INDUSTRIAL USES OF AGRICULTURAL MATERIALSAugust 28, 1996 Approved by the World Agricultural Outlook Board INDUSTRIAL USES OF AGRICULTURAL MATERIALS Situation and Outlook is publishedonce a year by the Economic Research Service, U.S. Department of Agriculture,>Washington, DC 20005-4788. IUS-6. Please note that this release contains only the text of INDUSTRIAL USES OF AGRICULTURAL MATERIALS--tables and graphics are not included. Subscriptions to this report are no longer available Contents Summary Introduction Macroeconomic and Industrial Outlook Starches and Sugars Fats and Oils Natural Fibers Animal Products Forest Products Specialty Plant Products Special Article Potential Niche Fuel Markets for Biodiesel and Their Effectson Agriculture List of Tables Coordinator Lewrene Glaser voice (202) 219-0091, fax (202) 219-0035, e-mail lkglaser@econ.ag.gov Contributors William Bryan Just, ERS Linwood Hoffman, ERS Ron Buckhalt, Alternative Agricultural Research and CommercializationCenter Bruce Kinzel, Agricultural Research Service David Torgerson, ERS Allen Baker, ERS John McClelland, ERS, Office of Energy and New Uses Paul Tatarka, Agricultural Research Service Charles Plummer, ERS Irshad Ahmed, BoozAllen & Hamilton, Inc. Lewrene Glaser, ERS Sandra Pyles, ERS Anton Raneses, ERS James Duffield, ERS, Office of Energy and New Uses Leroy Watson, National Biodiesel Board Craig Chase, Technical and Engineering Management Steven McLaughlin, University of Arizona Jacqueline Salsgiver, ERS Peter Ince, Forest Service, Forest Products Laboratory J. Michael Price, ERS Statistical Support Anton Raneses, (202) 219-0752 Charles Plummer, (202) 219-0717 Mae Dean Johnson, (202) 219-0506 Editor Diane Decker Graphics, Design, and Layout Wynnice Napper Anne Pearl Summary released August 27, 1996. The next summary of Industrial Uses of Agricultural Materials Situation and Outlook Report is scheduled for release in July 1997. Acknowledgments This report was made possible through the active support of many people and organizations. Funding for this issue was receivedfrom USDA's Alternative Agricultural Research and Commercialization Corporation. Harry Parker, Professor of Chemical Engineeringat Texas Tech University, and Donald Van Dyne, Professor of Economics at the University of Missouri, contributed time and expertise to this report. Mention of private firms or products does not indicate endorsement by USDA. Printed on kenaf paper with soy ink. Summary Greater Planting Flexibility and Industrial Uses Provide More Market Opportunities for Agriculture With U.S. farmers now facing few restrictions on what they can plant, industrial crops will need to stay competitive--economically and agronomically--with other crops to ensure their continued viability. Expanded planting flexibility is a hallmark of the recently passed Federal Agriculture Improvement and Reform Act of 1996 (1996 Act). The 1996 Act takes the United States to an almost fully market-oriented farm policy by eliminating annual supply control programs, instituting near full planting flexibility, and decoupling income support from production and market prices. The 1996 Act allows farmers greater freedom to respond to market incentives. Therefore, expected market returns and crop rotation needs or desires will become important factors as farmers evaluate commodities to produce in the future. The 1996 Act also made USDA's Alternative Agricultural Research and Commercialization (AARC) Center a wholly owned government corporation. In addition, the Act amends Federal procurement policy to encourage Federal agencies to give procurement preference to environmentally friendly products produced by companies supported by the AARC Corporation. Scientific developments from USDA's Agricultural Research Service are now posted on the Internet. Industry, the scientific community, and consumers can use this Internet service to target specific interests. More than 13,000 research project reportsare available on the agency's Technology Transfer Automated Retrieval System. The strong growth in U.S. gross domestic product in the second quarter of 1996 is expected to give way to more moderate growth for the rest of 1996 and 1997. Reflecting moderating growth, manufacturing output is expected to rise at an average annual rate of 3.5 to 4.5 percent through the end of 1997. As mature industries in a mature economic recovery, most of the industrial sectors using agricultural inputs will grow more slowly than manufacturing overall. Industrial uses of corn are expected to total 622 million bushels in 1995/96 (September/August), down 18 percent from the previous year, mainly due to lower use for ethanol. Ethanol producersare in the midst of a financial squeeze, resulting from rapidly rising corn prices, only moderate gains in coproduct prices, and relatively stable ethanol prices. Several companies are manufacturing biodegradable loose-fill packaging materials from corn and wheat starch. Industrial vegetable oil markets reflect a varied picture of production and use. Tung oil is being produced in the United States for the first time since 1973. Crambe is again being grown in North Dakota after a year of no commercial production. Industrial rapeseed acreage in the Pacific Northwest is down from previous years. Glycerine markets remain tight, as demand continues to outpace supply. Biodiesel commercialization facesa number of regulatory and market challenges in the United States. Approximately 37 million metric tons of paper and wood materials were recovered for recycling in 1994, providing a renewable source of inputs to manufacturers. Beside paper and paperboard products, other items made from recycled paper and wood include cellulose insulation, molded-pulp products, animal bedding, paper mulch, packaging cushioning material, and wallboard panels. Findingnew markets for wastepaper and waste wood is essential to the growth of the recycling industry. To meet environmental regulations of the last three decades, environmental remediation has developed into a multibillion dollar industry. The high cost of many traditional methods is causing many organizations to look to lower cost alternatives. Phytoremediation, the systematic use of plants to treat environmental contamination, is a potential low-cost technology that is being investigated for many remediation applications. A special article examines possible biodiesel demand in three niche fuel markets the biodiesel industry has identified as likely candidates for commercialization--Federal fleets, mining, and marine/estuary areas. If a 20-percent biodiesel blend becomesa competitive alternative fuel in the coming years, these markets could demand as much as 100 million gallons of biodiesel. If soybean oil was the sole feedstock used to produce the biodiesel, these markets could account for an additional 770 million pounds of soybean oil. Results of an econometric-based simulation indicate the effect of this increase in demand on the U.S. soybean complex and net farm income would be small. Moreover, if biodiesel commercialization occurs, cheaper raw materials, such as waste cooking oil, may be the primary feedstocks. Introduction 1996 Farm Legislation Affects Industrial Crops and Products Expanded planting flexibility is one of the hallmarks of the recently passed Federal Agriculture Improvement and Reform Act of 1996 (1996 Act). The 1996 Act also amends Federal procurement policy to give preference to environmentally friendly products produced by companies supported by USDA's Alternative Agricultural Research and Commercialization Corporation. Scientific developments from USDA's Agricultural Research Service are now available on the Internet. 1996 Act Makes Major Changes in Commodity Programs Since the 1930's, agricultural legislation has been enacted to stabilize and boost farm income. Farm laws originally enactedin 1938 and 1949 are considered permanent legislation, because they do not have a specified termination date. However, since their original passage, these two laws have been amended with new farm legislation about every 4 to 5 years, temporarily setting agricultural policy and guiding farm production. One general result was to link production and marketing controls with price and income support for many important farm commodities, such as wheat, corn, cotton, rice, sugar, tobacco, and peanuts. During fiscal years 1989 through 1995, annual payments to farmers producing wheat, feed grains, cotton, and rice have totaled more than $40 billion, averaging $5.8 billion annually. In 1995 and 1996, Congress considered farm legislation to replace the expiring Food, Agriculture, Conservation, and Trade Act of 1990 (1990 Act). The result was the Federal Agriculture Improvementand Reform Act of 1996, which was signed into law on April 4, 1996, and covers crop years 1996 through 2002. Title I of the 1996 Act provides set payments and a nonrecourse loan program with marketing loan provisions for wheat, feed grains, cotton, and rice. Soybeans and minor oilseeds (sunflower seed, canola, industrial rapeseed, safflower, flaxseed, and mustard seed) receive only the nonrecourse loan program with marketing loan provisions. One of the stated purposes of the 1996 Act is to improve the operation of the farm programs for milk, peanuts, and sugar. The 1996 Act will likely become another landmark in U.S. agricultural policy. It takes a major step toward phasing outsome aspects of commodity programs that have existed, in some form, since the 1930's. For example, it takes the United States toan almost fully market-oriented farm policy by eliminating annual supply control programs, instituting near full planting flexibility, and decoupling income support from production and market prices. Dependence on market forces will generate economic efficiency gains and make the U.S. farm sector more competitive in the global marketplace. However, farm income may become more variable and, therefore, producers will have more responsibility for managing income risk, a previous role of the Federal Government that is sharply reduced under the 1996 Act. One major change that will be of particular interest to individuals and businesses involved in industrial crop production is the planting flexibility provisions. Farmers planting minor oilseeds, alternative crops (such as sesame, plantago ovato, and triticale), and industrial crops (such as crambe, meadowfoam, kenaf, and milkweed) will be able to plant any amount of these crops without program restrictions. New Production Flexibility Contracts Production flexibility contracts (PFC) are the new method of providing payments to farms that produce wheat, feed grain, cotton, and rice. Deficiency payments, which fluctuated depending on market prices, are eliminated and replaced with PFC payments. PFC's provide set payments to program participants regardless of production levels or season-average farm prices. The total amount available for PFC payments is fixed in advance and declines gradually over the 7-year life of the 1996 Act. PFC paymentsare based on contract acreage and the farm-program-payment yield (similar to crop-acreage base and program yield under the 1990 Act and other previous farm bills). Annual acreage reduction programs, 0/85/92 and 50/85/92 programs, and the Farmer-Owned Reserve are not authorized for 1996 through 2002. Any producer with an established crop-acreage base who had land enrolled in an annual acreage reduction program in at least 1 of the past 5 years, or who had land that was considered planted, was eligible to sign a PFC. Sign-up began May 20, 1996, and extended through August 1, 1996. However, there is an exception to this one-time sign-up. Acreage in Conservation Reserve Program contracts expiring after August 1 will be permitted to enter the program if these acres were part of a farmer's crop acreage base. Producers signing contracts have to comply with conservation, wetland, planting-flexibility, and land-use requirements. All PFC's, unless terminated earlier, will extend through the 2002 crop. As of August 20, 1996, 98.8 percent of estimated eligible acreage had been enroled in PFC's. For fiscal years 1996 through 2002, the 1996 Act allocates a total of $35.6 billion for contract payments. An individual annual contract payment is calculated as the contract-payment quantity (in bushels, pounds, or hundredweight) times the annual payment rate (dollars per bushel, pound, or hundredweight). Although the annual payment rates will not be known until after sign-up, they will be affected by total participating base acreage, program yields associated with that base acreage, and any adjustments made to the total payment amount based on deficiency-payment refunds or repayments, or terminated contracts. Annual contract paymentswill be made by September 30th each year. Under the 1996 Act, producers may plant any commodity or crop on contract acreage (although there are restrictions on fruit and vegetable production) and still receive an annual payment. In general, fruits and vegetables cannot be produced on contract acreage, but if a history of fruit and vegetable cropping exists on contract acres, production may continue in some cases with a corresponding acre-by-acre drop in payments for that year. Haying or grazing on all contract acreage, including unlimited planting of alfalfa and other foliage, may occur at any time during the year without loss of an annual payment. Planting a crop is not required for payment eligibility. Farmers, however, must use contract acreage for some agricultural or related activity and not for nonagricultural commercial or industrial purposes. The 1996 Act orients production agriculture to market returns by allowing farmers to respond to market incentives, instead of government programs. Expected market returns and rotational needs or desires will become major determining factors as producers evaluate commodities to produce in the future. Because producers will know what their PFC payments will be until 2002, they will have greater freedom to implement multiyear crop rotations and production plans. Therefore, industrial-crop returns must stay competitive, economically and agronomically, with other crops to provide farmers with production incentives. Marketing and contractual relationships and vertical coordination developed in recent years will be important, as producers secure markets for industrial crops and processors secure quality supplies. Nonrecourse, marketing-assistance loans are available for each