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Value of Corn to U.S. Ethanol Refiners and Cost to U.S. Consumer

Value of Corn to U.S. Ethanol Refiners and Cost to U.S. Consumer. Dr. Thomas E. Elam President FarmEcon LLC November 9, 2011. First, the lawyer told me to say….

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Value of Corn to U.S. Ethanol Refiners and Cost to U.S. Consumer

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  1. Value of Corn to U.S. Ethanol Refiners and Cost to U.S. Consumer Dr. Thomas E. Elam President FarmEcon LLC November 9, 2011

  2. First, the lawyer told me to say… The information contained herein is currently believed to be reliable and the views expressed within this document reflect judgments at this time and are subject to change without notice. FarmEcon LLC does not warrant that the information contained herein is fully accurate or complete, and it should not be relied upon as such. Any business decisions made based on this information and analysis are the sole responsibility of the decision maker.

  3. Corn prices and energy markets • Until about 2006 • Corn prices were set by food supply/demand • Energy markets had no influence • Today • Energy is a major corn price influence • Energy value of corn higher historical food value • What changed?

  4. Something Changed!

  5. What changed? • Higher oil prices increased the value of ethanol • Ethanol production exploded • Federal policy – the RFS • Market forces • Corn production limited by land • Massive supply/demand imbalance • Feed use squeezed by ethanol use

  6. What did the RFS do? Forced increases in ethanol production Artificially raised corn demand Drove up corn prices Drove up ethanol costs and prices Can be seen clearly in the price records

  7. Total Energy Cost Premium of Ethanol vs. 87 Octane Unleaded Gasoline(Includes Cost of Ethanol Plus Tax Credit) RFS #2 RFS #1

  8. What is the real value of ethanol? • As an octane enhancer? • Market is saturated • Value has dissipated • As a fuel? • With today’s engines, 66% of gasoline price • E-85 worth about 72% of gasoline price • 10-21-11 national average was 87% ($3.50 vs. $3.05) (E85.com) • Explains why E-85 has never taken off, even in Iowa • Engine technology can reduce the mileage difference • Direct injection/turbo-charging can effectively use the octane • Not widely available

  9. Correlations: Monthly Average Prices, Omaha #2 Yellow Corn; Petroleum Blender Gasoline and Ethanol

  10. Regression for Season Average Corn Price, Feedgrain Crops of 1990-2009 Ethanol production growth in excess to 4 billion gallons, ethanol prices over $2/gallon, and low stocks are all combining to drive corn prices up. The next year looks like more of the same at this point. R2 = 89% Forecast 2010 crop price was $5.47/bushel, above the USDA $5.18 average Forecast 2011 crop price is $6.46/bushel, vs. the USDA $6.20-$7.20 range Lower stocks, higher ethanol prices, and ethanol production all important drivers

  11. Ethanol producer value equation,Western Iowa costs and returns Value of corn depends on ethanol and DDGS prices and yields. Sources: USDA/AMS, Iowa Ethanol Plant Report, 10-21-2011 Iowa State University ethanol plant margin model, 10-21-2011

  12. Corn and soybean meal outlook • Corn prices will remain volatile • Low carryover stocks • Subject to energy market fluctuations • Sensitive to global demand • Sensitive to 2012 acreage and weather • Potential ethanol RFS policy shifts • Soybean meal also likely to be higher • Continued reductions in U.S. crop • Strong global demand for soybeans

  13. Feedgrains Balance * September 1 Crop Year

  14. Soybean Outlook Detail to 2011/2012* * September 1 Crop Year

  15. Corn/SBM/DDGS Feeding Lower feed availability & higher protein exports are squeezing consumption

  16. If Ethanol Tax Credit Goes Away? About $5.8 billion of revenue goes away Including DDGS, total ethanol plant sales are about $43 billion Most of credit stays with blender But that much money has a corn price effect Maximum effect is about $1/bushel Real effect will be less

  17. RFS is the Real Policy Issue Sets price insensitive floor for corn demand Inflates corn, DDGS and ethanol prices Absent RFS and tax credit, ethanol priced near BTU-parity to gasoline: 67% of gasoline Wholesale gasoline at $3.00 = $2.00 ethanol $2.00 ethanol = $4.75 corn and $150 DDGS

  18. Cost to consumers • Lower food production, higher retail prices • Per capita consumption declining • We may have seen “peak meat” in 2007/2008 • Meat dairy and poultry prices increasing • Annual U.S. cost well in excess of $50 billion, and climbing • Cost of fuel is higher • No offset in crude oil price, world has surplus capacity • Ethanol costs driven higher • Tax credit cost approaching $6 billion/year • Total cost/year about $15-16 billion

  19. 2006-2012 Per Capita Total Meat Consumption: 10% Reduction • Recession and slow recovery • Lower availability driving pricing up • Root causes: • Higher Costs • Lower Production • Export growth

  20. Acceleration in retail food prices • Can’t look at month-to-month changes, need to look at cumulative effects: • Compared to pre-RFS #2, food price inflation rates are much higher relativeto overall inflation rates outside the food sector. • “Other Than Food” includes sharply higher energy prices!

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