Ethanol

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					National Institute for Animal Agriculture


Fueling Ethanol: Implications for
     Livestock Producers


 Steve R. Meyer, Ph.D.
 Paragon Economics, Inc.

                              Paragon Economics, Inc.
                                From information, knowledge
Introduction
   Credit where credit is due
    - Dr. Ron Plain, University of Missouri
    - Drs. Dermot Hayes and Bruce Babcock and
      colleagues, ISU-CARD
   If gasoline prices remain high, ethanol
    production will drive the biggest change in
    U.S. agriculture since:
    - The introduction of soybeans?
    - The tractor?

                                 Paragon Economics, Inc.
                                   From information, knowledge
Why is Ethanol Production is Increasing?
   Ethanol production is profitable




                               Paragon Economics, Inc.
                                 From information, knowledge
Huge profits for ethanol plants in 2006




                            Paragon Economics, Inc.
                              From information, knowledge
Why is Ethanol Production Increasing?
   Ethanol production is profitable
   Production economics
    - High cost of gasoline and crude oil




                                  Paragon Economics, Inc.
                                    From information, knowledge
U.S. Retail Gasoline Prices
                     All Grades, All Formulations, 1996-2006
cents/gal.
 350

 300

 250

 200                                     l.



 150

 100

  50
     1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: U.S. Energy Information Administration   Paragon Economics, Inc.
                                                   From information, knowledge
Crude Oil Prices 1997-2006




Source: NYMEX            Paragon Economics, Inc.
                             From information, knowledge
Crude Oil Futures Prices, 2007-2012
  $/barrel
  72

  70

  68

  66

  64

  62

  60
     Jan07      Jan08       Jan09          Jan10   Jan11          Jan12


Source: NYMEX closes on 3/02/07, 3/30/07           Paragon Economics, Inc.
                                                     From information, knowledge
Why is Ethanol Production is Increasing?
   Ethanol production is profitable
   Production economics
    - High cost of crude oil
    - Cheap corn




                               Paragon Economics, Inc.
                                 From information, knowledge
U.S. Average Corn Price, 1908-2006
  $ Per Bushel
   4.00
   3.50                                                                            1942-1972
   3.00                 1908-1942                                                  30 years
   2.50                 35 years                                                   Avg $1.26
   2.00                 Avg $0.78

   1.50
                                                                                                                                                      1973-2006
   1.00
                                                                                                                                                      34 years
   0.50
                                                                                                                                                      Avg $2.37
   0.00
          1908
                 1912
                        1916
                               1920
                                      1924
                                             1928
                                                    1932
                                                           1936
                                                                  1940
                                                                         1944
                                                                                1948
                                                                                       1952
                                                                                              1956
                                                                                                     1960
                                                                                                            1964
                                                                                                                   1968
                                                                                                                          1972
                                                                                                                                 1976
                                                                                                                                        1980

                                                                                                                                               1984
                                                                                                                                                      1988
                                                                                                                                                             1992
                                                                                                                                                                    1996
                                                                                                                                                                           2000
                                                                                                                                                                                  2004
Source: USDA/NASS                                                                                                           Paragon Economics, Inc.
                                                                                                                                 From information, knowledge
U.S. Average Corn Price, 1908-2006
                    $ Per Bushel
                    4.00
                    3.50                                                                         1942-1972
  What’s the        3.00           1908-1942                                                     30 years
   next price       2.50           35 years                                                      Avg $1.26
                    2.00           Avg $0.78
  plateau for
                    1.50
  corn price?       1.00
                                                                                                                                                            1973-2006
                                                                                                                                                            34 years
                    0.50
                                                                                                                                                            Avg $2.37
                    0.00
                           1908
                                  1912
                                         1916
                                                1920
                                                       1924
                                                              1928
                                                                     1932
                                                                            1936
                                                                                   1940
                                                                                          1944
                                                                                                 1948
                                                                                                        1952
                                                                                                               1956
                                                                                                                      1960
                                                                                                                             1964
                                                                                                                                    1968
                                                                                                                                           1972
                                                                                                                                                  1976
                                                                                                                                                         1980
                                                                                                                                                                1984
                                                                                                                                                                       1988
                                                                                                                                                                              1992
                                                                                                                                                                                     1996
                                                                                                                                                                                            2000
                                                                                                                                                                                                   2004
The 1940s step: 62%
The 1970s step: 88%
A 75% step will take corn to $4.15/bu
Source: USDA/NASS                                                                                              Paragon Economics, Inc.
                                                                                                                      From information, knowledge
   Ethanol: A corn product for a long time to come
                   1.2                               corn           cellulose             imports
                   1.0
Quadrillion BTUs