loan commodity (wheat, corn, barley, grain sorghum, oats, extra-long-staplecotton, upland cotton, rice, soybeans, sunflower seed, canola, industrial rapeseed, safflower, mustard seed, and flaxseed) for the 1996 through 2002 crops. The general loan provisionsfrom the 1990 Act are continued under the 1996 Act. Producers canplace eligible production under loan in return for receiving the commodity loan rate. Marketing loan provisions are not available for extra-long-staple cotton but are continued for wheat, feed grains, upland cotton, rice, soybeans, and minor oilseeds. Producers may repay nonrecourse, marketing-assistance loans at the lesser of the loan rate plus interest or the repayment rate, which may fall below the loan rate to minimize government stock holding and allow for competitive markets. Minimum loan rates will be calculated as 85 percent of a moving average of the last 5 years' market prices, excluding years with highest and lowest prices, subject to maximums set equal to the 1995 loan rate. Corn and wheat loan rates may be further reduced based on stocks-to-use ratios. Sorghum, barley, and oats loan rates are set in relation to the rate for corn, taking into account their feed value relative to corn. The rice loan rate is setat $6.50 per hundredweight. Loan rate ranges have been set for several commodities: soybeans will range between $4.92 to $5.26 per bushel; minor oilseeds, between 8.7 and 9.3 cents per pound; and upland cotton, between 50 and 51.92 cents per pound. Theloan rate for extra-long-staple cotton is subject to a maximum of 79.65 cents per pound. The maximum a person can receive in PFC payments is $40,000 per year, down from the previous limit of $50,000. An individual's limit on payments from marketing-loan provisions, marketing-loan gains, or loan-deficiency payments continues at $75,000. NAP May Also Benefit Industrial Crop Producers Another change implemented by the 1996 Act is that producers who receive farm program benefits are not required to obtain crop insurance, if the producer waives emergency crop loss assistance. For those crops not currently covered by crop insurance, USDA is instructed to continue to operate a noninsured crop disaster assistance program (NAP). USDA's Office of Risk Management offers crop insurance, including catastrophic coverage, for major field crops and many fruits and vegetables. NAP will provide producers of noninsured crops with coverage equivalent to the catastrophic risk protection available to producers of major commodities, provided that an area-based yield trigger is first met. Industrial rapeseed (on a pilot basis)and flaxseed are currently the only industrial crops eligible for crop insurance. Research is underway examining the feasibility of insuring crambe, specialty canolas, and other noninsured crops. NAP is administered by USDA's Farm Service Agency (FSA) and funded by the Commodity Credit Corporation. NAP covers various fruitsand vegetables, floriculture, ornamental nursery, Christmas tree crops, turfgrass sod, seed crops, aquaculture, and noninsured industrial crops. NAP requires both an area trigger and an individual trigger for a producer to collect a payment. An area must have a yield lossof 35 percent, and may be defined, at the discretion of the State FSA director, as a county, a geographic area with at least 320,000 acres, or a geographic area with a crop value of at least $80 million. To date, virtually all areas have been defined usingthe county definition. In addition to the area trigger, an individual producer must have a crop loss of at least 50 percent of the expected yield. NAP payments are based on established yieldsfor the crop and an average market price or comparable coverage determined by the Secretary of Agriculture. For crop years 1996 through 1998, 60 percent of the average market price or comparable coverage is recoverable. For crop years 1999 through 2002, 55 percent of the average market price or comparable coverage is recoverable. A third part of the 1996 Act that may be of interest to industrial crop producers and processors is the research title (Title VIII), which amends the National Agricultural Research, Extension, and Teaching Policy Act of 1977 (NARETPA). As amended by the 1996Act, the purposes of federally supported research, extension, and education are to increase and enhance competitiveness and productivity of U.S. agriculture, develop new uses and new products for agricultural commodities, aid with technology transfer, improve risk management in the U.S. agricultural industry, improve safe production and processing of food while maintaining a balance between yields and environmental soundness, support higher education, and maintain safe food supplies to meet human requirements. For example, Title VIII Section 806 relates to grants for research or the production and marketing of alcohol and industrial hydrocarbons from forest products and agricultural commodities. The 1996 Act extends authority for appropriationson agricultural research, extension, and education activities under NARETPA through fiscal 1997. Government Encouraged To Buy AARC Products The 1996 Act also made USDA's Alternative Agricultural Research and Commercialization (AARC) Center a wholly owned government corporation. In addition, there is language in the Act's rural development title amending Federal procurement policy to encourage Federal agencies to give procurement preference to environmentally friendly products produced by companies supported by the AARC Corporation. The intent of the new procurement language is to give Federal procurement officials the latitude to establish set-asides and preferences for AARC Corporation-supported, environmentally preferable products. Some argue that since the Federal Government has taken an equity position in these companies, the American people are, in essence, stockholders. The quicker these companies can become profitable, the faster they can repay the Federal investment. Their repayments go into the AARC Corporation revolving fund to be reinvested in other companies, thereby continuing the process of creating new economic opportunities in rural communities, while protecting the environment. The procurement preference is not open-ended. The preference eligibility will expire 5 years after companies have repaid their investment to the AARC Corporation, or no longer than 10 years after companies receive support from the Corporation. The AARC Corporation supports companies that have a variety of products now on the market, including absorbents; biocontrol agents and planting media; construction materials and composites; coatings and films; cosmetics; cleaning agents, solvents, detergents, and surfactants; degradable polymers; filler, yarn, and insulations; fuels; inks; lubricants; pharmaceutical and veterinary products; and paper and packaging. Interested persons should contact the AARC Corporation for a catalog of supported products and more information (phone 202-690-1633, fax 202-690-1655, e-mail rbuckhal@rus.usda.gov). This report is printed on kenaf paper supplied by KP Products, an Albuquerque, New Mexico company, in which the AARC Corporation has invested. Secretary Glickman Tours Office Built With AARC Products On April 24, 1996, Secretary of Agriculture Dan Glickman and Deputy Secretary Richard Rominger, along with Federal Environmental Executive Fran McPoland, toured the new Washington, DC, headquarters of the Natural Resource Defense Council (NRDC). NRDC is using many "green" products in its new offices. Four construction products supported by the AARC Corporation were used at the NRDC headquarters at 1200 New York Avenue, NW: o Nonload-bearing walls (EnviroPanels) and interior doors inthe office were made from compressed wheat straw by Stramit U.S.A. in Perryton, Texas. o Cabinets were fashioned from PrimeBoard, fiberboard made from 100-percent wheat straw with no noxious chemical additives, by PrimeBoard, Inc., of Wahpeton, North Dakota. o The counter tops for computers and work stations were madefrom Environ, a composite material manufactured from soybean meal and waste newspaper. Environ looks like marble but can be handledlike wood, and is produced by Phenix BioComposites in St. Peter, Minnesota. o Strong, lightweight Gridcore panels for furniture and office partitions were manufactured using recycled paper or kenaf fibers by Gridcore Systems International of Long Beach, California. Some 25 percent of the AARC Corporation's partners are involved in construction and the building-products industry. Other construction-related materials in the AARC Corporation portfolio that were not used in the NRDC office include: o Load-bearing wall panels made from wheat straw by AgriBoard Industries of Fairfield, Iowa, and Coppell, Texas; o A composite material made from recycled plastic and wheat straw for outdoor use in posts, railroad ties, decks, docks, window and door frames manufactured by XYMAX, Inc., of Mankato, Kansas; o Lightweight, extended-life utility poles, constructed by joining tapered wood staves with veneer wraps, made by PoleTech, Inc.,of North Branch, Minnesota; and o An environmentally friendly concrete-form release agent made from crambe and/or industrial rapeseed oil by the Leahy-Wolf Company of Franklin Park, Illinois. More Repayments Received Although the AARC Corporation has been making investments for only 4 years, it has already begun to receive paybacks from six companies. The first paybacks came in 1995 from Leahy-Wolf and Natural Fibers of Ogallala, Nebraska, which manufactures pillows and comforters using milkweed floss and markets the products internationally. Thus far in 1996, the AARC Corporation has received paybacks from: o BioPlus, Inc., of Ashburn, Georgia, which uses peanut hullsas the carrier base for crop protection materials and as flushable cat litter; o Aquinas Technologies of St. Louis, Missouri, which producesand markets ethanol-based products made from corn, including a windshield washer fluid, America's Solution, that will soon be available nationwide; o Innovative Biosystems of Moscow, Idaho, which uses crop residues to make potting mix; and o Midwest Biofuels, a subsidiary of Interchem Environmental,Inc., of Overland Park, Kansas, which uses soybean methyl esters to make a variety of products including biodiesel and cleaning solvents. In its first 4 years of funding, the AARC Corporation has invested $28 million in projects in 32 States, and has leveraged $112 million in private funds, creating over 5,000 jobs in rural communities. ARS Technology Transfer Continues Scientific developments from USDA's Agricultural Research Service (ARS) are now available on the Internet. More than 13,000 research project reports are available on the agency's Technology Transfer Automated Retrieval System (TEKTRAN) at http://www.nal.usda.gov/ttic/tektran/tektran.html. Industry,the scientific community, and consumers can use this Internet service to target specific interests. Projects can be searched by keywords, such as commodity type, potential industrial application, and scientific discipline. Entries of newly completed research projects submitted for publication are added to TEKTRAN on a biweekly basis. In addition, information on licensable patents and patent applications can be accessed through TEKTRAN's link to the National Agricultural Library. Licensable patent information is updated each month and kept current by ARS' Office of Technology Transfer (OTT). Inventor addresses, and phone and fax numbers accompany each entry to expedite commercialization efforts of ARS-developed technology. A planned OTT home page is expected to offer a full range of technology transfer opportunities and services. The agency's longstanding commitment to improving the commercial viability of biofuels continues. For example, two patent applications on technology developed by ARS scientists in Philadelphia, Pennsylvania, were filed recently that specifically address this issue. One invention involves enzymatic productionof a fuel additive, using oilseed byproducts, that can be added directly to automotive fuels. A second invention uses inexpensive feedstocks, such as rendered fats and restaurant grease, to make biodiesel, as well as to produce fuel additives and lubricants. ARS's technology transfer efforts continued in fiscal 1996, with the agency signing a number of Cooperative Research and Development Agreements (CRADA's) and licensing agreements with U.S. firms. (CRADA's allow joint collaboration between government scientists and industry to develop particular discoveries.) For example,ARS scientists in Albany, California, have entered a CRADA with Tenneco Packaging Company, Inc., of Canandaigua, New York, on the development of biodegradable containers made from wheat starch. The technology also can be used to make a lightweight concrete-like product, which is of particular interest to the high-value ornamental brick and stone market. Two other CRADA's signed in fiscal 1996 involve the development of composite materials from starch to make products such as fast-food packaging, cutlery, films, and plates. Scientists in Peoria, Illinois, are working with the Biotechnology Research and Development Corporation of Peoria and Tenneco Packaging, Inc., on an extruded starch-based sheeting technology to develop biodegradable alternatives to petroleum-derived plastics. A variety of food and nonfood applications is being commercialized using a stable, nonseparable composition made from starch and oil. Known as Fantesk, it was developed and patented by ARS scientists in Peoria, Illinois. The Union Camp Corporation of Wayne, New Jersey, was granted an exclusive license to the technology to make environmentally friendly adhesives, glues, and coatings. OptaFood Ingredients of Bedford, Massachusetts, licensed the technology for a variety of food applications, such as fat replacements. Additional companies are working with Opta on sublicensing the technology to develop commercial products. The starch-oil combination also attracted the attention of Seedbiotics, Inc., of Caldwell, Idaho, which will use the technology to encapsulate fertilizers and biological pesticides and herbicides in compositions that can be used to coat seeds to reduce surface-level application of these compounds. Additional applications of the technology include pharmaceuticals, lubricants, and personal-care products. In addition, Quincy Soybean Company of Quincy, Illinois, has applied for an exclusive license for an