Bottlenecks and Oil Price Spikes: Impact
on U.S. Ethanol and Agriculture
Chad Hart
Center for Agricultural and Rural Development
Iowa State University
chart@iastate.edu
515-294-9911
Kansas State University
Manhattan, Kansas
October 5, 2007
Outline
 Based on an update of our earlier 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
U.S. Ethanol Industry
•Current ethanol capacity: 129 plants,
6.88 billion gallons/year
•Total capacity under construction and
expansion: 6.77 billion gallons/year
•76 new ethanol plants and 10
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.
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
 The “E-85 bottleneck”: the location and quantity of
flex-fuel vehicles and E-85 pumps
Three Cases
 Baseline
 Current policies, “normal” weather
 Higher oil prices throughout projection period
 Adding $10/barrel to the crude oil price
 Drought in the 2012 crop year

Placing a 1988-style drought in the middle of the
projection period
Projected U.S. Ethanol Production
billion gallons
16
14
12
10
8
6
4
2
0
2006
2008
2010
2012
2014
2016
Projected U.S. Dry Mill Margins
US$/bushel
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2006
2008
2010
2012
2014
-0.20
-0.40
Margin Over Operating Costs
Margin Over Total Cost
2016
Margins
atEthanol
Various
andMargins
Gasoline
Prices
Dry Mill
PlantCorn
Operating
at Different
Corn and Gasoline Prices
1.50
1.00
Wholesale
Price of
Gasoline
$ per gallon
0.50
0.00
0.00
1.00
2.00
3.00
4.00
-0.50
-1.00
-1.50
Dollars per Bushel
5.00
6.00
7.00
1.00
1.50
2.00
2.50
Wholesale Gasoline and Ethanol Prices
US$/gallon
3.00
2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
2006
2008
2010
Unleaded Gasoline
2012
Ethanol
2014
2016
Projected U.S. Corn Planted Area
million acres
95
90
85
80
75
70
2006
2008
2010
2012
2014
2016
Projected Utilization of U.S. Corn
million bushels
7000
6000
5000
4000
3000
2000
1000
0
2006
2007
Feed
2008
2009
Fuel
2010
HFCS
2011
Seed
2012
2013
Food, Other
2014
Exports
2015
2016
Projected U.S. Corn and Soybean Prices
US$/bushel
8.00
7.00
6.00
5.00
4.00
3.00
2006
2007
2008
2009
2010
Corn
2011
2012
Soybeans
2013
2014
2015
2016
Projected U.S. Soybean Planted Area
million acres
80
75
70
65
60
2006
2008
2010
2012
2014
2016
Projected U.S. Biodiesel Production
million gallons
600
550
500
450
400
350
300
2006
2008
2010
2012
2014
2016
Projected U.S. Meat Production
billion pounds
45
40
35
30
25
20
2006
2007
2008
2009
2010
Beef
2011
Pork
2012
Broiler
2013
2014
2015
2016
Projected U.S. Retail Meat Prices
$ per pound
5
4
3
2
1
0
2006
2007
2008
2009
2010
Beef
2011
Pork
2012
Broiler
2013
2014
2015
2016
Projected Brazilian Ethanol Production
million gallons
8000
7000
6000
5000
4000
2006
2007
2008
2009
2010
2011
Brazil
2012
2013
2014
2015
2016
Projected Ethanol Production
million gallons
1500
1000
500
0
2006
2007
2008
2009
2010
China
2011
2012
EU
India
2013
2014
2015
2016
Projected Argentine Area Harvested
thousand hectares
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
2006
2007
2008
2009
Corn
2010
2011
Wheat
2012
2013
Soybeans
2014
2015
2016
Projected Brazilian Area Harvested
thousand hectares
35000
30000
25000
20000
15000
10000
5000
0
2006
2007
2008
2009
Corn
2010
2011
Wheat
2012
2013
Soybeans
2014
2015
2016
Impact of Higher Crude Oil Price
 Increased crude oil price by $10/barrel over the projection
 Margins on ethanol plants increase
 New incentive to invest in added capacity for ethanol
production
 Eventually, a new equilibrium reached where there is no
incentive to invest in or exit the ethanol industry
 Will demand for ethanol be enough?