                   0.8

                   0.6

                   0.4

                   0.2

                   0.0
                         2003

                                2005

                                       2007

                                              2009

                                                      2011

                                                             2013
                                                                     2015

                                                                            2017

                                                                                   2019

                                                                                          2021

                                                                                                 2023

                                                                                                        2025

                                                                                                               2027
                                                                                                                      2029
  Source: DOE/EIA, Annual Energy Review, February 2006
                                                     Paragon Economics, Inc.
                                                                                            From information, knowledge
Ethanol Plant Economics and Profitability
   2 major operating expense items
    - Corn
    - Natural gas / coal
   2 major sources of income
    - Ethanol
    - DGS – wet or dry




                                Paragon Economics, Inc.
                                  From information, knowledge
Northwest Iowa Prices, 2006-07
  . . . DDGS has begun to closely track corn
     $ Per Ton
     160
     140
     120
     100
      80                 Corn    DDGS   WDGS
      60
      40
      20
       0
           O-06   N-06    D-06          J-07               F-07




Source: LMIC                                   Paragon Economics, Inc.
                                                 From information, knowledge
Cost of Dry Milling Ethanol
                               2005                   2007
    Corn ($1.95)             $0.7074               $1.4545
    Natural gas               0.2107                0.2300
    Electricity               0.0581                0.0600
    Enzymes & yeast           0.0465                0.0500
    Chemicals & Denaturant    0.0897                0.0900
    Labor & administration    0.1000                0.1100
    Maintenance               0.0616                0.0620
    Fixed costs               0.1200                0.1200
    Other costs               0.0145                0.0150
    TOTAL COST                1.4085                2.1915
    Less DDG & CO2 credit     0.2234                0.4400
    Total cost per gallon    $1.1851               $1.7500
  Ethanol Price               $1.80                 $2.25
 Source: USDA/OCE                     Paragon Economics, Inc.
                                        From information, knowledge
DTN Ethanol Price Forecast




                             Paragon Economics, Inc.
                               From information, knowledge
Ethanol & Unleaded Gasoline Avg. Rack Price –
FOB Omaha
               3.00
                                           ethanol          gasoline
               2.50

               2.00
    $/gallon




               1.50

               1.00

               0.50
                                                                                       Forecast

               0.00
                      1982

                             1985

                                    1988

                                             1991

                                                    1994

                                                           1997

                                                                  2000

                                                                         2003

                                                                                2006

                                                                                       2009

                                                                                              2012

                                                                                                     2015
 Source: FAPRI                                                           Paragon Economics, Inc.
                                                                           From information, knowledge
Why is Ethanol Production is Increasing?
   Ethanol production is profitable
   Production economics
    - High cost of crude oil
    - Cheap corn
   Public policy
    - Subsidies




                               Paragon Economics, Inc.
                                 From information, knowledge
Public Policy Timeline




                         Paragon Economics, Inc.
                           From information, knowledge
Subsidies for Ethanol Production
   51-cent per gallon federal excise tax credit
    - Amounts to $0.051/gal. for E-10 gasoline
    - $0.43 cents/gallon for E-85
   Various state incentives
    - Missouri has producer tax credits -- 20 cents
      on first 12.5 million gallons
    - Iowa and Illinois state excise tax exemptions
    - 1 to 1.5 cents per gallon
    - Iowa income tax credits for retailers selling
      more than 60 percent ethanol-blended fuel
                                   Paragon Economics, Inc.
                                     From information, knowledge
Why is Ethanol Production is Increasing?
   Ethanol production is profitable
   Production economics
    - High cost of crude oil
    - Cheap corn
   Public policy
    - Usage Subsidies
    - Mandated use
       » 7.5 bil. gallons of renewable fuels by
         2012
       » Proposed increase to 15 or even 30 bil.
                                Paragon Economics, Inc.
                                  From information, knowledge
Ethanol Production & Renewable Fuels Mandate
Bil. Gallons
9.0
8.0       Ethanol Production Mandate
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
     1998 2000 2002 2004 2006 2008 2010 2012 2014