ARS-patented method for manufacturing 100-percent soy inks. Developed by ARS scientistsin Peoria, Illinois, the 100-percent soy inks have characteristics that meet or exceed industry standards for product functionality and quality. The textile industry is showing interest in an improved enzymatic retting process being developed by ARS scientists in Athens, Georgia, to make products from fiber flax. The technology would replace existing enzymatic treatments and dew-retting, which depends on microorganisms and weather conditions to separate flax's long bast fibers from the rest of the stem. The technology should allow textile companies to develop a more consistent product, with high strength and moisture-absorbance characteristics. A Memorandum of Understanding for Technology Transfer between ARS and the State of Florida, which was signed in November 1995, began to bear fruit in fiscal 1996 with several activities benefiting both organizations. To assist Florida's new port inspection program, ARS notified Florida officials about a patented method developed in Albany, California, that uses imaging technology to inspect plant materials. Florida officials are working with a business partner to develop a CRADA. Likewise, Florida officials have assisted in efforts to commercialize a USDA pest-control technology, which uses global positioning systems to target pests, by locating businesses associated with the Kennedy Space Center. Four companies are currently evaluating the commercial potential of this new technology. Florida also forwarded an inquiry from a Fort Lauderdale company concerning the development of a precision fertilizer-injection system. After further investigation, itwas determined that this system could also be used to deliver biological pest control materials developed by ARS scientists in Mississippi and Texas. [1996 Act: William Bryan Just, ERS,and Linwood Hoffman, ERS, (202) 501-7103, lhoffman@econ.ag.gov. AARC Corporation: Ron Buckhalt, AARC Corporation, (202) 690-1633, rbuckhal@rus.usda.gov. ARS: Bruce Kinzel, ARS, (301) 504-6965, bmk@ars.usda.gov.] Macroeconomic and Industrial Outlook More Moderate Economic Growth Expected in the Rest of 1996 and 1997 The strong growth in U.S. gross domestic product in the second quarter of 1996 is expected to give way to more moderate growth for the rest of 1996 and 1997. Reflecting moderating growth, manufacturing output is expected to rise at an average annual rate of 3.5 to 4.5 percent through the end of 1997. As mature industries in a mature economic recovery, most of the industrial sectors using agricultural inputs will grow more slowly than manufacturing overall. U.S. industries that use agricultural inputs tend to be mature industries and, as such, find their economic prospects closely tied to changes in the general U.S. economy. This section providesan overview of the U.S. economy and manufacturing sector, focusing on nine major industries that use agricultural materials. The U.S. gross domestic product (GDP) grew a robust 4.2 percent in the second quarter of 1996, reflecting strong manufacturing growth. Lumber-and-products output rose as new housing and home improvement projects, delayed by bad weather in the first quarter, began in the second. Also, housing demand was up because strong disposable-incomegrowth from a real increase in total wages paid (employment increased sharply during the quarter) and the use of variable rate mortgages overcame the impact of long-term mortgage rates that were 1 percent higher than at the end of 1995. Transportation-equipment output increased because of car and van rebates, good personal-incomegrowth, rising business spending on vehicles, and dealers rebuilding inventories depleted by the strike at General Motors (GM). Textile-mill production rose because of increased spending on furniture. Chemicals and products and rubber and plasticswere hurt by higher energy prices and a strengthening of the dollar that slowed exports and increased imports. Manufacturing output increased 2.4 percent in the first quarter of 1996, while GDP grew a moderate 2.0 percent (table 1). Of nine major industries using agricultural materials (lumber and products, furniture and fixtures, industrial machinery and equipment, transportation equipment, textile-mill products, paper and products, chemicals and products, rubber and plastic products, and leather and products), only two experienced gains in the first quarter. Industrial machinery and equipment grew at an annualized rate of 19.5 percent and chemicals and products increased 1.7 percent. Production dropped in the other seven industries. Lumber-and-products output declined because of unusually bad weather that inhibited construction. The GM strike was responsible for a quarterly decline in transportation-equipment output. Rubber output was stagnant as export sales could not make up for a drop in domestic demand for tires and material on GM cars. Mature Industries in a Mature Recovery The current recovery is at a mature stage, which means the robust growth seen in the second quarter will not be reflected in the nine industries. Only the industrial-machinery-and-equipment industry, because of computers and business equipment, and the rubber-and-plastic-products industry are running at capacity utilizationrates similar to those of the 1988-89 peak of the last business cycle (table 2). These two industries have also averaged output growth comparable to that of the last two business recoveries that lasted more than 5 years (1961-69 and 1981-89). Based on capacity utilization behavior and other characteristics, the nine industries generally could be described as mature industries. The chemicals-and-products and noncomputer-based-machinery industries are cases in point. Employment growth in these industries is below average for the economy as a whole, and output has not generally expanded as fast as overall manufacturing. Double-digit output-growth rates, such as those of the technology-driven computer industry, are very unlikely. Finally, the industries they provide with inputs, such as other manufacturers, are also mature, providing only modest growth in derived demand. Prospects for the Rest of 1996 and 1997 In the second quarter of 1996, the nine major industries using agricultural materials enjoyed a good economic environment. The next year and a half probably will be less favorable as economic conditions will be more like an average of the previous four quarters. While growth in the third quarter of 1996 may be above trend because of the positive impact of the previous two quarters' gains, the fundamentals point to moderate growth for the rest of 1996 and 1997. GDP growth is expected to average 2 to 2.6 percent during the period, with manufacturing output expected to rise 3.5 to 4.5 percent. Consumers, while stimulated by higher incomes, are not likely to continue accumulating debt as they have for the last year and a half. Credit card and other loan delinquencies are up, so lenders are likely to increase their scrutiny of potential borrowers. Cash-strapped State and local governments, faced with increasing school enrollments and declining Federal assistance, will raise fees and property, income, and sales taxes, further cutting into consumers' spendable income. The 100-basis-point rise in long-term interest rates since late 1995 will further slow consumer durable spending and contribute to lower investment growth. Investment spending is apparently slowing as manufacturers and resellers of computers, which have led the investment boom of the last 3 years, have recently reported sluggish sales growth. The record increases in profits are moderating, making some slowdown in equipment spending inevitable. The recent strengthening of the dollar versus the German mark and the Japanese yen makes it unlikely that a declining real trade deficit will provide an impetus for growth. Lower Federal spending, only partially offset by higher local spending, will be an additional drag on GDP growth. Crude oil prices are likely to fall as North Sea and Iranian production expand. Prices are expected to average $18 to $19per barrel during the next six quarters. If prices do rise, becauseof unexpected supply disruptions or pressure from higher than expected U.S. and world growth, they are not likely to increase above $25 per barrel due to the large excess capacity held by increasingly independent oil producers. If the strong growth of the second quarter continues into the summer, the Federal Reserve (Fed) may raise short-term interest rates. Although housing and consumer durable growth will decline soon after any rate hike, a significant slowing of the economy would not be seen for four to six quarters. The banking-credit system, however, is in good shape and, with available funds, lending should not be severely restrained. Although the economy has been quite strong, capacity utilization is not close to a level presaging inflationary bottlenecks. Productivity has grown faster than wages so far in this expansion, also insulating the economy from a runup in inflation. Greater industrial competitiveness, which makes it hard to pass on wage increases, is another impediment to sharply higher inflation. Thus, there is little chance of higher wages or production bottlenecks starting an inflationary spiral that the Fed will have to choke off with large hikes in short-term interest rates. Prospects for the Nine Industries Mixed But Modestly Good None of the nine major industries using agricultural materials should be in recession in 1996 or 1997 due to general economic conditions, but growth will be below that of the first two quarters of 1996. Lumber and products and furniture and fixtures, dueto less expected construction activity and slow growth in durable spending by consumers, will likely grow modestly at best, compared with the second quarter. Higher short-term interest rates, ifthey occur, would further slow construction and durable spending growth. The prospects for transportation-equipment growth are modest at best, because the domestic light-vehicle market is saturated and local governments are likely too strapped for cash to buy vehicles. However, the U.S. competitive position for airplane exports is good, possibly bringing growth in transportation equipment in one or two of the next six quarters, despite weak fundamentals for the rest of the industry. Production of paper and products and rubber and plastic products is close to full capacity, making growth prospects limited. Rubber is also constrained by the meager prospects for transportation-equipment-output growth. The major risk to the industries' moderate prospects is stronger GDP growth than the 2- to 2.6-percent average expected for the rest of 1996 and 1997. If growth stays strong, the Fed will raise short-term rates more than currently anticipated. This would likely boost long-term rates as well. Lumber and products and furniture and fixtures would do well for a quarter or two, then likely be faced with several quarters of declining output. Industrial machinery and equipment and transportation equipment would likely face sharp declines in late 1996 and 1997 with higher interest rates. Chemicals and products and rubber and plastic products would likely do somewhat better in 1996 at the cost of a much weaker 1997. Slow auto industry growth and the likely risein the dollar from higher U.S. interest rates, which would lower exports, would reduce output and prices in 1997 for most companies in these two industries. [David Torgerson, ERS, (202) 501-8447, dtorg@econ.ag.gov] Starches and Sugars Ethanol Production Down, But Packaging and Adhesive Uses Are Up Industrial uses of corn are expected to total 622 million bushels in 1995/96, down 18 percent from the previous year, mainly due to lower use for ethanol. Ethanol producers are in the midst ofa financial squeeze, resulting from a combination of rapidly rising corn prices, only moderate gains in coproduct prices, and relatively stable ethanol prices. Biodegradable loose-fill packaging materials are being manufactured from corn and wheat starch. Almost one-third of all adhesives produced and used inthe United States are of natural or renewable origin. Industrial uses of corn are expected to total 622 million bushels in 1995/96 (September/August), down 18 percent from the previous year (table 3). Corn use for the production of industrial starch, fuel, and manufacturing alcohol will all be lower than in 1994/95, primarily due to this year's high corn prices. In 1996/97, witha larger corn crop, industrial uses of corn are forecast to rise 6 percent from this year's depressed levels to 661 million bushels. Corn used for ethanol production in 1995/96 is estimated at 395 million bushels, down 26 percent from last year. Higher corn prices have affected fuel ethanol producers, especially dry-mill operations. With corn prices expected to stay strong and ethanol prices held down because of competitive pressures, as of August 1996, producers are expected to keep production low until new-crop corn is available. In 1996/97, ethanol production is likely to partially rebound and use 425 million bushels of corn, which is still below the 1994/95 peak of 533 million bushels. Corn used to make starch in the first three quarters of 1995/96 declined 4 percent from a year earlier. Starch prices have been strong and may have encouraged some switching to other feedstocks to reduce use. High reported prices suggest producers have passed along the higher costs of corn. Based on elevator bid pricesand values of wet-mill byproducts, the net cost of corn for starch has increased sharply during 1996. In May 1996, net corn costs were 9.64 cents per pound, up from 1995's average of 4.34 cents. Useof corn for starch may be up in June to August from a year ago, leaving use for all of 1995/96 down 3 percent from the 226 million bushels used in 1994/95. In 1995/96, corn used for denatured manufacturing and industrial alcohol is expected to total 40 million bushels, nearly the same as the 36 million used in 1994/95. Current data are only available from the Bureau of Alcohol, Tobacco, and Firearms (ATF) through December 1995 and showed a doubling in corn use for the September through November period. With high corn prices, use will likely slow, as has occurred in prior high-cost periods. In thelast half of the marketing year, use is expected to drop significantly below a year earlier. If corn prices decline as expected in 1996/97, corn use in