Ethanol EconomicsEthanol Economics

Mike CarnallMike Carnall

30 October 200730 October 2007

HopesHopes

Increased Use of Ethanol Will:Increased Use of Ethanol Will: Reduce dependence on imported oilReduce dependence on imported oil Reduce gasoline pricesReduce gasoline prices Reduce long term GHG emissionsReduce long term GHG emissions

Fears & DoubtsFears & Doubts

Increased Ethanol Production Will:Increased Ethanol Production Will: Dramatically increase food pricesDramatically increase food prices

Corn will be diverted from food to ethanolCorn will be diverted from food to ethanol Cropland will be diverted from food crops to cornCropland will be diverted from food crops to corn

Do little to reduce the price of fuel/energyDo little to reduce the price of fuel/energy Capacity is small compared with fuel usageCapacity is small compared with fuel usage Net energy gain from ethanol is smallNet energy gain from ethanol is small

Result in little net decline in carbon emissionsResult in little net decline in carbon emissions Energy yield of corn based ethanol is low Energy yield of corn based ethanol is low

Increasing cropland and crop intensity will Increasing cropland and crop intensity will have adverse environmental effectshave adverse environmental effects

Some FactsSome Facts 2006 US Corn Acreage: 2006 US Corn Acreage:

78.3 million acres planted in 2006 2006 US Ethanol Production: 2006 US Ethanol Production:

4.89 Billion Gallons (20.0 percent of the corn crop)4.89 Billion Gallons (20.0 percent of the corn crop) US Gasoline Consumption US Gasoline Consumption

140 Billion Gallons140 Billion Gallons Ethanol as Percent of US Motor Gasoline Ethanol as Percent of US Motor Gasoline

Usage:Usage: 3.5% volumetric3.5% volumetric 2.3% energy basis 2.3% energy basis

Ethanol has 66% of energy content of gasolineEthanol has 66% of energy content of gasoline 1.4% net energy saved 1.4% net energy saved

Energy replaced less energy required to produce ethanolEnergy replaced less energy required to produce ethanol

Energy BalanceEnergy Balance

Total Energy Required to Produce 1 Total Energy Required to Produce 1 Gallon of Ethanol (btu): 45,802Gallon of Ethanol (btu): 45,802

Ethanol Energy Content (btu/gal): Ethanol Energy Content (btu/gal): 75,700 75,700

Net: 30,528Net: 30,528 Ratio: 1.666Ratio: 1.666

Shapouri, USDA, 2004 - Includes credit for Shapouri, USDA, 2004 - Includes credit for by products by products

This is a Controversial NumberThis is a Controversial Number

Inputs & OutputsInputs & Outputs

1.23 Billion Btu

1.0 Billion Btu Gasoline8,696 Gal

0.23 BBtu

Processing etc.

-

0.74 Billion Btu

1.0 Billion Btu Ethanol

29 Acres+

13,210 Gal

0.61 BBtu 0.13 BBtu

Source: Michael Wang, Presentation at UIUC Sustainable Bioenergy Workshop April 14, 2006

Replacing a Gasoline Btu Replacing a Gasoline Btu with an Ethanol Btuwith an Ethanol Btu

Reduces:Reduces: Fossil Energy Use by 40%Fossil Energy Use by 40%

(1.23 btu/btu – 0.74 btu/btu) / 1.23 btu/btu(1.23 btu/btu – 0.74 btu/btu) / 1.23 btu/btu Petroleum Energy Use by 89%Petroleum Energy Use by 89%

(1.23 btu/btu – 0.13 btu/btu) / 1.23 btu/btu(1.23 btu/btu – 0.13 btu/btu) / 1.23 btu/btu

Current ConsumptionCurrent Consumption

Gasoline Gasoline 140 Billion Gallons Per Year140 Billion Gallons Per Year

Corn Acres Required to Replace Gasoline Corn Acres Required to Replace Gasoline Energy with EthanolEnergy with Ethanol 10% - 48 million acres10% - 48 million acres 85% - 405 million acres85% - 405 million acres 100% - 476 million acres100% - 476 million acres

