-years and 58-days. Granted, this is a long period of time, though it is hardly what we imagine as perpetuity; whatever that means. However in our modelling, some assumptions are made.

18. Another example: If $1.00 @ 25pc in perpetuity equals $4.00, then the time to perpetuity equals 6.212567-years (n = log 4 / log 1.25), or 6-years and 78-days.

19. So we may observe that as perceived risk rises, the pay-off horizon shortens; or the PV shrinks. The converse is also true. This is an example of the risk/return trade-off; as there is an inverse relationship (and therefore a negative slope) between them.

20. This adjustment for interest income (or expense), is referred-to as the ‘time-value-of-money’.

21. Another concept to understand in relation to NPV analysis (where positive NPV projects are acceptable investments) is the question, what is the hurdle rate of return (IRR), or the maximum borrowing-rate (less a Margin-of-Safety), where NPV equals zero?

22. A rational investor will surely pay no more than the number this discount hurdle rate equates to under the assumptions given; yet if the long-term view of interest rates over the term of the project is less than this hurdle rate, one will see a higher NPV and is more likely to invest.

23. And if expected EBIT increases, due to better management or market conditions, then the NPV will also rise.

24. A positive side effect of a higher EBIT as a percentage of Revenue, is that perceived lending risk will also fall, leading to lower risk premiums being applied.

shall illustrate with an example.

If rural, pastoral and grazing land in the Blackall/Tambo Shire of Central Western Queensland, in large part, has an average carrying capacity for a cow-and-calf unit of 1:21-Acres, then the carrying capacity of the cow alone is 1:14.69-Acres (if weaning percentages are 80pc and bulls are joined at 3pc).

If a Margin-of-Safety of 10pc is added-on to this carrying capacity, then the number becomes 1:16.15-Acres per cow (Dry Unit Equivalent).

To arrive at a fair estimate of market value, for what this parcel of land is worth on a per-Acre basis (Walk-In, Walk-Out, including stock, plant and all things necessary for the continuing operation of a Going Concern enterprise), you should request trading and profit and loss statements from the vendor (under signed Confidentiality and Non-Disclosure Agreements) going back at least five years, and the lodged income tax returns which accompanied them. This is an important step as a part of the data verification process.

There may well be resistance to this request from the vendor, as this data is of a private and sensitive nature. However this level of disclosure, is what everyone else in the real world complies with, to ensure there is full-information on the table for a prospective purchaser to review.

The production of same gives the purchaser some higher level of comfort around the numbers, and therefore a lower level of risk premium will be applied in the NPV analysis. Also, where there is un-certainty beyond rationality, lenders will also put a higher risk premium on any funding requirements.

To continue with my example, I will assume the following inputs and equations:

1. A purchaser will not borrow more than one-half of the expected market value of the total adult cattle herd.

2. A purchaser will not borrow more than 20pc of the total Asset Value of the enterprise including all things necessary; including the land component.

3. The parcel of land is around 36,000-Acres in size.

4. The average market value of the herd is $850.00 each. (It should be around $1300.00 per Head.)

5. The average adjusted EBIT, over the period covering the past five years, and expected over the next three years, is $450,000.

6. The carrying capacity, as calculated above, is 1:16.15-Acres (Dry Unit Equivalent).

7. That an appropriate regression equation to calculate a ‘Bare of Stock and Plant’ Price for comparison, may be:-

• Y = $770.00 x (X) -0.717,where ‘X’ equals Carrying Capacity expressed as ‘Acres per Beast’.

8. That an appropriate regression equation to calculate a ‘WIWO (Operating)’ Price for comparison, may be:-

• Y = $1,417.30 x (X) -0.86,where ‘X’ equals Carrying Capacity expressed as ‘Acres per Beast’.

9. That the average Opportunity Cost of Investment is 9.5 percent per annum (Compound).

10. That a purchase should be looked-at like a perpetual Bond, paying annuity income as a coupon, and with NPV at Zero (0), to find the ‘price you should pay no more than’; using a multiple of income, and a cost to buy (reflecting perceived risk).

11. The formula for this calculation may be:-

• NPV = (EBIT x (1 + (1/Opportunity Cost))) – Original Cost.

• Setting NPV to Zero (0), the equation changes to,

• (EBIT x (1 + (1/Opportunity Cost))) = Original Cost

12. A rational risk-averse investor, only invests in positive NPV projects; so where NPV equals zero(0), you are indifferent as to whether you will invest or not.

13. There is no ‘one-true-value’.

14. Equations which model what might happen, only model our expectations of future expected cash-flow and value, and are not accurate; as only actual outcomes are measurable and real.

