1. Ethanol Economics Mike Carnall 30 October 2007

2. Hopes Increased Use of Ethanol Will: Increased Use of Ethanol Will: Reduce dependence on imported oil Reduce dependence on imported oil Reduce gasoline prices Reduce gasoline prices Reduce long term GHG emissions Reduce long term GHG emissions

3. Fears & Doubts Increased Ethanol Production Will: Increased Ethanol Production Will: Dramatically increase food prices Dramatically increase food prices Corn will be diverted from food to ethanol Corn will be diverted from food to ethanol Cropland will be diverted from food crops to corn Cropland will be diverted from food crops to corn Do little to reduce the price of fuel/energy Do little to reduce the price of fuel/energy Capacity is small compared with fuel usage Capacity is small compared with fuel usage Net energy gain from ethanol is small Net energy gain from ethanol is small Result in little net decline in carbon emissions Result in little net decline in carbon emissions Energy yield of corn based ethanol is low Energy yield of corn based ethanol is low Increasing cropland and crop intensity will have adverse environmental effects Increasing cropland and crop intensity will have adverse environmental effects

4. Some Facts 2006 US Corn Acreage: 2006 US Corn Acreage: 78.3 million acres planted in 2006 2006 US Ethanol Production: 2006 US Ethanol Production: 4.89 Billion Gallons (20.0 percent of the corn crop) 4.89 Billion Gallons (20.0 percent of the corn crop) US Gasoline Consumption US Gasoline Consumption 140 Billion Gallons 140 Billion Gallons Ethanol as Percent of US Motor Gasoline Usage: Ethanol as Percent of US Motor Gasoline Usage: 3.5% volumetric 3.5% volumetric 2.3% energy basis 2.3% energy basis Ethanol has 66% of energy content of gasoline Ethanol has 66% of energy content of gasoline 1.4% net energy saved 1.4% net energy saved Energy replaced less energy required to produce ethanol Energy replaced less energy required to produce ethanol

5. Energy Balance Total Energy Required to Produce 1 Gallon of Ethanol (btu): 45,802 Total Energy Required to Produce 1 Gallon of Ethanol (btu): 45,802 Ethanol Energy Content (btu/gal): 75,700 Ethanol Energy Content (btu/gal): 75,700 Net: 30,528 Net: 30,528 Ratio: 1.666 Ratio: 1.666 Shapouri, USDA, 2004 - Includes credit for by products Shapouri, USDA, 2004 - Includes credit for by products This is a Controversial Number This is a Controversial Number

6. Inputs & Outputs 1.23 Billion Btu1.0 Billion Btu Gasoline 8,696 Gal 0.23 BBtu Processing etc. - 0.74 Billion Btu 1.0 Billion Btu Ethanol29 Acres + 13,210 Gal 0.61 BBtu0.13 BBtu Source: Michael Wang, Presentation at UIUC Sustainable Bioenergy Workshop April 14, 2006

7. Replacing a Gasoline Btu with an Ethanol Btu Reduces: Reduces: Fossil Energy Use by 40% Fossil Energy Use by 40% (1.23 btu/btu – 0.74 btu/btu) / 1.23 btu/btu (1.23 btu/btu – 0.74 btu/btu) / 1.23 btu/btu Petroleum Energy Use by 89% Petroleum Energy Use by 89% (1.23 btu/btu – 0.13 btu/btu) / 1.23 btu/btu (1.23 btu/btu – 0.13 btu/btu) / 1.23 btu/btu

8. Current Consumption Gasoline Gasoline 140 Billion Gallons Per Year 140 Billion Gallons Per Year Corn Acres Required to Replace Gasoline Energy with Ethanol Corn Acres Required to Replace Gasoline Energy with Ethanol 10% - 48 million acres 10% - 48 million acres 85% - 405 million acres 85% - 405 million acres 100% - 476 million acres 100% - 476 million acres Current Cropland Usage Current Cropland Usage 93 million acres of corn planted in 2007 93 million acres of corn planted in 2007 437 million acres total US arable land 437 million acres total US arable land

9. Million Acres Required to Replace: US Arable Land - 437 US Arable Land - 437 Energy based percentages 85% of Gasoline – 405 85% of Gasoline – 405 25% of Gasoline – 119 25% of Gasoline – 119 Planted in 2007 - 93 Planted in 2007 - 93 10% of Gasoline – 48 10% of Gasoline – 48

10. US Grain Crop Planting

11. Where to From Here? How Much Ethanol Will be Produced? How Much Ethanol Will be Produced? How High Will Corn Prices Go? How High Will Corn Prices Go? How Will Food Prices Be Affected? How Will Food Prices Be Affected? How Will Gasoline Prices Be Affected? How Will Gasoline Prices Be Affected?

