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Biofuels in Japan-Q&A with Hiroshi Shiraiwa

Posted by admin on May 3rd, 2007

As the dialogue about the rise of biofuels has mostly focused on production in the US and Brazil, it is interesting to see how the biofuels debate is played out in other areas of the world. In this Trading Ideas Q&A, we have asked one of IPC’s members, Hiroshi Shiraiwa, about his views on domestic biofuel production in Japan, and about the concerns this raises for the environment, Japan’s trade policy, competitiveness, and agricultural and rural development in the country. What will the development of a bioethanol industry in Japan mean for job creation, Japanese farmers, the fight against global warming, and the overall economy in Japan? Shiraiwa is also formerly a counselor for the Japan International Agriculture Council, and a former director of Mitsui & Co.

Q: How can Japan afford to grow biofuel feedstocks? Does Japan have enough land to meet its domestic supply?

A: Yes and no. We have enough farmland to produce a huge volume of special rice for fuels; we have probably one million hectares at best for feedstock production. However, no country in the world has enough land to produce the biofuels feedstock necessary to meet its entire domestic fuel demand. For example, even the US could supply only a small percentage of biofuels to replace gasoline use. With limited acreage for corn production, the US does not have any surplus land anymore except for CRP acreage. Therefore, when we say we have enough land supply, it means that the supply meets with government mandated or targeted figures. In my opinion, countries should set up target figures for biofuels production based on availability of domestic feedstocks, such as agricultural crops and cellulosic feedstocks.

Japan established a target to have a supply of 6 million kilo litters of biofuels, or roughly 10% of transport fuel demand, by 2030. No detailed figure by source of feedstock was disclosed, but it is assumed to be a combination of crops and plant cellulose. According to a tentative simulation, the target of 6 million kilo liters could be achieved by using domestic resources, including special high yielding rice, which is palatable, but not suitable for staple food use in Japan.

In Japan, there are 4,671 thousand hectares of farmland as of 2006, of which 2,543 thousand are paddy fields. Of these paddy fields, only 1,684 thousand hectares(66%) were planted, and the balance (859 thousand) was left unplanted, or diverted for growing wheat or soybeans. The Ministry of Agriculture, Forestry and Fisheries introduced a diversion program that allows for and subsidizes the planting of wheat or soybeans on this land to improve Japan’s food self-sufficiency ratio from 40 to 45 percent on a caloric-intake basis, to meet the guidelines set forth in the New Agricultural Basic Law, enacted in 1999. However, paddy fields are not suitable for such crops, and the poor quality and high cost of both have forced the government to pay huge amounts of subsidies. These subsidy payments could be redirected and used for feedstock production of biofuels. This is what I am proposing. Moreover, the subsidies for rice to be used for ethanol would be less than that currently paid for wheat or soybeans.

In addition, about 380 thousand hectares of farmland were abandoned for no purpose. We can probably utilize a total of one million hectares of paddy fields for feedstock production, as we cannot use it for staple rice planting, due to decreasing rice consumption in Japan. Total production could rise to more than ten million tons, in view of higher yields and two-time harvesting in the southern region. The cost of holding paddy fields in Japan is very cheap (given a very low property tax), as long as the property remains within the family. There have been only a limited number of sales and purchases of paddy fields up to now. The government has been trying to facilitate the consolidation of farmland in order to scale up the average size of farmland per farm, but hasn’t made much progress so far. There is one advantage of planting rice over the other crops: there is no problem with consecutive rice planting, and it will not affect yield per hectare. Other crops need to be rotated every year in order to maintain a good yield. In Niigata, the biggest rice producing prefecture in Japan, some farmers planted a test case of Hokuriku 193, a variety developed quite some time ago for feed purposes, and harvested as much as twice the volume compared to the normal rice variety. There could potentially be an increased yield of three or four times as much in the future, if we introduced a GM crop.

Q. We have seen media reports saying that Mitsui and Co. is partnering with Petrobras, the Brazilian oil company, to conduct a feasibility study for producing bioethanol in Brazil, and has plans to sign long term supply contracts for ethanol exports to Japan. How much ethanol does Japan import from Brazil now? Is Brazilian ethanol needed to meet Japanese fuel efficiency standards?

A. There are currently no ethanol imports from Brazil used for fuel, but ethanol is imported for beverage purposes. Recently, oil companies have jointly imported ethyl tertiary butyl ether (ETBE) from France, which has been prohibited for use until now due to its potential harm to human health. The oil industry is resisting the introduction of biofuels into the Japanese market, as they want to protect their traditional market share and profitability. Nothing is fixed as far as ethanol for fuel is concerned. I know Mitsui has signed a contract with Petrobras, but there is currently no infrastructure to handle bio-ethanol in Japan.

Q. How suitable is rice for biofuel production, in terms of cost-effectiveness and environmental friendliness? What is the net energy balance of ethanol made from rice?