15. The concept of ‘common-sense’ should be fastidiously applied, and in large doses.

Expected Value per Acre: To Buy

• Bare of Stock and Plant:

– Y = $770.00 x (21.0) -0.717  = $3.124M. (or $86.79 per Acre.)

– We use the higher carrying capacity of 1:21.0 -Acres because the place is a blank piece of paper, and may have many uses; however that is the long-term carrying capacity of the place, on the average.

• WIWO (as a Going Concern):-

– Y = $1,417.30 x (16.15) -0.86  = $4.664M. (or $129.55 per Acre.)

• Value to Pay No More Than (WIWO):

– NPV = (EBIT x (1 + (1/Opportunity Cost))) – Original Cost.

– Set NPV equal to Zero (0).

– Equation becomes:-

o (EBIT x (1 + (1/Opportunity Cost))) = Original Cost.

o ($450K. x (1 + (1/0.095))) = Original Cost.

– Original Cost = $5.1868M. (or $144.08 per Acre)

– Therefore, the break-even value per Acre above, is the maximum you should pay; if the EBIT is $450K. and the borrowing cost is 9.5pcpa.

– Of course, if either variable changes, then so will the answer.

• ‘True’ value for WIWO lies between $129.55 and $144.08 per Acre.

• As you can see, it is important to have a view of the future, to ensure you do not pay too much.

• As each case is different, please consult with your advisor; however, the above should give you food for thought.

• Of course, ‘value’ is in the eye of the beholder; price is what you pay, and value is what you get.

• Be aware that under this model, if all else remains constant under the WIWO example above, except if Item-2 changes to 30pc, then the value per Acre you are willing to pay may fall to $87.72. This is a big difference, and it indicates the higher level of perceived operating and financial risk, as Debt/Equity ratio moves from 20pc or 2/8 (25pc), to 30pc or 3/7 (43pc).

• Alternately, if the Expected Future Revenue looks set to jump (due to the signing of a long-term trade agreement with another country), then the Demand Curve for beef will shift quickly relative to the Supply Curve (which is fixed in the short-term), and of course you should expect to receive a higher capital payment if you are a seller; and conversely pay more if you are a buyer.

Expected Value per Acre: To Lease or for Agistment

If you did not want to buy through lack of access to capital, and merely required Agistment, or a Lease, on a per-Head-per-Week basis (as applied to adult cattle), and the expected yield was similar to the Opportunity Cost of Capital, then the following may apply:-

– ((Value / Acre) x (Opportunity Cost) x (Carrying Capacity / Acre)) / 52-Weeks.

– Or, our old friend, (Beast Area Valuation x Opportunity Cost) / 52-Weeks.

– Dry Cattle  = ($144.08 x 9.5pc x 16.15) / 52 = $4.25 per Head per Week, or

– Dry Cattle  = ($2,326.89 x 9.5pc) / 52-Weeks = $4.25 per Head per Week.

– Wet Cattle = ($144.08 x 9.5pc x 23.10) / 52 = $6.08 per Head per Week, or

– Wet Cattle = ($3,328.25 x 9.5pc) / 52-Weeks = $6.08 per Head per Week.

– Same income overall will eventuate, but able to carry less adult cattle; per the assumptions above.

– You will note BAV is different for Wet or Dry cattle. How can this be? It is exactly the same block of land! Therefore, BAV may be confusing, and should only be used as a rough guide when valuing agricultural land.

Conclusions

What I have tried to show here, in the above assumptions and calculations, is that a rational approach needs to be made to the valuation of any investment, no matter where, or what it is; else you run the risk of paying too much.

It may also mean having your banker/financier see the investment as more high-risk than it otherwise should be, and therefore self-justifying charging you a higher interest rate premium, as applied on borrowed funds, than necessary; which may have the unintended consequence of leading to a higher risk of bankruptcy in marginal investments; remember this type of business is usually asset-rich, but cash-poor (though it should not be); so always build into your calculations a Margin-of-Safety.

The Discounted Cash-Flow (DCF) Method and the calculation of the Net Present Value (NPV) of an income stream, is a very appropriate way to value an asset of this type, and is used by investors from all walks of life; whilst also being strongly supported by the Courts, as a valid and robust approach to valuing assets.

The ‘accounting equation’ (where Assets = Liabilities + Equity), like all good algebra, must stay in balance. When valuing a business using this Method, you are valuing the Assets which you need to operate the business; however, if you are buying the business’ legal structure (ie a Pty Ltd company, for example), then take out any Surplus Assets and remove any Liabilities you are not absorbing, to arrive at the Equity Value (where Assets minus Liabilities = Equity).

Look to the long-term patterns in the data for randomness, trend, cycle, and seasonality, etcetera, by using a 13-week Weighted Moving Average of Revenue (for example), only looking back to learn; however, have a view of the future, and remember, you value an asset with a view to the future expected income from it.