12. Relationships

13. Ethanol - Gasoline Relationship Complement (volumes move together) Complement (volumes move together) Lack of Flexible Fuel Vehicles (FFVs) may limit ethanol to 10% blend Lack of Flexible Fuel Vehicles (FFVs) may limit ethanol to 10% blend With FFV bottleneck ethanol & gasoline are complements With FFV bottleneck ethanol & gasoline are complements Supplement (volumes move in opposite directions) Supplement (volumes move in opposite directions) Below 10% blend ethanol will supplement Below 10% blend ethanol will supplement As more FFVs are sold ethanol will supplement rather than complement gasoline As more FFVs are sold ethanol will supplement rather than complement gasoline FFVs will be more attractive where ethanol is plentiful, i.e. midwest FFVs will be more attractive where ethanol is plentiful, i.e. midwest FFVs will use up to 85% ethanol blend FFVs will use up to 85% ethanol blend

14. Economic Factors Effect of Policies Effect of Policies Mandated quantity Mandated quantity Higher mandate, more ethanol Higher mandate, more ethanol Level of subsidy Level of subsidy Higher subsidy, more ethanol Higher subsidy, more ethanol Effect of Energy Prices Effect of Energy Prices Petroleum Petroleum Gasoline: higher price, more ethanol (if FFVs available) Gasoline: higher price, more ethanol (if FFVs available) Diesel: higher price, less ethanol (soybeans replace corn) Diesel: higher price, less ethanol (soybeans replace corn) Other (fertilizer, pesticides) Other (fertilizer, pesticides) Higher price less ethanol Higher price less ethanol

15. Current Ethanol Policy Mandated production Mandated production Renewable Fuels Standard (RFS) requires 4.0 Billion gallons by 2006, 7.5 Billion gallons by 2012 Renewable Fuels Standard (RFS) requires 4.0 Billion gallons by 2006, 7.5 Billion gallons by 2012 California 9% in 2012, 11% in 2017, 26% in 2022 California 9% in 2012, 11% in 2017, 26% in 2022 Subsidized prices Subsidized prices $0.51 per gallon “blenders credit” $0.51 per gallon “blenders credit” Some states provide additional subsidies Some states provide additional subsidies Tariff protection Tariff protection Ad valorem tariff of 2.5% Import duty of 54¢ per gallon (some CBERA exemptions)

16. Corn – Energy Relationship Corn Production is Energy Intensive Corn Production is Energy Intensive Energy costs are≈50% of total operating cost Energy costs are≈50% of total operating cost Cost of corn is sensitive to energy prices Cost of corn is sensitive to energy prices Higher Gasoline Price Makes Ethanol Production Profitable at Higher Corn Prices Higher Gasoline Price Makes Ethanol Production Profitable at Higher Corn Prices

17. Breakeven Corn Price November 2006 (from Purdue) Corn Breakeven @ $60 Crude Additive=$4.82/bu Subsidy=$3.96/bu Energy=$2.19/bu Range of Crude Prices (2006-2007) Min $45/bbl, Max $72/bbl Ave $58/bbl Range of Corn Prices (2006-2007) Min $2.04/bsl, Max $3.96/bsls Ave $2.93/bsl Source: Hurt et al, “Economics of Ethanol”, Purdue Extension, ID-339,

18. Food – Corn – Energy Relationship Retail food costs are dominated by processing and transport Retail food costs are dominated by processing and transport Only about 19% of cost is farm input [US] Only about 19% of cost is farm input [US] Higher energy prices will result in higher food prices even at constant corn prices Higher energy prices will result in higher food prices even at constant corn prices Increase in corn price from $2.00 to almost $4.00 has had little effect on US food prices Increase in corn price from $2.00 to almost $4.00 has had little effect on US food prices

19. Corn and Beef Prices Source: NCGA, “Understanding the Impact of Higher Corn Prices on Consumer Food Prices”.

20. Back to the Questions How Much Ethanol Will be Produced? How Much Ethanol Will be Produced? How High Will Corn Prices Go? How High Will Corn Prices Go? How Will Food Prices Be Affected? How Will Food Prices Be Affected? How Will Gasoline Prices Be Affected? How Will Gasoline Prices Be Affected?

