The growth in the number of farm based anaerobic digesters over the last four years has created a market for agricultural energy crops - from the traditional maize silages to increasingly popular use of grass silage, energy beet and whole crop rye, as well as farm based waste such as poultry litter, cattle manures and slurries.
Falling soft commodity prices, increasingly volatile input and crop prices, as well as a reduction in the area of sugar beet contracted to British Sugar, have all increased growers’ interest in supplying crops to anaerobic digesters. It is not just the prospect of finding a more stable market for agricultural produce which is encouraging growers to review their options, however. Pests, disease and weed pressure resulting from intensive crop rotations, together with the reducing effectiveness of chemicals to control black grass and other diseases have all encouraged growers to look at longer and more sustainable rotations.
In many parts of the country where land has been used predominantly for combinable, or root crops, there is also a growing issue of low organic matter in soils and the use of digestate helps to put organic matter back into the soil, particularly for example when part of the rotation includes a grass ley.
Having a proportion of the arable land in energy crop production therefore helps growers widen their combinable crop rotation, potentially stabilising their margins and returning organic matter to the soil. This fits well with developers and investors looking for growers to provide a regular and secure source of energy crops and land for digestate.
The reduction in the Feed-in Tariff and lower margins for new AD Plants as Renewable Heat Incentive (RHI) degression looms, however, is beginning to put pressure on the energy crop prices offered.
A widely used benchmark is the &/tonne of dry matter (DM) material delivered to the AD plant clamps. This has typically been around the &1/t/% DM but there are signs that the market is offering less than this in some regions. For some producers this can mean that they are better off growing other crops or leasing land to the plant operators rather than take the risk of growing the crop themselves.
Both parties therefore need to do their sums carefully to ensure that they can both benefit in the long term from these sorts of contract being entered into. When grain prices rise and arable margins improve, there will be pressure on developers to review pricing policies which will have an impact on profitability and cash flow later on.
It is also important that both parties are realistic about the yields and dry matter that can be delivered to ensure that they can both meet their parts of the contract and develop long-term sustainable relationships. Although energy crop supply contracts will help growers to even out the volatility of international commodity prices and AD Plant operators to improve the security of their feedstock supply, it has to work for both parties to ensure that both can be financially profitable in the long term.
The detail of the supply contract terms, therefore, need careful thought in terms of the medium to long term consequences over a range of economic conditions for both parties. Growers should still consider supplying AD plants as an opportunity and for those with a suitable location with a gas main nearby or good grid connection consider leasing their site for a developer. It might be a better earner than normal arable crops!
For further information contact David Kinnersley on 01905 459427 or email him here
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