A. Rice has almost the same starch content as corn. As long as biofuels companies can procure rice for fuel production at a competitive level, with some government support, compared to the price of imported ethanol, the industry can be sustained. To be realistic about this project, Japan needs to improve the production cost of rice further. Presently, we could reduce production costs a lot by introducing high-yielding variety of rice, and by adopting more cost-effective farming methods. Further, we would make ethanol production from rice more efficient by using the entire husk of rice by gasifying it using a co-generation system source of energy, so that there is no need to use fossil-fuel for dehydration purposes. This is one advantage over corn ethanol processing. Also, using nanotechnology to extract water could save on energy consumption.

As far as the net energy balance, we don’t have any concrete figures, because there is no biofuel industry in Japan yet. We have to rely on results from EU and US studies on the biofuel energy balance, which have up until now supported the production of biofuels.

Q. Is the drive toward ethanol production in Japan fueled by a desire for cleaner energy, or is it motivated by a desire to protect rice farmers from trade liberalization?

A. The reason for a biofuels industry in Japan should be first and foremost to reduce greenhouse gas emissions as much as possible on a global scale. When importing ethanol from Brazil, Japan should consider whether it is best to do so when Brazil might not be able to satisfy its own domestic demand. Producing biofuels would benefit Japan for the same reasons that it benefits the US. Every country has its own resources to produce bio-ethanol. In Japan, the industry is still in its early stages, and we need to develop technologies for the first and second generations of biofuels. We also need to fully utilize paddy fields that are now idle, and which are best suited for rice crops. Doing so will help to preserve rural Japan. If bio-ethanol projects were realized, Japanese rice farming could become much more competitive, such as with the introduction of new ways of rice farming. Eventually, farming could become even more competitive with the advent of GM crops as feedstock. A healthy bioethanol industry would also help create new jobs in rural areas, improve Japan’s balance of trade, help to increase and diversify farm income, and induce young generations of farmers to stay in farming communities.

Q. Do you know how increased ethanol production in Japan might affect other industries/businesses there that use rice for inputs to make their goods? You mentioned that Japanese ethanol could be made from brown rice, unsuitable for food in Japan. Does any other industry use brown rice?

A. Here, the situation is completely different from the US. US corn has many kinds of markets, such as for food, feed, high fructose corn syrup, and for export all over the world. Japanese rice presently has only limited markets, which are the domestic staple food market, and the sake market (rice wine). This is an important difference to note between the effects of using rice for ethanol production in Japan, versus the effects of ethanol production in the US and Brazil, in terms of negative effects on the food market. Because the type of rice used for ethanol production in Japan is not the type suitable for consumption, there is no competition between staple food rice and rice for fuel. Therefore, Japanese rice production for ethanol would not negatively affect commodity prices, and domestic or global food supply.

At a time when an ethical argument can be made against producing feedstocks for fuel use due to their impact on food prices, we cannot say that this will happen in Japan. I also speculate that the US will eventually abandon its freedom to farm policy and reintroduce a farm policy of acreage allotment by dividing allocation of acreage between food and fuel. I would like to hear any comments from IPC Members on this.

Q. How supportive is the Japanese public for the use of biofuels instead of fossil fuels?

A.The Japanese public supports the promotion of biofuels, but political leadership is lacking at present. We need a Mr. Bush or Mr. Blair in Japan.

Q. Would ethanol production in Japan need to be subsidized, or would it be competitive?

A. Japan needs to have almost the same framework as in the US to promote a domestic biofuel industry. We need to have subsidies for feedstock production, and also subsidies for the construction of ethanol plants. We need to have legal mandates to produce and consume a certain level of biofuels for automobiles. We need to have flex-fuel cars. We need to have legislation to force the oil industry to comply with government policy. We need to have enough tariffs to protect new industries until they become competitive. There is no difference between Japan and the US on this matter, except that the US uses corn for ethanol and Japan would use a different kind of rice for ethanol.

It is important to understand, however, that rice is a special product for Japan, and a symbol of its culture and tradition. Therefore, I would propose that we term rice that is grown in Japan for fuel purposes “Eco-grain” instead of “ethanol rice,” so as to reduce resistance among farmers, and to keep them proud of growing rice. The issue at stake also is how to best utilize set-aside or abandoned paddy fields, which has been a long-time challenge for the government and for farmers. Land has been set aside in order to prevent excessive rice production. This “set aside” land is different from land that has been diverted and used for soy and wheat production, according to government mandates, as mentioned earlier. So, overall, agriculture would benefit the most from this scheme, and so would consumers. But the oil industry would be the loser, unless it invested in the Japanese biofuels industry as a new business opportunity.

Q: If Japan were to move ahead with domestic ethanol production, as you suggest, do you envisage Japan to have high trade barriers against ethanol imports from Brazil? How would protecting an infant Japanese ethanol industry work with sourcing ethanol imports from Brazil?  Might this necessitate some kind of specific and preferential Brazil-Japanese trade agreement?

My personal view is that a certain amount of imported ethanol will be necessary. In order to help support a growing ethanol industry in Japan, I have suggested the idea of introducing a tariff-rate quota (TRQ) system for allowing these imports.

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