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The New World of Biofuels - Implications for Agriculture and Energy

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					The New World of Biofuels:
Implications for Agriculture
        and Energy

 Keith Collins, Chief Economist, USDA

  EIA Energy Outlook, Modeling, and Data
               Conference
               March 28, 2007
               Overview
 Ag 101

 Status of Biofuels & Market Implications

 Public Policy and Biofuels

 Role of Research

 USDA Energy Policy & 2007 Farm Bill
            Ag at a Glance
         Item           2006               2007F
                               Billion $
Farm cash receipts      243                 259
 Crop receipts          122                 134
   Corn receipts         23                 31
 Livestock receipts     121                 125
Livestock feed costs     31                 35
Value of exports (FY)    69                 78
                 Farm Program Payments . . .
                    corn accounts for a large share
            30

            25

            20
                    Other crops
Billion $




                    Corn
            15

            10

             5

             0
               96

               97

               98

               99

               00

               01

               02

               03

               04

               05

               06

                F
              07
             19

             19

             19

             19

             20

             20

             20

             20

             20

             20

             20
            20
                                  Fiscal Year
                        Corn Ethanol Production . . .
                  expect to use 27% of ’07 corn crop for nearly 9 bil. gal.
                   10                                                                     30
                    9
                                                                                          25
Billion gallons




                    8
                    7                                                                     20




                                                                                               Percent
                    6
                    5                                                                     15
                    4
                    3                                                                     10

                    2
                                                                                          5
                    1
                    0                                                                     0




                                                                                     8F
                     1

                             4

                                    7

                                           0

                                                  3

                                                         6

                                                                9

                                                                       2

                                                                              5
                   /0

                           /0

                                  /0

                                         /9

                                                /9

                                                       /9

                                                              /9

                                                                     /0

                                                                            /0

                                                                                   /0
      80

                          83

                                 86

                                        89

                                               92

                                                      95

                                                             98

                                                                    01

                                                                           04

                                                                                  07
    19

                        19

                               19

                                      19

                                             19

                                                    19

                                                           19

                                                                  20

                                                                         20

                                                                                20
                                  Ethanol           Share of Corn Production
                              Biodiesel Production . . .
                  expect to use 17% of ’07 soyoil crop for 500 mil. gal.

                  600                                                                     24

                  500                                                                     20
Million gallons




                  400                                                                     16




                                                                                               Percent
                  300                                                                     12

                  200                                                                     8

                  100                                                                     4

                    0                                                                     0




                                                                                     8F
                          1


                                   2


                                            3


                                                     4


                                                            5


                                                                     6


                                                                              7
                        /0


                                 /0


                                          /0


                                                   /0


                                                          /0


                                                                   /0


                                                                            /0

                                                                                   /0
                00


                                01


                                         02


                                                  03


                                                         04


                                                                  05


                                                                           06

                                                                                  07
              20


                              20


                                       20


                                                20


                                                       20


                                                                20


                                                                         20

                                                                                20
                                                  Biodiesel            Share
   Global Coarse Grain Stocks . . .
               getting uncomfortably tight
% of total use
   40
    35                                 19% & Record
                                       corn prices
    30
    25
    20
    15
    10
     5                                        2006/07F: 12%
     0
         1977/78 1981/82 1985/86 1989/90 1993/94 1997/98 2001/02 2005/06
                                 Crop Year
        Expected Net Returns . . .
                  favor corn
$ per acre
400
                    2006   2007
350
300
250
200
150
100
 50
  0
         Corn   Soybeans     Wheat   Upland
                                     Cotton
         Corn Acres Planted . . .
         highest Since 1945 expected
Million acres
 100



  90



  80



  70



  60




                                                                               F
    45


            52


                    59


                            66


                                    73


                                            80


                                                    87


                                                            94


                                                                    01

                                                                            08
 19


         19


                 19


                         19


                                 19


                                         19


                                                 19


                                                         19


                                                                 20

                                                                         20
        Projected Corn Ethanol Production…
                          expect 12 bil. gal. in 2016/17– 30% of corn crop

                  14
                  12
Billion gallons




                  10
                    8
                    6
                    4
                    2
                    0
                      1


