socio-economic impacts of u.s. ethanol bruce a. babcock center for agricultural and rural...
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Socio-Economic Impacts of U.S. Ethanol
Bruce A. Babcock
Center for Agricultural and Rural DevelopmentIowa State University
Overview
• Broad overview of U.S. and world biofuels
• Economics of the U.S. ethanol industry
• Impacts on grain prices and feed costs in the long term and short term
• What is accomplished by corn ethanol?
Number of U.S. Ethanol Plants(Jan 1)
0
20
40
60
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120
140
160
2000 2001 2002 2003 2004 2005 2006 2007 2008
U.S. Ethanol Industry Capacity on January 1
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1000
2000
3000
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7000
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9000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Mil
lion
Gal
lons
U.S. Ethanol Production (% of U.S. Gasoline Consumption)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Corn Utilized for Ethanol (Percent of U.S. Corn Crop)
0%
5%
10%
15%
20%
25%
30%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Gross bushels
Net bushels
Subsidies and Protection
• $0.51 per gallon tax credit to blenders increase the WTP for corn by $1.47 per bushel
• $0.54 per gallon import tariff on most Brazilian ethanol
• Various tax credits for construction
U.S. Ethanol Production With New EISA Mandates
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Mil
lion
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Mandated corn ethanol use
Corn Utilized for Ethanol (Assumes 1.5% increase in annual production from 2007
base)
0%
5%
10%
15%
20%
25%
30%
35%
40%
1995 2000 2005 2010 2015 2020 2025
Gross bushels
Net bushels
Average Share of World Exports 2002 through 2007
0%
10%
20%
30%
40%
50%
60%
70%
UnitedStates
Argentina Brazil Canada Australia Russia EuropeanUnion
Ukraine SouthAfrica
Wheat
Coarse Grain
Soy
Three Indicators of World Food Demand
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1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
1966
= 1
00 PopulationCalorieFeed Grain
World Crop Area
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Wheat Coarse Grains Rice Oilseeds
mil
lion
ha
Biofuels Impacts
• Feed Grains: 60 billion liters of ethanol represents 12% of world production
• Oilseeds: 15 billion liters of biodiesel represents 11% of world production of vegetable oil
• Sugarcane: 30 billion liters of ethanol represents 6% of oilseeds land potentially displaced
Market Price Impacts
• Assuming no change in aggregate production– 17% reduction in available vegetable oil would
increase price by 84%
– 12% reduction in feed grain supplies would increase price by 60%
Commodity Economics
• Profits tend towards zero– When profits are positive, expansion occurs,
output price goes down, profits go down– When profits are negative, contraction occurs,
output price goes up, profits go up
Biofuels Commodity Economics
• Profits tend towards zero– When profits are positive, expansion occurs,
feedstock price goes up, profits go down– When profits are negative, contraction occurs,
feedstock price goes down, profits go up
So key is to determine the size of the ethanol industry that increases corn prices enough to drive industry profits towards zero.