Source: FAPRI                    Paragon Economics, Inc.
                                   From information, knowledge
The mandate has not effect at present
 Bil. Gallons
 14
             Ethanol Production   Mandate
 12
 10
  8
  6
  4
  2
  0
      1998      2001     2004     2007   2010       2013         2016


Source: FAPRI                               Paragon Economics, Inc.
                                              From information, knowledge
Why is Ethanol Production is Increasing?
   Ethanol production is profitable
   Production economics
    - High cost of crude oil
    - Cheap corn
   Public policy
    - Usage Subsidies
    - Mandated use
    - Phase-out of MTBE as oxygenate

                               Paragon Economics, Inc.
                                 From information, knowledge
Shortage of Ethanol in 2006
   Concerns over air pollution led to require-
    ments that gasoline contain an oxygenate
    in certain areas at certain times
   MTBE (Methyl Tertiary Butyl Ether) and
    Ethanol are the two practical options
   MTBE usage is being rapidly phased out
    because of potential liability relating to
    water quality

                               Paragon Economics, Inc.
                                 From information, knowledge
                                             Paragon Economics, Inc.
Source: Terry Francl, American Farm Bureau     From information, knowledge
MTBE withdrawal was big profit driver in ‘06




                             Paragon Economics, Inc.
                               From information, knowledge
World Ethanol Production, 2005
                     18%

                                                    U.S.A.
                                        35%
              4%                                    Brazil

             8%                                     China

                                                    India

                                                    others

                             35%



Source: Renewable Fuels Association   Paragon Economics, Inc.
                                        From information, knowledge
2005 Ethanol Variable Production Costs

   Brazil sugarcane          $0.81/gallon
   U.S. corn – wet mill      $1.03/gallon
   U.S. corn – dry mill      $1.05/gallon
   U.S. molasses             $1.27/gallon
   U.S. sugar beets          $2.35/gallon
   U.S. sugarcane            $2.40/gallon
   E.U. sugar beets          $2.89/gallon
   U.S. raw sugar            $3.48/gallon
   U.S. refined sugar        $3.97/gallon
                             Paragon Economics, Inc.
 Source: USDA/OCE              From information, knowledge
U.S. Ethanol Production, 1980-06

                   6

                   5
 Billion Gallons




                   4

                   3

                   2

                   1

                   0
                       1980

                              1982

                                     1984

                                            1986

                                                   1988

                                                          1990

                                                                 1992

                                                                        1994

                                                                               1996

                                                                                       1998

                                                                                              2000

                                                                                                     2002

                                                                                                            2004

                                                                                                                    2006
Source: Renewable Fuels Association                                              Paragon Economics, Inc.
                                                                                      From information, knowledge
Ethanol plants have exploded!
            Existing & Planned U.S. Corn Processing Plants




    Blue = Operating
    Red = construction
    Green = planned
    Pink = Expansion of Existing plants




                                              Paragon Economics, Inc.
                                                From information, knowledge
Will there be any “available” corn in Iowa?
                                                                                            65 Planned + current in Iowa
                                   *
                                                                                            11 Just across the borders
                                               *
                 *                                 *           *
              Lyon
                       O*
                        sceola Dickenson
                                               Emmet
                                                             *      *
                                                * WinnebagoWorth Mitchell HowardWinneshAllamakee
                *    O’Brien Clay Palo   *        *            * Floyd * *
                                                                                  iek
            Sioux                          Kosuth
                                                    Hancoc         * Chickasaw Fayette
                                 * Alto             k
                                                             erroG
                                                            C ordo
                                                                                          Clayton
                     * BuenaV* Pocahontas Humbol * Franklin Butler Bremer
                                             * Wright
          * *
          Plymouth  Cherokee
                                    ista    dt                                      *
                *
              Woodbury Id  * *Sac Calhoun Webster Hamilton Hardin Grundy BlackHawk Buchana Delawa
                            a                  *       * **                                re
                                                                                                                                         Dubuque
                                            *                                      n          *
                                                                                                 Tama                Linn                      Jackson
                                                                                                             n
                                                                                                            Benton                 Jones
                 Monona Crawford Carroll Greene                Boone     Story
                                                                            r *   Marshal
                               *                                                  l            * ** **                                          Clinton*
                                                   *            *         *                     *
                                                                                            Poweshiek
                                                                                                                                   Cedar        n
                              Shelby Audubon Guthrie       Dalla Polk                                 Johnson
                 Harrison                                                         Jaspr
                                                                                      e                                                          Scott *
             *                            *                s
                                                                                                            Iowa
                                                                                                                                   Mucatine*
                      Pottawattamie                        Madis Warren Marion Mahask Keokuk                       Washington
                                        Cass        dir
                                                   Aa
    *                                                      on                                                                   Louisa
                                                        *                      a
                                                                                                 * apello
                      Mills     Montgomery     *
                                           Adams       Union    Clarke        Lucas Monroe        W           Jefferson
                                                                                                                          Henry
                                                                                                                                   esM*
                                                                                                                                  D oines