                                  5


                                              9


                                                          3


                                                                      7


                                                                                  1


                                                                                              5


                                                                                                          9


                                                                                                                      3


                                                                                                                                  7
                   /0


                               /0


                                           /0


                                                       /9


                                                                   /9


                                                                               /0


                                                                                           /0


                                                                                                       /0


                                                                                                                   /1


                                                                                                                               /1
                  80


                           84


                                       88


                                                   92


                                                               96


                                                                           00


                                                                                       04


                                                                                                   08


                                                                                                               12


                                                                                                                           16
     19


                          19


                                      19


                                                  19


                                                              19


                                                                          20


                                                                                      20


                                                                                                  20


                                                                                                              20


                                                                                                                          20
Ethanol Imports Augment Demand…
                               imports soaring, led by Brazil

                  800
                  700
Million gallons




                  600
                  500
                  400
                  300
                  200
                  100
                    0

                                                             0


                                                                    2


                                                                           4


                                                                                  6
                     90


                            92


                                   94


                                          96


                                                  98

                                                          '0


                                                                 '0


                                                                        '0


                                                                               '0
                                            CBI   Other      Brazil
                  Source: Census and Customs CBI TRQ data
Projected Soy Biodiesel Production…
expect 700 mil. gal. in 2016/17 – 23% of soyoil production

                   800
                   700
 Million gallons




                   600
                   500
                   400
                   300
                   200
                   100
                     0
                     2000/01   2003/04   2006/07   2009/10   2012/13   2015/16
               Ethanol-Corn Price Spread . . .
                             weekly data (2.75xPeth-Pcrn)

               9.00
               8.00
               7.00
$ per bushel




               6.00
               5.00
               4.00
               3.00
               2.00
               1.00
               0.00
                      1999   2000   2001   2002   2003   2004   2005   2006 2007
                Ethanol-Corn Price Spread . . .
                       annual data with alternative Peth scenarios

               5.00
               4.50
               4.00
               3.50                                             Ethanol priced =
$ per bushel




                                                                historical premium
               3.00
               2.50
               2.00                                                    Priced = gasoline

               1.50
               1.00
               0.50                          Priced = 70% gasoline
               0.00
                      1999   2001   2003   2005   2007   2009   2011   2013   2015
      Challenges Facing Ethanol
   Corn trend acreage & yields
   Global weather
   Demand growth for blends/E85
   Ethanol distribution system
   Tax credit, tariff, RFS/AFS issues
   Livestock feed costs & adjustments
   DDG quality
   Meat and consumer food prices
   Environmental issues: nitrogen, water
    quantity & quality, CRP
Change in Fuel Use Since 2005 Met by
         Ethanol/Biodiesel
                     80                                     ∆ Total Gas/Distillate Use    4




                                                                                                Change in Use (quad BTUs)
                     70                                                                   3.5
% Share Met by E&B




                                                           E/B share of
                     60                                    ∆ total fuel use               3

                     50                                                                   2.5

                     40                                                                   2
                                                                              ∆ E/B use
                     30                                                                   1.5

                     20                                                                   1

                     10                                                                   0.5

                     0                                                                    0
                           2006        2008        2010        2012     2014      2016

                          Source: 2007 EIA Annual Energy Outlook
Options to Maintain Biofuel Growth
 Do nothing

 Minimum prices (price controls)

 Maintain or amend subsidies/tax
preferences

 Increase renewable fuel standards
  Projected Corn Ethanol Production. . .
          w/o tax credit and import tariff (USDA analysis)
                  14

                  12
Billion gallons




                  10

                   8

                   6

                   4

                   2

                   0
                       2007/08   2009/10     2011/12     2013/14    2015/16

                                 With credit/tariff    W/O credit/tariff
                       Projected Corn Prices…
  w/o tax credit and import tariff (USDA analysis)
               3.80
               3.70
$ per bushel




