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Examining the Rapid Expansion of Biofuels in the United States

Examining the Rapid Expansion of Biofuels in the United States. Presented by Jerry Norton Grains Analyst World Agricultural Outlook Board U.S. Department of Agriculture Presented at The Impact of Biofuels on Commodity Markets Renaissance Hotel, Brussels, Belgium September 26, 2007.

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Examining the Rapid Expansion of Biofuels in the United States

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  1. Examining the Rapid Expansion of Biofuels in the United States Presented by Jerry Norton Grains Analyst World Agricultural Outlook Board U.S. Department of Agriculture Presented at The Impact of Biofuels on Commodity Markets Renaissance Hotel, Brussels, Belgium September 26, 2007

  2. Expanding U.S. Biofuels Demand • American Jobs Creation Act of 2004 • Signed into law October 22, 2004 • Energy Policy Act of 2005 • Signed into law August 8, 2005 • MTBE Phase-out • May 2006 • Rising petroleum prices • 2004 through 2006 The Impact of Biofuels on Commodity Markets

  3. American Jobs Creation Act of 2004 • Volumetric Ethanol Excise Tax Credit • Shifted ethanol excise exemption to a tax credit • Set the ethanol blender credit at $0.51 per gallon through 2010 • Eliminated blend level restrictions • Tax code had limited eligible ethanol blends to 5.7, 7.7, and 10 percent for the excise exemption • Biodiesel Blender Tax Credit • $1.00 per gallon (virgin agricultural oils and fats) • $0.50 per gallon on recycled feed stock • Credit available through 2006 The Impact of Biofuels on Commodity Markets

  4. Energy Policy Act of 2005 • Renewable Fuels Standards (RFS) • Mandated U.S. renewable fuels use • Started at 4 billion gallons in 2006 • Set at 4.7 billion gallons for 2007 • Goes to 7.5 billion gallons in 2012 • Biodiesel Blender Tax Credit • Extended through 2008 • Repealed gasoline oxygenate requirement • Effective May 2006 • Did not address MTBE liability issue The Impact of Biofuels on Commodity Markets

  5. MTBE Phase-out • Methyl tertiary butyl ether (MTBE) was blended into U.S. fuels for 20 years • Initially used in 1970’s to boost octane following the elimination of leaded gasoline • Used since 1995 as an oxygenate in reformulated gasoline (RFG) required under the Clean Air Act • MTBE ground water pollution • Soluble in water and does not easily biodegrade • Leaked from faulty underground storage and spills • Found in ground water, particularly California and northeastern United States The Impact of Biofuels on Commodity Markets

  6. MTBE Phase-out, cont. • EPA of 2005 provided no liability relief • Eliminated RFG oxygenate requirement • Refiners and blenders no longer required to use an oxygenate such as MTBE • Most major refiners phased out of MTBE to avoid future liability starting in May 2006 • Major RFG states (CA and NY) had already banned MTBE use starting as early as 2004 • Ethanol replaces MTBE • As an octane enhancer • As a volume extender The Impact of Biofuels on Commodity Markets

  7. Rising Petroleum Prices May 2006 Aug 2005 Oct 2004 MTBE Phase-out Energy Policy Act of 2005 JOBS Act of 2004 Note: Petroleum prices shown are monthly averages for the New York Harbor cash price. The Impact of Biofuels on Commodity Markets

  8. Rising Gasoline and Ethanol Prices May 2006 Aug 2005 Oct 2004 MTBE Phase-out Energy Policy Act of 2005 JOBS Act of 2004 Note: Ethanol and regular gasoline prices are the monthly Nebraska rack (wholesale terminal) prices. The Impact of Biofuels on Commodity Markets

  9. Expanding U.S. Biofuels Production • Incentives and mandates for use • Rising petroleum and biofuels prices • Relative low feedstock costs (through fall 2006) • Wide margins for producers • Short payback periods on investments The Impact of Biofuels on Commodity Markets

  10. Ethanol Production Capacity • Existing capacity reported at 6.8 bil. gal./yr. (bgy) • 129 operating plants • Renewable Fuels Association (RFA) September 13, 2007 • Last year capacity reported at 4.9 bgy • 103 operating plants • RFA September 18, 2006 • Currently 76 plants under construction • 9 existing plant expansions underway • Will add 6.6 bgy of capacity over next 18-24 months • Capacity expected to reach 13.4 bgy in 2009 • Surpassing 2012 RFS 7.5-bgy mandate fall 2007 The Impact of Biofuels on Commodity Markets

  11. U.S. Ethanol Production Capacity Annual Capacity Shown by Month 12 7 5 Source: Renewable Fuels Association and USDA. The Impact of Biofuels on Commodity Markets

  12. U.S. Ethanol Plants The Impact of Biofuels on Commodity Markets

  13. U.S. Biofuels Production 2007 Note: Based on projected 2007 calendar year ethanol and biodiesel production. The Impact of Biofuels on Commodity Markets