The past has a memory, which carries forward, though dissipating with the passage of time; usually exponentially, depending upon the accepted usage and effect. Remember the past is just a guide to the future, so only look back to learn.

Do not pay too much; as you make your profit when you buy, not when you sell.

I encourage debate, and am happy to be proved wrong.

Good Luck, and thank you for your time.” End quote. The analysis is part of a series to Beef and Central by Michael Vail, and is addressed to investors making capital budgeting decisions towards a long-term investment in the agricultural production industry. Co2Land org posts this not as advice but for information only.

CO2Land org only adds that these numbers will change as values change and if you recall sentiments over commitment periods for CFI, you may now consider insurance packages may be the new industry to protect the family – assuming families are still allowed to compete in agriculture.

Co/trigeneration sequel – Balancing Energy in your Business

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In its draft report on Electricity Networks and the Regulatory Frameworks the Productivity Commission encourages a standard approach to Embedded generation (12.2) and puts a focus on minor distributed generation such as PVs, VAWTs etc (13), and the disparities in tariffs. The general theme is to push toward time based pricing to assist technologies where it can be incorporated within a strategy of load lopping.

On 4 November CO2Land (www.co2land.org) posted “Balancing Energy in Your Business” and a quote from the story said “It might be time, if you have not already, consider curtailment opportunities, renewable generation, cogeneration or trigeneration (albeit some high profile projects may well prove to be an embarrassment for overblown claims), or combinations of technologies with emphasis on energy savings.” This sequel further explains the pros and cons of cogeneration and trigeneration. The message is fully understand it first!

Increasingly common, where gas connections are possible, is the embedding of co-generation and there is an increase trigeneration. A little 101 here:

  • Cogeneration: Also known as combined heat and power, cogeneration uses wasted heat from gas-fired engines to project into other processes such as generating more electricity or producing heating.
  • Trigeneration: Combined cooling, heat and power – goes a step further, simultaneously producing power, thermal energy and cooling. The cooling can be used for production processes or climate control.

Gas Today (www.gastoday.com.au/news/benefits_of_cogeneration_and_trigeneration/078333 ) ran a story on Benefits of cogeneration and trigeneration where the authors said: “Cogeneration and trigeneration are already well established in Australia, with a growing clientele of property owners and developers incorporating them into their new or existing buildings or plants. Flexibility in design makes these applications easy to adapt to different customer demands, and thus cogeneration and trigeneration plants can be found in various different locations, including:

  • Urban areas with office buildings or retail complexes;
  • Residential areas;
  • Industrial or manufacturing facilities, such as breweries, abattoirs and dairies;
  • Hospitals;
  • Education facilities including universities and schools;
  • Airports;
  • Government sites such as state and federal agencies; and
  • Data centres.”

However, with all good marketing efforts should come the balancing with ‘real’ stories. After reading a post of Dru Spork (Manager at Grocon in Sydney), he made the comment  “those with experience should be able to chuckle along with this”, and what did he mean? Pitfalls we suspect and what to avoid when sizing. Some common mistakes and problems are:

  1. Design size for load lopping rather than operation. This can mean the unit is insufficient to handle the building load if isolated from grid connection.
  2. Total reliance on standards measures (AS3000) design ratings and not correctly sizing to match operation. That is not measuring correctly the actual equipment selections coupled with absorbed power/run power modelling.
  3. Not considering the ‘what if’ on the power requirements when other energy efficiency initiatives or technologies are introduced. Will there be a need to run the generator?
    The economics are very important for the business case and overblown estimates could mean a stranded asset. Consider:
  • The Capex investment for different load operations.
  • Modelling the generator operation modeled at say 100%, 75% and 50% load (to predict available electrical load) and match this to absorber performance at 100%, 75% and 50% – rather than checking the quality of the heat output and how this works with the absorbers.
  • Determine building heat load in the operational model.
  • Be prepared for battles with the electrical authorities over fault levels and approval procedures (project approvals can take around 18 months).
  • Empty buildings do not need power. The operations modelling of the generators assume occupation and operations of the building.

CO2Land org considers it is not uncommon that such projects fail and it tend to be because the introduction was not planned as well as it should have been. When talking to Ahmed Abdoh, he said “that is why we in Carbon Training International offer the only nationally recognised course in Cogeneration and Trigeneration that can help how to take the right decision on size and type. check out our course on www.co2ti.com . The primary material of the Course is the work of Winton Evers (Ecoprofit Management) and Ahmed Abdoh (CO2Planet) moderated by Bill McGhie (CO2Ti).

