Biofuel Impacts on Agriculture
Chad Hart
Center for Agricultural and Rural Development
Iowa State University
March 29, 2007
ISU Livestock Field Specialist Meeting
Ames, Iowa
E-mail: chart@iastate.edu
Projected World Oil Consumption
Source: Energy Information Administration, International Energy Outlook 2006
Projected World Energy Sources
Source: Energy Information Administration, International Energy Outlook 2006
World Ethanol Production, 2006
6%
7%
1%
6%
39%
8%
33%
U.S.
Brazil
China
Europe
Africa
Asia
Rest of World
World Ethanol Imports, 2006
7%
2%
13%
9%
66%
3%
U.S.
EU
India
Japan
South Korea
Rest of World
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
Billion Gallons
6
U.S. Ethanol Production
5
4
3
2
1
0
Source: Renewable Fuels Association
300
U.S. Biodiesel Growth
Million Gallons
250
200
150
100
50
0
1999 2000 2001 2002 2003 2004 2005 2006
Source: National Biodiesel Board
35
Renewable Fuels Standard
Billion Gallons
30
25
20
15
10
5
0
2006 2007 2008 2009 2010 2011 2012 2017
Ethanol Industry Snapshots
Jan. 2000
Jan. 2001
Jan. 2002
Jan. 2003
Jan. 2004
Jan. 2005
Jan. 2006
Jan. 2007
Ethanol Plants
54
56
61
68
72
81
95
110
Source: Renewable Fuels Association
Capacity (mgy)
1,749
1,921
2,347
2,707
3,101
3,644
4,336
5,386
Ethanol – State by State
State
IA
IL
NE
MN
SD
WI
KS
IN
MO
MI
ND
CO
CA
TN
KY
NM
WY
OH
FL
OK
GA
Current Capacity
(million gallons)
1,706
894
681
557
555
230
211
162
155
150
134
88
69
67
35
30
10
4
4
2
1
Biodiesel – State by State
State
TX
IA
IL
TN
MN
MO
OH
SC
CA
AL
AR
CO
NJ
OK
VA
FL
GA
IN
LA
MI
PA
Current Capacity
(million gallons)
143
139
66
65
63
47
39
36
36
35
27
27
24
23
22
22
19
15
15
15
12
20
10
20
07
20
04
20
01
19
98
19
95
19
92
19
89
19
86
19
83
19
80
Billion Gallons
Continuing Ethanol Growth
15
12
9
6
3
0
Ethanol – State by State
State
IA
NE
IL
MN
SD
IN
WI
KS
OH
TX
MI
ND
TN
NY
MO
OR
CO
GA
KY
CA
MS
AZ
WA
Current Capacity
1,706
681
894
557
555
162
230
211
4
0
150
134
67
0
155
0
88
1
35
69
0
0
0
Being Built
(million gallons)
1,740
1,424
291
451
425
687
282
295
399
370
107
100
138
164
0
143
50
100
50
0
60
55
55
Total
3,446
2,105
1,185
1,008
980
849
512
506
403
370
257
234
205
164
155
143
138
101
85
69
60
55
55
Biodiesel – State by State
State
IA
TX
NJ
IL
IN
MO
ND
WA
MS
SC
WI
AR
TN
AL
NV
PA
OH
CA
MN
GA
KY
NE
OK
Current Capacity
139
143
24
66
15
47
0
8
9
36
1
27
65
35
6
12
39
36
63
19
7
0
23
Being Built
(million gallons)
210
164
150
80
120
78
117
101
99
61
83
53
13
40
60
54
26
29
0
40
50
55
31
Total
349
307
174
146
135
125
117
109
108
97
84
80
78
75
66
66
65
64
63
59
57
55
54
Oil Futures As Of 3/27/2007
70
69
68
$ per barrel
67
66
65
64
63
62
61
60
May
2007
Dec.
2007
Dec.
2008
Dec.
2009
Dec.
2010
Dec.
2011
Dec.
