Department of Economics The Economics of Biofuels North Central Regional Association of Assessing...

Department of Economics

The Economics of Biofuels

North Central Regional Association of Assessing Officers 34th Annual Conference

Coralville, IowaJune 17, 2009

Chad HartAssistant Professor/Grain Markets Specialist

[email protected]


Population2008 2020 2050

(billion) (billion) (billion)World 6.678 World 7.601 World 9.393

China 1.330

China 1.431

India 1.808

India 1.148

India 1.362

China 1.424

U.S. 0.304 U.S. 0.336 U.S. 0.420Indonesia 0.238

Indonesia 0.268

Nigeria 0.357

Brazil 0.192

Brazil 0.212

Indonesia 0.313

Pakistan 0.168

Pakistan 0.204

Bangladesh 0.280

Bangladesh 0.154

Bangladesh 0.190

Pakistan 0.278

Russia 0.141

Nigeria 0.184

Brazil 0.228

Nigeria 0.138

Russia 0.132 Congo 0.189

Japan 0.127

Mexico 0.125

Mexico 0.148

Source: U.S. Bureau of the Census,International Data Base


Liquid Fuel Usage2006 2010 2015 2020 2025 2030

(Million Barrels Oil Equivalent per

Day) (Percent of 2006 Value)

United States 20.7 95% 98% 98% 100% 105%

Canada 2.3 100% 100% 100% 104% 109%

Mexico 2.1 71% 81% 90% 95% 100%

Europe 15.7 92% 92% 95% 96% 96%

Japan 5.2 88% 92% 96% 92% 90%

China 7.2 118% 139% 168% 192% 213%

India 2.7 89% 115% 144% 159% 174%

Africa 3.0 117% 120% 123% 127% 130%

Central and South America 5.7 116% 116% 119% 125% 133%

World 85.0 102% 107% 113% 119% 125%

Source: Energy Information Administration


Crude Oil Prices


0

20

40

60

80

100

120

140

Jan-8

6

Jan-8

8

Jan-9

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Jan-9

2

Jan-9

4

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6

Jan-9

8

Jan-0

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$ p

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Crude Oil Futures Prices

Source: NYMEX

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100

110

120

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140

July2008

Dec.2008

Dec.2009

Dec.2010

Dec.2011

Dec.2012

Dec.2013

Dec.2014

Dec.2015

Dec.2016

$ p

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barr

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2008 2009


Iowa’s Alternative Energy SourcesEthanol: Over 40 plants in operation/construction

Ranked 1st in ethanol production

Biodiesel: Over 15 plants in operation/construction

Wind: Ranked 3rd in wind energy productionRanked 1st in ratio of wind/total energy


Ethanol Plant Locations

Source: Ethanol Producer Magazine


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12

Bill

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Ethanol ProductionBased on the pace over the 1st 2 months of 2009

Sources: Renewable Fuels Association, Energy Information Administration


Biodiesel Plant Locations

Source: Biodiesel Magazine


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800

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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Biodiesel ProductionBased on the pace over the 1st 2 months of 2009

Sources: National Biodiesel Board, Energy Information Administration


Ethanol Margins

Source: ISU, CARD


Biodiesel Margins

Source: ISU, CARD


U.S. Blended Motor Gasoline Consumption


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145

Bill

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Fuel Prices

Source: Nebraska Energy Office

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Ethanol Gasoline

Rack prices in Omaha


Fuel Futures Prices

Sources: NYMEX and CBOT

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1.00

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Ethanol Gasoline


Ethanol Blending Advantage

-0.04

-0.02

0.00

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0.04

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0.12

0.14

0.16

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% of Gasoline Blended with Ethanol


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90%5

/7/2

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Price Movements Since 2007

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.51/3

/200

7

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/200

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11/3

/20

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/20

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9

Dow Oil Corn Soybeans


Estimated Hog Returns

Source: ISU Extension, Farrow-to-Finish

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-40

-20

0

20

40

60

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

$ p

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hea

d


Estimated Cattle Returns

Source: ISU Extension, Yearling Steers

-300

-200

-100

0

100

200

300

400

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

$ p

er

hea

d


Hog Returns vs. Corn Prices

Sources: ISU Extension, Farrow-to-Finish;USDA-NASS

-50

-40

-30

-20

-10

0

10

20

30

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

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Jun-08

Sep-08

Dec-08

Mar-09

$ p

er

hea

d

2

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6

$ p

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bush

el


Cattle Returns vs. Corn Prices

Sources: ISU Extension, Yearling Steers;USDA-NASS

-300

-250

-200

-150

-100

-50

0

50

100

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

$ p

er

he

ad

2

3

4

5

6

$ p

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bush

el


Factors Leading to Higher Commodity Prices

Source: USDA-ERS, Trostle, July 2008


Commodity Price Indexes

Source: International Financial Statistics


Events in 2007Droughts:

Northern Europe, Ukraine, Russia, Northwest Africa, Turkey, Australia, and Argentina