We also ask you to consider, you will get noise complaints from the adjacent buildings when operating, you will not get $120 per KWH value every day for generating, for these projects a ‘too analytical’ engineering report is a good report!

Major shake-up for DPI

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It is goodbye to Catchment Management and the Livestock Health and Pest Authorities. They are to be eliminated in a major shake-up in the provision of agricultural and catchment management services in NSW. This means a Major shake-up for the Department of Primary Industries.

It is understood the new structure would be responsible for:

  • Agricultural advice
  • Plant and animal pest control and biosecurity
  • Natural resource management; and
  • Emergency and disaster assessment and response.

The Primary Industries Minister Katrina Hodgkinson was quoted as saying “agricultural advisory services provided by Agriculture NSW (part of the Department of Primary Industries) would also be incorporated in a single new body, Local Land Services,……Farmers and landowners will be able to easily access natural resource management, agricultural advice and biosecurity functions from one organization,….The structure will free up staff to work more closely with their communities, encourage innovation and integration across the landscape and be more accountable to ratepayers”.

The Minister is also credited with saying Local Land Services would be regionally-based, semi-autonomous, statutory organisations governed by locally-elected and skills-based board members. For more information on the new structure, follow the link, as outlined by Ms Hodgkinson: media/pdf/20121004_FINAL_Local_Land_Services_fact_sheet.pdf

CO2Land org has always encouraged better practices and notes the new Local Land Services will be set up to promote innovation, improve productivity and let farmers and landholders to get on with being able to manage their land.

This news should comfort organisations looking for a better relationship with levels of government without the prescriptive styles of the former authorities. While it is welcome that the work of community-based natural resource management organisations like Landcare NSW and Greening Australia will be more closely attuned to the administration it remains to be seen if harmony will prevail over funding distributions and cooperation with other co-funded organisations including the Rural Research and Development Corporations.

CO2Land org notes there is concerned over job cutting and the effects on the bush funding models. The main criticism being the election promises and moves to decentralisation is in fact becoming centralisation of DPI.  We spoke to a recent DPI employee that accepted a package from the body, and it was said – now more good than bad will follow, everyone was too comfortable before and whether the remaining staffing is permanent Government employees or contractors or just made up of volunteers it will be better than the way it was delivering. Only one real issue remains: What will be the sources of the funding for vital work?

What would happen if the Carbon Farming Initiative (CFI) did not go ahead

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What would happen if the Carbon Farming Initiative (CFI) did not go ahead – the faithful can take the view it is an unlikely scenario – however, the terms of what is a commitment seems to loom as a political issue.  The pros and conns of whether it should be 10, 25 or 100 years is very much part of the politics and views have been put forward in previous writings suggesting it is something that needs to be carefully evaluated and a mistake in the terms and timings could amount to a revival of feudalism for farmers (Posted on August 8, 2012 by co2land – You can’t sit on a fence, a barbed wire fence at that, and have one ear to the ground).

Recently, the Department of Climate Change and Energy Efficiency (DCCEE) in Australia made some important announcements:

  1. The case for continuing with CFI: The case can best be viewed through www.cleanenergyfuture.gov.au and recent presentations include the process of eligible activities, the intention of the positive list, baseline identification (which clearly put the illustration of what will happen if the CFI did not continue as a project), examples of the methodology proposal, preparation and the approval process (which is in complete acceptance when it appears on the Federal Register of Legislative Instruments).
  2. The appointment of Agrifood Skills Australia to develop the competency sets for CFI participants:  Associates of CO2Land org had previously lobbied both parties to argue the need for the competency sets and urged they should not believe they alone fully know the competency sets required. Examples were given where previous outreach attempts lacked some hard capability to influence other than a  ‘wait and see’ attitude and business as usual will continue until the audience can fully understand the partitioners voice is being heard. It is urged the associates should still be canvased to help resolve such dilemma in developing competency set faced by outreach entities.

CO2Land org also researches in an independent way and notes that according to US advances in ‘green businesses’ (previously we have also indicated CFI should not be described as a ‘carbon’ business initiative) the “Bay Area news channel KQED, by funneling auction revenues into green businesses, like sustainable farming, and encouraging corporate polluters to find more eco-friendly methods of conducting business, the state has a chance to reduce its greenhouse gas emissions by 80 percent by the year 2050″.

What exactly constitutes a green business? The news channel reports that sustainable agriculture is on the state’s approved list. This includes farms that “sequester carbon” with methods like reducing soil tillage, practicing water and energy conservation, and reducing synthetic fertilizer use through compost, cover crops, and crop rotation. Could we see a policy change here, suitable for Australia – soon!

cracks and drafts under the shadow cabinet doors

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Getting the house in order: Turnbull rebuttal of Bishop, and Abbott says Carbon Tax responsible for energy prices rises of 30, 50 100% depending on state affected. When he categorically claims he will dismantle the tax and energy prices will fall 30%!  On Today television it was his piece de resistance, in the mean time another of the shadow cabinet was published in the Australian as saying she (Julie Bishop) has privilege of ASIO briefings! Where can we find the truth?

