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The Economics of Biofuels

The Economics of Biofuels. North Central Regional Association of Assessing Officers 34 th Annual Conference Coralville, Iowa June 17, 2009 Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911. Population. Source: U.S. Bureau of the Census,

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The Economics of Biofuels

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  1. The Economics of Biofuels North Central Regional Association of Assessing Officers 34th Annual Conference Coralville, Iowa June 17, 2009 Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911

  2. Population Source: U.S. Bureau of the Census, International Data Base

  3. Liquid Fuel Usage Source: Energy Information Administration

  4. Crude Oil Prices Source: Energy Information Administration

  5. Crude Oil Futures Prices Source: NYMEX

  6. Iowa’s Alternative Energy Sources Ethanol: Over 40 plants in operation/construction Ranked 1st in ethanol production Biodiesel: Over 15 plants in operation/construction Wind: Ranked 3rd in wind energy production Ranked 1st in ratio of wind/total energy

  7. Ethanol Plant Locations Source: Ethanol Producer Magazine

  8. Ethanol Production Based on the pace over the 1st 2 months of 2009 Sources: Renewable Fuels Association, Energy Information Administration

  9. Biodiesel Plant Locations Source: Biodiesel Magazine

  10. Biodiesel Production Based on the pace over the 1st 2 months of 2009 Sources: National Biodiesel Board, Energy Information Administration

  11. Ethanol Margins Source: ISU, CARD

  12. Biodiesel Margins Source: ISU, CARD

  13. U.S. Blended Motor Gasoline Consumption Source: Energy Information Administration

  14. Fuel Prices Rack prices in Omaha Source: Nebraska Energy Office

  15. Fuel Futures Prices Sources: NYMEX and CBOT

  16. Ethanol Blending Advantage

  17. % of Gasoline Blended with Ethanol Source: Energy Information Administration

  18. Price Movements Since 2007

  19. Estimated Hog Returns Source: ISU Extension, Farrow-to-Finish

  20. Estimated Cattle Returns Source: ISU Extension, Yearling Steers

  21. Hog Returns vs. Corn Prices Sources: ISU Extension, Farrow-to-Finish; USDA-NASS

  22. Cattle Returns vs. Corn Prices Sources: ISU Extension, Yearling Steers; USDA-NASS

  23. Factors Leading to Higher Commodity Prices Source: USDA-ERS, Trostle, July 2008

  24. Commodity Price Indexes Source: International Financial Statistics

  25. Events in 2007 • Droughts: • Northern Europe, Ukraine, Russia, Northwest Africa, Turkey, Australia, and Argentina • Increased export taxes: • China, Argentina, Russia, Kazakhstan, Malaysia, and Indonesia • Export restrictions: • Argentina, Ukraine, India, Vietnam, Serbia, Egypt, Cambodia, Indonesia, and Kazakhstan

  26. The Food Dollar Source: USDA-ERS

  27. Farm to Retail Food Price Spread Source: USDA-ERS, 2001

  28. Changes in Food Price Indexes 1BLS estimated expenditure shares, December 2008 2Forecasts updated May 20, 2009 Sources: Bureau of Labor Statistics, USDA-ERS

  29. Renewable Fuels Standard (RFS)

  30. Renewable Fuels Standard (RFS) 50% GHG Emission Reduction 60% GHG Emission Reduction 20% GHG Emission Reduction If construction started after Dec. 2007

  31. Countries Pursuing Biofuels • US • Brazil • Argentina • Colombia • Paraguay • Canada • Uruguay • Mexico • Thailand • New Zealand • South Africa • South Korea • Philippines • Indonesia • Pakistan • China • India • Malaysia • Australia • Japan • EU • Russia • Not a complete list

  32. Government Policies for Biofuels Ethanol • Ad valorem tariff of 2.5% • Import duty of $0.54 per gallon • Volumetric Ethanol Excise Tax Credit (VEETC) • $0.45 per gallon starting in 2009 Biodiesel • Biodiesel Mixture Excise Tax Credit • $1.00/0.50 per gallon Cellulosic • Cellulosic Biofuel Producer Tax Credit • $1.01 per gallon

  33. Cellulosic Biofuel Waiver Provisions • EPA (in consultation with DOE and USDA) can reduce the cellulosic biofuel mandated volume • Waiver trigger based on EIA projections • EPA will also sell cellulosic biofuel credits • Price set at Max($0.25 per gallon, $3.00 – Average wholesale gasoline price per gallon)

  34. Components of 2007 Energy Act • Up to $500 million per year in grants for the production of advanced biofuels (with at least an 80% reduction in GHG emissions relative to current fuels) • Up to $25 million per year in grants for R&D for biofuel production in states with low rates of biofuel production

  35. Energy in the Farm Bill • Grants for the development and construction of advanced biofuel biorefineries, up to 30% of the cost of the project • Loans for the same, up to $250 million or 80% of the cost per project

  36. Biomass Crop Assistance Program • To support production of crops for bioenergy and assist with collection, harvest, storage, and transportation of biomass to conversion facilities • Excluded materials • Farm program crops, animal byproducts, food waste, yard waste, algae

  37. Biomass Crop Assistance Program • Requires producers and conversion facilities to submit proposal establishing a project area • Establishes contracts between USDA, producers, and facilities to promote project • Sets up establishment payments for perennial crops and annual payment to biomass producers

  38. Biomass Crop Assistance Program • Payments are also authorized for biomass collection, harvest, storage, and transportation • Matching payments • $1 for each $1 per ton paid by conversion facility, up to $45 per ton, for 2 years

  39. Draft Lifecycle GHG Reductions Source: EPA, May 2009

  40. CARB Fuel Carbon Values Source: CA Air Resources Board, April 2009

  41. Hay Acreage Source: USDA-NASS

  42. CRP Expiring Contracts April 2009: 33.712 million acres Cap in 2010: 32 million acres Source: USDA-FSA

  43. Land Availability Data from Census of Agriculture 1997 2002 2007 Land in farms 955 938 922 Total cropland 445 434 406 Harvested cropland 319 303 310 Cropland in pasture 66 61 36 Other cropland 60 71 61 Total woodland 77 76 75 Pastureland (not crop) 398 395 409 Land in other uses 34 33 32 Source: USDA-NASS

  44. Renewable Fuels Standard (RFS)

  45. Currently Available Biomass Source: NREL, 2005

  46. Spectrum of Biofuels • Grain/Sugar Ethanol • Biodiesel • Green Gasoline/Diesel • Cellulosic Ethanol • Butanol • Pyrolysis Liquids • Syngas Liquids Most Mature Least Mature Source: NREL, 2006

  47. Biofuel Challenges • Production costs • Conversion, ag. production, etc. • Infrastructure barriers • Developing supply chain for biomass • Continued development of biofuel distribution system • Growth in biofuel-compatible vehicles

  48. Biofuel Challenges • Investment risks • Higher capital costs, emerging technology • Biomass production shifts • Inducing farmers to produce new crops • Consumer understanding • About the fuels • About the tradeoffs

  49. Thank you for your time!Any questions?My web site:http://www.econ.iastate.edu/faculty/hart/

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