Increased export taxes:China, Argentina, Russia, Kazakhstan,

Malaysia, and Indonesia

Export restrictions:Argentina, Ukraine, India, Vietnam, Serbia,

Egypt, Cambodia, Indonesia, and Kazakhstan


The Food Dollar

Source: USDA-ERS


Farm to Retail Food Price Spread

Food Farm Value Share of

Retail Food Price

Food Farm Value Share of

Retail Food Price

Eggs 53 Canned Corn 22

Beef 49 Sugar 27

Chicken 48 Wheat Flour 19

Milk 34 Bread 5

Pork 31 Corn Flakes 4

Orange Juice 33 Corn Syrup 3

Source: USDA-ERS, 2001


Changes in Food Price Indexes

Sources: Bureau of Labor Statistics, USDA-ERS

Consumer price indexes Relative importance

1

Final 2005

Final 2006

Final 2007

Final2008

Forecast 20092

(Percent)All food 100.0 2.4 2.4 4.0 5.5 3.0 - 4.0Food away from home 44.3 3.1 3.1 3.6 4.4 3.5 - 4.5Food at home 55.7 1.9 1.7 4.2 6.4 2.5 - 3.5Meats, poultry, and fish 12.2 2.4 0.8 3.8 4.2 2.0 - 3.0Eggs 0.7 -13.7 4.9 29.2 14.0 -5.0 - -4.0Dairy products 6.2 1.2 -0.6 7.4 8.0 -4.0 - -3.0Fats and oils 1.6 -0.1 0.2 2.9 13.8 3.0 - 4.0Fruits and vegetables 8.2 3.7 4.8 3.8 6.2 3.0 - 4.0Sugar and sweets 2.1 1.2 3.8 3.1 5.5 3.0 - 4.0Cereals and bakery 7.9 1.5 1.8 4.4 10.2 2.5 - 3.5Nonalcoholic beverages 6.7 2.9 2.0 4.1 4.3 3.0 - 4.0Other foods 10.1 1.6 1.4 1.8 5.2 3.0 - 4.01BLS estimated expenditure shares, December 20082Forecasts updated May 20, 2009


Renewable Fuels Standard (RFS)

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2009 2010 2011

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Additional Advanced Biofuels Biodiesel

Cellulosic Biofuels Conventional Biofuels

CropYear

Billion Bushels

2008 3.57

2009 4.11

2010 4.43


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Conventional Biofuels Cellulosic Biofuels

Biodiesel Additional Advanced Biofuels


60% GHG Emission Reduction

50% GHG Emission Reduction

20% GHG Emission ReductionIf construction started after Dec. 2007


Countries Pursuing BiofuelsUSBrazilArgentinaColombiaParaguayCanadaUruguayMexico

ThailandNew ZealandSouth AfricaSouth KoreaPhilippinesIndonesiaPakistanChina

IndiaMalaysiaAustraliaJapanEURussia

Not a complete list


Government Policies for BiofuelsEthanolAd valorem tariff of 2.5%Import duty of $0.54 per gallonVolumetric Ethanol Excise Tax Credit (VEETC)

$0.45 per gallon starting in 2009

BiodieselBiodiesel Mixture Excise Tax Credit

$1.00/0.50 per gallon

CellulosicCellulosic Biofuel Producer Tax Credit

$1.01 per gallon


Cellulosic Biofuel Waiver ProvisionsEPA (in consultation with DOE and

USDA) can reduce the cellulosic biofuel mandated volume

Waiver trigger based on EIA projections

EPA will also sell cellulosic biofuel creditsPrice set at Max($0.25 per gallon, $3.00 –

Average wholesale gasoline price per gallon)


Components of 2007 Energy ActUp to $500 million per year in grants for

the production of advanced biofuels (with at least an 80% reduction in GHG emissions relative to current fuels)

Up to $25 million per year in grants for R&D for biofuel production in states with low rates of biofuel production


Energy in the Farm BillGrants for the development and

construction of advanced biofuel biorefineries, up to 30% of the cost of the project

Loans for the same, up to $250 million or 80% of the cost per project


Biomass Crop Assistance Program

To support production of crops for bioenergy and assist with collection, harvest, storage, and transportation of biomass to conversion facilities

Excluded materialsFarm program crops, animal byproducts, food

waste, yard waste, algae



Requires producers and conversion facilities to submit proposal establishing a project area

Establishes contracts between USDA, producers, and facilities to promote project

Sets up establishment payments for perennial crops and annual payment to biomass producers



Payments are also authorized for biomass collection, harvest, storage, and transportation

Matching payments$1 for each $1 per ton paid by conversion facility,

up to $45 per ton, for 2 years


Draft Lifecycle GHG Reductions

Source: EPA, May 2009


CARB Fuel Carbon Values

Source: CA Air Resources Board, April 2009


Hay Acreage

Source: USDA-NASS

56

57

58

59

60

61

62

63

64

65

199

0

199

1

199

2

199

3

199

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200

9

Mill

ion a

cre

s


CRP Expiring Contracts

Source: USDA-FSA

0

1

2

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6

2008 2009 2010 2011 2012 2013

Mill

ion a

cre

s

April 2009: 33.712 million acresCap in 2010: 32 million acres


Land AvailabilityData from Census of Agriculture

1997 2002 2007Land in farms 955 938 922Total cropland 445 434 406Harvested cropland 319 303 310Cropland in pasture 66 61 36Other cropland 60 71 61Total woodland 77 76 75Pastureland (not crop) 398 395 409Land in other uses 34 33 32

Source: USDA-NASS


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Conventional Biofuels Cellulosic Biofuels

Biodiesel Additional Advanced Biofuels



Currently Available Biomass

Source: NREL, 2005


Spectrum of Biofuels

Source: NREL, 2006

Grain/Sugar EthanolBiodieselGreen Gasoline/DieselCellulosic EthanolButanolPyrolysis LiquidsSyngas Liquids

Most Mature

Least Mature


Biofuel ChallengesProduction costs

Conversion, ag. production, etc.Infrastructure barriers

Developing supply chain for biomassContinued development of biofuel

distribution systemGrowth in biofuel-compatible vehicles


Biofuel ChallengesInvestment risks

Higher capital costs, emerging technology

Biomass production shiftsInducing farmers to produce new crops

Consumer understandingAbout the fuelsAbout the tradeoffs


Thank you for your time!

Any questions?

My web site:http://www.econ.iastate.edu/faculty/hart/

Department of Economics The Economics of Biofuels North Central Regional Association of Assessing...

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