CO2Land org then noted a tweet from Malcolm Turnbull (Federal Member of Wentworth – Shadow Minister) rebut Bishop’s claim: Methinks there are cracks and drafts under the door of shadow cabinet! It should also be said Turnbull has a lot of experience of Government and from a personal perspective when he was the Federal Minster for the Environment he does know how to count the apples of the greenhouse tree.  Quoted from the tweet is:

[ Published on: September 28, 2012

Today The Australian carries a story by Cameron Stewart stating that I was briefed by ASIO about the Government’s decision to ban Huawei from participating in the NBN project on national security grounds.

The Australian suggests that this is at odds with my comment “Having said that, we have not been privy to the security intelligence advice that the government has had. We will review that decision in the light of all the advice in the event of us coming into government. That’s as far as I can go.”

I have not hitherto publicly confirmed or denied that I have been briefed by ASIO but I note Julie Bishop has confirmed she was briefed by ASIO and as it happens I was present at the same briefing.

ASIO did not provide us with the full advice it had given to the Government. This was not surprising. Opposition briefings are very rarely, if ever, as complete as those given to the Government of the day and as a consequence the responsible approach for us to take was simply to state that if we formed a Government we would review the decision in the light of the complete advice and intelligence material that is inevitably only available to the Government of the day.]

No doubt swords are drawn in shadowland

 

food shortages, weather patterns and prices

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Overheard: a farmer complaining near Canberra that the entire vegetable crop of the farm is loaded in a container and shipped to China, They are not allowed by contract to sell any produce locally, nor in this country. How common is this, and it was worth a closer look for worldwide trends.

Co2Land org did not have to look too hard to find 3 trends that impact the commercial world of farming: Food Shortages, Implications of global weather, and Non Farmer induced price behaviours.

Originally posted by farminguk.com each of these trends were reported as separate items, but in tying them together it made an interesting study.

1. Food shortages ‘a major threat to global security’ 26-04-2012

The warning in the story is the concerns over global food supply. It is argued economic hardship; political instability and human conflict could be the future reaction to a poor food supply. It is stressed this is beyond the threat of hunger and malnutrition and extends into wider security concerns.

They talk of the need for policy directions to embrace developments in agricultural science and technology to avert the dangers of shocks and disruptions to the food supply system. That currently innovations in plant science is discouraged in the policy agenda.

CO2Land org did notice that the use of wording ‘anti-science EU policy agenda’ and assumes this as a covert attempt to promote GM foods.  In particular the words: “Innovations in plant science, from agricultural biotechnology to advanced crop protection products, offer major opportunities for Europe’s farmers to deliver sustainable gains in agricultural productivity. Yet such advances are currently discouraged by an anti-science EU policy agenda.”

The argument is national and international security risks of failing to tackle the global food supply crisis. Commissioned by the Crop Protection Association the UK Parliament was told “Food supplies must increase by at least 70% to keep pace with the demands of a world population set to exceed 9 billion by 2050, and the report highlights the urgent need to increase agricultural productivity, reduce food waste and improve distribution networks….The report also recognises that increasing food production sustainably in a world of rising urbanisation and already strained natural resources will require access to the most advanced farming technologies and practices. ”

2. El Nino fading: Implications on global weather 27-09-2012

This post really startled: The implications of a wane of the weather patterns do not guarantee a change replenishing soil moisture for crops.

It would be reasonable to expect cooling surface temperatures in the tropical Pacific is the wane of El Niño atmospheric osolation.  And then comes the quote reported to be from Don Keeney, Senior Agricultural Meteorologist for MDA EarthSat Weather/CropCast. “It is true that we are seeing a fading El Niño, but this does not mean that we are automatically headed for La Niña,”

So how does this affect the global food situation? Again, to quote the source: “While the easing of El Niño makes the idea of drought-busting rains in the U.S. and ideal growing conditions in South America less certain, the current trend away from El Niño does imply that the tropical Pacific will have less influence on weather patterns in most areas”.

From this we can glean future weather patterns will continue to shift from being predictable ways of announcing rain and temperature events. This is explained as the effects of other circulation patterns called teleconnections. What are the implications of this pattern shift?  The answer is less certainty and increased variability making long-range forecasts more difficult and less reliable in estimating temperature and rainfall signals.