2012
95
4.00
90
3.50
85
3.00
80
2.50
75
2.00
70
1.50
2000
2002
2004
Planted Acres
2006
2008
Farm Price
2010
$ per Bushel
Million Acres
Corn Outlook
76
7.75
74
7.00
72
6.25
70
5.50
68
4.75
66
4.00
2000
2002
2004
Planted Acres
2006
2008
Farm Price
2010
$ per Bushel
Million Acres
Soybean Outlook
63
4.30
62
4.00
61
3.70
60
3.40
59
3.10
58
2.80
57
2.50
2000
2002
2004
Planted Acres
2006
2008
Farm Price
2010
$ per Bushel
Million Acres
Wheat Outlook
65
130
64
120
63
110
62
100
61
90
60
80
2000
2002
2004
Harvested Acres
2006
2008
Farm Price
2010
$ per Ton
Million Tons
Hay Outlook
Corn Utilization
70
60
Percent
50
40
30
20
10
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Feed
Ethanol
Exports
Other
Corn Available for Export
Million Bushels
Corn in 2004
Less than -300
-299 - -150
-149 - 0
1 - 150
151 - 500
More than 500
Available in 2010
Million Bushels
Corn in 2010 - Baseline
Less than -300
-299 - -150
-149 - 0
1 - 150
151 - 500
More than 500
45
140
40
130
35
120
30
110
25
100
20
90
15
80
10
70
5
60
0
50
2000
2002
Production
2004
2006
2008
Price, DDG, Lawrenceburg, IN
2010
$ per Ton
Million Tons
Distillers Grains Outlook
Distillers Grains Usage by Species
30000
Thousand Tons
25000
20000
15000
10000
5000
0
2007
2008
Beef
Pork
2009
Poultry
2010
Dairy
A Closer Look
6000
Thousand Tons
5000
4000
3000
2000
1000
0
2007
2008
Pork
2009
Poultry
Dairy
2010
30
90
29
85
28
80
27
75
26
70
25
65
24
60
2000
2002
Production
2004
2006
2008
Price, Nebraska Direct Steers
2010
$ per Cwt.
Billion Pounds
Beef Outlook
22
48
21
41
20
34
19
27
18
20
2000
2002
Production
2004
2006
2008
Price, Sows, Iowa-S. Minn.
2010
$ per Cwt.
Billion Pounds
Pork Outlook
38
1.90
36
1.80
34
1.70
32
1.60
30
1.50
2000
2002
2004
Production
2006
2008
Price, Broiler Retail
2010
$ per Pound
Billion Pounds
Broiler Outlook
8.0
1.80
7.8
1.60
7.6
1.40
7.4
1.20
7.2
1.00
7.0
0.80
2000
2002
2004
Production
2006
2008
Price, Shell Egg Retail
2010
$ per Dozen
Billion Dozen
Egg Outlook
Scenario with Higher Oil Prices
• Assume oil prices are $10/barrel higher
than projected
• Margins on ethanol plants increase
• New incentive to invest in added capacity
• Major hurdle will be felt at 14 – 15 billion
gallons due to E-10 saturation
• Drop in ethanol price will eventually
encourage increase in flex-fuel cars
-2%
Pork Retail
Price
Pork
Production
Beef Retail
Price
Beef
Production
Soybean
Price
Soybean
Acreage
Corn Fed
Ethanol
Production
Corn Price
-4%
Corn
Acreage
Percent Change
Changes from Base Case for 2010
12%
10%
8%
6%
4%
2%
0%
Proposals for the 2008
Farm Bill
Chad Hart
Center for Agricultural and Rural Development
Iowa State University
March 29, 2007
ISU Livestock Field Specialist Meeting
Ames, Iowa
E-mail: chart@iastate.edu
Current Farm Support
• Three main programs
– Direct Payment Program
– Counter-cyclical Payment Program
– Marketing Loan Program
• Direct payments are fixed; counter-cyclical
and marketing loan payments vary with
price
Key Settings
Crop
Target
Price
($/bu.)
2.63
Direct
Payment
Rate ($/bu.)
0.28
National
Loan Rate
($/bu.)
1.95
Soybeans
5.80
0.44
5.00
Wheat
3.92
0.52
2.75
Corn
When Payments Are Triggered
$200.00
Returns ($/acre)
$150.00
$100.00
$50.00
$0.00
-$50.00
-$100.00
$1.50 $1.70 $1.90 $2.10 $2.30 $2.50 $2.70 $2.90 $3.10 $3.30 $3.50
Price ($/bushel)
Market Return less Variable Costs
Countercyclical Payment
Net Crop Insurance Benefit
Direct Payment
Marketing Loan Benefit
Farm Bill Timing
• Debate will pick up this spring
– Commodity groups presented their proposals to the
House yesterday
• Optimistic timeline: Farm bill will be passed and
signed this summer, in time for winter wheat
• Both Ag. Committee chairmen (Harkin,
Peterson) have stated they will pass a new farm
bill, not an extension
– Rep. Peterson has sounded more extension oriented
in recent reports
Farm Bill Budget
• Budget determined by Congress, but based on
projections of spending for current farm bill
• With crop prices projected to remain high,
current farm support program cost are projected
to be low
• This doesn’t leave much room for farm bill
changes
Farm Bill Proposals
• There are many proposals out there
–
–
–
–
–
USDA
National Corn Growers Association
American Soybean Association
National Association of Wheat Growers
American Farmland Trust
• Can be divided into two camps
– Modify current structure
– Move to revenue-based farm support
Wheat Proposal
• Higher target price
– Wheat: $5.29/bu., up $1.37
• Higher direct payment rate
– Wheat: $1.19/bu., up $0.67
• No change on loan rate
• No specifics on other crops
Wheat Proposal
• Proposal would more than double direct
payments
• Counter-cyclical payments would trigger at
prices below $4.10/bu.