                       *
                     Fremont
                                *Page
                                           Taylor Ringgold Decatur Wayne             Appanoose    Davis        anB
                                                                                                              V uren Lee

                                                                                                                             *
        Figure 1.       *
                                                                        ,
        Iowa Corn Processing & Ethanol Plant Locations, Actual & Planned. 8/25/06
                                                            Paragon Economics, Inc.
                                                                                                                   From information, knowledge
Ethanol Plant Statistics, 3/13/07
   114 plants operating in 21 states with
    capacity to produce 5.6334 billion gallons
    of ethanol per year (49 plants farmer
    owned)
   80 new plants under construction and 7
    expansions with capacity to produce
    6.3949 billion gallons of ethanol per year
   ~100 plants being planned

Source: Renewable Fuels Association   Paragon Economics, Inc.
                                        From information, knowledge
                                             U .S . E th a n o l C a p a c ity
G a llo n s ( M ln ) .
                                         (U n d e r C o n s tru c tio n , P ro b a b le & P o s s ib le b y A u g 0 9 )
  3 0 ,0 0 0
  2 8 ,0 0 0
  2 6 ,0 0 0                                P o s s ib l e
  2 4 ,0 0 0
  2 2 ,0 0 0                                P r o b a b le
  2 0 ,0 0 0
                                            C o n s tr u c tio n
  1 8 ,0 0 0
  1 6 ,0 0 0                                E x is tin g
  1 4 ,0 0 0
  1 2 ,0 0 0
  1 0 ,0 0 0
    8 ,0 0 0
    6 ,0 0 0




                                                                                                                                                                                                                       A u g -0 9
                                                          A u g -0 7




                                                                                                                                       A u g -0 8
                                                                                    D e c -0 7




                                                                                                                                                                    D e c -0 8
                                             J u n -0 7




                                                                                                                          J u n -0 8




                                                                                                                                                                                                          J u n -0 9
                                                                                                                                                                                              A p r-0 9
                                                                                                 F e b -0 8




                                                                                                                                                                                 F e b -0 9
                F e b -0 7


                             A p r-0 7




                                                                                                              A p r-0 8
                                                                       O c t- 0 7




                                                                                                                                                    O c t- 0 8
    4 ,0 0 0



       S o u rc e s : R F A , p re s s re p o rts , c o m p a n y filin g s, a n d in te rvie w s w ith in d u s try c o n ta c ts.



                                                                                                                                                    Paragon Economics, Inc.
                                                                                                                                                                 From information, knowledge
    Corn Milled for Ethanol

                  5.0
                                                        actual           forecast
                  4.0
Billion Bushels




                  3.0

                  2.0

                  1.0

                  0.0
                        90-91

                                92-93

                                        94-95

                                                96-97

                                                         98-99

                                                                 00-01

                                                                          02-03

                                                                                  04-05

                                                                                          06-07

                                                                                                    08-09

                                                                                                            10-11

                                                                                                                    12-13

                                                                                                                            14-15

                                                                                                                                    16-17
     Source: USDA/OCE                                                                             Paragon Economics, Inc.
                                                                                                    From information, knowledge
U.S. Corn Production, 1970-06
                   12