CO2Land org can now speculate the potential of countries with larger populations will do what they can to accumulate or guarantee food security. This includes buying the entire crops at the farm gate of one country to export to the other and even then process any excess to be imported by the originating country. The near Canberra farmer even mentioned it was believed that farms produce went to China was then sent to New Zealand processed and sent packaged back to Australia. We have no proof other than see if a comparative economic benefit exists it is possible to believe.

3. Current food supply could lead to severe price rises 26-07-2012

It would seem UK and Australia shares a common problem in the food industry. That being a small number of processors and retailers were dominating the industry and farmers were finding that they are struggling to keep afloat. The demands of dominate processors and retailers mean comparative economic advantage from one country to the next will be exploited and the consumer is partly to blame because they insist on paying less.

The post tells of how many farmers or too small to be of interest to supermarket chains and that small scale farmers are struggling to exist. It cannot legally be called restriction of trade; it is simply that the economies of scale required place very restrictive contracts conditions on farmers by way of what is required by supermarkets. Farmers then find the outlets for their produce are very limited and the price to get to market further erodes a reasonable return on the price consumers will pay.

My near Canberra farmer is large scale in the sense container loads are shifted and it does seem insane that the produce is grown locally, and sent to massive packing centres wherever before being transported back to local supermarkets. It also appears the large scale producer is under increasing pressure to continue to lower costs of production and increase the varieties that increase shelve life of the products.  It is conceivable that they like smaller farmers will find resilience not enough to stay in the market place. You could then ask if it is not the weather that will sink us for food security is it a lack of competition at the process and retail end that is the problem?

CO2Land org finds it must absolutely agree the issues and problem are many to use the weather pattern analogy it is teleconnections that are bring random and less easy predictors of how to best handle the problem of enough food. But no matter the comment it is difficult to go past the arguments that the food industry is full of short termism and the state of the market drives this behaviour. As is the debate on climate change we do need to address this, the changes in the environment and learn the market itself cannot be sustainable without political will to protect our long-term future.  But it is already too late!

 

lower project risks for issuance of carbon credits – Farmers benefit

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Carbon Pricing was expected to increase farm costs by $3.2b in Australia at the fixed price of $23 per tonne CO2-e (increasing at 2.5% per annum for three years). Then after 28 August 2012: You may have been confused when the announcement from the government said we will synchronize with European Emissions Trading scheme by 2015 and effects will be felt immediately and most definitely from 2014 where we can expect our ceiling cap to be set by a European communities. This can be taken to be a positive step and as we (serious about economics) know economies of scale give more certainty to the market. One thing has not changed is the point where the market will fully transition to a flexible price determined by the market.

Being that Industry intelligence is vital for a successful business, it is right to ask questions and have data provided to be analyzed and have the facts assembled and crafted into a response. So without political spin we should give a bit of the background on Agriculture in Australia:

Agriculture accounts for about 15% of Australia’s total emissions, but it is notoriously difficult to narrow a number of the sector individual parts for what they contribute. It varies a lot and is in part why the Australian Government’s Clean Energy Plan for the carbon price does not apply to Australia’s agriculture sector, which means that farmers are not liable to pay a direct tax on carbon emissions. Farmers are also exempt from paying tax on their fuel consumption until 2014, when the government will begin to tax carbon emissions from heavy on-road transport.

Lets examine what CO2Land org also thinks is part of the reason agriculture is not applied to the carbon pricing, and it stems from the wording ‘carbon’. In Australia we legislated there are six greenhouse gases and each has different lasting affects on the global warming and climate actions. For instance:

  • Livestock farming is carbon which of which largely depends on how you count it and it can be greater than 21 times more potent than carbon dioxide and is attributed with at least 75% of agriculture carbon.
  • Pasture and grain growers’ account for at least 15% of the sector’s emissions. This is also very difficult to measure as much depends on the amount of fertilizer use, crop residue burning and harvesting activities.
  • Other factors that affect the sector are drought conditions, changes in livestock numbers, pasture quality and commodity prices affect on demand.

Therefore the issue for the industry with the carbon price is the indirect costs under the carbon price conditions, primarily in the form of higher prices for farming inputs and production. The rise in freight and fuel-based costs beyond 2014 will detract from the bottom line, as it will become more expensive to transport livestock and get fresh produce to market.  Now if the carbon price after 2014 is more likely to be stabilized by a more efficient global market scheme it should be reasonable to assume those price rises will be lower than predicted. Lets take a punt and say annual growth of agriculture production will increase or remain steady in 2014-15 and not decline by around 1%. This should indicate revenue impact of the introduction of Carbon pricing is now not as severe (it is worth noting that transport cost are around 16% of co2 emission in the farming product) and a more stable pricing mechanism will have direct downstream pricing benefits for farms. Therefore farmers should have a more relaxed view of the situation than previously.