Current Cropland UsageCurrent Cropland Usage 93 million acres of corn planted in 200793 million acres of corn planted in 2007 437 million acres total US arable land437 million acres total US arable land

Million Acres Required to Replace:Million Acres Required to Replace:

US Arable Land - US Arable Land - 437437

Energy based percentages

85% of Gasoline – 85% of Gasoline – 405405

25% of Gasoline – 25% of Gasoline – 119119

Planted in 2007 - 93Planted in 2007 - 93

10% of Gasoline – 10% of Gasoline – 4848

US Grain Crop PlantingUS Grain Crop PlantingPlanted Acreage

0

50

100

150

200

250

300

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Year

Mil

lio

n A

cres

Soybeans

Wheat

CornBarleyOats

Where to From Here?Where to From Here?

How Much Ethanol Will be Produced?How Much Ethanol Will be Produced? How High Will Corn Prices Go?How High Will Corn Prices Go? How Will Food Prices Be Affected?How Will Food Prices Be Affected? How Will Gasoline Prices Be Affected?How Will Gasoline Prices Be Affected?

RelationshipsRelationships

Ethanol - Gasoline RelationshipEthanol - Gasoline Relationship Complement Complement (volumes move together)(volumes move together)

Lack of Flexible Fuel Vehicles (FFVs) may limit Lack of Flexible Fuel Vehicles (FFVs) may limit ethanol to 10% blendethanol to 10% blend

With FFV bottleneck ethanol & gasoline are With FFV bottleneck ethanol & gasoline are complementscomplements

Supplement Supplement (volumes move in opposite directions)(volumes move in opposite directions) Below 10% blend ethanol will supplement Below 10% blend ethanol will supplement As more FFVs are sold ethanol will supplement As more FFVs are sold ethanol will supplement

rather than complement gasoline rather than complement gasoline FFVs will be more attractive where ethanol is FFVs will be more attractive where ethanol is

plentiful, i.e. midwestplentiful, i.e. midwest FFVs will use up to 85% ethanol blendFFVs will use up to 85% ethanol blend

Economic FactorsEconomic Factors

Effect of Policies Effect of Policies Mandated quantityMandated quantity

Higher mandate, more ethanolHigher mandate, more ethanol Level of subsidyLevel of subsidy

Higher subsidy, more ethanolHigher subsidy, more ethanol Effect of Energy PricesEffect of Energy Prices

Petroleum Petroleum Gasoline: higher price, more ethanol (if FFVs available)Gasoline: higher price, more ethanol (if FFVs available) Diesel: higher price, less ethanol (soybeans replace Diesel: higher price, less ethanol (soybeans replace

corn)corn) Other (fertilizer, pesticides) Other (fertilizer, pesticides)

Higher price less ethanolHigher price less ethanol

Current Ethanol PolicyCurrent Ethanol Policy

Mandated productionMandated production Renewable Fuels Standard (RFS) requires 4.0 Renewable Fuels Standard (RFS) requires 4.0

Billion gallons by 2006, 7.5 Billion gallons by Billion gallons by 2006, 7.5 Billion gallons by 20122012

California 9% in 2012, 11% in 2017, 26% in 2022California 9% in 2012, 11% in 2017, 26% in 2022 Subsidized pricesSubsidized prices

$0.51 per gallon “blenders credit”$0.51 per gallon “blenders credit” Some states provide additional subsidiesSome states provide additional subsidies

Tariff protectionTariff protection Ad valorem tariff of 2.5% Import duty of 54¢ per gallon (some CBERA

exemptions)

Corn – Energy Relationship Corn – Energy Relationship

Corn Production is Energy IntensiveCorn Production is Energy Intensive Energy costs are≈50% of total operating Energy costs are≈50% of total operating

costcost Cost of corn is sensitive to energy pricesCost of corn is sensitive to energy prices

Higher Gasoline Price Makes Ethanol Higher Gasoline Price Makes Ethanol Production Profitable at Higher Corn Production Profitable at Higher Corn PricesPrices

