Socio-Economic Impacts of U.S. Ethanol Bruce A. Babcock

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Socio-Economic Impacts of
U.S. Ethanol
Bruce A. Babcock
Center for Agricultural and Rural Development
Iowa State University
Overview
• Broad overview of U.S. and world biofuels
• Economics of the U.S. ethanol industry
• Impacts on grain prices and feed costs in
the long term and short term
• What is accomplished by corn ethanol?
Number of U.S. Ethanol Plants
(Jan 1)
160
140
120
100
80
60
40
20
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
U.S. Ethanol Industry Capacity on January 1
9000
8000
Million Gallons
7000
6000
5000
4000
3000
2000
1000
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
U.S. Ethanol Production
(% of U.S. Gasoline Consumption)
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
Corn Utilized for Ethanol
(Percent of U.S. Corn Crop)
30%
25%
20%
Gross bushels
Net bushels
15%
10%
5%
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Subsidies and Protection
• $0.51 per gallon tax credit to blenders
increase the WTP for corn by $1.47 per
bushel
• $0.54 per gallon import tariff on most
Brazilian ethanol
• Various tax credits for construction
U.S. Ethanol Production With New EISA Mandates
16000
14000
10000
8000
Mandated corn
ethanol use
6000
4000
2000
20
22
20
20
20
18
20
16
20
14
20
12
20
10
20
08
20
06
20
04
20
02
0
20
00
Million Gallons
12000
Corn Utilized for Ethanol
(Assumes 1.5% increase in annual production from 2007
base)
40%
35%
30%
25%
Gross bushels
Net bushels
20%
15%
10%
5%
0%
1995
2000
2005
2010
2015
2020
2025
Average Share of World Exports 2002 through 2007
70%
60%
50%
40%
Wheat
Coarse Grain
Soy
30%
20%
10%
0%
United
States
Argentina
Brazil
Canada
Australia
Russia
European
Union
Ukraine
South
Africa
Three Indicators of World Food Demand
700
600
1966 = 100
500
Population
Calorie
Feed Grain
400
300
200
100
0
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
World Crop Area
300
250
million ha
200
150
100
50
-
Wheat
Coarse Grains
Rice
Oilseeds
Biofuels Impacts
• Feed Grains: 60 billion liters of ethanol
represents 12% of world production
• Oilseeds: 15 billion liters of biodiesel represents
11% of world production of vegetable oil
• Sugarcane: 30 billion liters of ethanol represents
6% of oilseeds land potentially displaced
Market Price Impacts
• Assuming no change in aggregate
production
– 17% reduction in available vegetable oil would
increase price by 84%
– 12% reduction in feed grain supplies would
increase price by 60%
Commodity Economics
• Profits tend towards zero
– When profits are positive, expansion occurs,
output price goes down, profits go down
– When profits are negative, contraction occurs,
output price goes up, profits go up
Biofuels Commodity Economics
• Profits tend towards zero
– When profits are positive, expansion occurs,
feedstock price goes up, profits go down
– When profits are negative, contraction occurs,
feedstock price goes down, profits go up
 So key is to determine the size of the ethanol
industry that increases corn prices enough to
drive industry profits towards zero.