manufacturing alcohol will likely hold its own against other feedstocks and chemical processes for making ethyl alcohol (ethanol). Revisions Made in the Data on Food and Industrial Uses Data on food and industrial uses of corn were revised this month following a review of various use categories. These estimateswere changed to reflect the numbers reported in the final 1992 Census of Manufacturers. Changes in beverage and manufacturing alcoholalso relied heavily on ATF data. Estimates of corn used to make starch were lowered slightly to reflect Census Bureau numbers. For beverage and manufacturing alcohol, the new series is much more variable and around 20 million bushels larger than previous estimates for recent years. Although licensed by ATF as beverage plants, some ethanol plants also produce fuel or manufacturing alcohol. This necessitated a revision in the data. While the Census of Manufacturers previously published data on beverage industries, the 1992 Census broke out ethyl alcohol production by organic chemical manufactures, including fuel alcohol from wet and dry milling and pure (natural) alcohol. The Census data are within 1 percent of the ATF data, assuming denatured alcohol is 95 percent alcohol and pure alcohol in proof gallons is actually 185 proof. Because alcohol dataare reported in proof gallons, tax gallons, and wine gallons, aligning the two sets of data is not always easy. ATF has distinct legal definitions of proof and tax gallons, but in practice a proof gallon and a tax gallon are about the same, both 100 proof, 50 percent ethyl alcohol. While the ATF and Census data on alcohol production agree, Census numbers on grains used in alcohol production are not available for the organic chemical category to compare with ATF numbers. TheATF data give production of various types of alcohol and total grains used. For alcohol and spirits 190 proof and over, there is a breakout of production by kind of materials used, such as grain, fruit, or ethylene gas. Some simplifying assumptions were usedto calculate use. Estimated corn used for beverage and manufacturing alcohol was calculated by taking grain needed and multiplying it by corn's share of total grains as reported by ATF. Grain neededwas the sum of estimated grain spirits over 190 proof, less net withdrawals for fuel, grain spirits less than 190 proof, and whiskey production converted to grain at 5.1 proof gallons per 56 pounds of grain. Finally, corn used to produce beer, as reported by ATF, continues to be included in the beverage category. Prices Squeeze Ethanol Producers Ethanol producers are in the midst of a financial squeeze, resulting from rapidly rising corn prices, only moderate gains in coproduct prices, and relatively stable ethanol prices. The result has been a 30-percent reduction in ethanol production from a year ago, and production is expected to continue falling over the next several months. Ethanol production is seasonal, picking up in September and October in anticipation of the oxygenated-fuel season that runs from November through February in about 30 cities. Production beginsto decline in March and April, as wet millers shift to making sweeteners used in beverages that are in higher demand during the summer (figure 1). Producers also tend to upgrade and perform maintenance on their facilities during the summer, when seasonal demand for ethanol is lower. Several factors have affected the profitability of ethanol producers in the first 6 months of 1996. First, corn prices have been historically high, exceeding $5 per bushel in Chicago spot markets at one point. Second, while soybean prices have also increased, they have not risen as much as corn prices. Thus,corn prices are higher relative to soybean prices on an historical basis. Prices of coproduct feeds from ethanol production are closely linked to soybean meal prices and, therefore, have not increased as much as corn prices have. Third, until the sharprise in gasoline prices in February and March, gasoline prices remained steady. Ethanol prices are strongly influenced by gasoline prices, because a large proportion of the ethanol produced in the Corn Belt is blended into regular gasoline as an octane enhancer and fuel extender. Stable gasoline prices have tended to keep ethanol prices from climbing. The result of these market forces has been an increase in the net cost of corn per gallon of ethanol produced from about 50 cents a year ago to more than $1 now, based on cash prices for corn of $4.80 to $5 per bushel. (Net corn costs include the cost of corn per bushel minus revenue for coproduct feed.) With these costs doubling, producers needed similar increases in ethanol prices to maintain profit margins. Instead, ethanol prices were held inthe $1.10 to $1.20 range through April 1996. This combination of rising net corn costs and flat ethanol prices created financial conditions that could not sustain ethanol production in the long run. Not until the effects of the February and March gasoline price spikes had worked their way into the market were ethanol producers able to raise prices and ease tight margins. Because some ethanol producers engage in hedging and other strategies to limit price risk, they probably have been affected less severely than an analysis using cash prices would indicate. However, some producers found their most profitable course of action was selling their futures positions that had nearly doubled in value and temporarily suspending production, instead of buying corn to produce ethanol. This action on the part of several firms will exacerbate the seasonal reduction in ethanol production and could result in the lowest monthly ethanol production in 10 years. The outlook for the next 6 months is for lower production and poor margins for producers. As production drops, prices may get aboost because a greater share of ethanol demand will be as an oxygenate in reformulated gasoline markets instead of a fuel extender in conventional gasoline blending. If profit margins for ethanol producers remain tight, ethanol blending in the conventional gasoline octane/extender market could come to a virtual halt. However, mandated markets for oxygenated fuel and reformulated gasoline will continue to provide a market for ethanol, which remains competitive with other oxygenates in many mandated market areas. States are continuing their financial support for ethanol producers. While some ethanol plants have been temporarily closed, others in Minnesota have just begun production. These farmer-owned cooperatives are backed by the commitments of their members and a 20-cents-per-gallon State payment. A good corn crop this year is likely to bring ethanol prices down. August USDA estimates for the 1996/97 marketing year of $3.15 to $3.55 per bushel might be high enough to keep some plants from returning to full production at current gasoline prices. However, the real key to producer profitability is net corn costs per gallon. A more normal alignment between corn and soybean prices should help net corn costs decline after the harvest. If theydo, many ethanol producers will begin producing at much higher utilization rates. Starch-Based Loose Fill Used for Product Packaging Protective packing materials are used to cushion, protect, and stabilize articles in boxes, cartons, and other containers for shipping and storage. Manufacturers, mail-order firms, and other industries are big users of protective packing materials. Themost common materials used to make protective packing are expanded polystyrene (EPS), shredded newsprint, cardboard, excelsior (fine wood shavings), popcorn, and starch. EPS-based, loose-fill foams have enjoyed a steady growth in packaging applications over the last two decades, but are now a target in the solid waste disposal debate because of their nondegradability. Consumers are demanding and legislators are mandating the use of environmentally benign packing materials. To address the public's concern regarding disposability, biodegradable loose-fill packaging products are being developed and manufactured from corn and wheat starch, and are a growing portion of the loose-fill packaging market. In most cases, starch-based, loose-fill products are 100-percent biodegradable, with the exception of products that contain nondegradable additives. Most starch-based, loose-fill products can be dissolved in water. Smaller quantities could be disposed of in flowerbeds and gardens or simply flushed down the drain to a municipal wastewater treatment facility. Large quantities, which could have detrimental effects on a wastewater treatment facility simply due to the sheer volume of product, would need to be composted; for example, with municipal lawn and garden waste. A 1993 comparative study bythe Minnesota Office of Waste Management claims that starch-based loose fill is a reasonable alternative to EPS-based loose fill if composting infrastructures exist and EPS foam recycling is impractical. Satisfactory performance, good properties, and low cost have enabled EPS-based loose fill to grow over the last 20 years into a successful 90-million-pound-per-year packaging product (1). EPS market growth was particularly strong in the 1980's, at more than 20 percent per year. However, many external-market and economic forces, such as the Persian Gulf War, recession, and the switch to alternative packing materials and methods, slowed this growth rate to less than 2 percent during the 1990's. In addition to using alternative loose-fill products, manufacturers have redesigned packages and packing products to use less material. Suppliers conservatively estimate the starch loose-fill market, as of June 1996, at approximately 15 to 20 percent of the EPS loose-fill market. This means that packagers are using 13.5 to 18.0 million pounds of starch loose fill in addition to the 90 million pounds of EPS loose fill. For starch-based products to have captured some of the loose-fill market means they have had to compete with EPS's performance characteristics. For example, mechanical integrity is important because the function of loose fill is to adequately protect shipped or stored goods. Compression and resiliency tests, conductedby USDA's National Center for Agricultural Utilization Research (NCAUR) in Peoria, Illinois, demonstrated that both starch-based and EPS-based loose fill have similar mechanical integrity. Starch loose fill is more sensitive to changes in relative humidity and temperature than EPS loose fill, but the higher amount of absorbed moisture does not compromise its mechanical properties. A beneficial property that starch loose fill has, which EPS does not, is the ability to resist static cling. Starch-Based Loose Fill Produced by Several Companies In general, starch-based packaging products are manufactured using extrusion technology, a process in which the starch is cooked, worked into a plastic-like dough, forced through a die, expanded by loss of moisture and a decrease in pressure, and cooled into a rigid structure with a porous texture. Modified or unmodified starches may be used, depending on the producer and the product. In addition, manufacturers add proprietary additives and other ingredients to develop specific products. Technology typicalof the plastics industry molds the starch-based material into final shapes, such as loose fill, sheets, and other forms. Several companies actively develop, produce, and/or market starch-basedloose fill. The products and producing companies are: o CLEAN GREEN by Clean Green Packing Company of Minneapolis, Minnesota, a wholly owned subsidiary of Environmental Technologies USA, Inc.; o ENVIROFIL by EnPac, a DuPont/ConAgra Company, of Wilmington, Delaware; o ECO-FOAM by American Excelsior Company of Arlington, Texas; o FLO-PAK BIO 8 by Free-Flow Packaging Corporation of Redwood City, California; o RENATURE by Storopack, Inc., of Cincinnati, Ohio; and o STAR-KORE by Star-Kore Industries of Memphis, Tennessee, formerly Unistar Industries, Ltd. Some of these companies produce or distribute other nonstarch-based packaging products as well. For example, Free-Flow Packaging manufactures 100-percent, recycled EPS loose fill and American Excelsior manufactures virgin EPS loose fill. Warner Lambert of Morris Plains, New Jersey, no longer manufactures starch-based resin for loose fill, but licenses the technology to EnPac. National Starch of Bridgewater, New Jersey, licenses its high-amylose starch technology exclusively to American Excelsior Company. Norel Company of Little Ferry, New Jersey, and Storopack, Inc., manufacture and distribute starch loose fill for EnPac under the ENVIROFIL trademark. EnPac sublicenses the Warner-Lambert technology to other companies including Clean Green Packing and Free-Flow Packaging Corporation. Many companies have recently introduced new-product applications. EnPac has introduced ENVIROMOLD, a wheatstarch, loose-fill material that is dampened with water so the foamed pieces can stick together to form a continuous protective cushion. This product is targeting packagers that use foamed-in polyurethane (liquid chemicals that are combined to form a resilient foam structure) and polyethylene. This market is estimated at about 300 million cubic feet (2). American Excelsior manufactures starch-based extruded shapes and rigid-sheet products for a variety of applications, including end caps, pouches, rolls, and die-cut forms. Other applications recently announced by American Excelsior at the International Agricultural Summit in Kansas City, Missouri, include toys such as foamed logs and blocks, confetti, furniture guards, and potty training aids. Star-Kore Industries has developed flexible- and rigid-sheet products from modified-starch technology. Starch Loose-Fill Prices Dependent on Corn Prices Though comparable in function to EPS loose fill, starch-based loose fill is still about 30 percent more expensive. Excluding shipping costs, the average price of commercial starch-based loose fill is 54 cents per cubic foot, while EPS loose-fill prices average about 41 cents per cubic foot from the manufacturer. In addition to being higher priced than EPS loose fill, starch loose fill also has a higher bulk density (weight per cubic foot) than EPS loose fill. This means that an equal volume of starch loose fill in a package will weigh more than an equivalent volume of EPS loose fill. Thus, end users of starch loose fill are hit twice, first by higher purchase prices and then by higher shipping costs due to more weight. However, over