               3.60
               3.50
               3.40
               3.30
               3.20
               3.10
               3.00
                      2007/08    2009/10    2011/12    2013/14    2015/16

                                With credit/tariff    W/O credit/tariff
Projected Soy Biodiesel Production. . .
                                  w/o tax credit (USDA analysis)

                  800
                  700
Million gallons




                  600
                  500
                  400
                  300
                  200
                  100
                    0
                        2007/08     2009/10   2011/12     2013/14    2015/16
                                         With credit    W/O credit
  President’s “20 in 10” Proposal
 Reduce U.S. gasoline use by 20% in the
  next 10 years

 Path:
  – Modify CAFÉ
  – Require 35 billion gallons of renewable and
    alternative fuels by 2017

 Easy to achieve?

 Role of Ethanol and Biodiesel ?
             USDA Baseline Biofuel Production
                  40
                  35
                  30                                    “20 in 10”
Billion gallons




                  25
                                                                    22 billion
                  20
                  15
                  10
                   5
                   0
                       2007/08   2009/10     2011/12      2013/14       2015/16
                                           Ethanol     Biodiesel
         Biomass Potential by 2017
                   (excluding corn based ethanol)
    (310 million tons of biomass = 28 billion gallons of ethanol)
                                                    10            1
                                                              5
2
                                  1 3
                                          33                          19

    17                 1
                                                                                   5
                                 19                 9

                           12                                                  6
                                                                                            22
                                               80
                                                                               4
                                                                           2
                                 7        7    8
         Forest Residues (130)                                                         17
                                      1                  14
         Crop Residues (152)
                                               2
         Perennial Crops (26)
                                                         Source: “Billion-Ton” Study
        Cost Competitiveness of
          Cellulosic Ethanol
                    Corn          Cellulosic        Cellulosic
                    Based          Today?--         2010-12—
                                 Illustrative       DOE target
Feedstock          $1.17             $1.00            $0.33
                 @$3.22/bu         @$60/dt           @$30/dt
                 2.75g/bu           60g/dt            90g/dt
By-Product          -$0.38          -$0.10            -$0.09
Enzymes              $0.04           $0.40            $0.10
Other Costs**        $0.62           $0.80            $0.22
Capital Cost         $0.20           $0.55            $0.54
Total                $1.65           $2.65            $1.10
 ** (includes preprocessing, fermentation, labor)
          Role for Research
 Reduce Production Costs
  - Land Costs
    -- Cropland
    -- Grassland/Pasture
  - Establishment and Reseeding
  - Bailing and Staging


 Transportation Costs
               Cropland Rents . . .
        hard for dedicated crops to compete for land




Cropland rents over $100/acre
need over 3 dt/acre just to
cover land costs
              Production Costs . . .
              (actual economic data are limited)
 University of Nebraska/ARS
   --Switchgrass, 173 acres, 5 years, 10 farmers
   --Average yield = 3.4 tons/acre
   --Land cost = $17/ton
   --Production cost = $27/ton
     Total cost = $44/ton

 Iowa State University
   --Switchgrass from Pasture
   --Average yield = 4 tons/acre
   --Land cost = $13/ton
   --Establishment + reseeding cost = $7/ton
   --Production cost = $40/ton
     Total cost = $60/ton
     2007 Farm Bill Proposal

 $500 million-- Ag Bioenergy and Biobased
 Products Research Initiative
 $150 million--Biomass Research and
 Development Act
 $100 million--Cellulosic Bioenergy
 Program
 $150 million--Forest Wood-to-Energy
  Program
 Biomass Reserve Program (BRP)
                 Conclusions
 Tight agricultural markets raising risks
 Corn ethanol:
  --Approaching limits
  --Making minor inroads in crude oil market
  --Can do a little more with better yields
 Cellulosic technology:
  --Great prospects
  --Large potential biomass feedstock base (technical)
  --Must focus on economic potential
  --Need to improve yields to reduce feedstock costs
  --Public policy goal to get over initial adjustment costs

				
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