U.S. Corn Supply Curve
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10,000 11,000 12,000 13,000 14,000 15,000 16,000
U.S. Corn Production million bushels)
$/b
u
Ethanol Supply as Determined by Available Corn
0.00
1.00
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8.00
0 5 10 15 20 25 30 35 40
U.S.Ethanol Production (billion gallons)
$/b
u
Demand for Ethanol
• Substitute for gasoline
• Octane enhancer
• Component in Clean Air Act fuels
• Fuel to meet state and federal RFS
• Fuel to meet low carbon fuel requirements
Market Demand for Ethanol: Price of Gas = $2.50/gal
0.00
0.50
1.00
1.50
2.00
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0 5 10 15 20 25
Billion Gallons
$/ga
l
What is the Market Price of Corn with No Government Intervention? (Price of gas = $2.00)
0.00
2.00
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0 5 10 15 20 25
Billion Gallons
$/b
u
Supply of Ethanol
Demand for Ethanol
What is the Market Price of Corn with No Government Intervention? (Price of gas = $2.50)
0.00
2.00
4.00
6.00
8.00
10.00
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0 5 10 15 20 25
Billion Gallons
$/b
u
Supply of Ethanol
Demand for Ethanol
What is the Market Price of Corn with No Government Intervention? (Price of gas = $3.00)
0.00
2.00
4.00
6.00
8.00
10.00
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0 5 10 15 20 25
Billion Gallons
$/b
u
Supply of Ethanol
Demand for Ethanol
What is the Market Price of Corn with No Government Intervention? (Price of gas = $4.00)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
0 5 10 15 20 25
Billion Gallons
$/b
u
Supply of Ethanol
Demand for Ethanol
What is the Market Price of Corn with $0.51 per gallon Subsidy? (Price of gas = $2.00)
0.00
2.00
4.00
6.00
8.00
10.00
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0 5 10 15 20 25 30 35 40
Billion Gallons
$/b
u
Supply of Ethanol
Demand for Ethanol
What is the Market Price of Corn with $0.51 per gallon Subsidy? (Price of gas = $2.50)
0.00
2.00
4.00
6.00
8.00
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0 5 10 15 20 25 30 35 40
Billion Gallons
$/b
u
Supply of Ethanol
Demand for Ethanol
What is the Market Price of Corn with $0.51 per gallon Subsidy? (Price of gas = $3.00)
0.00
2.00
4.00
6.00
8.00
10.00
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0 5 10 15 20 25 30 35 40
Billion Gallons
$/b
u
Supply of Ethanol
Demand for Ethanol
Long Run Corn Prices With and Without Blenders Subsidy
3.00
3.50
4.00
4.50
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5.50
6.00
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50
Price of Gas
Pri
ce o
f C
orn
Short Run Outlook
• Calibrate 2008/09 corn demand curves to latest WASDE projections– food, feed, export, storage
• Supply equals Harvested Acreage * Harvested Yield Non-harvested Acreage = function of yield
• Stochastic Variables (parametric distributions)– Gasoline price (leads to random ethanol demand)– Planted acreage– Export demand– Corn yields– Ethanol industry capacity in 2008/09
Baseline Results (10 billion gallon mandate, $0.51 cent tax credit)
• Expected planted acres: 86 million
• Expected yield: 151 bu/ac
• Expected corn price: $5.60/bu
• Expected ethanol production: 10.3 bg (billion gallons)
Impact of Eliminating the Mandate (10 billion gallon mandate, $0.51 cent tax credit)
• Expected corn price: $5.34/bu (down 4.6%)
• Expected ethanol production: 9.3 bg (down 10%)
Removal of $0.51 Tax Credit
No Mandate• Expected corn price: $4.83/bu (down 14%)• Expected ethanol production: 7.25 bg (down 30%)
With Mandate• Expected corn price: $5.20/bu (down 2.2%)• Expected ethanol production: 7.25 bg (down 1%)• Probability that mandate binds: 71%• Average subsidy needed: $0.41 per gallon
Impact of a Drought (detrended 1988 corn yield of 113 bu/ac)
No Mandate• Expected corn price: $6.42/bu (up 29%)• Price volatility: 14.3% (down 12.9%)• Expected ethanol production: 3.2 bg (down 67%)
Impact of a Drought (detrended 1988 corn yield of 113 bu/ac)
With Mandate• Expected corn price: $7.99/bu (up 50%)• Expected ethanol production: 10.1 bg • Probability that mandate binds: 92.3%• Average additional subsidy needed when mandate
binds: $0.79 per gallon
Corn Ethanol Impacts
• Lowered gasoline prices
Reduction in Blended Fuel Prices from Increasing Annual Ethanol Volume by 10 Percent
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May-1990 Jan-1993 Oct-1995 Jul-1998 Apr-2001 Jan-2004 Oct-2006 Jul-2009
cen
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allo
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Corn Ethanol Accomplishments
• Lowered gasoline prices
• Opened infrastructure pathways to potential cellulosic biofuels
• Forced adjustments in North American livestock industry
• Made world realize that agricultural production should not be taken for granted