                   10
 Billion Bushels




                   8

                   6

                   4

                   2

                   0
                        70

                             73

                                  76

                                       79

                                            82

                                                 85

                                                      88

                                                           91

                                                                  94

                                                                         97

                                                                                00

                                                                                       03

                                                                                                06
                                                                Paragon Economics, Inc.
                                                                  From information, knowledge
Forecast Corn Production, 2006-16

                   16
                   14
                   12
 Billion Bushels




                   10
                   8
                   6
                   4
                   2
                   0
                        2005

                               2006

                                      2007

                                             2008

                                                    2009

                                                           2010

                                                                  2011

                                                                         2012

                                                                                2013

                                                                                       2014

                                                                                              2015

                                                                                                      2016
Source: FAPRI November 2006 Forecast                                     Paragon Economics, Inc.
                                                                            From information, knowledge
ISU/CARD research project – Hayes, et. al.
   Counted operating plants and those under
    construction -- ethanol capacity thru 2009.
   Used economic models to determine
    subsequent capacity increases (to 2016)
    based on ethanol returns over costs
   Projected the response to increased U.S.
    ethanol production by:
    - U.S. and foreign crop and livestock production
    - World commodity prices and retail prices

                                   Paragon Economics, Inc.
                                     From information, knowledge
ISU/CARD Scenarios
   Base scenario: Low oil prices and an E 85
    bottleneck
   Scenario 2: $10 higher oil prices and an E
    85 bottleneck
   Scenario 3: $10 higher oil prices and no E
    85 bottleneck
   No need to run a lower oil price scenario
    - Base case stops new ethanol construction
    - Existing plants will stay in operation but may
      change owners
                                  Paragon Economics, Inc.
                                    From information, knowledge
Key Determinants of Impacts
   Crude oil prices
    - Low oil price was $5 lower than the 2/27
      NYMEX close
    - High oil price was $5 higher than 2/27 close
   Policy incentives -- kept $0.51/gal. blenders
    tax credit and $0.54/gal. import tariff
   Demand for E85
    - Made it responsive to the price of ethanol but
      did not change policies (mainly state)
      regarding mandated E 10 use
                                   Paragon Economics, Inc.
                                     From information, knowledge
The Concept of Equilibrium
   CARD researchers assumed that individuals
    are self interested and do not leave money
    on the table – will arrive at equilibriums
   Examples of disequilibria:
    - If $2 worth of corn produces $6 worth of ethanol
    - If livestock producers are losing money because
      of high feed costs
    - If a Midwestern farmers net $200 from selling
      corn and $100 from soybeans


                                   Paragon Economics, Inc.
                                     From information, knowledge
Base Case Results – Low oil, E-85 bottleneck
   Ethanol production stops expanding after existing
    construction is completed
   Corn yields and acres grow and minimize ethanol’s
    price effect toward the end of the study period
   Beef producers (here and abroad) absorb most of
    the DDGs
   DDGS prices remain above $100 per ton -- just
    enough below corn prices to enter ruminant rations
    and NOT enter pig diets
   Using DDGs for cattle alleviates downward pressure
    on soybean meal prices
                                   Paragon Economics, Inc.
                                     From information, knowledge
Returns: As expected in the LR . . .
         . . . VC makes plant closure unlikely
                      Projected U.S. Dry Mill Margins Over Operating Costs
                                      and Over Total Costs
              1.60

              1.40

              1.20

              1.00

              0.80
   $/bushel




              0.60

              0.40

              0.20

               0.00
                  2004      2006         2008          2010          2012         2014         2016     2018
              -0.20

              -0.40

                                   Dry Mill Margin Over Operating Costs     Margin Over Total Cost
                                                                                Paragon Economics, Inc.
                                                                                    From information, knowledge
Ethanol production levels out after 2010
                             Projected U.S. Ethanol Production from Corn
                    16,000


                    14,000


                    12,000


                    10,000
  million gallons




                     8,000


                     6,000


                     4,000


                     2,000


                        0
                             2006     2007     2008      2009       2010          2016

                                                                Paragon Economics, Inc.
                                                                  From information, knowledge
Corn acres levels also – then falls at the end
                               Projected U.S. Corn Planted Acreage
                   95



                   90
   million acres




                   85



                   80



                   75



                   70
                        2006      2007      2008      2009        2010          2016
                                                             Paragon Economics, Inc.
                                                               From information, knowledge
Corn price crunch through 2010
                              Projected Corn Prices