  14. Biodiesel Production Capacity • Existing capacity reported at 1.85 bgy • 165 operating plants • National Biodiesel Board (NBB) September 7, 2007 • Last year capacity reported at 0.395 bgy • 65 operating plants • NBB May 1, 2006 • Currently 80 companies with plants under construction and 4 expansions • Capacity will reach 3.22 bgy when completed The Impact of Biofuels on Commodity Markets

  15. U.S. Biodiesel Plants The Impact of Biofuels on Commodity Markets

  16. U.S. Biodiesel Plants under Construction The Impact of Biofuels on Commodity Markets

  17. U.S. Biodiesel Production Capacity 3.22 2.56 1.11 The Impact of Biofuels on Commodity Markets

  18. U.S. Corn Production Note: 2007 production is a forecast from the Crop Production report, September 12, 2007. The Impact of Biofuels on Commodity Markets

  19. U.S. Corn Planted Area Note: 2007 planted area is an estimate from the Acreage report, June 29, 2007. The Impact of Biofuels on Commodity Markets

  20. Rising Corn Prices December 2007 Corn Futures $4.28 2/22/07 $2.84 9/15/06 Source: Chicago Board of Trade settlement prices. The Impact of Biofuels on Commodity Markets

  21. Increased Incentives for Corn Soybean Nov. 07 Futures / Corn Dec. Futures 07 Soybean prices high relative to corn 2.74 9/14/07 Corn prices high relative to soybeans 1.91 1/26/07 Source: Chicago Board of Trade settlement prices. The Impact of Biofuels on Commodity Markets

  22. Pre-Planting Net Returns Outlook The Impact of Biofuels on Commodity Markets

  23. U.S. Corn Used for Ethanol Note: 2006/07 through 2010/11 are projections from the September 12, 2007, World Agricultural Supply and Demand Estimates report and the February 2007 USDA Agricultural Projections to 2016. The Impact of Biofuels on Commodity Markets

  24. U.S. Domestic Corn Use Note: 2006/07 and 2007/08 are projections from the World Agricultural Supply and Demand Estimates report, September 12, 2007. The Impact of Biofuels on Commodity Markets

  25. U.S. Corn Exports Note: 2006/07 and 2007/08 are projections from the World Agricultural Supply and Demand Estimates report, September 12, 2007. The Impact of Biofuels on Commodity Markets

  26. U.S. Farm Prices and Stocks/Use for Corn $3.10 mid-point of projected range 13.1% Note: 2006/07 and 2007/08 are projections from the World Agricultural Supply and Demand Estimates report, September 12, 2007. The Impact of Biofuels on Commodity Markets

  27. U.S. Soybean Planted Area Note: 2007 planted area is an estimate from the Acreage report, June 29, 2007. The Impact of Biofuels on Commodity Markets

  28. U.S. Soybean Production Note: 2007 production is a forecast from the Crop Production report, September 12, 2007. The Impact of Biofuels on Commodity Markets

  29. U.S. Soybean Oil Stocks Note: 2006/07 and 2007/08 are projections from the World Agricultural Supply and Demand Estimates report, September 12, 2007. The Impact of Biofuels on Commodity Markets

  30. Rising Soybean Oil Prices December 2007 Soybean Oil Futures $0.40 9/14/07 $0.26 10/2/06 Source: Chicago Board of Trade settlement prices. The Impact of Biofuels on Commodity Markets

  31. U.S. Soybean Oil Used for Biodiesel Note: 2006/07 through 2010/11 are projections from the September 12, 2007, World Agricultural Supply and Demand Estimates report and the February 2007 USDA Agricultural Projections to 2016. The Impact of Biofuels on Commodity Markets

  32. EU Industrial Use of Vegetable Oil 7% of global veg. oil production Note: 2006/07 and 2007/08 are projections from the World Agricultural Supply and Demand Estimates report, September 12, 2007. The Impact of Biofuels on Commodity Markets

  33. Need to Expand Ethanol Use • “Blending wall” concerns • Ethanol blending above the RFS mandates • RFS for 2007 is 4.7 billion gallons • Production capacity approaching 7 billion gallons • Reaching beyond reformulated markets • MTBE phase-out created a 4.2 bgy market • State-level mandates and incentives for blending • Flex-fuel vehicles and E85 demand The Impact of Biofuels on Commodity Markets

  34. U.S. Reformulated Gasoline Markets Source: U.S. Environmental Protection Agency, www.epa.gov/otaq/rfg/whereyoulive.htm. The Impact of Biofuels on Commodity Markets

  35. The Ethanol Puzzle • How will market absorb additional ethanol? • 13.4 billion gallons of annual capacity in 2009 • At what ethanol price? • Recent declines in ethanol prices • Larger supplies must price themselves into new markets The Impact of Biofuels on Commodity Markets

  36. Conclusions • Growing ethanol production capacity will demand more U.S. corn acres. • Much of this will come from soybeans. • Commodity prices will reflect need for acres and production. • Tight world grain and oilseed supplies will add to the market’s challenge. The Impact of Biofuels on Commodity Markets

  37. The end Thank you! The Impact of Biofuels on Commodity Markets

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