U.S. Corn Supply Curve
8.00
7.00
6.00
$/bu
5.00
4.00
3.00
2.00
1.00
0.00
10,000
11,000
12,000
13,000
14,000
U.S. Corn Production million bushels)
15,000
16,000
Ethanol Supply as Determined by Available Corn
8.00
7.00
6.00
$/bu
5.00
4.00
3.00
2.00
1.00
0.00
0
5
10
15
20
25
30
U.S.Ethanol Production (billion gallons)
35
40
Demand for Ethanol
•
•
•
•
•
Substitute for gasoline
Octane enhancer
Component in Clean Air Act fuels
Fuel to meet state and federal RFS
Fuel to meet low carbon fuel requirements
Market Demand for Ethanol: Price of Gas = $2.50/gal
4.00
3.50
3.00
$/gal
2.50
2.00
1.50
1.00
0.50
0.00
0
5
10
15
Billion Gallons
20
25
What is the Market Price of Corn with No Government
Intervention? (Price of gas = $2.00)
12.00
10.00
$/bu
8.00
6.00
Supply of Ethanol
4.00
2.00
Demand for Ethanol
0.00
0
5
10
15
Billion Gallons
20
25
What is the Market Price of Corn with No Government
Intervention? (Price of gas = $2.50)
12.00
10.00
$/bu
8.00
6.00
Supply of Ethanol
4.00
2.00
Demand for Ethanol
0.00
0
5
10
15
Billion Gallons
20
25
What is the Market Price of Corn with No Government
Intervention? (Price of gas = $3.00)
12.00
10.00
Demand for Ethanol
$/bu
8.00
6.00
Supply of Ethanol
4.00
2.00
0.00
0
5
10
15
Billion Gallons
20
25
What is the Market Price of Corn with No Government
Intervention? (Price of gas = $4.00)
12.00
10.00
$/bu
8.00
Demand for Ethanol
6.00
Supply of Ethanol
4.00
2.00
0.00
0
5
10
15
Billion Gallons
20
25
What is the Market Price of Corn with $0.51 per gallon
Subsidy? (Price of gas = $2.00)
12.00
10.00
$/bu
8.00
Demand for Ethanol
6.00
4.00
Supply of Ethanol
2.00
0.00
0
5
10
15
20
Billion Gallons
25
30
35
40
What is the Market Price of Corn with $0.51 per gallon
Subsidy? (Price of gas = $2.50)
12.00
10.00
8.00
$/bu
Demand for Ethanol
6.00
4.00
Supply of Ethanol
2.00
0.00
0
5
10
15
20
Billion Gallons
25
30
35
40
What is the Market Price of Corn with $0.51 per gallon
Subsidy? (Price of gas = $3.00)
12.00
10.00
Demand for Ethanol
$/bu
8.00
6.00
4.00
Supply of Ethanol
2.00
0.00
0
5
10
15
20
Billion Gallons
25
30
35
40
Long Run Corn Prices With and Without Blenders Subsidy
6.00
5.50
Price of Corn
5.00
4.50
4.00
3.50
3.00
0.00
0.50
1.00
1.50
2.00
2.50
Price of Gas
3.00
3.50
4.00
4.50
Short Run Outlook
• Calibrate 2008/09 corn demand curves to latest
WASDE projections
– food, feed, export, storage
• Supply equals
Harvested Acreage * Harvested Yield
Non-harvested Acreage = function of yield
• Stochastic Variables (parametric distributions)
–
–
–
–
–
Gasoline price (leads to random ethanol demand)
Planted acreage
Export demand
Corn yields
Ethanol industry capacity in 2008/09
Baseline Results
(10 billion gallon mandate, $0.51 cent tax credit)
• Expected planted acres: 86 million
• Expected yield: 151 bu/ac
• Expected corn price: $5.60/bu
• Expected ethanol production: 10.3 bg (billion gallons)
Impact of Eliminating the Mandate
(10 billion gallon mandate, $0.51 cent tax credit)
• Expected corn price: $5.34/bu (down 4.6%)
• Expected ethanol production: 9.3 bg (down 10%)
Removal of $0.51 Tax Credit
No Mandate
• Expected corn price: $4.83/bu (down 14%)
• Expected ethanol production: 7.25 bg (down 30%)
With Mandate
•
•
•
•
Expected corn price: $5.20/bu (down 2.2%)
Expected ethanol production: 7.25 bg (down 1%)
Probability that mandate binds: 71%
Average subsidy needed: $0.41 per gallon
Impact of a Drought
(detrended 1988 corn yield of 113 bu/ac)
No Mandate
• Expected corn price: $6.42/bu (up 29%)
• Price volatility: 14.3% (down 12.9%)
• Expected ethanol production: 3.2 bg (down 67%)
Impact of a Drought
(detrended 1988 corn yield of 113 bu/ac)
With Mandate
•
•
•
•
Expected corn price: $7.99/bu (up 50%)
Expected ethanol production: 10.1 bg
Probability that mandate binds: 92.3%
Average additional subsidy needed when mandate
binds: $0.79 per gallon
Corn Ethanol Impacts
• Lowered gasoline prices
Reduction in Blended Fuel Prices from Increasing Annual Ethanol
Volume by 10 Percent
9
8
7
cents per gallon
6
5
4
3
2
1
0
May-1990
Jan-1993
Oct-1995
Jul-1998
Apr-2001
Jan-2004
Oct-2006
Jul-2009
Corn Ethanol Accomplishments
• Lowered gasoline prices
• Opened infrastructure pathways to
potential cellulosic biofuels
• Forced adjustments in North American
livestock industry
• Made world realize that agricultural
production should not be taken for granted
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