         3.50

         3.45

         3.40

         3.35

         3.30
  $/bu




         3.25

         3.20

         3.15

         3.10

         3.05

         3.00
                2006   2007          2008      2009          2010         2016
                                                      Paragon Economics, Inc.
                                                        From information, knowledge
Feed, Exports fall thru ’10, then grow at end
                                          Projected Utilization of Corn

                    7,000


                    6,000


                    5,000
                                                                                            Feed
  million bushels




                    4,000                                                                   Fuel
                                                                                            HFCS
                                                                                            Seed
                    3,000                                                                   Food, Other
                                                                                            Exports
                    2,000


                    1,000


                       0
                            2006   2007       2008       2009      2010        2016
                                                                          Paragon Economics, Inc.
                                                                            From information, knowledge
Beef cattle use the DDGS
                  Projected Use of DDGS
                  in U.S. Feed ('000 tons)
35,000


30,000


25,000


20,000                                                             Beef
                                                                   Pork
                                                                   Poultry
15,000
                                                                   Dairy

10,000


 5,000


    0
         2007   2009     2011     2013         2015
                                         Paragon Economics, Inc.
                                           From information, knowledge
DDGS will always (?) be better for cattle
   DDGS provide an advantage to cattle, dairy
     Assumptions:
     •Corn             $2.00 / bu     Dairy Lactation              $114.24

     •SBM            $175.00 / ton
                                      Poultry Finisher             $100.09
     •Urea            $360.00 / ton
     •Non-ruminant diets corn/SBM     Layer Diet                   $104.66
     •Ruminant diets typical diets
     with competing by-products.      Swine G-F Diet                $96.34

     Source: Tilstra, Land O’ Lakes   Beef Feedlot                 $108.00



                                              Paragon Economics, Inc.
                                                   From information, knowledge
Impacts of Higher Crude
   Ethanol plant margins increase -- New
    incentive to invest in added capacity
   Major hurdle will be encountered at 14 – 15
    billion gallons due to E-10 saturation
   Relatively lower ethanol prices will eventually
    encourage increase in flex-fuel cars
   Another 8 billion gal. – total of 22 billion gal.
   By 2015
    - No incentive to grow or exit the ethanol industry
    - Ethanol will be priced below energy value
                                    Paragon Economics, Inc.
                                      From information, knowledge
Full Equilibrium with high crude, E-85
   What if ethanol sells at its energy value and
    crude oil is $64?
   Will only happen if E 10 is mandated thereby
    freeing up pumps for E 85.
   Ethanol production increases by another 8
    billion gallons to a total of nearly 30 billion
    gallons
   Corn price goes to $4.42 per bushel
   The economic effects are about twice as
    large as those discussed earlier
                                 Paragon Economics, Inc.
                                   From information, knowledge
Biofuel production and grain acreages
                                      Base          High Crude
                           Unit      Scenario        Scenario
Biofuels Production
Ethanol from corn        Bil. Gal.        14.5                 29.3
Ethanol from cellulose   Bil. Gal.              0                  0
Biodiesel                Bil. Gal.       0.429               0.507


Planted Acres
Corn                     Million          92.5               112.5
Soybeans                 Million          68.4                 57.3
Wheat                    Million          57.0                 41.9


                                       Paragon Economics, Inc.
                                         From information, knowledge
U.S. grain prices and exports
                                        Base           High Crude
                             Unit      Scenario         Scenario
Prices
Corn (farm price)          $/bu.             3.16                  4.42
Soybeans                   $/bu.              6.56                 8.09
Wheat                      $/bu.              4.29                 5.27
Soybean Meal (Decatur 48%) $/ton           159.00              193.00
Soybean Oil (Decatur)      Cents/lb.        35.30                  39.6

Exports
Corn                       Mil. bu.          2451                   922
Soybeans                   Mil. bu.           880                   594
Wheat                      Mil. bu.          1037                   490
                                        Paragon Economics, Inc.
                                          From information, knowledge
U.S. corn, soybean and wheat usage
                                             Base           High Crude
                                   Unit     Scenario         Scenario
Domestic Use
Corn for Feed                    Mil. bu.       5,746                4,920
Corn for Ethanol                 Mil. bu.       5,046               10,858
Corn for Other Food/Industrial   Mil. bu.       1,441                1,385
Total Domestic Corn Use          Mil. bu.      12,233               17,163
Domestic Use + Exports           Mil. bu.      14,684               18,805

Soybean Crush                    Mil. bu.        1,985                1,781

Wheat Milling                    Mil. bu.           977                  962



                                             Paragon Economics, Inc.
                                               From information, knowledge
Impacts of higher oil and ethanol . . .

