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 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? 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

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

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

Crude Prices are Critical We used approximately $65 crude in the baseline and $75 crude in the high oil scenario As of October 16 th 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

Baseline Wholesale Gasoline and Ethanol Prices

Baseline Projected U.S. Ethanol Production

Baseline Projected U.S. Corn Planted Area

Baseline Projected Utilization of Corn

Baseline Projected U.S. Corn and Soybean Prices

Baseline Brazilian and Argentine Soybean Planted Area

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

Corn Market Baseline (2016)Long-RunPercentage Change Corn Price ($/bushel) % Corn Area (million acres) % Corn Production (million bushels) 14,75018, % Corn Use in Ethanol (million bushels) 5,04610, % Corn Feed Use (million bushels) 5,7464, % Corn Exports (million bushels) 2, %

Ethanol and Distillers Grains Markets Baseline (2016)Long-RunPercentage Change Ethanol Production from Corn (million gallons) 14,56829, % Ethanol Consumption (million gallons) 15,24429, % Ethanol Wholesale Price (US$/gallon) % Ethanol Net Imports (million gallons) % Distillers Grains Production (thousand tons) 39,75887, Distillers Grains Price (US$/ton) % Distillers Grains Domestic Use (thousand tons) 37,28063, %

Livestock Market Baseline (2016)Long-RunPercentage Change Beef Retail Price (US$/pound) % Pork Retail Price (US$/pound) % Broiler Retail Price (US¢/pound) % Turkey Retail Price (US¢/pound) % Egg Retail Price (US¢/dozen) % Milk Retail Price (US$/cwt) %

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

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%

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

Why does corn ethanol dominate?

Well to Wheels petroleum energy use of various fuels in Btus per million btus of fuel produced and used, and associated reduction in fossil energy consumption relative to gasoline or diesel. FuelTechnology/ Feedstock WTPPTWWTWReduction Btu/mbtu vs. gas./die sel GasolineCurrent 110,0001,000,0001,110,000 - Future 110,0001,000,0001,110,000 - Avg. EtoHCurrent 100, % Future 90, % New EtoHNG-DDGS 85, % NG-WDGS 85, % Coal-DDGS 90, % Coal-WDGS 90, % Cellulosic EtoHSwitchgrass 70, % Corn Stover* 66, % Diesel** 112,196 1,000,000 1,112,196 - BiodieselSoybean oil** 129, %

GHG emissions of various fuels in CO2-equivalent grams per million btus of fuel produced and used, and percent reduction compared to current gasoline FuelTechnology/ Feedstock WTWEmission reduction GasolineCurrent 99,130- Future 99,130- Avg. EtoHCurrent 80, % Future 78, % New EtoHNG-DDGS 71, % NG-WDGS 60, % Coal-DDGS 101, % Coal-WDGS 80, % Cellulosic EtoHSwitchgrass 14, % Corn Stover* 13, % Diesel** 100,302 - BiodieselSoybean oil** 40, %

Per gallon compensation needed to provide equivalent subsidies relative to current for based ethanol Fuel Technology/ feedstock Fossil Energy Petroleum Energy GHG Avg. EtoHCurrent Coal-DDGS Cellulosic EtoHSwitchgrass Corn Stover Sugarcane EtoHSugarcane** BiodieselSoybean oil

Current subsidies for the externalities provided by biofuels FuelTechnology/ Feedstock Fossil Energy Reduction Petroleum Energy Reduction GHG Emission Reduction $/mbtu $/ton Avg. EtoHCurrent Future New EtoHNG-DDGS NG-WDGS Coal-DDGS * Coal- WDGS Cellulosic EtoH Switchgrass Corn Stover BiodieselSoybean oil

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

Thank You