examining the rapid expansion of biofuels in the united states

Examining the Rapid Expansion of Biofuels in the

United StatesPresented by

Jerry Norton

Grains AnalystWorld Agricultural Outlook BoardU.S. Department of Agriculture

Presented at

The Impact of Biofuels on Commodity MarketsRenaissance Hotel, Brussels, Belgium

September 26, 2007

Sept. 26, 2007 The Impact of Biofuels on Commodity Markets 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


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


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• Repealed gasoline oxygenate requirement• Effective May 2006• Did not address MTBE liability issue


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


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


Rising Petroleum Prices

30

35

40

45

50

55

60

65

70

75

80

Jan 2004 Jul Jan 2005 Jul Jan 2006 Jul Jan 2007 Jul

$/barrel

Oct 2004

Aug 2005

May 2006

JOBS Act of 2004

Energy Policy Act of 2005

MTBE Phase-out

Note: Petroleum prices shown are monthly averages for the New York Harbor cash price.


Rising Gasoline and Ethanol Prices

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Jan 2004 Jul Jan 2005 Jul Jan 2006 Jul Jan 2007 Jul

$/gallon Ethanol Unleaded Gasoline

Oct 2004

Aug 2005

May 2006

JOBS Act of 2004

Energy Policy Act of 2005

MTBE Phase-out

Note: Ethanol and regular gasoline prices are the monthly Nebraska rack (wholesale terminal) prices.


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


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


U.S. Ethanol Production Capacity

0

2

4

6

8

10

12

14

Sep-06 Mar-07 Sep-07 Mar-08 Sep-08

Billion gallons

57

12

Annual Capacity Shown by Month

Source: Renewable Fuels Association and USDA.


U.S. Ethanol Plants


U.S. Biofuels Production 2007

Ethanol94%

Biodiesel6%

Note: Based on projected 2007 calendar year ethanol and biodiesel production.


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


U.S. Biodiesel Plants


U.S. Biodiesel Plants under Construction


U.S. Biodiesel Production Capacity

0.40

0.71

1.70

1.37

1.850.860.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

May 2006 January 2007 September 2007

Billion gallons

Existing Capacity Expansion/ Under Construction

Forecast 2007/08

production1.11

2.56

3.22


U.S. Corn Production

6

7

8

9

10

11

12

13

14

1995 1997 1999 2001 2003 2005 2007F

Billion bushels

Note: 2007 production is a forecast from the Crop Production report, September 12, 2007.


U.S. Corn Planted Area

65

70

75

80

85

90

95

1995 1997 1999 2001 2003 2005 2007F

Million acres

Note: 2007 planted area is an estimate from the Acreage report, June 29, 2007.


Rising Corn Prices

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

3/1/2005 8/2/2005 1/3/2006 6/6/2006 11/7/2006 4/10/2007 9/11/2007

$/bushel

Source: Chicago Board of Trade settlement prices.

December 2007 Corn Futures

$2.84 9/15/06

$4.28 2/22/07


Increased Incentives for Corn

1.80

2.00

2.20

2.40

2.60

2.80

1/3/2006 4/16/2006 7/28/2006 11/8/2006 2/19/2007 6/2/2007 9/13/2007

Ratio


Soybean Nov. 07 Futures / Corn Dec. Futures 07

1.91 1/26/07

Corn prices high relative to soybeans

Soybean prices high relative to corn

2.74 9/14/07


Pre-Planting Net Returns Outlook

0

50

100

150

200

250

300

350

400

Corn Soybeans Wheat Rice Upland Cotton

$/acre Spring 2006 Spring 2007


U.S. Corn Used for Ethanol

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1995/96 1998/99 2001/02 2004/05 2007/08F 2010/11F

Billion bushels

0

5

10

15

20

25

30

35

PercentEthanol corn use Ethanol share of corn use

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.


U.S. Domestic Corn Use

0

2

4

6

8

10

12

1995/96 1997/98 1999/00 2001/02 2003/04 2005/06 2007/08F

Billion bushels

Feed and residual Ethanol Other food, seed, and industrial

Note: 2006/07 and 2007/08 are projections from the World Agricultural Supply and Demand Estimates report, September 12, 2007.


U.S. Corn Exports

1.00

1.25

1.50

1.75

2.00

2.25

2.50

1995/96 1997/98 1999/00 2001/02 2003/04 2005/06 2007/08F

Billion bushels



U.S. Farm Prices and Stocks/Use for Corn

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

1995/96 1998/99 2001/02 2004/05 2007/08F

$/bushel

0

5

10

15

20

25PercentFarm Price Stocks/Use


$3.10 mid-point of projected

range

13.1%


U.S. Soybean Planted Area

55

60

65

70

75

80

1995 1997 1999 2001 2003 2005 2007F

Million acres

Note: 2007 planted area is an estimate from the Acreage report, June 29, 2007.


U.S. Soybean Production

1.50

2.00

2.50

3.00

3.50

1995 1997 1999 2001 2003 2005 2007F

Billion bushels

Note: 2007 production is a forecast from the Crop Production report, September 12, 2007.


U.S. Soybean Oil Stocks

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1995/96 1997/98 1999/00 2001/02 2003/04 2005/06 2007/08F

Million tons

Record stocks in 2005/06



Rising Soybean Oil Prices

20

22

24

26

28

30

32

34

36

38

40

42

3/1/2005 8/2/2005 1/3/2006 6/6/2006 11/7/2006 4/10/2007 9/11/2007

Cents/pound


December 2007 Soybean Oil Futures

$0.26 10/2/06

$0.40 9/14/07


U.S. Soybean Oil Used for Biodiesel

0

100

200

300

400

500

600

700

800

2000/01 2002/03 2004/05 2006/07 2008/09F 2010/11F

Million gallons

0

5

10

15

20

25

PercentBiodiesel production Biodiesel share of soybean oil use

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.


EU Industrial Use of Vegetable Oil

0

2

4

6

8

10

12

2001/02 2002/03 2003/04 2004/05 2005/06 2006/07F 2007/08F

Million tons Rapeseed Oil Soybean Oil Palm Oil Other Oil


7% of global veg. oil production


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


U.S. Reformulated Gasoline Markets

Source: U.S. Environmental Protection Agency, www.epa.gov/otaq/rfg/whereyoulive.htm.


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


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.


Thank you!

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examining the rapid expansion of biofuels in the united states

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