             IMPACT OF $4.42/BU CORN
                        NE Steers/Beef   Hogs/Pork         Chicken
Production Cost                            36.0%
Production                  -1.6%          -9.2%              -6.0%
Producer Price              8.8%                            +15.0%*
Retail Price                4.0%           8.2%               5.0%
Exports                     -8.0%         -17.0%             -16.0%
*Ready-to-cook bird price




                                           Paragon Economics, Inc.
                                             From information, knowledge
Big question is “What is the yield trend?”
              ACTUAL & PROJECTED CORN YIELDS
  Bu/acre
  200
              Actual Yield
  180         Trend, '69-'06
              Trend '96-'06
  160
              Trend '80-'96

  140

  120

  100

   80

   60
        1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
                                                Paragon Economics, Inc.
                                                  From information, knowledge
Summary of ISU/CARD findings
   Low-steady oil: Corn growth will suffice
   Higher oil: Could need MUCH more corn
    and drive prices >$4/bu.
   DDGS are used by beef – advantage!
   High corn: lower meat exports and higher
    meat prices with pork getting hurt worst
   All of these assume NORMAL weather – a
    short crop would result in BIG short-term
    problems
                              Paragon Economics, Inc.
                                From information, knowledge
Strategy for profits in ’07 and beyond:
   Buy low
   Convert efficiently
   Sell high


SOME PRINCIPLES ARE FOREVER

     BUT THE DEFINITIONS CAN
              CHANGE!
                              Paragon Economics, Inc.
                                From information, knowledge
“Low” corn will be >$3 and maybe >$4/bu.




                           Paragon Economics, Inc.
                             From information, knowledge
Bottom line on ethanol
   We’re on the wrong side of the political
    energy issue – and not much to do about it!
    - Well-managed operations will survive
    - Lower profit margins but not much red ink?
    - Smaller livestock sectors than would otherwise
      have been the case – e.g. hogs/pork will miss
      out on 1.5%/yr. growth
   DDGS give beef and dairy an advantage
   Very questionable impacts on rural America
    – 80 ethanol jobs supplant 800 pork jobs?
                                  Paragon Economics, Inc.
                                    From information, knowledge
Questions & Discussion
 CME’s Daily Livestock Report
www.dailylivestockreport.com

    National Hog Farmers’
   North American Preview
 www.nationalhogfarmer.com
                     Paragon Economics, Inc.
                       From information, knowledge
Forecast of Deflated Light Crude Oil Prices, 2003-30

 $/barrel
 70
 60
 50
 40
 30
 20
 10
  0
      2003 2006 2009 2012 2015 2018 2021 2024 2027 2030

Source: DOE/EIA, Annual Energy Review, Feb. 2006   Paragon Economics, Inc.
                                                     From information, knowledge
Forecast of EIA Refiners Acquisition Cost,
2005-16
 $/barrel
 80
 70
 60
 50
 40
 30
 20
 10
   0
       2005      2007       2009   2011    2013           2015

Source: USDA/OCE, February 2007           Paragon Economics, Inc.
                                            From information, knowledge
US Energy Source & Use, 2005
    Source         Quad         Use            Quad
                    BTUs                       BTUs
   Petroleum       40.1       Transportation 28.0
   Natural Gas      22.6      Industrial      20.9
   Coal            22.9       Resid/com’cial 11.1
   Renewable energy 6.1       Electricity    39.9
   Nuclear power     8.1




