U.S. Ethanol Industry Outlook: Socio/Economic Impact of Booming Ethanol Industry Bruce A. Babcock

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U.S. Ethanol Industry Outlook:
Socio/Economic Impact of Booming
Ethanol Industry
Bruce A. Babcock
Center for Agricultural and Rural Development
Iowa State University
Presented at the ProBeef 07
Ames, Iowa September 5, 2007
Overview
• Review where we are with ethanol and
where we are going under current policies
and oil prices
• What would happen if oil prices rise?
• What would happen if drought hit the U.S.
Corn Belt?
U.S. Ethanol Industry
•Current ethanol capacity: 6.5 billion
gallons/year
•Total capacity under construction and
expansion: 6.5 billion gallons/year
•77 new ethanol plants and 8
expansion projects underway
•2.2 billion bushels of corn were used
in producing fuel ethanol in
2006/2007 marketing year.
•3.2 billion bushels of corn are
expected to be used in producing fuel
ethanol for 2007/2008 marketing year.
•At 13 billion gallons, corn use = 4.7
billion bushels = 30 million acres
U.S. Biodiesel Industry
•Current capacity: 1.2 billion
gallons/year
•Total capacity under construction and
expansion: 0.7 billion gallons/year
•Carriquiry calculates that sales were
less than 300 million gallons in 2006
•FAPRI also projects less than 30%
capacity utilization because of low or
negative operating margins
Projected U.S. Ethanol Production
billion gallons
16
14
12
10
8
6
4
2
0
2006
2008
2010
2012
Ethanol Production
2014
2016
Historical and Projected U.S. Biodiesel Production
600
500
300
200
100
0
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
million gals
400
Feedstock
Other
Canola
Soybean
Historical and Projected (Jan 2007) Planted Acreage
100
■
90
80
■
60
50
40
Actual Planted
Acreage in 2007
30
20
10
0
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
20
08
20
10
20
12
20
14
20
16
million acres
70
Corn
Soybeans
Projected Utilization of Corn
million bushels
7000
6000
5000
4000
3000
2000
1000
0
2006
2007
Feed
Fuel
2008
HFCS
2009
Seed
Food, Other
2010
Exports
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 Gasoline and Ethanol Prices
3.00
2.50
$/gal
2.00
1.50
1.00
0.50
0.00
2004
2006
2008
2010
Wholesale Price of Unleaded ($/gallon)
2012
2014
Wholesale price of ethanol
2016
Brazil Price
2018
Actual and Projected Use of DDGS
in U.S. Feed ('000 tons)
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
2002
2004
2006
2008
2010
2012
2014
2016
Maximum Inclusion Rate of DDGS in Feed
(Percent of Feed by Dry Matter Weight)
100%
90%
80%
70%
60%
Poultry
Beef
Dairy
Pork
50%
40%
30%
20%
10%
0%
2005
2007
2009
2011
2013
2015
Projected Use of DDGS
in U.S. Feed ('000 tons)
35,000
30,000
25,000
Beef
Pork
Poultry
Dairy
20,000
15,000
10,000
5,000
0
2007
2009
2011
2013
2015
Maximum and Projected Actual Inclusion
Rates of DDGS in Feed
(Percent of Feed by Dry Matter Weight)
100%
90%
80%
70%
60%
Beef Max
Beef Actual
50%
40%
30%
20%
10%
0%
2000
2002
2004
2006
2008
2010
2012
2014
2016
Maximum and Projected Actual Inclusion
Rates of DDGS in Feed
(Percent of Feed by Dry Matter Weight)
35%
30%
25%
20%
Dairy Max
Dairy Actual
15%
10%
5%
0%
2000
2002
2004
2006
2008
2010
2012
2014
2016
Projected Use of DDGS
in U.S. Feed ('000 tons)
6,000
5,000
4,000
Pork
Poultry
Dairy
3,000
2,000
1,000
0
2007
2009
2011
2013
2015
Relationship Between DDGS Price and
Corn Price
120
4.00
3.50
100
3.00
2.50
60
2.00
1.50
40
1.00
20
0.50
0
0.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
DDG Price
Corn Price
$/bu
$/ton
80
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 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
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
Importance of Margin
• Without prospect of a positive margin, ethanol
plants will not get built
• With plants operating at full capacity there is a
corn price that shuts down ethanol plants,
freeing up corn to feed livestock
• If there is excess capacity, there is a corn price
that will cause plants to run at full capacity
• Both floor and ceiling prices are determined by
price of gasoline.
Dry Mill Ethanol Plant Operating Margins at Different
Corn Prices with $2.00 Gasoline ($1.84 Ethanol)
1.00
0.80
0.60
Plant will
operate
0.40
$ per gal
Plant will
shut-down
Wholesale
Price of
Gasoline
2.00
0.20
0.00
0.00
-0.20
1.00
2.00
3.00
4.00
-0.40
-0.60
Dollars per Bushel
5.00
6.00
7.00
Dry Mill Ethanol Plant Operating Margins 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
Three Scenarios
1. Price of gasoline falls to $1.00/gallon after 14
billion gallons of ethanol capacity is built
–
Price of corn will be bid up to $2.50 per bushel
2. Price of gasoline remains at $2.00/gallon, 35
million acres needed to run ethanol plants
−
Price of corn will be above $3.30/bu, but will not rise
above $4.75/bu even under short crop conditions
3. Price of gasoline rises to $2.25 per gallon
because crude oil prices increase $10 above
baseline levels
Impact of Higher Crude Oil
Price
• Increased crude oil price by $10/barrel over the
projection
• Margins on ethanol plants increase
• New incentive to invest in added capacity for ethanol
production
• Eventually, a new equilibrium reached where there is
no incentive to invest in or exit the ethanol industry
• Will demand for ethanol be enough?
– E-10 market will saturate around 15 billion gallons
– Drop in ethanol price relative to gasoline will eventually
encourage increase in demand for the flex-fuel cars
Wholesale Gasoline and Ethanol
Prices
US$/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. 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. 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$/bushel
8.00
7.00
6.00
5.00
4.00
3.00
2.00
2006
2007
2008
2009
2010
Corn
2011
2012
Soybeans
2013
2014
2015
2016
Projected U.S. Soybean Planted Area
million acres
80
75
70
65
60
55
2006
2007
2008 2009
2010
2011 2012 2013 2014
Scenario
Baseline
2015
2016
Projected U.S. Biodiesel
Production
million gallons
800
700
600
500
400
300
200
100
0
2006 2007
2008 2009
2010
2011 2012 2013 2014
Scenario
Baseline
2015 2016
U.S. Meat, Egg, and Dairy Price
Changes
Baseline
Scenario
Percentage
Change
Beef Retail Price
($/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
Historical
U.S.
Corn
Production
Deviation of Actual Corn Production from Expected
Production
Deviations
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%
Conclusions
• U.S. biofuels policy choices combined with
the price of crude oil will determine future
feed prices
• Food prices primarily determined by
factors other than the price of feed
• Cellulosic ethanol will not replace cornbased ethanol without a change in policy
incentives
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