CO2Land org was sent a notice that ( www.ibisworld.com.au ) IBISWorld published a special report on Carbon Pricing in June 2012 on the state of play as was seen at that time, and this in part formed this comparison to conclude the latest move to European Trading Scheme should be a good move. Reason: Likelihood of indirect costs not rising to the levels predicted and a near complete counter to the increase in on-road fuel costs from 2014. And, less discount on our buyers and sellers actions in forward sellers markets – lower project risks for issuance of carbon credits for developers.

Carbon price -positive posts today

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Carbon price featured in two positive posts today. Both would give some certainty to farmers under carbon offsets schemes. The first was reported by AAP, 28 August 2012, on what CO2Land org has tipped and that is that the European Emission Trading scheme was in a state of change and ultimately, all markets will benefit from these changes: The Australian Government announced plans to link Australia’s scheme to Europe’s emissions trading scheme from 2015. Also announced was an equally important event, The Department of Climate Change and Energy Efficiency, Carbon Farming Initiative team, announced the opening of Expressions of Interest for grants funding to develop carbon farming methods.

Why are the two linked? Aspects of both effect Australian companies that will be able to sell credits in Europe and farmers wanting some certainty to the ability to generate credits through changes to their land practices, and that had an issue in that it was well posted Australia might not have generated sufficient credits to meet the domestic demand.

The link is also important for project developers that are used to assigning risk to issuance of carbon credits and they can now be more certain that the projects will conform to pricing expectation without the need to vary or discount. Without it the only other option was to assign a risk to earlier transactions and take a greater discount.

What else is good? Currently Europe permits are trading for about 8 euro (high $9) and traders can offer that to you now to meet future liabilities. Sorry Tony, this means the carbon price will most likely be cheaper for Australian businesses by the effective date and possibly before, and the beauty of it is the European Union will be the one that will put the brakes on if things get too aggressive. Yes, someone else to watch over the price.

What else would farmers like? Current restrictions of the liability that can be met by overseas carbon schemes will be more price friendly through the European Scheme and that scheme will become a floating-price emissions trading scheme and the Australian linkage to Europe will be a free market with price advantages that can be traded without affecting the level of carbon cuts needed.

We will leave the clean energy advantages for another post.

 

The operative of ‘Consistently’, ‘Resilience’

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We were discussing some difficulties with methodologies and land use change. The operative of ‘consistently’ became problematic as climate change is about uncertainty in weather patterns!!!

My friend said I have a meteorology business for exactly that reason. So where are you at I asked: Answer, we are in the middle of contract negotiations with XXXX Airport and have 2 different capital raisings underway (one for an existing project and one for an exciting startup). However, I think you know I have an interest in seeing if this carbon space can work. CO2Land org should add this friend’s track record in other spaces is pretty good. So why only express and interest in the carbon space, why is there a hesitation to get fully into it when it is so important?

Assuming CO2Land org decided on a capital raising venture, my friend said adopt this approach if it is based on Carbon Farming Initiative (CFI) and determine: How many farmers do you believe you have willing to participate, and how many hectares do you believe could be allocated? In truth without an approved methodology – none! But we have lots of potential!

Assuming we have potential (and pending approval of our methodology – allow 12 months or more for approval) we have to determine: What proportions of these (farmers and hectares) consistently fall into the rainfall categories:

a)      800 -899mm per annum or greater

b)      700-799mm pa

c)       600-699mm pa

d)      500-599mm pa

e)      Below 500mm pa

Now we enter into a circular argument (The operative of ‘consistently’ became problematic as climate change is about uncertainty in weather patterns!!!). To add another dimension we can talk of timeframes for participation: Is it 7 years, 25years or 100years – back to you later – but assume 100years remains. Notice how many time the word assume is used – remember the old adage – to assume is to make an ass of you!

Many landholders can be looking at what best suits their contribution to participate in abatement activities, Some will decide on the Carbon Farming Initiative (CFI), some Biodiversity Funds (BF) and some might just choose business as usual (BAU). CO2Land org has previously stated BAU is a means of denial and a work to go broke slowly tactic.

So what causes some to think BAU? Possibly, some might have been very keen on biodiversity a few years back and question the efficiency and effectiveness. In recent times those that have effective strategies in place and locked up their properties had had this turned around by coal seam gas well and minerals exploration. Additionally, as reported by The Conversation, 11 July 2012, was that 168 countries including Australia signed the Convention on Biological Diversity in 1992-93 to achieve  “a significant reduction in the current rate of biodiversity loss at the global, regional and national level” by 2010 – by 2010 not one of the 168 countries could demonstrate significant progress toward meeting this target.

