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National Institute for Animal Agriculture

National Institute for Animal Agriculture. Fueling Ethanol: Implications for Livestock Producers. Introduction. Credit where credit is due Dr. Ron Plain, University of Missouri Drs. Dermot Hayes and Bruce Babcock and colleagues, ISU-CARD

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National Institute for Animal Agriculture

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  1. National Institute for Animal Agriculture Fueling Ethanol: Implications for Livestock Producers

  2. Introduction • Credit where credit is due • Dr. Ron Plain, University of Missouri • Drs. Dermot Hayes and Bruce Babcock and colleagues, ISU-CARD • If gasoline prices remain high, ethanol production will drive the biggest change in U.S. agriculture since: • The introduction of soybeans? • The tractor?

  3. Why is Ethanol Production is Increasing? • Ethanol production is profitable

  4. Huge profits for ethanol plants in 2006

  5. Why is Ethanol Production Increasing? • Ethanol production is profitable • Production economics • High cost of gasoline and crude oil

  6. U.S. Retail Gasoline Prices All Grades, All Formulations, 1996-2006 Source: U.S. Energy Information Administration

  7. Crude Oil Prices 1997-2006 Source: NYMEX

  8. Crude Oil Futures Prices, 2007-2012 Source: NYMEX closes on 3/02/07, 3/30/07

  9. Why is Ethanol Production is Increasing? • Ethanol production is profitable • Production economics • High cost of crude oil • Cheap corn

  10. U.S. Average Corn Price, 1908-2006 1942-1972 30 years Avg $1.26 1908-1942 35 years Avg $0.78 1973-2006 34 years Avg $2.37 Source: USDA/NASS

  11. U.S. Average Corn Price, 1908-2006 1942-1972 30 years Avg $1.26 What’s the next price plateau for corn price? 1908-1942 35 years Avg $0.78 1973-2006 34 years Avg $2.37 The 1940s step: 62% The 1970s step: 88% A 75% step will take corn to $4.15/bu Source: USDA/NASS

  12. Ethanol: A corn product for a long time to come Source: DOE/EIA, Annual Energy Review, February 2006

  13. Ethanol Plant Economics and Profitability • 2 major operating expense items • Corn • Natural gas / coal • 2 major sources of income • Ethanol • DGS – wet or dry

  14. Northwest Iowa Prices, 2006-07 . . . DDGS has begun to closely track corn Source: LMIC

  15. Cost of Dry Milling Ethanol 2005 2007 • Corn ($1.95) $0.7074 $1.4545 • Natural gas 0.2107 0.2300 • Electricity 0.0581 0.0600 • Enzymes & yeast 0.0465 0.0500 • Chemicals & Denaturant 0.0897 0.0900 • Labor & administration 0.1000 0.1100 • Maintenance 0.0616 0.0620 • Fixed costs 0.1200 0.1200 • Other costs 0.0145 0.0150 • TOTAL COST 1.4085 2.1915 • Less DDG & CO2 credit 0.22340.4400 • Total cost per gallon $1.1851 $1.7500 Ethanol Price $1.80 $2.25 Source: USDA/OCE

  16. DTN Ethanol Price Forecast

  17. Ethanol & Unleaded Gasoline Avg. Rack Price – FOB Omaha Forecast Source: FAPRI

  18. Why is Ethanol Production is Increasing? • Ethanol production is profitable • Production economics • High cost of crude oil • Cheap corn • Public policy • Subsidies

  19. Public Policy Timeline

  20. Subsidies for Ethanol Production • 51-cent per gallon federal excise tax credit • Amounts to $0.051/gal. for E-10 gasoline • $0.43 cents/gallon for E-85 • Various state incentives • Missouri has producer tax credits -- 20 cents on first 12.5 million gallons • Iowa and Illinois state excise tax exemptions • 1 to 1.5 cents per gallon • Iowa income tax credits for retailers selling more than 60 percent ethanol-blended fuel

  21. Why is Ethanol Production is Increasing? • Ethanol production is profitable • Production economics • High cost of crude oil • Cheap corn • Public policy • Usage Subsidies • Mandated use • 7.5 bil. gallons of renewable fuels by 2012 • Proposed increase to 15 or even 30 bil.