– Currently triggered at $3.40/bu.
• Counter-cyclical payment rate would max at
$1.35/bu.
– Current max of $0.65/bu.
Soybean Proposal
• Higher target prices
– Higher of current target price or 130% of 2000-2004
Olympic average of season-average prices
• Higher loan rates
– Higher of current loan rate or 95% of 2000-2004
Olympic average of season-average prices
• No change on direct payments
Soybean Proposal
Crop
Target
Price
($/bu.)
2.75
Direct
Payment
Rate ($/bu.)
0.28
National
Loan Rate
($/bu.)
2.01
Soybeans
6.85
0.44
5.01
Wheat
4.15
0.52
3.03
Corn
Payments under Soybean Proposal
$200.00
Returns ($/acre)
$150.00
$100.00
$50.00
$0.00
-$50.00
-$100.00
$1.50 $1.70 $1.90 $2.10 $2.30 $2.50 $2.70 $2.90 $3.10 $3.30 $3.50
Price ($/bushel)
Market Return less Variable Costs
Countercyclical Payment
Net Crop Insurance Benefit
Direct Payment
Marketing Loan Benefit
Payment Changes
$200.00
Returns ($/acre)
$150.00
$100.00
$50.00
$0.00
-$50.00
-$100.00
$1.50 $1.70 $1.90 $2.10 $2.30 $2.50 $2.70 $2.90 $3.10 $3.30 $3.50
Price ($/bushel)
Market Return less Variable Costs
Countercyclical Payment
Net Crop Insurance Benefit
Direct Payment
Marketing Loan Benefit
Corn Proposal
• Revenue-based support program
– County-level (Revenue Counter-Cyclical
Program)
• Marketing loans changed to recourse
loans (means farmers could not forfeit
crop as payment for loan)
• No change on direct payments
Revenue Counter-Cyclical Program
• Somewhat like current counter-cyclical program
• Revenue guarantee = Percentage*County trend
yield*Projected price
• Actual county revenue = County yield*National price
• Payments made when actual county revenue is below
revenue guarantee
• May be integrated with crop insurance
American Farmland Trust Proposal
• Similar to National Corn Growers’ Proposal
– Revenue-based counter-cyclical program
• Revenue guarantee = Percentage*National trend
yield*Projected price
• Actual revenue = National yield*National price
• Payments made when actual revenue is below revenue
guarantee
• Planned integration with crop insurance
– Premiums and indemnities reduced by payments from revenue
counter-cyclical program
Why Switch to Revenue?
• Critics of the current farm bill point to two main
factors
– Continuing need for disaster assistance
– Possible overcompensation from price-based
programs
• Example: 2004 for corn, record corn yields, 3rd highest corn
crop value, large corn government payments
• Targeting revenue, instead of price, can address
these factors
USDA Proposal
• Set loan rate at minimum of loan rates in Housepassed version of 2002 farm bill or 85% of 5year Olympic average prices
• Change marketing loan program from daily price
settings to monthly price settings
• Increase direct payment rates
• Change counter-cyclical program to be revenuebased
USDA Proposal
Crop
Target
Price
($/bu.)
2.63
Direct
Payment
Rate ($/bu.)
0.30
Max. Nat.
Loan Rate
($/bu.)
1.89
Soybeans
5.80
0.50
4.92
Wheat
3.92
0.56
2.58
Corn
USDA’s Revenue Counter-Cyclical
Program
• Revenue guarantee = 2002-2006 National Olympic
average yield*Effective target price
– Effective target price = Target price – Direct payment rate
• Actual revenue = National yield*Max(Season-average
price, National loan rate)
• Payments made when actual revenue is below revenue
guarantee
• Pays on base acres and yields, not planted acres and
actual yields
Corn Example
• 2002-2006 National Olympic average yield = 146.4 bu./acre
• Effective target price = $2.35/bu.
• Target revenue = $344.04/acre
• National yield = 130 bu./acre
• Season-average price = $2.30/bu.
• Actual revenue = $299.00/acre
• Farm program yield = 114.3 bu./acre
• Current program payment = $0.05/bu.
– ($2.35 - $2.30)
• Proposed program payment = $0.394/bu.
– (($344.04 - $299.00)/114.3)
The Next Farm Bill?
• May look like some of these proposals
– As time proceeds, the odds increase for packages
that look like the wheat and soybean proposals
• Congress usually blazes its own trail
– USDA proposals do not carry significant weight in
Congress
• Cost will be a major consideration