The New World of Biofuels: Implications for Agriculture and Energy Keith Collins, Chief Economist, USDA EIA Energy Outlook, Modeling, and Data Conference.

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