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The Evolving Economics of Ethanol, and the Outlook for Policy Change and Industry Investment

The Evolving Economics of Ethanol, and the Outlook for Policy Change and Industry Investment. Dermot Hayes Pioneer Hi-Bred Chair in Agribusiness Iowa State University Informa Economics December 13th Roundtable Meeting. Outline.

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The Evolving Economics of Ethanol, and the Outlook for Policy Change and Industry Investment

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  1. The Evolving Economics of Ethanol, and the Outlook for Policy Change and Industry Investment Dermot Hayes Pioneer Hi-Bred Chair in Agribusiness Iowa State University Informa Economics December 13th Roundtable Meeting

  2. Outline • Based on the CARD studies “Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets” and Implied Objectives of Biofuels Subsidies: What are we trying to accomplish? http://www.card.iastate.edu/publications/synopsis.aspx?id=1050 • The objective was to estimate: • how large the biofuels sector in the U.S. could become • the impact of the biofuels sector on crops markets, trade, and on livestock markets • the response of world agricultural markets • What the current level of subsidies suggests about our goals • How we should subsidize to achieve our goals

  3. Outline of the first study • After establishing a baseline, we ran a number of scenarios including: • high crude oil price with no bottleneck • high crude oil price with bottleneck • drought with an ethanol mandate • removal of CRP land for ethanol production • removal of tax credit and import tariff

  4. Baseline • All models are calibrated on 2006 historical data and projections cover the period between 2007 and 2016 (2007/08 and 2016/17 marketing year) • Ethanol production out to mid-2010 is based on actual construction; after that the number of ethanol plants responds to economic stimuli • Ethanol demand is modeled based on gasoline prices and ultimately on crude oil prices • Existing domestic and trade policies remain unchanged

  5. Crude Prices are Critical • We used approximately $65 crude in the baseline and $75 crude in the high oil scenario • As of October 16th the NYMEX light sweet crude was almost exactly at the $75 for 2015 delivery • We had anticipated the current ethanol bottleneck and expect retail ethanol to sell at or below its 0.66 energy value for the projection period

  6. Baseline Wholesale Gasoline and Ethanol Prices

  7. Baseline Projected U.S. Ethanol Production

  8. Baseline Projected U.S. Corn Planted Area

  9. Baseline Projected Utilization of Corn

  10. Baseline Projected U.S. Corn and Soybean Prices

  11. Baseline Brazilian and Argentine Soybean Planted Area

  12. Impact of Higher Crude Oil Price • Increased crude oil price by $10/barrel over the projection • Margins on ethanol plants increase • New incentive to invest in added capacity for ethanol production • Eventually, a new equilibrium reached where there is no incentive to invest in or exit the ethanol industry • Will demand for ethanol be enough? • E-10 market will saturate around 15 billion gallons • Drop in ethanol price will eventually encourage increase in demand for the flex-fuel cars

  13. Corn Market

  14. Ethanol and Distillers Grains Markets

  15. Livestock Market

  16. Impact of Short Crop Scenario • Drought in 2012 similar to 1988 • Regional yields of corn, soybeans and wheat changed from trend levels • Yields fell by 25% for corn, 18% for soybeans, 11% for wheat • Ethanol mandate for 2012 assumed to be 14.7 billion gallons

  17. Corn, Soybean and Ethanol Markets • Corn price increases by 42% above baseline levels • Soybean price rises by 22% • Corn exports and stock levels decline by more than 60% • Corn exports from South America, China, etc. fill part of the gap from decline in U.S. corn exports • The southern hemisphere gets the “message” in late July and produces enough to get the world through to the following year • Corn feed use declines by 15%

  18. Other Biofuels • Cellulosic ethanol is not competitive under current policy incentives • The costs associated with baling and hauling stover make it uncompetitive so long as corn is less that $4.80 per bushel • Switchgrass has an additional problem in that an acre of crop ground must be used, the higher the energy price the greater the value of this acre • Biodiesel does not make economic sense under current policy

  19. Why does corn ethanol dominate?

  20. Per gallon compensation needed to provide equivalent subsidies relative to current for based ethanol

  21. Bottom Line • Crude oil prices will drive ethanol production and ethanol production will drive corn and soybean prices • If crude stays strong, ethanol will continue to grow and will continue to displace animal feed and exports • Whenever corn falls below a breakeven price we will build ethanol facilities to drive it back to that price • We do not expect to see cheap DDGs over the long run • Cellulosic ethanol is not ready for commercialization • Biodiesel is an industry that is waiting for high crude oil prices and cheap soybean oil prices this will not happen so long as farmers can chose between corn and soybean production • The current subsidy structure appears designed to foster corn based ethanol

  22. Thank You

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