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$30 $40 $50 $60 $70 $80 $90

Crude Oil: $/barrel

Co

rn:

$/b

us

he

l

$.51 Subsidy + $.25 Additive

With $.51 Subsidy

Energy Value

Breakeven Corn PriceBreakeven Corn PriceNovember 2006 (from Purdue)November 2006 (from Purdue)

Corn Breakeven @ $60 CrudeAdditive=$4.82/buSubsidy=$3.96/buEnergy=$2.19/bu

Range of Crude Prices (2006-2007)Min $45/bbl, Max $72/bbl Ave $58/bbl

Range of Corn Prices (2006-2007)Min $2.04/bsl, Max $3.96/bslsAve $2.93/bsl

Source: Hurt et al, “Economics of Ethanol”, Purdue Extension, ID-339,

Food – Corn – Energy RelationshipFood – Corn – Energy Relationship

Retail food costs are dominated by Retail food costs are dominated by processing and transport processing and transport Only about 19% of cost is farm input [US]Only about 19% of cost is farm input [US]

Higher energy prices will result in Higher energy prices will result in higher food prices even at constant higher food prices even at constant corn pricescorn prices

Increase in corn price from $2.00 to Increase in corn price from $2.00 to almost $4.00 has had little effect on almost $4.00 has had little effect on US food pricesUS food prices

Corn and Beef PricesCorn and Beef Prices

Source: NCGA, “Understanding the Impact of Higher Corn Prices on Consumer Food Prices”.

Back to the QuestionsBack to the Questions

How Much Ethanol Will be Produced?How Much Ethanol Will be Produced? How High Will Corn Prices Go?How High Will Corn Prices Go? How Will Food Prices Be Affected?How Will Food Prices Be Affected? How Will Gasoline Prices Be Affected?How Will Gasoline Prices Be Affected?

Getting AnswersGetting Answers

Many InteractionsMany Interactions Oil PriceOil Price

Effect on demandEffect on demand Effect on supplyEffect on supply

PoliciesPolicies Other cropsOther crops

SoybeansSoybeans WheatWheat

Import/ExportImport/Export

ModelingModeling

Model must include:Model must include: Effect of oil priceEffect of oil price Planting decision (corn v soybeans v wheat …)Planting decision (corn v soybeans v wheat …) Livestock feeding decisions (value of byproducts)Livestock feeding decisions (value of byproducts) Effect of policy parameters (subsidy, tariff etc.)Effect of policy parameters (subsidy, tariff etc.) Imports/exports of cornImports/exports of corn Imports/exports of soybeansImports/exports of soybeans Availability of FFVsAvailability of FFVs Investment in ethanol stillsInvestment in ethanol stills Response to price changes Response to price changes Establish equilibrium Establish equilibrium

Modeling ExerciseModeling Exercise

Determine the effect of higher oil pricesDetermine the effect of higher oil prices Baseline assuming current oil price forecast Baseline assuming current oil price forecast Oil + $10/bbl (no FFV bottleneck)Oil + $10/bbl (no FFV bottleneck)

Emerging Biofuels: Outlook of Effects on U.S. Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock MarketsGrain, Oilseed, and Livestock Markets

Authors:Authors: Elobeid, Fabiosa, Hayes, Babcock, Yu, Dong, Hart, BeghinElobeid, Fabiosa, Hayes, Babcock, Yu, Dong, Hart, Beghin

Center for Agricultural and Rural Development, Iowa Center for Agricultural and Rural Development, Iowa State UniversityState University

Forecast Forecast (2016 long run equilibrium)(2016 long run equilibrium)

CommodityCommodity BaseBase Oil +Oil +$10$10

Corn Planted Acreage (million acres)Corn Planted Acreage (million acres) 92.592.5 112.3112.3

Portion used for EthanolPortion used for Ethanol 34%34% 60%60%

Portion of Corn ExportedPortion of Corn Exported 17%17% 5%5%

Ethanol Produced from corn (million Ethanol Produced from corn (million gals)gals) 14,56814,568 29,06329,063

Subsidy/year @ $0.51/gal (billions of Subsidy/year @ $0.51/gal (billions of $)$) $7.43$7.43 $14.82$14.82