the past year, manufacturers of starch-based loose fill have been able to narrow the cost differential between starch and EPS-based foam products due to improvements in manufacturing methods. Because commercial starch-based loose fill generally contains more than 90 percent starch, the price of a specific loose-fill product is highly dependent on starch prices. (The remaining 10 percentor less consists of additives that facilitate production and improve performance.) Because cornstarch is the cheapest, most widelyused industrial starch in the United States, most starch-based loose fill likely is manufactured from cornstarch, although some products may use wheat and/or potato starch. Good mechanical performance and biodegradability have enabled starch-based loose fill to successfully compete with EPS-based products. Industry sources anticipate continued market growthfor starch-based products, as research efforts continue to reduce cost, improve performance, and develop new applications for loose fill and other starch-based foam products. This research is being conducted by starch producers, packaging manufacturers, and USDA laboratories such as NCAUR. Natural Adhesives Respond to Changing Market Influences Adhesives are used in a wide variety of applications. Over 1,000 different types of natural and synthetic adhesives are used in the manufacture of textiles, plastics, wood products, ceramics, electronics, glass items, cosmetics, pharmaceuticals, and metals. Adhesives are one of the leading industrial-product categories that use a large amount of natural raw materials. Almost one-thirdof all adhesives produced and used in the United States is of natural or renewable origin (figure 2). Natural adhesives are derivedfrom a wide variety of raw materials, including agricultural, animal, and forestry components. Leading feedstocks are corn and wheat starches, vegetable oils, rubber, animal-based proteins, gelatin, lignin, and mussels. Specialty natural adhesives are derivedfrom highly refined starches. Synthetic adhesives are primarily derived from petrochemicals and include thermoplastics, thermosets, bitumens, and elastomeric adhesives. The thermoplastics sectoris the largest sector by volume, while the elastomerics sector is highest in value of the synthetic adhesives. The 12.8-billion-pound U.S. adhesives market was valued at $6.5 billion in 1995. In the last decade, overall adhesive growth averaged 2 percent per year, by volume. The recession of 1990 dampened adhesive use, but the demand for natural adhesives has been growing steadily since late 1992. In 1995, the overall demand for adhesives grew 3.1 percent, and is projected to grow at 3.3 percent annually through 2000. Natural adhesives are expectedto exceed this average and grow over 3.8 percent annually through 2000, higher than the rates projected for bitumens and elastomerics. Certain synthetic subcategories, catering to niche markets, may also see above average growth. During late 1980's, certain synthetic subcategories saw growth several times the average, notably hot melt, hot melt pressure-sensitive, acrylic pressure-sensitive, polyvinyl acetate, cyanoacrylate, anaerobic, and radiation-curable adhesives. However, their growth rates have suffered in the 1990's. Environmental regulations restricting the use of certain synthetic adhesives, product-quality improvements, green-product reformulation, and identification of new applications, combined with overall growth in the U.S. economy in recent years, are some of the key factors responsible for the recent and projected growth for natural adhesives. This year's high corn prices, however,have dampened the demand for many starch-based adhesives. High-volume, low-value grades may see no or slight market growth until prices become competitive with other substitutes. High-value, refined, starch-based naturals may not be affected by higher corn prices. Certain important categories of synthetics, particularly thermoplastics, are expected to shrink over the next 5 years, while some specific naturals, especially protein-based adhesives, will probably grow at twice the average. Part of this change is based on the industry's response to environmental regulations. For example, because of Clean Air Act regulations limiting emissions of volatile organic compounds, solvent-based adhesives are being displaced with refined naturals and other specialized synthetic elastomerics in such fields as pressure sensitive, construction, and automotive applications. Robotics are an increasingly popular means of applying adhesives in assembly line production. These automated systems exhibit a technical preference for natural adhesives due to easy equipment cleaning and flow characteristics. Higher engineered applications, such as the replacement of mechanical fasteners, will also contribute to the overall growth of adhesive markets. In foundry applications, demand for natural adhesives (binders) is expected to grow at 2.8 percent annually to 134 million pounds in 1997. Environmental concerns have spurred the use of natural adhesives that have better biodegradability profiles than their synthetic counterparts. The success of starch-based adhesives in the packaging industry is directly associated with the solid-waste disposal problems faced by petroleum-based films. Recycling operations have spurred the use of starch-based adhesives in paper cartons, bottle labels, stationery, and some interior plywood fabrications. Starch-based adhesives are the largest segment of the natural-adhesives market. In 1995, approximately 60 percent ofthe 4 billion pounds of natural adhesives produced and consumed in the United States were derived from starch, primarily corn and wheat starch. These 2.4 billion pounds of starch required roughly 73 million bushels of corn equivalent. National Starch & Chemical Company is one of the leading starch-based adhesives companies in the United States. It has led the way in developing and introducing a number of starch-based adhesives, including the Kor-Lok and Duro-Lok lines of adhesives. It is estimated that there are over 100 different formulations of starch-based adhesives currently on the market. Starch-based adhesives are less expensive then other natural and synthetic adhesives and range in price between 50 cents and $2.50 per pound. Almost all natural adhesives are priced under $8.00 per pound. Another type of natural adhesive is animal glue. It is producedby the hydrolysis of the protein collagen from the skins, hides, and bones gathered from slaughterhouses. The glue's diverse applications in paper, glass, abrasives, matches, and metal refining maintain its commercial position in the face of highly competitive synthetic materials. Besides being used directlyas an adhesive, animal glue is also an additive in a wide range of adhesive and flocculating formulations. New Research and Development May Lead to Future Growth Significant research and development have been underway since the early 1980's to design and develop natural adhesives with specific functional properties. For example, at least three USDA laboratories are engaged in developing natural adhesives with better water resistance properties. Some of the latest natural adhesives under investigation are based on protein, fiber, and oil from corn, wheat, soybeans, and mussels. Although soy proteins have been used in paints and coatings for many years for their coagulation properties, only recently have commercially viable adhesives with superior application properties been developed. Soy-based wood adhesives are the first alternative adhesives likely to capture significant market share. Mussel protein-based adhesives are already reaching commercial significance, with great potential in medical and industrial applications. Midwest Grain Products, Inc., of Atchison, Kansas, is developing a new wheat gluten-based line of adhesives for both food and nonfood applications. Gluten-based adhesives present exceptional properties, such as solubility, adhesion, binding, elasticity, plasticity, flexibility, and chemical reactivity, and are used to make pressure-sensitive tapes, electrostatic painting, ceramics, and water resistant applications. While new categories of natural adhesives are being developed, existing products are being improved. The outlook for natural adhesives in most application areas is bright through the turn of the century as environmental laws continue to regulate the use of synthetics. Efforts by private industry and USDA laboratories promise to further expand the number of natural adhesives and their market share. [Industrial uses of corn: Allen Baker, ERS,(202) 219-0360, albaker@econ.ag.gov. Ethanol: John McClelland, ERS/OENU, (202) 501-6631, jmcclell@econ.ag.gov. Starch-basedloose fill: Paul Tatarka, ARS, (309) 681-6428, tatarkpd@ncaur1.ncaur.gov, and Charles Plummer, ERS, (202) 219-0717, cplummer@econ.ag.gov. Adhesives: Irshad Ahmed, BoozAllen& Hamilton, (703) 917-2060, 71332.3160@compuserve.com. 1. Modern Plastics, Vol. 73, No. 1, January 1996. 2. Plastics News, Vol. 8, March 25, 1996. Fats and Oils Crambe, Industrial Rapeseed, and Tung Provide Valuable Oils In 1996, crambe is again being grown commercially, while industrial rapeseed acreage is down from previous years. Tung oil is being produced in the United States for the first time since 1973. Glycerine markets remain tight, as demand continues to outpace supply. Biodiesel commercialization faces a number of regulatory and market challenges in the United States. Crambe Again in Commercial Production The American Renewable Oilseed Association (AROA), an organization of crambe growers, contracted with 145 farmers in 1996 to grow 22,000 acres of crambe. No commercial acreage was planted in1995 because much of the crambe oil produced in 1994 had not been sold prior to spring planting. Commercial crambe production beganin North Dakota in 1990, and U.S. acreage peaked in 1993 at 57,683 acres (table 4). (See the June 1993 and the September 1995 issues of this report for more information on crambe supply and uses.) All of the 1996 acreage is in North Dakota. As of mid-July, about 19,000 acres were in good to excellent condition. There is no predetermined contract price this year, but producers are likely to receive between 11.5 and 12 cents per pound of seed harvested. The crop will be toll processed by Archer Daniels Midland at its Enderlin, North Dakota, oilseed crushing plant. AROA has contracted with Witco Corporation, headquartered in Greenwich, Connecticut, to buy the crambe oil and will market the crambe meal to feed manufacturers for beef finishing rations. AROA has set up a separate steering committee and business to develop a production, processing, and marketing infrastructure for novel oilseeds in the Northern Great Plains. The grower-owned company, AgGrow Oils, plans to offer stock to growers this December, construct a 200-ton-per-day crushing facility in 1997, and begin operation with the 1997 crop. Negotiations are underway that include contracting for 30,000 to 60,000 acres of crambe annually and other novel oilseeds such as high-oleic sunflower and safflower, flax, and possibly specialty canolas. U.S. Industrial Rapeseed Production Declines Like crambe oil, industrial rapeseed oil contains high amounts of erucic acid. To meet industry requirements, industrial rapeseed oil must contain at least 45 percent erucic acid. In contrast, canola and other special types of rapeseed, such as high-lauric canola, have been bred or genetically engineered to contain different fatty acids in their oils. Canola oil is used for edible consumption and, according to Food and Drug Administration standards, must contain less than 2 percent erucic acid. Canolais the name generally applied to rapeseed that has low amounts of erucic acid in its oil and low levels of glucosinolates in its meal. Cross pollination can occur if industrial rapeseed and canola are planted in adjacent fields, resulting in an oil with an intermediate erucic acid content that would be useless for either application. Visually, the seeds of the two types are identical; only testing can differentiate their characteristics. In the Pacific Northwest, where both types are grown, a couple of States have designated production regions to address the cross-pollination issue. Idaho established six production areas in 1986 and Washington State finalized rules and regulations for 12 production districts in 1988. Industrial rapeseed has been grown in the Pacific Northwest for over 40 years. It was also produced in the South during the late 1980's and early 1990's. Harvested acreage of industrial rapeseed has declined from 19,400 acres in 1987/88 to 2,400 in 1995/96 (table 5). During the same period, domestic productionhas dropped from 22 million pounds to an estimated 3 million pounds. In the Pacific Northwest, industrial rapeseed is produced for birdseed and oil. Historically, birdseed has accounted for at least 50 percent of production, according to Andrew Thostenson, a former merchandiser with Spectrum Crop Development, a canola and rapeseed merchandizing firm in Clarkston, Washington. After becoming familiar with canola, birdseed manufacturers now buy either industrial rapeseed or canola, whichever is cheaper. The only known U.S. crusher of industrial rapeseed is Koch Agricultural Services of Great Falls, Montana. According to Steve Chambers, a marketing manager for the company, Koch contracts for seed and buys it on the open market. In addition, unprocessedseed is exported to Japan, where it is crushed and the oil used as lubricants in the steel manufacturing industry and the meal used as fertilizer. The Market for Erucic-Acid Oils Remains Tight Charles Leonard, an oleochemical industry expert, estimates world consumption of high-erucic-acid oils for industrial applications at about 125 million pounds per year, with the United States accounting for about 35 million pounds. This is up from a 1991 industry estimate of 25 to 30 million pounds for the U.S. share. Other major industrial users are Europe and Japan. Two 1996 articles in the Chemical Marketing Reporter, quoting industry sources, estimate the U.S. supply of industrial rapeseed oil at about 5 million pounds of domestic production and around 25 to 30 million pounds shipped in from Canada and Europe (1, 2). This is similar to USDA estimates of industrial-rapeseed-oil production and imports for the late 1980's and early 1990's (table 19). However, according to USDA figures, U.S. rapeseed