                                    Paragon Economics, Inc.
                                      From information, knowledge
Ethanol Production Capacity By State                            .
                    # of     current               under
.    State          plants   capacity   construction
                               ---million gallons per year---
1.     Iowa                  28         1176.5                      530.0
2.     Minnesota             17          648.6                       58.0
3.     Nebraska              19          623.5                      501.0
4.     Illinois               7          533.0                      107.0
5.     South Dakota          13          432.0                      238.0
6.     Kansas                 9          205.5                       95.0
7.     Wisconsin              6          188.0                       40.0
8.     North Dakota           4          163.5                      100.0
9.     Missouri               4          110.0                       45.0
10.    Indiana                5          102.0                      280.0
                                                Paragon Economics, Inc.
 U.S. Total
Source: USDA/OCE June 2006   101                             2122.5
                                        4818.9 From information, knowledge
Ethanol as Fuel


    Over 90% of U.S. ethanol is used as
     fuel
    Although ethanol and gasoline can be
     blended in any proportion, in the U.S. it
     is largely:
     - 10% ethanol & 90% gasoline
     - 85% ethanol & 15% gasoline (E85)
    Blends with high ethanol content
     require modifications in the automobile
                                Paragon Economics, Inc.
     (flexible fuel vehicle)           From information, knowledge
    Approximate Energy Content
Gasoline has 125,000 BTUs per gallon
Gasohol has 121,150 BTUs per gallon
10% ethanol has 120,940 BTUs per gallon
E85 has 92,500 BTUs per gallon
85% ethanol has 90,500 BTUs per gallon
95% ethanol has 86,430 BTUs per gallon
100% ethanol has 84,400 BTUs per gallon

Less energy means fewer miles per gallon… But,
                                   than Economics,
ethanol has a higher octane ratingParagon gasolineInc.
                                      From information, knowledge
Ethanol: energy gain or loss?


 Because of efficiency gains
  On the farm
     - Reduced tillage
    In ethanol plants
     - Faster, higher yielding conversion
 The energy gain from ethanol in new dry
   milled plants is above 75%
                                 Paragon Economics, Inc.
                                   From information, knowledge
                    U.S. Gasoline Usage, 1986-06


                  160
                  140
                  120
Billion Gallons




                  100
                  80
                  60
                  40
                  20
                   0
                        1986

                               1988

                                      1990

                                             1992

                                                    1994

                                                           1996

                                                                  1998

                                                                            2000

                                                                                    2002

                                                                                            2004

                                                                                                       2006
                                                                    Paragon Economics, Inc.
              Source: U.S. Energy Information Administration
                                                                         From information, knowledge
                   Ethanol Production, 1980-06


                  6.0

                  5.0
Billion Gallons




                  4.0

                  3.0

                  2.0

                  1.0

                  0.0
                        1980

                               1982

                                      1984

                                             1986

                                                    1988

                                                           1990

                                                                  1992

                                                                         1994

                                                                                1996

                                                                                         1998

                                                                                                2000

                                                                                                       2002

                                                                                                              2004

                                                                                                                     2006
                                                                                 Paragon Economics, Inc.
Source: Renewable Fuels Association
                                                                                       From information, knowledge
Gasoline & Ethanol Production, 1986-06


                   160                        ethanol         gasoline
                   140
                   120
 Billion Gallons




                   100
                   80
                   60
                   40
                   20
                    0
                         1986

                                1988

                                       1990

                                              1992

                                                     1994

                                                            1996

                                                                   1998

                                                                             2000

                                                                                     2002

                                                                                             2004

                                                                                                        2006
                                                                     Paragon Economics, Inc.
               Source: U.S. Energy Information Administration
                                                                          From information, knowledge
          U.S. Gasoline Usage



   141 billion gallons gasoline used per
    year
   Mandating 10% ethanol in all gasoline
    would require that nearly half of the
    U.S. corn crop be processed into
    ethanol
   If all U.S. corn were made into ethanol,
    it would produce 31 billion gallons per
                               Paragon Economics, Inc.

    year                              From information, knowledge
    78.6 Billion Bushels of Corn


   Record U.S. corn yield is 160 bu/acre
   78.6 billion bushels at 160 bu/acre
    would require 491 million harvested
    acres of corn
   Equals 156% of 2005 U.S. harvested
    acreage of corn, soybeans, wheat,
    sorghum, cotton, rice, sunflowers,
    barley, oats, rye, peanuts, tobacco,
    canola, sugar beets, sugarcane,
                               Paragon Economics, Inc.

    potatoes, dry edible beans, proso millet
                                      From information, knowledge

				
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