Corn Price ($/bushel)Corn Price ($/bushel) $3.10$3.10 $4.43$4.43

Grain PlantingsGrain Plantings2006-2016/17 (long run equilibrium)2006-2016/17 (long run equilibrium)

Baseline

0

50

100

150

200

250

2006 2007 2008 2009 2010 2017

Year

Mill

ion

Ac

res

Soybeans

Wheat

Corn (Ethanol)

BarleyOats

Corn (Other)

Oil + $10

0

50

100

150

200

250

2006 2007 2008 2009 2010 2017

Year

Mill

ion

Ac

res

Soybeans

Wheat

Corn (Ethanol)

BarleyOats

Corn (Other)

Effect on Food PricesEffect on Food PricesOIL+$10OIL+$10

CommodityCommodity From No From No EthanolEthanol

From From BaseBase

Food at HomeFood at Home +2.2%+2.2% +1.3%+1.3%

MeatMeat +6.3%+6.3% +3.8%+3.8%

EggsEggs +13.5%+13.5% +8.1%+8.1%

DairyDairy +4.5%+4.5% +2.7%+2.7%

Food Away From HomeFood Away From Home +1.5%+1.5% +0.9%+0.9%

No Ethanol – Corn price of $1.90/bushel

Fossil Energy Savings Fossil Energy Savings (2016 long run equilibrium)(2016 long run equilibrium)

BaseBase Oil +Oil +$10$10

Percent of Gasoline Consumption (by Percent of Gasoline Consumption (by volume at 140 Billion gallons/yr)volume at 140 Billion gallons/yr) 10.410.4 20.820.8

Percent of Gasoline (by energy)Percent of Gasoline (by energy) 6.8%6.8% 13.7%13.7%

Percent of Total Gasoline Fossil Percent of Total Gasoline Fossil Energy SavedEnergy Saved 2.7%2.7% 5.4%5.4%

Percent of Total Gasoline Petroleum Percent of Total Gasoline Petroleum Energy SavedEnergy Saved 6.13%6.13% 12.2212.22

%%

Potential Effect on Gasoline Potential Effect on Gasoline Prices?Prices?

Gasoline price is a model inputGasoline price is a model input Energy provided by ethanol is a small Energy provided by ethanol is a small

(<13%) portion of motor fuel energy(<13%) portion of motor fuel energy Higher ethanol production requires Higher ethanol production requires

more corn productionmore corn production Absent higher subsidies, corn Absent higher subsidies, corn

production only responds to higher production only responds to higher pricesprices

Concluding ThoughtsConcluding Thoughts

Cost to consumers is highCost to consumers is high $14 Billion/yr ($47 per person) in subsidy $14 Billion/yr ($47 per person) in subsidy 1.8% increase in food cost1.8% increase in food cost

Reduction in petroleum demand is Reduction in petroleum demand is modestmodest About 12% About 12%

Environmental EffectsEnvironmental Effects Effect on Less Developed CountriesEffect on Less Developed Countries

End of PresentationEnd of Presentation

Source: Michael Wang, Presentation at UIUC Sustainable Bioenergy Workshop April 14, 2006

Estimated Net Energy ValuesEstimated Net Energy Values

FAPRI ModelFAPRI ModelFood and Agricultural Policy Research InstituteFood and Agricultural Policy Research Institute

System of linked modelsSystem of linked models Livestock Livestock Domestic crops Domestic crops World trade models for commoditiesWorld trade models for commodities US policy cost modelUS policy cost model US net farm income modelUS net farm income model

Developed and maintained jointly by:Developed and maintained jointly by: Iowa State University, AmesIowa State University, Ames University of Missouri, ColumbiaUniversity of Missouri, Columbia

Crude Oil Price ProjectionCrude Oil Price Projection(Baseline)(Baseline)

Refiners’ Acquisition Cost (Refiners’ Acquisition Cost (≈NYMEX - $6.70)≈NYMEX - $6.70)

$50

$52

$54

$56

$58

$60

$62

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016