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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 ConferenceMarch 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
Farm Program Payments . . .corn accounts for a large share
0
5
10
15
20
25
30
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
F
Fiscal Year
Bil
lio
n $ Other crops
Corn
Corn Ethanol Production . . .expect to use 27% of ’07 corn crop for nearly 9 bil. gal.
0
1
2
3
4
5
6
7
8
9
10
1980
/01
1983
/04
1986
/07
1989
/90
1992
/93
1995
/96
1998
/99
2001
/02
2004
/05
2007
/08F
Bil
lio
n g
allo
ns
0
5
10
15
20
25
30
Per
cen
t
Ethanol Share of Corn Production
Biodiesel Production . . .expect to use 17% of ’07 soyoil crop for 500 mil. gal.
0
100
200
300
400
500
600
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08F
Mil
lio
n g
allo
ns
0
4
8
12
16
20
24
Per
cen
t
Biodiesel Share
Global Coarse Grain Stocks . . .getting uncomfortably tight
0
5
10
15
20
25
30
35
40
1977/78 1981/82 1985/86 1989/90 1993/94 1997/98 2001/02 2005/06
% of total use
2006/07F: 12%
19% & Record corn prices
Crop Year
0
50
100
150
200
250
300
350
400
Corn Soybeans Wheat UplandCotton
$ per acre
2006 2007
Expected Net Returns . . .favor corn
60
70
80
90
100Million acres
Corn Acres Planted . . .highest Since 1945 expected
Projected Corn Ethanol Production… expect 12 bil. gal. in 2016/17– 30% of corn crop
0
2
4
6
8
10
12
14
Bill
ion
gallo
ns
Ethanol Imports Augment Demand…imports soaring, led by Brazil
0
100
200
300
400
500
600
700
800
90 92 94 96 98 '00
'02
'04
'06
Mil
lio
n g
allo
ns
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
0
100
200
300
400
500
600
700
800
2000/01 2003/04 2006/07 2009/10 2012/13 2015/16
Mill
ion
gallo
ns
Ethanol-Corn Price Spread . . .weekly data (2.75xPeth-Pcrn)
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
$ p
er
bu
sh
el
2000 2002 2004 20061999 2001 2003 2005 2007
Ethanol-Corn Price Spread . . .annual data with alternative Peth scenarios
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
1999 2001 2003 2005 2007 2009 2011 2013 2015
$ p
er b
ush
el
Ethanol priced = historical premium
Priced = gasoline
Priced = 70% gasoline
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
0
10
20
30
40
50
60
70
80
2006 2008 2010 2012 2014 2016
% S
har
e M
et b
y E
&B
0
0.5
1
1.5
2
2.5
3
3.5
4
Ch
ang
e in
Use
(q
uad
BT
Us)
Source: 2007 EIA Annual Energy Outlook
∆ Total Gas/Distillate Use
∆ E/B use
E/B share of ∆ total fuel use
Options to Maintain Biofuel Growth
Do nothing
Minimum prices (price controls)
Maintain or amend subsidies/taxpreferences
Increase renewable fuel standards
Projected Corn Ethanol Production. . . w/o tax credit and import tariff (USDA analysis)
0
2
4
6
8
10
12
14
2007/08 2009/10 2011/12 2013/14 2015/16
Bil
lio
n g
allo
ns
With credit/tariff W/O credit/tariff
Projected Corn Prices…w/o tax credit and import tariff (USDA analysis)
3.00
3.10
3.20
3.30
3.40
3.50
3.60
3.70
3.80
2007/08 2009/10 2011/12 2013/14 2015/16
$ pe
r bu
shel
With credit/tariff W/O credit/tariff
Projected Soy Biodiesel Production. . .w/o tax credit (USDA analysis)
0
100
200
300
400
500
600
700
800
2007/08 2009/10 2011/12 2013/14 2015/16
Mill
ion
gallo
ns
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
0
5
10
15
20
25
30
35
40
2007/08 2009/10 2011/12 2013/14 2015/16
Bil
lio
n g
all
on
s
Ethanol Biodiesel
“20 in 10”
22 billion
Biomass Potential by 2017(excluding corn based ethanol)
(310 million tons of biomass = 28 billion gallons of ethanol)
19
51
14
2
8
22
6
5
17
2
4
3
19
1
7
1
7
9
80
10
33
12
117
2
Source: “Billion-Ton” Study
Forest Residues (130)
Crop Residues (152)
Perennial Crops (26)
Cost Competitiveness of Cellulosic Ethanol
** (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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