Will dairies benefit from the “green" wave?

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Dan DeRuyter's methane digester generates up to 1.2 megawatts of electricity, which is fed into the local utility company’s power grid. It is enough electricity to power 600 to 800 homes. In return, DeRuyter receives about $35,000 a month, depending on the price the utility company is willing to pay. Currently, he is receiving 5 cents per kilowatt-hour, which is relatively low compared to other parts of the country. 

If I could just get a reasonable rate for my power, I’d be happy about that,” says DeRuyter, co-owner of a 4,500-cow dairy in Outlook, Wash. “You really need to get paid about 7 cents (per kilowatt-hour) to make the doggone thing work.”

He’s confident that he could get more for his power if he could just sell it in a competitive market. But, due to various regulations, he must take what the local utility is willing to pay. The lack of competition is more of an issue for him at this point than what the U.S. Congress is willing to generate with cap-and-trade energy legislation.

He’s not asking Congress or anyone else for special funding. He just wants the ability to sell his power in a competitive market. “Just allow me to compete,” he adds.

For various reasons, the cap-and-trade legislation now in Congress is no panacea. It does not address the competition issue that DeRuyter is alluding to. And, it could be detrimental to the majority of dairy farmers who don’t have methane digesters. 

Legislation in the works
In June, the U.S. House of Representatives passed the American Clean Energy and Security Act, also known as the cap-and-trade bill. Proponents say it will create a clean-energy incentives program that will recharge our economy with new technology, new business and new jobs. Opponents say it will raise energy cost, create more government regulation, and possibly kill off some of the traditional sources of energy in this country, such as the coal industry.

The U.S. Senate may take up the matter this fall.

Yet, a news report on Sept. 16 casts doubt on the future of cap-and-trade legislation. According to CBS News, quoting a previously unreleased analysis by the U.S. Treasury Department, a cap-and-trade law would cost the typical American household an extra $1,761 per year. These types of estimates make the likelihood of passage in the Senate more problematic.

And, more specific to the dairy industry, one has to ask how many dairies are in a position to benefit under cap-and-trade.  

Winners and losers
Of the roughly 1,750 dairy farms in California, fewer than 20 have methane digesters, according to Neil Black, chief operating officer of California Bioenergy, which partners with dairy farms in renewable-energy projects.

He acknowledges that the number of dairies with methane digesters is small, but perhaps more dairies would build them if the right incentives were in place. Those incentives include (1) higher payments from utility companies and (2) higher carbon-trading credits on the Chicago Climate Exchange and over-the-counter markets.

The cap-and-trade bill would not require the utility companies to pay more for electricity — which is bad news for producers like DeRuyter — but it might help raise the value of carbon-trading credits.
The Congressional Budget Office estimates that carbon credits or allowances would rise to $19 per ton by 2015 and $26 per ton by 2019. The U.S. Environmental Protection Agency is a little more conservative, estimating the price would rise to $13 per ton by 2015 and $16 per ton by 2020. (Currently, carbon credits sell for about $3 per ton on the over-the-counter markets.) 

Black says the cap-and-trade bill passed by the House in June would be “very beneficial” to dairies with methane digesters.

But, again, few dairies have methane digesters.

Paul Martin, director of environmental services at Western United Dairymen, says he is aware of 18 digesters in California, although not all of them are operating at the present time. And, of those 18 dairies, Martin says he is only aware of one that is participating in the Chicago Climate Exchange.

There will be winners and losers with cap-and-trade, Martin says. Potential winners include dairies with methane digesters. Losers will be just about everyone else who will have to pay higher energy costs without the chance to offset those costs with methane digesters, no-till farming or other certified methods of reducing greenhouse-gas emissions.

Most dairies would lose
That is the same conclusion reached by the Agricultural and Food Policy Center at Texas A&M University.

In a special study analyzing the House cap-and-trade bill, the Ag and Food Policy Center concluded that 18 of the 22 dairies it collected data on would lose money. That’s because the farms would experience higher energy costs with no way to offset those costs. 

Of the remaining four, none of them showed a significant increase in net farm income — it was more a matter of staying even with current income levels. 

Besides dairies, the study looked at crop farms and other types of livestock. The study concluded that the only farms that would likely benefit under cap-and-trade are feedgrain/oilseed farms located in or near the Corn Belt and wheat farms located in the Great Plains. These farms could potentially shift some of their marginal cropland to trees, which might have the benefit of raising grain prices (since there would be less cropland) and possibly providing those farms with carbon offsets.

None of the dairies in the study had methane digesters. But the study authors did look at what would make methane digesters potentially profitable under a cap-and-trade scenario. They concluded that for farms using ag carbon credits, several farms would need carbon prices of $80 per ton or more to make them as well off as they are now with no cap-and-trade.

Eighty dollars per ton is significantly higher than the Congressional Budget Office and EPA estimates.
“The carbon price is going to have to be higher than what people think,” says Joe Outlaw, agricultural economist at Texas A&M and one of the study’s principal authors.

A lot of uncertainty
Currently, carbon prices have hit the skids (at $3 per ton or lower) because of all of the uncertainly over what’s going to happen with cap-and trade. In the summer of 2008, carbon was trading at around $8 per ton.

It’s yet to be seen just how much the public will be willing to pay for this, considering the fact that agriculture is responsible for just 8.2 percent of U.S. greenhouse emissions (according to “U.S. Inventory of Greenhouse Gas Emissions and Sink [1990-2005], Trends in Greenhouse Gas Emissions,” by EPA). And of that 8.2 percent, just 0.7 percent comes from manure management. Most of the agricultural emissions come from the way the soil is managed.

Martin, of Western United Dairymen, recalls a Swedish delegation that visited California a few years ago. These  people had expertise in methane digesters, and Sweden has always been a model for methane-digester success. Two important questions were asked at that meeting:

  • Can you make digesters pay by digesting manure only? The Swedish answered “no,” you have to co-digest the manure with other waste materials, such as food waste, restaurant grease, slaughterhouse waste, to make them pay. 
  •  What has made your methane digester program a success? Their answer, “The public will to invest in it.”

“I thought that was revealing,” Martin says.

How much the U.S. public is willing to invest in “green energy” — when it is quite obvious that the cap-and-trade bill will raise expenses for each household, perhaps as much as $1,761 per year — has yet to be seen.

For dairies, it would be better if the legislation attacked the real issue of competition among utilities, which would help people like Dan DeRuyter. Rather than trying to include agriculture, which generates a small portion of the greenhouse gases in this country, maybe the legislation could concentrate on the electric-power and transportation industries that generate a majority of the emissions.

Most dairies don’t want to see their operating costs go up without some corresponding way to offset those costs.



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