Then consider: Australia has plenty of food and exports about 50% of production, we only create about 1% of the global food supply – Australian farmers are efficient in terms of the food and fibre produced per unit of labour input – but most of our farming systems are based on high inputs of expensive fuel, fertilizer, chemicals, and machinery – with very high wage costs and a high Australian dollar, it is increasingly difficult for Australia to hold existing markets. Then comes the question from CO2Land org, and our biggest retailers import food, yet we are the most efficient country in the world per unit of labour input – and if we can recycle most fertilizer use, why is not that encouraged?

How is your methodology, well maybe it takes a long time to get a approval for good reason, if you want a biodiversity outcome the following could worry you as “There is an emerging view that although forests remove a substantial amount of CO2 from the atmosphere, much of the carbon is being stored in living woody biomass rather than as dead organic matter in soils – carbon stored in soils is desirable from a management perspective in that soils are more stable over time, so carbon can be locked away for hundreds to thousands of years and not be re-released to contribute to atmospheric CO2. Source: The Conversation 12July 2012. Maybe CFI based on carbon stored in soil is the way to go!

Now a little more on why your methodology may be too narrow in its focus and it revolves around the word ‘Resilience’. According to the Decision Point, August 2012, Resilience is not about not changing as far as natural habitats are concerned – it is concerned with holding a system in exactly the same condition erodes resilience because the capacity to absorb disturbance is based on the system’s history of dealing with disturbances.

Once again CO2Land org does thank Garry Reynolds of Caring for our Country, DAFF for the reference sources.

Waste, Land, Climate Changes

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Waste movers:

South Australians have done what is the environmental equivalent of taking more than 300,000 passenger cars off the road, or planting 2 million trees and set a new record for recycling, diverting almost 80% of waste from landfill in the past financial year. Source: The Adelaide Advertiser 26 June 2012.

A printer cartridge in a landfill will take between 450–1,000 years to decompose, and creating the plastic for one laser toner cartridge uses 3 litres of oil. In 2012, in Australia an estimated 5 million litres of oil could be saved annually by using remanufactured printer cartridges. The claim is 450 million toner cartridges and 1.5 billion ink cartridges are expected to be used and thrown into landfill this year

Aluminum is almost endlessly recyclable – it saves 95% of the energy it would take to make new metal – nearly three-quarters of all aluminum ever made since 1886 remains in use today.

The Land Changes

Small family-owned and managed farms are struggling for survival in the face of corporate and large-scale agriculture – research released by the Australian Farm Institute (AFI) found that in Victoria last year, only 28% of family farms were of sufficient scale and profitability to earn enough income to support the families owning them – more than one-third of all family farms relied on adults living on the farm to earn wages elsewhere – another 39% of farmers earned so little from trying to grow and produce food that their family income was below the median of all Australian households. Source: SmartCompany 26 June 2012.

Farms with under $100,000 of sales a year tend to have in excess of 95% of their net income from off-farm wages – there is a “strong disconnect” between the public perception of where food comes from and the reality, with 20% of farmers producing almost 80% of total production – the AFI says that while the major retailers and food producers advertise their connection with the average Joe farmer, a bloke on a tractor with his hat on, that’s not the reality – the reality now is much larger-scale farm businesses.

A recent national Landcare survey found that 93% of the landholders surveyed practiced Landcare on their farms, and 73% said that they feel they are part of Landcare – 61% said that Landcare plays an important role in building social capacity in their local community – 95% of farmers indicated that Landcare has not ‘had its day’ yet – 79% believe the movement needs to evolve to meet the challenges of the future – and 80% see the movement as having a major role in responding to national challenges such as food security, environment and climate adaptation. Landcare 09 August 2012.

The US is the biggest producer of corn, soybeans and wheat in the world – the first 7 months of the year have been the hottest on record and the country is experiencing the worst drought in 50 years – a poor harvest will mean global prices will rise and global stockpiles will be depleted – whereas Australian farmers envision a good season and bumper crops. Source: SunHerald 12 August 2012.

Climate Change

The Arctic’s glaciers, including those of Greenland’s vast ice caps, are retreating – the Greenland ice sheet has recently shed around 200 gigatonnes of ice a year- this is a 4 –fold increase on a decade ago -– the area covered by snow in June was roughly a fifth less than in the 1960s – the land is also thawing and the permafrost is shrinking – alien plants, birds, fish and animals are creeping north. Source: The Economist 16 June 2012.

The Arctic is warming roughly twice as fast as the rest of the planet – as the ice melts it is replaced by dark melt-water pools which attract more solar heat – this causes local warming – more melting and more solar heat gain. Source: The Economist 16 June 2012.

Thank you to Garry Reynolds DAFF NRM Co-ordinator.