oil production has declined from 5.7 million pounds in 1991/92 to an estimated 836,000 pounds in 1995/96, while imports have averaged 9.8 million pounds during the same period. Although no data are available from industry sources or USDA on U.S. crambe-oil production, crambe oil reportedly gained acceptance in the U.S. high-erucic-acid market in the early 1990's when Humko Chemical, a division of Witco Corporation, began relying on it as a domestic source of erucic acid. Humko currently uses both industrial rapeseed and crambe oils (4), but supplies of crambe oil are reported as limited. World supplies of high-erucic acid oils have tightened in the last few years as older rapeseed varieties have been replaced with canola types. For example, Poland and the former East Germany historically have been heavy producers of industrial rapeseed oil because much was used for edible purposes. However, since the breakup of the Eastern Bloc, industrial rapeseed has yielded to canola because industrial rapeseed oil cannot be sold to European Union countries for edible purposes. Erucic acid-containing rapeseed varieties are now considered specialty crops in Canada and Europe. China, Russia, and India, however, still use high-erucic acid rapeseed oil for human consumption. World supplies of industrial rapeseed oil are expected to remain tight. Although Canadian production is fairly stable, European production is below expectations again this year. According toa spokesman for Croda Universal, Inc., which is headquartered in the United Kingdom, the 1996 European harvest of industrial rapeseed will be 1,000 hectares short of what is needed (1). The U.S. market for high-erucic-acid oils will likely be served mostly by domestic production and imports from Canada. Calgene Chemical,a subsidiary of Calgene, Inc., of Davis, California, has an agreement with CanAmera Foods of Oakville, Ontario (North America's largest rapeseed processor) to distribute some of CanAmera's industrial rapeseed oil in the United States. Prices for erucic-acid oils have increased as supplies have tightened (1, 2). Higher world prices have been felt in erucic-acidproduct markets. Three producers of erucamide--Witco Corporation, Croda Universal, Inc., and Akzo Nobel Chemicals, Inc.--raisedthe prices of their erucamide products by 20 cents per pound in April and May 1995 due in part to high prices of high-erucic-acid oils. Because of current high prices and the prospects of continued tight supplies, the companies increased their erucamide prices again in May and June 1996, Akzo by 8 cents per pound and Witco and Croda by 25 cents per pound. While U.S.-based Witco uses both crambe and industrial rapeseed oils, the other two manufacturers use only industrial rapeseed oil. High-Erucic-Acid Oils Have Traditional and Emerging Uses The primary market for high-erucic-acid oils is erucamide. Plastic-film manufacturers have used erucamide for decades in bread wrappers and garbage bags. It lubricates the extruding machine during manufacture of thin plastic films. After processing, the erucamide migrates to the surface of the films and keeps them from clinging together. Two cheaper amides, stearamide and oleamide, cannot individually provide the critical properties that erucamide does. Therefore, erucamide is preferred, even at about twicethe price. Charles Leonard estimates that 48 million pounds of high-erucic-acidoils are used worldwide in making about 15 million pounds of erucamide per year (table 6). Erucamide is sold by a half dozen oleochemical producers in the United States, Europe, and Asia. Witco is the largest worldwide producer and marketer, supplying product from its Memphis, Tennessee, production facility. Leonard estimates that erucamide market growth roughly parallels the growth of polyolefin film sales, which in recent years has ranged from 4 to 6 percent per year. Cationic surfactants that function as active ingredients in personal-care products, laundry softeners, and other household products appear to be an up-and-coming use for high-erucic-acid oils. Some companies in Japan and the United States are using cationic surfactants derived from 22-carbon fatty acids, such as those found in rapeseed, crambe, and meadowfoam oils, as the active ingredient in hair conditioners. At least two U.S. companiesare doing research in this area. An estimated 18 million pounds of high-erucic-acid oils are used worldwide to manufacture roughly 6 million pounds of cationic surfactants. Because rapeseed and crambe oils have a high degree of lubricity, they also are used either directly as lubricants or in lubricant formulations. They are used as spinning lubricants in the textile, steel, and shipping industries; as cutting, metal-forming, rolling, fabricating, and drilling oils; and as marine lubes. For example, Calgene Chemical offers a line of erucic-acid esters to the textile and automotive fluids industries. International Lubricants,Inc., of Seattle, Washington, sells erucic-acid-oil-based automatic transmission fluid additives, cutting oils, hydraulic oils, and power steering fluids. The transmission fluid additives are currently used by five European automobile manufacturers and U.S. transmission repair shops, and are newly available in retail auto parts stores. One of the selling points of the erucic-acid-oil products offered by International Lubricants is their enhanced biodegradability compared to their petroleum-based counterparts. Thus, they are said to be more environmentally friendly. Several companies are reportedly in the market for industrial rapeseed and canola oils for lubricant applications because of their environmental attributes, which has caused a recent increase in demand (2). Another use of erucic-acid oils in response to environmental concerns is in the production of concrete mold-release agents. Leahy-Wolf Company of Franklin Park, Illinois, has developed and patented a biodegradable concrete-release agent based on industrial rapeseed oil, and is marketing it through U.S. distributors. Construction companies and precasters of concrete structures, such as sewer pipes, vaults, and bunkers, coat their molds and forms with release agents to facilitate the release of the hardened concrete. Often these compounds, which are traditionally petroleum-based, leach out of the mold or concrete and end up in the groundwater. Construction firms and precasters have had to modify their operations, however, to meet increasingly strict State and local regulations that limit the release of petroleum-based chemicals into the environment. Tung Oil Production Begins Again in the United States Tung oil, a nonedible vegetable oil, is scheduled to be produced again in the United States beginning in December 1996. The sole U.S. producer will be American Tung Oil Corporation (ATO) of Lumberton, Mississippi. ATO was created 4 years ago by Blake Hanson of Industrial Oil Products (IOP) of Woodbury, New York, to revive domestic production of tung oil, which has not occurred since March 1973. IOP is the largest supplier of tung oil inthe Western Hemisphere. Tung oil, produced from the fruit (nut) of the tung tree, contains mainly eleostearic fatty acid, with smaller amounts of oleic, linoleic, and palmitic fatty acids. Tung oil's physical and chemical properties make it useful as a protective coating, solvent, and/or drying agent in various paints, varnishes, lacquers, resins, fiberboard, concrete sealers, electronic circuit boards, and printing inks. Its superior drying properties allowit to be sold at a price premium compared to other vegetable drying oils such as linseed oil (tables 37 and 40). Various new applications for tung oil and its byproducts also are being developed for use in products such as cosmetics, insecticides, and lubricants. Tung oil is produced commercially mostly in subtropical regions, primarily in China and South America. Tung oil production issmall compared with that of many other vegetable oils. Estimated world production averages 50,000 metric tons a year. Major producers include China (about 42,000 metric tons), Paraguay (about 4,000 metric tons), Argentina (about 3,000 metric tons), and Brazil (about 1,000 tons) (3). The world supply of tung oil can be very volatile, as tung orchards can be greatly affected by adverse weather conditions and by age of the orchards. Though hearty, fast growing, and naturally resistant to disease and insects (tung trees require no fungicides or pesticides), tung trees are very sensitive to temperature levels during fruit-set. There is also some concern that aging orchards in South America may be losing productivity. In addition, Brazil produces primarily for domestic consumption and China uses as much as 25,000 metric tons of oil per year (3). A poor crop in anyof the major producing countries often leads to volatile tung oil prices. The current U.S. tung oil market is supplied largely by Argentina and Paraguay. During 1991-95, 50 percent of U.S. imports of tung oil came from Argentina, another 37 percent from Paraguay, and 11 percent from China (table 7). Small South American crops in 1991/92 and 1992/93 led to extremely high tung oil prices in the United States from mid-1992 through most of 1993 (table 40). Good crops in South America and China in 1993/94 helped prices decline in 1994. Decreased demand from Japan and Europe in 1994 and 1995 helped keep U.S. tung oil prices down, despite smaller crops the last two seasons. However, U.S. tung oil prices have increased slightly this summer, and may rise even further, as South America and China are anticipating relatively small crops again this season. In addition, a lower supply of Chinese tung oil and renewed Japanese demand due to a strengthening economy are likely to put more upward pressure on prices for South American tung oil. How far prices will rise remains to be seen, but the market's continued volatility will likely encourage some companies to use other natural and synthetic alternatives in their product formulations. Tung Production Is Centered in Mississippi ATO is confident its revitalization of domestic production will help stabilize tung oil supply and prices. The company is currently planting its initial goal of 5,000 acres of tung trees, 500 acres of which will be company owned, and the rest contracted with individual growers. Current production of tung nuts is from several hundred acres of 3- to 4-year-old trees in southern Mississippi, although ATO is open to contracting with growers in other parts of the U.S. production region (a 100-mile wide area along the Gulf Coast extending from north central Florida into eastern Texas). The oil will be extracted at ATO's Tung Ridge Ranch mill near Poplarville, Mississippi, and will be distributed by IOP. Blake Hanson, president of IOP, projects U.S. production for 1996 to be about 50,000 pounds of oil, which will have little impact on world markets. However, Mr. Hanson notes that as trees reach production maturity in about 4 to 5 years (when they will be 7 to 8 years old), the United States will be a significant producer of tung oil. He projects that in 5 years, U.S. production will be about 2 million pounds of oil. In 8 years, if all 5,000 acresare planted and producing, production could be over 4 million pounds. These trees could sustain commercial production for about 25 years, unless destroyed by natural disaster. Prior U.S. production of tung oil occurred between the late 1930's and 1972, peaking in 1958 at 44.8 million pounds. Indicativeof the tung oil industry, production during this period varied greatly from year to year, due primarily to the crop's natural bearing cycle and late frosts during budding. Weather will still be an important factor in this current production effort. However, higher fruit yields than were realized in previous decades are anticipated due to the use of heavy bearing varieties and improved farming methods. Harvesting costs will be reduced by mechanical harvesting, which is not used internationally and was not employed in the United States until the late 1960's. In addition, ATOplans to store surplus tung oil during years of over-production in an attempt to stabilize market prices during years of under-production. Under proper conditions, tung oil can be stored for several years. Tung Oil Market Has Changed The U.S. market for tung oil has changed dramatically during the past half-century. U.S. industrial use of tung oil peaked in1947 at 130.4 million pounds, with over 75 percent used by the paint and varnish industry, and about 10 percent used by the resins industry. However, in the late 1940's, as the protective coatings industries shifted to lower cost substitutes, including synthetics and other oils, domestic consumption of tung oil declined dramatically. By 1961, domestic use had fallen to around 35.9 million pounds, with 73 percent consumed by the paint and varnish industry and 15 percent by the resins industry. A general shift from the use of vegetable oil-based paints, which often require petrochemical solvents to reduce paint viscosity, in favor of water-based latex paints since the 1960's, contributed to a further decline in the use of tung oil. In 1994, domestic use was estimated at 9.3 million pounds, with 71 percent consumed by the resins and plastics industry, and 13 percent by the paint and varnish industry (table 30). The 1995 estimate for domestic useof tung oil is 20.2 million pounds, but this, according to industry sources, is likely overstated. One industry source estimates current tung oil use at around 10 million pounds, broken down as follows: 40 percent in paints, varnishes, and wood coatings;40 percent in inks and overprint varnishes for graphic arts; 14 percent in fiberboard and other building materials; and 6 percent in miscellaneous items like caulk, concrete sealers, and brakepads (3). Current and future uses of tung oil depend on several factors, including various regulations in the Clean Air Act Amendments of 1990 (CAAA) that require coatings manufacturers to reduce volatile organic compounds (VOC's) in their formulations. Petrochemicals such as toluene, xylene, methyl ethyl ketone, and methyl isobutyl ketone must be eliminated entirely. Chlorinated solvents mustbe removed from formulations because of their ozone-damaging potential. Because of these regulations, many companies are formulating new products, a number of which use tung oil because of its good drying ability and inherent solvency. However, these regulations have also caused the