E-10 market will saturate around 15 billion gallons
Drop in ethanol price will eventually encourage increase in
demand for the flex-fuel cars
Projected U.S. Ethanol Production
billion gallons
25
20
15
10
5
0
2006 2007
2008 2009
2010 2011 2012
Scenario
2013 2014
Baseline
2015 2016
Projected U.S. Dry Mill Margins
US$/bushel
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2006
2008
2010
2012
2014
-0.20
-0.40
Margin Over Operating Costs
Margin Over Total Cost
2016
Wholesale Gasoline and Ethanol Prices
US$/gallon
3.00
2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
2006
2008
2010
Unleaded Gasoline
2012
Ethanol
2014
2016
Projected U.S. Corn Planted Area
million acres
110
100
90
80
70
2006 2007 2008 2009 2010
2011 2012 2013 2014 2015 2016
Scenario
Baseline
Projected Utilization of U.S. Corn
million bushels
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
2006
2007
Feed
2008
2009
Fuel
2010
HFCS
2011
Seed
2012
2013
Food, Other
2014
Exports
2015
2016
Projected U.S. Corn and Soybean Prices
US$/bushel
8.00
7.00
6.00
5.00
4.00
3.00
2.00
2006
2007
2008
2009
2010
Corn
2011
2012
Soybeans
2013
2014
2015
2016
Projected U.S. Soybean Planted Area
million acres
80
75
70
65
60
55
2006
2007
2008 2009
2010
2011 2012 2013 2014
Scenario
Baseline
2015
2016
Projected U.S. Biodiesel Production
million gallons
800
700
600
500
400
300
200
100
0
2006 2007
2008 2009
2010
2011 2012 2013 2014
Scenario
Baseline
2015 2016
Projected U.S. Meat Production
billion pounds
45
40
35
30
25
20
2006
2007
2008
2009
2010
Beef
2011
Pork
2012
Broiler
2013
2014
2015
2016
Projected U.S. Retail Meat Prices
$ per pound
5
4
3
2
1
0
2006
2007
2008
2009
2010
Beef
2011
Pork
2012
Broiler
2013
2014
2015
2016
U.S. Meat, Egg, and Dairy Price Changes
Baseline
Scenario
Percentage Change
Beef Retail Price
($/pound)
4.52
4.62
2.2%
Pork Retail Price
($/pound)
3.30
3.35
1.5%
Broiler Retail Price
($/pound)
1.96
2.00
2.0%
Turkey Retail Price
($/pound)
1.26
1.30
3.2%
Egg Retail Price
($/dozen)
1.63
1.68
3.1%
Farm to Retail Food Price Spread
Food
Farm Value Food
Farm Value
Share of Retail
Share of Retail
Food Price
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-Economic Research Service, 2001
Impact on Rest of the World
 World grain and oilseed prices increase
 Result in higher feed and food prices
 Higher food prices
 Higher livestock production cost
 Countries in South America and Asia fill the gap
Impact of Short Crop Scenario
 Drought in 2012 similar to 1988


Regional yields of corn, soybeans and wheat
changed from trend levels
Yields were off by 25% for corn, 18% for
soybeans, and 11% for wheat in 1988
 Ethanol mandate for 2012 assumed to be 14.7
billion gallons
Deviation Corn
of Actual Production
Corn Production from
Expected
Historical
Deviations
Production
20%
15%
10%
5%
19
57
19
59
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
Corn, Soybean and Ethanol Markets
 Corn price increases by 44% above baseline levels
 Soybean price rises by 22%
 Corn exports and stock levels decline by more
than 60%
 Corn exports from South America, China, etc. fill
part of the gap from decline in U.S. corn exports
 Corn feed use declines by 16% (switch to other
feeds)
 Ethanol trade increases moderately
Livestock Market
 Higher feed costs affect the livestock sector but to
a lesser extent as shock is perceived as temporary

Production declines



Broiler production declines the most (over 2.5%)
Milk production declines the least (0.5%)
Retail prices increase


Egg prices increase the most (about 5.5%)
Prices of other products increase by a range between
2% and 4%
Thank You