Presentation overview

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1 U.S. Ethanol Expansion: How the Agricultural Sector Adjusts & Challenges to Future Expansion Paul Westcott U.S. Department of Agriculture Economic Research Service AAEA Annual Meeting Orlando, Florida July 2008 Presentation overview Market and policy setting for U.S. ethanol expansion Commodity market adjustments Crops Livestock 2007 Energy Act Challenges to cellulosic-based ethanol expansion 1

2 Market and policy setting for U.S. ethanol expansion Market and policy setting Oil prices 2005 Energy Policy Act 2007 Energy Policy Act 2

3 Crude oil prices, refiners acquisition cost, imports $ per barrel Source: U.S. Department of Energy, Energy Information Administration, July Energy Policy Act of 2005 Role in ethanol expansion Mandated Renewable Fuel Program Established minimum levels of renewable fuels to be used in gasoline Contributed to the elimination of the use of MTBE as a gasoline additive, adding to the expansion in ethanol 3

4 U.S. ethanol expansion Ethanol expansion, implications for corn Corn is currently the most economically viable feedstock in the United States for ethanol production Most of the expansion in ethanol production is from corn-based dry mills 4

5 Corn-based ethanol production projections exceed 2005 renewable fuels program mandate Billion gallons USDA projections Renewable fuels program, Energy Policy Act of / / / /16 Source: USDA Agricultural Projections to 2017, February Ethanol s role in gasoline and corn markets: Current relationship Ethanol is small relative to overall gasoline use But ethanol accounts for a large and growing share of corn use Ethanol 4.6% Ethanol 19% FSI less ethanol 12% Feed and residual 50% Gasoline 95.4% Exports 19% /07 Stock-to-use ratio, 11.6% 5

6 Ethanol s role in gasoline and corn markets: Projected relationships in 10 years Ethanol still small relative to overall gasoline use Ethanol accounts for one-third of corn use Ethanol 8.6% Ethanol 33% Feed and residual 40% Gasoline 91.4% Other FSI 10% Exports 17% /18 Source: USDA Agricultural Projections to 2017, February Stock-to-use ratio, 8.4% How does the agricultural sector adjust? Crops 6

7 Corn used for ethanol production Large ongoing expansion Billion bushels / / / /16 Source: USDA Agricultural Projections to 2017, February Crop sector effects of ethanol expansion Corn Higher prices Increased acreage Reduced exports and non-ethanol domestic use Lower stocks Soybeans Lower acreage for competing crops, particularly soybeans Reduced exports, domestic use, and stocks Higher prices 7

8 Corn price projections $/bushel / / / / /09 Source: USDA World Agricultural Supply and Demand Estimates, July Corn acreage projections: Planted area increases in response to higher corn prices Million acres / / / / /09 Source: USDA Acreage report, June 2008 and USDA Agricultural Projections to 2017, February

9 Corn use projections: Feed use* declines Billion bushels / / / / /09 * Includes statistical residual Source: USDA World Agricultural Supply and Demand Estimates, July Corn export projections: U.S. exports also fall Billion bushels / / / / /09 Source: USDA World Agricultural Supply and Demand Estimates, July

10 Corn stocks projections: Ending stocks drop Billion bushels / / / / /09 Source: USDA World Agricultural Supply and Demand Estimates, July Corn and soybean projected plantings: Much of the corn area expansion comes from soybeans Million acres 95 Corn Soybeans / / / /16 Sources: USDA Acreage report, June 2008 and USDA Agricultural Projections to 2017, February

11 Soybean price projections: Prices higher reflecting lower acreage and reduced supplies $/bushel / / / / /09 Source: USDA World Agricultural Supply and Demand Estimates, July How does the agricultural sector adjust? Livestock 11

12 Livestock sector effects of ethanol expansion Higher corn prices Greater availability of ethanol production coproducts Distillers grains from dry mill ethanol production Different effects across livestock types Reflects feed conversion efficiencies Also, ruminants can use distillers grains more readily than monogastric animals, which favors use by beef cattle Lower production for all meats, particularly in 2009 as ethanol production continues its expansion U.S. beef and pork production Billion pounds Beef Pork Year Source: USDA World Agricultural Supply and Demand Estimates, July

13 U.S. broiler production Billion pounds Year Source: USDA World Agricultural Supply and Demand Estimates, July Energy Act 13

14 Renewable Fuel Standard, 2007 Energy Act Billion gallons Total RFS RFS, other (mostly ethanol derived from corn starch) RFS, advanced biofuels Calendar year Renewable Fuel Standard, 2007 Energy Act Billion gallons 20 RFS, advanced biofuels RFS, cellulosic 5 RFS, biodiesel Calendar year 14

15 Cellulosic feedstock challenges Cellulosic feedstocks: Supply challenges Supply challenges #1 Technical conversion feasibility Cost containment and economic viability Supply challenges #2 Feedstock production & economic viability Feedstock storage and delivery infrastructure Supply challenges #3 Ethanol distribution infrastructure Pump certifications for mid-level blends Wider availability and accessibility of E-85 pumps 15

16 Cellulosic feedstocks: Demand challenges Demand challenges #1 10 percent blend wall Legislative and regulatory barriers to higher, mid-level blends (other than E-85) Automobile fleet and warranties Demand challenges #2 E-85 expansion Automobile fleet transition to more flex cars 16