phaseout of some older tung-oil-containing products that include petrochemical solvents, which contain VOC's. Therefore, the net effects of CAAA regulationsfor the coatings industries will continue to play a major role in tung oil consumption. (For more information on VOC's and solvent replacements, see the fats and oils section of the June 1994 issue of this report). In addition to air quality regulations, future uses of tung oil are likely to depend upon market stabilization, price reduction, and the development of new uses and new modified-tung oil products. Lower prices and the success of these new products will be vital to increasing the demand for tung oil. Glycerine Uses Continue To Expand Glycerine is a byproduct of producing soaps, fatty acids, and fatty esters from the triglycerides in vegetable oils and animal fats. Primary sources of glycerine include tallow, palm kernel oil, and coconut oil. Dow Chemical is presently the only U.S. manufacturer producing synthetic glycerine from petrochemicals. Although the terms glycerine, glycerin, and glycerol often are used interchangeably, subtle differences in their definitions do exist. Glycerine is the commonly used commercial name in the United States for products whose principal component is glycerol. Glycerin refers to purified commercial products containing 95 percent or more of glycerol. Glycerol is the chemical compound 1,2,3-propanetriol. Worldwide production and consumption of glycerine is estimated at 1.5 billion pounds in 1995, up 10 percent from a year earlier. Europe and the United States account for over half of the consumption volume (figure 3). The supply of natural glycerineis directly related to fatty-acid and fatty-ester production. More sources of byproduct glycerine have been identified in recent years as uses for vegetable oils have increased, including processes for manufacturing biodiesel, fat substitutes, and polyols. In Europe, an estimated 100 million pounds of glycerine is currently produced in biodiesel production plants. In 1995, the United States had an estimated glycerine production capacity of 522.5 million pounds. Roughly 25 percent of thatis synthetic glycerine. Procter & Gamble and Dow Chemical arethe two largest U.S. producers. In the United States, eight natural glycerine producers, including Procter & Gamble, currently have15 production plants in operation. Dow has one synthetic glycerine plant. Glycerine is used in over 1,500 applications and end products. It has an extensive list of traditional uses that include drugs, cosmetics, resins, polymers, explosives, toothpaste, tobacco processing, paints, paper manufacturing, lubricants, textiles, and rubber (see the December 1993 issue of this report for more information). Pharmaceuticals, toothpaste, and personal-care products were major uses in 1995 (figure 4), and more applications are being developed all the time. For example, because of its environmentally friendly characteristics, glycerine has potential in new-generation fabric softeners, deicing fluids, and drilling fluids. The glycerine market has been tight since 1992. While world production has increased, rising demand continues to outpace supply. Glycerine competes with sorbitol and propylene glycolin food, beverage, and tobacco applications, but these and other glycerine substitutes may not be readily accepted by consumers because of their taste. Although tight supply conditions are expected to continue, declining cellophane and explosive use will compensate for some of the projected growth in newly identified applications, such as fabric softeners, sports drinks, and deicing fluids. Glycerine prices fluctuate widely, depending on supply and demand factors. Historically, glycerine prices have ranged from 51 cents to $1.08 per pound. Current prices are between $1.05 and $1.08per pound. High 1996 prices are due to a worldwide shortage of glycerine estimated at roughly 100 million pounds. Demand is strong because of new applications, an unwillingness on the part of end-product manufacturers to switch to substitutes, and environmental pressures to enhance end-product biodegradability. To satisfy the rising demand for glycerine, producers are boosting capacity by an estimated 50 million pounds through expansion and debottlenecking of existing facilities. Henkel Corporation, which is headquartered in Germany, is investing $60 million to add 10 to 20 percent to its worldwide glycerine capacity. U.S. demand in 1995 is estimated at 420 million pounds. The market is expected to grow 3 to 4 percent per year through 2000, higher than its historical growth rate of 2 to 3 percent per year, due to a wide variety of newer applications and product lines. By the year 2000, demand is projected to reach 500 million pounds. Glycerine prices are expected to remain high because of continued increases in demand. Fuel and Environmental Regulations Offer Challenges for Biodiesel One potential source of glycerine in the United States is biodiesel. However, despite new market opportunities for alternative fuels created by CAAA and the Energy Policy Act of 1992 (EPACT), biodiesel commercialization still faces a number of regulatory and market barriers. One challenge stems from EPACT's alternative-fuel, motor-fleet regulations that require Federal, State, and alternative fuel providers to increase their purchases of alternative-fueled vehicles. In a March 1996 final rule on the Alternative Fuel Transportation Program, the U.S. Department of Energy (DOE) concluded that neat (100 percent) biodiesel meets EPACT's criteria as an alternative fuel for this program (5). However, biodieselis an expensive fuel and to lower its cost, potential users want to blend it with petroleum diesel. The most common blend used today is a mixture of 20-percent biodiesel and 80-percent petroleum diesel (B20). However, B20 vehicles have been disqualifiedfrom the Program based on the March 1996 final rule. In the absenceof a special ruling on B20 or some other blend, it is unlikely that an immediate demand for biodiesel will be created through the Alternative Fuel Transportation Program. Biodiesel advocatesare working with DOE to establish an appropriate blend level that will qualify as an alternative fuel. Like most fuel producers, manufacturers of biodiesel and biodiesel blends have to meet CAAA fuel-property definitions and satisfy health-effect requirements. Hence, another regulatory hurdlestems from the U.S. Environmental Protection Agency's (EPA) current rule-making process of defining a standard diesel fuel. This definition will enable fuel manufacturers to determine whether their diesel fuels are substantially similar (sub-sim) to EPA's definition of diesel fuel in terms of chemical composition. When the finalrule is implemented, most fuel manufacturers, including those of biodiesel and biodiesel blends, must either be able to prove that their fuels are sub-sim to the diesel standard or receive a waiver under CAAA Section 211(f). If fuel manufacturers are able toshow that biodiesel has the same emission characteristics and the same engine degradation properties as EPA's definition of diesel fuel, they may be able to get a waiver for biodiesel. EPA expects to propose definitions for diesel fuel in December 1996, with an expected final rule in December 1997. Biodiesel producers also have to overcome the potential public-health-effect data requirements under CAAA Section 211(b) and (c). These provisions require manufacturers to gather preliminary research data on their fuels to evaluate the potentially harmful human health effects of fuel emissions and submit this information to EPA by May 1997. Biodiesel analysts are currently conducting research that will help biodiesel comply with both the sub-sim and health-effect requirements. Negative findings from these data could delay commercialization and require the biodiesel industry to conduct a new round of expensive health-effect testing to address EPA concerns. Another regulatory challenge for biodiesel relates to EPA's requirements on implementing particulate matter (PM) standards for pre-1994-model-year urban buses in areas with a 1980 population of more than 750,000. Finalized in 1993, the Urban Bus Retrofit Rebuild Program is designed to reduce PM exhaust emissions from older-model urban buses. Although the standards were to become effective when engines are rebuilt or replaced after January 1, 1995, EPA delayed enforcement for 1 year. EPA has developed two compliance options to provide some flexibility to bus operators in meeting the new PM standards. The standards in both options are based on what PM reductions can be achieved by equipment certified by EPA. The first option requires an operator to install certified PM-reduction equipment on each of their buses when bus engines are rebuilt or replaced. (An urban bus engine generally undergoes two or three rebuilds during its 15-year lifetime.) The second option requires that PM levels for the entire bus fleet be below a yearly average target level at the beginning of each year. This target level can be calculated by urban bus operators through a computer program provided by EPA. Average target levels will vary by engine age and PM-reduction requirements for the various engine types within the fleet. To date, five technologies in the form of rebuild kits and/or catalytic converters have been certified by EPA for the Urban Bus Retrofit Rebuild Program. In June 1995, Twin Rivers Technologies, a Massachusetts-based company, submitted a certification package to EPA different from the five technologies. This package aims to lower PM in some bus engines through the combined use of B20 and a catalytic converter. Even with EPA certification, the B20 package still faces an economic challenge, because under the first compliance option, the certified rebuild kits and catalytic converters are cheaper to use than the B20 package. Biodieselmay have a better opportunity under the second option, depending on how the B20 package affects fleet operators' average PM target levels. Additional Research Is Needed Research is needed to help biodiesel comply with government regulations, including exploring its environmental and health benefits and economic feasibility. USDA, DOE, and the National Biodiesel Board (NBB) have been working together to investigate these topics. For example, representatives from these organizations, along with university and other researchers, recently attended a biodiesel workshop at Mammoth Hot Springs, Wyoming, May 21-22, 1996. DOE, through its Pacific Northwestand Alaska Regional Bioenergy Program, and the University of Idaho's National Center for Advanced Transportation Technology sponsored the event, entitled Commercialization of Biodiesel: Environmental and Health Effects Workshop. The workshop's purpose was to assess the health and environmental effects associated with emissions from compression ignition engines and to identify the benefits to be gained by using biodiesel. Workshop participants agreed that, when compared to petroleum diesel, neat biodiesel generally offers the following known environmental and health benefits: biodegradability; reductionsin soot, greenhouse gases, and some emission levels; and a positive energy balance. Several other benefits were identified, suchas reduced toxicity and lower amounts of ozone precursors and mutagenic and carcinogenic compounds. However, additionaldata are needed to verify these potential benefits and how they change when blended with petroleum diesel. Workshop organizers hopeto use these known and potential environmental and health benefits to help meet CAAA health-effect data requirements and as an education campaign to boost biodiesel commercialization. An important opportunity to show biodiesel's net environmental benefits will be an analysis of biodiesel's life-cycle. The main purpose of this joint USDA-DOE study is to compare the environmental effects of biodiesel versus petroleum diesel. Life-cycle analysis accounts for all production activities and raw materials involved in producing a product. For example, with biodiesel, the analysis begins with assessing the environmental effects of growing soybeans, including the production of seed, fertilizer, and other inputs used on the farm. After the inputs aspect is analyzed, the environmental effects are then examined through the product's manufacturing, followed by consumption, and finally the waste stage (recycling or disposal). A final reportis expected before the end of the year. [Crambe and industrial rapeseed: Lewrene Glaser, ERS, (202) 219-0091, lkglaser@econ.ag.gov. Tung: Charles Plummer, ERS, (202)219-0717, cplummer@econ.ag.gov, and Sandra Pyles, ERS. Glycerine: Irshad Ahmed, BoozAllen & Hamilton, (703) 917-2060, 71332.3160@compuserve.com. Biodiesel: Anton Raneses, ERS,(202) 219-0752, araneses@econ.ag.gov; Jim Duffield, ERS/OENU, (202) 501-6255, duffield@econ.ag.gov; Leroy Watson, NBB, (202) 331-7373; and Craig Chase, Technical and Engineering Management, (307) 527-6912, 104723.623@compuserve.com.] 1. Chapman, Peter. "HEAR Oil Supply Crimp Affecting Erucic Users." Chemical Marketing Reporter. Schnell Publishing Company, NewYork, NY, May 6, 1996, p. 10. 2. Dolack, Pete. "HEAR Oil Prices Higher Due to Supply Tightness." Chemical Marketing Reporter. Schnell Publishing Company, New York, NY, March 4, 1996, p. 10. 3. Hanson, Blake, President, Industrial Oil Products, Woodbury, NY. Personal Communication, July 10, 1996. 4. Santos, William. "Crambe Oil Makes Moves Into RapeseedOil Territory." Chemical Marketing Reporter. Schnell Publishing Company, New York, NY, April 1, 1996, p. 10. 