An Analysis of the Long-Run Impact of Ethanol Expansion on Agricultural Markets

Chad HartCenter for Agricultural and Rural Development

Iowa State Universitychart@iastate.edu

515-294-9911

Presentation for representatives from NideraAmes, Iowa

August 20, 2007

Outline

Based on the CARD study “Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets”

http://www.card.iastate.edu/publications/synopsis.aspx?id=1050

Updated with available 2006 and 2007 data The objective is to estimate:

how large the biofuels sector in the U.S. could become the impact of the biofuels sector on crops markets, trade, and on

livestock markets the response of world agricultural markets

Model Interactions

•Current ethanol capacity: 124 plants, 6.48 billion gallons/year

•Total capacity under construction and expansion: 6.4 billion gallons/year

•76 new ethanol plants and 7 expansion projects underway

•2.2 billion bushels of corn were used in producing fuel ethanol in 2006/2007 marketing year.

•3.2-3.5 billion bushels of corn are expected to be used in producing fuel ethanol for 2007/2008 marketing year.

U.S. Ethanol Industry

Key Determinants of Impacts

Crude oil prices Used NYMEX futures prices as a guide

Policy incentives in the U.S. $0.51/gallon ethanol blenders credit $0.54/gallon import duty and 2.5% import tariff

Demand for E-85 included

Projected U.S. Ethanol Production

0

2

4

6

8

10

12

14

16

2006 2008 2010 2012 2014 2016

billion gallons

Ethanol Production

Projected U.S. Dry Mill Margins

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2006 2008 2010 2012 2014 2016

US$/bushel

Margin Over Operating Costs Margin Over Total Cost

Wholesale Gasoline and Ethanol Prices

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

2006 2008 2010 2012 2014 2016

US$/gallon

Unleaded Gasoline Ethanol

Projected U.S. Corn Planted Area

70

75

80

85

90

95

2006 2008 2010 2012 2014 2016

million acres

Corn Planted Area

Projected Utilization of U.S. Corn

0

1000

2000

3000

4000

5000

6000

7000

2006 2007 2008 2009 2010 2016

million bushels

Feed Fuel HFCS Seed Food, Other Exports

Projected U.S. Corn and Soybean Prices

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

US$/bushel

Corn Soybeans

Projected U.S. Soybean Planted Area

60

65

70

75

80

2006 2008 2010 2012 2014 2016

million acres

Soybean

Projected Brazilian Ethanol Production

4000

5000

6000

7000

8000

2007 2008 2009 2010 2016

million gallons

Brazil

Projected Ethanol Production

0

500

1000

1500

2007 2008 2009 2010 2016

million gallons

China EU India

Projected World Area Harvested

75

125

175

225

2007 2008 2009 2010 2016

million hectares

Corn Wheat Soybeans

Projected Argentine Area Harvested

0

5

10

15

20

2007 2008 2009 2010 2016

million hectares

Corn Wheat Soybeans

Projected Brazilian Area Harvested

0

5

10

15

20

25

30

35

2007 2008 2009 2010 2016

million hectares

Corn Wheat Soybeans

Projected World Corn Net Exports

2007/08 2016/17

21%

7%

57%

15%

Argentina Brazil

U. S. Rest of World

19%

4%

66%

11%

Argentina Brazil

U. S. Rest of World

Projected World Wheat Net Exports

2007/08 2016/17

11%

20%

24%

45%

Argentina Canada

U. S. Rest of World

11%

16%

24%

49%

Argentina Canada

U. S. Rest of World

Projected World Soybean Net Exports

2007/08 2016/1711%

42%

45%

2%

Argentina Brazil

U. S. Rest of World

9%

61%

28%

2%

Argentina Brazil

U. S. Rest of World

Projected World Soybean Meal Net Exports

2007/08 2016/17

53%

26%

15%

6%

Argentina Brazil

U. S. Rest of World

52%

28%

12%

8%

Argentina Brazil

U. S. Rest of World

Projected World Soybean Oil Net Exports

2007/08 2016/17

71%

26%

3%

Argentina Brazil U. S.

63%

27%

10%

Argentina Brazil U. S.

Impact of Higher Crude Oil Price

Increased crude oil price by $10/barrel over the projection Margins on ethanol plants increase New incentive to invest in added capacity for ethanol

production Eventually, a new equilibrium reached where there is no

incentive to invest in or exit the ethanol industry Will demand for ethanol be enough?

E-10 market will saturate around 15 billion gallons Drop in ethanol price will eventually encourage increase in

demand for the flex-fuel cars

Projected U.S. Ethanol Production

0

2

4

6

8

10

12

14

16

18

20

22

24

2006 2008 2010 2012 2014 2016

billion gallons

Ethanol Production

Projected U.S. Dry Mill Margins

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2006 2008 2010 2012 2014 2016

US$/bushel

Margin Over Operating Costs Margin Over Total Cost

Wholesale Gasoline and Ethanol Prices

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

2006 2008 2010 2012 2014 2016

US$/gallon

Unleaded Gasoline Ethanol

Projected U.S. Corn Planted Area

70

75

80

85

90

95

100

105

2006 2008 2010 2012 2014 2016

million acres

Corn Planted Area

Projected Utilization of U.S. Corn

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

2006 2007 2008 2009 2010 2016

million bushels

Feed Fuel HFCS Seed Food, Other Exports

Projected U.S. Corn and Soybean Prices

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

US$/bushel

Corn Soybeans

Projected U.S. Soybean Planted Area

60

65

70

75

80

2006 2008 2010 2012 2014 2016

million acres

Soybean

Projected Brazilian Ethanol Production

4000

5000

6000

7000

8000

2007 2008 2009 2010 2016

million gallons

Brazil

Projected Ethanol Production

0

500

1000

1500

2007 2008 2009 2010 2016

million gallons

China EU India

Projected World Area Harvested

75

125

175

225

2007 2008 2009 2010 2016

million hectares

Corn Wheat Soybeans

Projected Argentine Area Harvested

0

5

10

15

20

2007 2008 2009 2010 2016

million hectares

Corn Wheat Soybeans

Projected Brazilian Area Harvested

0

5

10

15

20

25

30

35

2007 2008 2009 2010 2016

million hectares

Corn Wheat Soybeans

Projected World Corn Net Exports

2007/08 2016/17

21%

7%

57%

15%

Argentina Brazil

U. S. Rest of World

23%

8%

50%

19%

Argentina Brazil

U. S. Rest of World

Projected World Soybean Net Exports

2007/08 2016/1711%

42%

45%

2%

Argentina Brazil

U. S. Rest of World

9%

64%

25%

2%

Argentina Brazil

U. S. Rest of World

Projected World Soybean Meal Net Exports

2007/08 2016/17

53%

26%

15%

6%

Argentina Brazil

U. S. Rest of World

52%

28%

13%

7%

Argentina Brazil

U. S. Rest of World

Projected World Soybean Oil Net Exports

2007/08 2016/17

71%

26%

3%

Argentina Brazil U. S.

66%

29%

5%

Argentina Brazil U. S.

Thank You