  22. Ethanol Production & Renewable Fuels Mandate Source: FAPRI

  23. The mandate has not effect at present Source: FAPRI

  24. Why is Ethanol Production is Increasing? • Ethanol production is profitable • Production economics • High cost of crude oil • Cheap corn • Public policy • Usage Subsidies • Mandated use • Phase-out of MTBE as oxygenate

  25. Shortage of Ethanol in 2006 • Concerns over air pollution led to require-ments that gasoline contain an oxygenate in certain areas at certain times • MTBE (Methyl Tertiary Butyl Ether) and Ethanol are the two practical options • MTBE usage is being rapidly phased out because of potential liability relating to water quality

  26. Source: Terry Francl, American Farm Bureau

  27. MTBE withdrawal was big profit driver in ‘06

  28. World Ethanol Production, 2005 Source: Renewable Fuels Association

  29. 2005 Ethanol Variable Production Costs • Brazil sugarcane $0.81/gallon • U.S. corn – wet mill $1.03/gallon • U.S. corn – dry mill $1.05/gallon • U.S. molasses $1.27/gallon • U.S. sugar beets $2.35/gallon • U.S. sugarcane $2.40/gallon • E.U. sugar beets $2.89/gallon • U.S. raw sugar $3.48/gallon • U.S. refined sugar $3.97/gallon Source: USDA/OCE

  30. U.S. Ethanol Production, 1980-06 Source: Renewable Fuels Association

  31. Ethanol plants have exploded!

  32. Will there be any “available” corn in Iowa?

  33. Ethanol Plant Statistics, 3/13/07 • 114 plants operating in 21 states with capacity to produce 5.6334 billion gallons of ethanol per year (49 plants farmer owned) • 80 new plants under construction and 7 expansions with capacity to produce 6.3949 billion gallons of ethanol per year • ~100 plants being planned Source: Renewable Fuels Association

  34. Corn Milled for Ethanol Source: USDA/OCE

  35. U.S. Corn Production, 1970-06

  36. Forecast Corn Production, 2006-16 Source: FAPRI November 2006 Forecast

  37. ISU/CARD research project – Hayes, et. al. • Counted operating plants and those under construction -- ethanol capacity thru 2009. • Used economic models to determine subsequent capacity increases (to 2016) based on ethanol returns over costs • Projected the response to increased U.S. ethanol production by: • U.S. and foreign crop and livestock production • World commodity prices and retail prices

  38. ISU/CARD Scenarios • Base scenario: Low oil prices and an E 85 bottleneck • Scenario 2: $10 higher oil prices and an E 85 bottleneck • Scenario 3: $10 higher oil prices and no E 85 bottleneck • No need to run a lower oil price scenario • Base case stops new ethanol construction • Existing plants will stay in operation but may change owners

  39. Key Determinants of Impacts • Crude oil prices • Low oil price was $5 lower than the 2/27 NYMEX close • High oil price was $5 higher than 2/27 close • Policy incentives -- kept $0.51/gal. blenders tax credit and $0.54/gal. import tariff • Demand for E85 • Made it responsive to the price of ethanol but did not change policies (mainly state) regarding mandated E 10 use

  40. The Concept of Equilibrium • CARD researchers assumed that individuals are self interested and do not leave money on the table – will arrive at equilibriums • Examples of disequilibria: • If $2 worth of corn produces $6 worth of ethanol • If livestock producers are losing money because of high feed costs • If a Midwestern farmers net $200 from selling corn and $100 from soybeans

  41. Base Case Results – Low oil, E-85 bottleneck • Ethanol production stops expanding after existing construction is completed • Corn yields and acres grow and minimize ethanol’s price effect toward the end of the study period • Beef producers (here and abroad) absorb most of the DDGs • DDGS prices remain above $100 per ton -- just enough below corn prices to enter ruminant rations and NOT enter pig diets • Using DDGs for cattle alleviates downward pressure on soybean meal prices

  42. Returns: As expected in the LR . . . . . . VC makes plant closure unlikely

  43. Ethanol production levels out after 2010

  44. Corn acres levels also – then falls at the end

  45. Corn price crunch through 2010

  46. Feed, Exports fall thru ’10, then grow at end

  47. Beef cattle use the DDGS

  48. DDGS will always (?) be better for cattle • DDGS provide an advantage to cattle, dairy • Assumptions: • Corn $2.00 / bu • SBM $175.00 / ton • Urea $360.00 / ton • Non-ruminant diets corn/SBM • Ruminant diets typical diets with competing by-products. Source: Tilstra, Land O’ Lakes

  49. Impacts of Higher Crude • Ethanol plant margins increase -- New incentive to invest in added capacity • Major hurdle will be encountered at 14 – 15 billion gallons due to E-10 saturation • Relatively lower ethanol prices will eventually encourage increase in flex-fuel cars • Another 8 billion gal. – total of 22 billion gal. • By 2015 • No incentive to grow or exit the ethanol industry • Ethanol will be priced below energy value

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