5. U.S. Department of Energy. "Alternative Fuel Transportation Program." Federal Register, Vol. 61 No. 51, March 14, 1996, pp. 10,629-30. Natural Fibers Hesperaloe Has Properties That Interest Papermakers The University of Arizona has been working with several companies in the pulp and paper industry to develop Hesperaloe as a new source of fibers for papermaking. Hesperaloe fibers are unusually long and thin, similar to those of abaca and sisal. Such nonwood fibers have important uses in high-value specialty papers. While abaca and sisal fibers are imported, Hesperaloe could be produced in the southwestern United States. Most papermakers in the United States, Canada, and Europe use trees as their source of fibers. In the pulping process, the wood is broken down, either chemically or mechanically, into individual fiber cells that are then suspended in an aqueous slurry and reformed into sheets on high-speed papermaking machines. Evergreen conifers (softwoods), such as pine, spruce, and Douglas fir, produce comparatively long fiber cells that form strong paper. Broad-leaved trees (hardwoods), like poplar and aspen, have shorter, broader cells that produce a smoother paper with less strength. Many papers, such as newsprint, are a mixture of softwood and hardwood pulps. Because the stronger softwood pulps command a higher price than hardwood pulps, papermakers blend these pulps to optimize paper quality while minimizing their use of higher cost fibers. Nonwood fibers, such as cereal straws, bamboo, and sugarcane bagasse, are also used in the pulp and paper industry. In 1993, world nonwood pulping capacity was 21 million metric tons, 10.6 percent of world paper pulping capacity (1). Nonwood fibers arean important source of papermaking materials in developing countries that have limited forest resources. China and India account for about 80 percent of the world's nonwood pulping capacity. There have been efforts in the United States over the past 30 years to develop kenaf, an annual fiber crop, as a nonwood fiber for papermaking, and more recent work in Europe has emphasized fiber hemp. Given that almost any plant is suitable for making sometype of paper, a new crop developed specifically for papermaking must have significant advantages in both quality and price to justify the commercialization effort. Hesperaloe a Possibility The University of Arizona has been working with several companies in the pulp and paper industry to develop two species of Hesperaloe (H. funifera and H. nocturna, desert plants native to northern Mexico) as a new source of fibers for papermaking. This 10-year project is about to move from the exploratory research and development stage toward full-scale commercialization. 1/ 1/ Some of the research was funded by USDA's Alternative Agricultural Research and Commercialization Corporation under Agreement 93AARC20030 and USDA's Cooperative State Research, Extension, and Education Service under Cooperative Agreement 94-COOP-1-0036. The greatest market opportunity for Hesperaloe fibers may be as a blend for strengthening various grades of paper (2), such as recycled paper. Fiber cells lose considerable strength in the deinking and repulping processes. Some amount of virgin fiber, usually softwood, must be added to recycled fibers to provide strength. Using a nonwood fiber, such as Hesperaloe, in recycled papers could be an attractive feature to consumers. The fiber cells of these Hesperaloe species are unusually long and thin (table 8). They range between 3 and 4 millimeters in length, comparable to the softwood fibers. However, they are much narrower, only 14 to 17 microns in width. The ratio of lengthto width, called the aspect ratio, is a good indicator of paper strength. This ratio for Hesperaloe is very high, about 240. In other words, Hesperaloe fibers combine the length of softwoods with the narrowness of straw fibers, an unusual property found only in abaca, sisal, and a few other specialty fibers. Pulps with special properties, such as a high aspect ratio, command a relatively high price. Some specialty nonwood pulps cost twoto four times that of softwood pulps (table 9). Abaca and sisal pulps, in particular, may cost $2,500 to $3,000 per metric ton. Both abaca and sisal are tropical crops that are harvested by hand and processed in small batch facilities, which account for the high cost of their fibers. Sisal production and processing, however, may change in the future if production is geared toward paper applications instead of twine and cordage. Because of their high cost, use of abaca and sisal pulps is restricted to certain small specialty markets, such as tea bags, certain filters, and sausage skins (2), with stringent requirements for high strength and fine texture (1). According to Census Bureau data, imports of raw or processed abaca fiber averaged 990 metric tons per year during 1989-94, while imports of raw or processed sisal fiber averaged 500 kilograms during the same period. Some imports of abaca and sisal cordage may also be used by the pulp and paper industry. Imports of abaca and sisal twine and cordage averaged 6,700 and 78,800 metric tons, respectively, during 1989-94. The James River Corporation has investigated using Hesperaloe fibers in several types of paper. Its patent on the use of Hesperaloe in tissue and towel papers (3) provides some information on the performance of these fibers. With these types of sanitary papers, it is difficult to simultaneously improve both softness and strength. However, using Hesperaloe fibers in the blend enhances both strength and softness, while increasing bulk and absorbency. An unpublished study, conducted by the Herty Foundation of Savannah, Georgia, for the University of Arizona, compared papers made from Hesperaloe (unbleached hand sheets) with papers made from softwood kraft, abaca, and sisal. According to this study, the Hesperaloe papers had superior breaking length and burst index over a range of refining intensities. Thus, papers made from Hesperaloe fibers are as good as those made from high-cost, specialty pulps. Hesperaloe Production Is Under Investigation The compact growth habits of Hesperaloe funifera and H. nocturna suggest that they could be grown at a high stand density. These perennial plants are very water-efficient, and their leaves are spineless and thornless, which facilitates handling. All these traits suggest that Hesperaloe species might do well under irrigated production in the arid southwestern United States. Test plantings of Hesperaloe funifera have been growing at Tucson, Arizona, for more than 8 years. Initial growth of transplanted stands was very slow, but high biomass yields were obtained after 5 years (table 10). Stands harvested at 5 years regrew to producea second harvest after another 3 years. A third harvest may be possible after another 2 years, since each plant now consists of a larger base from which more regrowth can occur. It is unknownhow many harvests could be made from a single stand before plants expand to fill the rows and interfere with machine operations. Larger plantings have been established recently at the Maricopa Agricultural Center at Maricopa, Arizona. Because seeds of these species are extremely scarce, and because planted seeds are slow to germinate and emerge, commercial production of Hesperaloe will have to use transplants for stand establishment. Weed control will also be costly in the beginning, since Hesperaloe is not competitive during its first few years when growth rates are low. Hesperaloe has a low-irrigation requirement because it possesses the crassulacean acid metabolism (CAM) pathway for photosynthesis. CAM plants take up carbon dioxide and transpire water at night rather than during the day, as is the case with most plants. Since the rate of transpiration is much lower during the night than during the day, CAM plants have a very high water-use efficiency. Grown throughout the year, Hesperaloe only requires about 24 inches of water annually. In comparison, wheat, which is grown in the winter in Arizona, requires about 36 inches of irrigation water and cotton, a summer crop, requires about 48 inches. The projected crop cycle for Hesperaloe consists of stand establishment with transplants during year 1, first harvest at year 5, second harvest at year 8, and third harvest at year 10 or 11. Fresh-weight leaf yields from the three harvests obtained over the 10 or 11 years are projected to total about 250 metric tons per acre (based on a planting density of 8,700 plants per acre). For commercial production, flower stalks would be removed at an early stage of growth. The effects of this on subsequent leaf growthhas yet to be investigated. Because dry fibrous raw material represents approximately 30 percent of the leaf fresh weight and pulp yield is 40 percent of the raw material, 1 acre of Hesperaloe funifera could probably produce sufficient biomass to yield 30 metric tons of pulp. This is equivalent to a 10- to 12-percent pulp yield based on the original fresh weight. Like abaca and sisal fibers, Hesperaloe fibers can be pulped by the kraft, soda, or sulfite processes (2, 3). In addition to its possible use in specialty papers, Hesperaloe could also potentially replace some softwood uses. For instance, in some applications, half as much sisal pulp can be used when substituted for softwood pulp (2), but market prices for sisal and softwood pulps do not favor such substitution. However, Hesperaloe pulp is superior to that of sisal and probably can be produced for less than twice the average price of softwood pulp. (Softwoodpulp prices vary greatly in 3- to 5-year cycles.) This potential for substituting Hesperaloe pulp for softwood pulp would greatly expand its market opportunities beyond that of the premium specialty papers. Additional markets would be necessary to justify the development of a new fiber crop, given the small size of the specialty papers market. Research on Hesperaloe will continue. Acreage at the Maricopa Agricultural Center is being expanded, primarily to increase seed production. The private sector is conducting pilot-scale pulping and papermaking trials. [Steven McLaughlin, University of Arizona, Office of Arid Lands Studies, (602) 621-8577, spmcl@ag.arizona.edu] 1. Atchison, Joseph E. "Nonwood Fiber Could Play MajorRole in Future U.S. Papermaking Furnishes." Pulp & Paper, July 1995,pp. 125-31. 2. Hurter, Alfred. M. "Utilization of Annual Plants and Agricultural Residues for the Production of Pulp and Paper." Nonwood Plant Fiber Pulping Progress Report 19, TAPPI Press, Atlanta, GA, 1991. 3. Reeves, R.H., J.D. Plantikow, L.J. Smith, T.P. Oriaran, A.O. Awofeso, and G.L. Worry. "Soft High Strength Tissue Using Long-Low Coarseness Hesperaloe Fibers." U.S. Patent No. 5320710, 1994. Animal Products Wool Gaining Favor Outside of Apparel Industry Traditionally, wool has been used in making worsted and woolen fabric for apparel and carpet, but wool's resiliency, absorbency, and flexibility have made it a popular input into other industries as well. Wool fibers are mechanically processed to form yarns, threads, fabrics, and nonwovens, with various end uses. Apparel, upholstery, blankets, carpeting and carpet pads, windings for baseballs, felts for piano hammers, and fabric for billiard and gaming tables are just a few of the many products that are made out of wool. New uses for wool include mulches, needle-punch pads,and booms, socks, and mitts to soak up oil and other materials from spills and leaks (table 11). Wool Goes Through Several Processing Steps The first step in wool processing takes place on the ranch where the sheep are shorn or clipped. The wool is sorted by lengthand fineness for its intended use in either the worsted or woolen system. Worsted and woolen are the two major classificationsfor wool yarns and fabrics. The primary difference between the two systems is the quality of the wool fiber they require and, thus, the value of the wool. The worsted system uses wool fibers that are of fine diameter and more than 3 inches in length. The fibers are combed and drawn during processing to make the individual fibers lie parallel and to eliminate shorter fibers, called noils. Worsted yarn is used to produce higher quality wool products, such as suits, dresses, gabardines, and crepes. The woolen systemuses shorter wool fibers to make fluffy yarns for sweaters, coats, and carpets. Beside raw wool (wools that have not been previously processed), the woolen system uses noils from the worsted system. Properties of wool that affect its value include fineness, fiber length, strength, color, the number of intermingled black fibers, and the presence of vegetable and foreign matter mixed in it. Fleece wool, which comes from the main body of the sheep, is normally separated from the belly and the skirtings. Fleece wool is evaluated for its quality and usually sold to processors in the worsted system. Belly wool is of good fineness but is shorter, relatively weak, discolored, and likely to carry vegetable matter. Belly wool is best suited for the woolen system. Finally,the skirtings provide the coarsest wool, which is often stained and is likely to carry kempy hairs (stiff, unsnippable fibers that will not take a dye). Skirtings are best used by the woolen systemor in nonwoven applications. After the fleece is clipped from the sheep and sorted, the wool is scoured or washed to remove grease and foreign matter, which can account for 30 to 70 percent of raw (unscoured) fleece weight. Wool is then passed through a system of wire rollers that straighten the fibers and remove any remaining vegetable matter. This process, called carding, produces a waste material that can be blended back into the spinning process with other wool to produce special-effect yarns or it can be sold for use in other markets. Wool is a natural protein fiber, similar to the protein found in human hair and fingernails. Properties of protein fibers, including low flammability, flexibility, and absorbency, make wool an excellent candidate for industrial applications. Wool is normally regarded as a safe flammable material since it burns very slowly and is self-extinguishing. Wool can also be given a flame-retardant finish with little effect on the physical or chemical properties of the fiber. Second, wool has excellent flexibility. The fibers can be bent back on themselves 20,000 times without breaking, as compared to 3,000 times for cotton and 75 times for rayon. Finally, wool can absorb moisture in vapor form and repel moisture in liquid form (up to 30 percent of its weight) without the surface feeling wet. Most Wool Is Used for Apparel The 1996 U.S. supply of raw wool is estimated at 175 million pounds, clean (after scouring), 10 percent below last year (table 12). Stocks at the beginning of 1996 are estimated to have been40 million pounds. Estimated 1996 wool production, at 30 million pounds, is 11 percent less than the previous year. U.S. raw wool imports are 85 million pounds, 4 percent below 1995. The apparel industry accounts for the largest share of raw wool, using more than 64 percent on average during 1990-94 (figure 5). Although most wool is used in the apparel industry, some of the lower quality wool is not suitable for this use and can be put into nontextile or industrial applications. Nearly 6 percent of raw wool was used in industrial and |