21. Getting Answers Many Interactions Many Interactions Oil Price Oil Price Effect on demand Effect on demand Effect on supply Effect on supply Policies Policies Other crops Other crops Soybeans Soybeans Wheat Wheat Import/Export Import/Export

22. Modeling Model must include: Model must include: Effect of oil price Effect of oil price Planting decision (corn v soybeans v wheat …) Planting decision (corn v soybeans v wheat …) Livestock feeding decisions (value of byproducts) Livestock feeding decisions (value of byproducts) Effect of policy parameters (subsidy, tariff etc.) Effect of policy parameters (subsidy, tariff etc.) Imports/exports of corn Imports/exports of corn Imports/exports of soybeans Imports/exports of soybeans Availability of FFVs Availability of FFVs Investment in ethanol stills Investment in ethanol stills Response to price changes Response to price changes Establish equilibrium Establish equilibrium

23. Modeling Exercise Determine the effect of higher oil prices Determine the effect of higher oil prices Baseline assuming current oil price forecast Baseline assuming current oil price forecast Oil + $10/bbl (no FFV bottleneck) Oil + $10/bbl (no FFV bottleneck) Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets Authors: Authors: Elobeid, Fabiosa, Hayes, Babcock, Yu, Dong, Hart, Beghin Elobeid, Fabiosa, Hayes, Babcock, Yu, Dong, Hart, Beghin Center for Agricultural and Rural Development, Iowa State University Center for Agricultural and Rural Development, Iowa State University

24. Forecast (2016 long run equilibrium) CommodityBase Oil +$10 Corn Planted Acreage (million acres) 92.5112.3 Portion used for Ethanol 34%60% Portion of Corn Exported 17%5% Ethanol Produced from corn (million gals) 14,56829,063 Subsidy/year @ $0.51/gal (billions of $) $7.43$14.82 Corn Price ($/bushel) $3.10$4.43

25. Grain Plantings 2006-2016/17 (long run equilibrium)

26. Effect on Food Prices OIL+$10 Commodity From No Ethanol From Base Food at Home +2.2%+1.3% Meat+6.3%+3.8% Eggs+13.5%+8.1% Dairy+4.5%+2.7% Food Away From Home +1.5%+0.9% No Ethanol – Corn price of $1.90/bushel

27. Fossil Energy Savings (2016 long run equilibrium) Base Oil +$10 Percent of Gasoline Consumption (by volume at 140 Billion gallons/yr) 10.420.8 Percent of Gasoline (by energy) 6.8%13.7% Percent of Total Gasoline Fossil Energy Saved 2.7%5.4% Percent of Total Gasoline Petroleum Energy Saved 6.13%12.22%

28. Potential Effect on Gasoline Prices? Gasoline price is a model input Gasoline price is a model input Energy provided by ethanol is a small (<13%) portion of motor fuel energy Energy provided by ethanol is a small (<13%) portion of motor fuel energy Higher ethanol production requires more corn production Higher ethanol production requires more corn production Absent higher subsidies, corn production only responds to higher prices Absent higher subsidies, corn production only responds to higher prices

29. Concluding Thoughts Cost to consumers is high Cost to consumers is high $14 Billion/yr ($47 per person) in subsidy $14 Billion/yr ($47 per person) in subsidy 1.8% increase in food cost 1.8% increase in food cost Reduction in petroleum demand is modest Reduction in petroleum demand is modest About 12% About 12% Environmental Effects Environmental Effects Effect on Less Developed Countries Effect on Less Developed Countries

30. End of Presentation

31. Source: Michael Wang, Presentation at UIUC Sustainable Bioenergy Workshop April 14, 2006 Estimated Net Energy Values

32. FAPRI Model Food and Agricultural Policy Research Institute System of linked models System of linked models Livestock Livestock Domestic crops Domestic crops World trade models for commodities World trade models for commodities US policy cost model US policy cost model US net farm income model US net farm income model Developed and maintained jointly by: Developed and maintained jointly by: Iowa State University, Ames Iowa State University, Ames University of Missouri, Columbia University of Missouri, Columbia

33. Crude Oil Price Projection (Baseline) Refiners’ Acquisition Cost (≈NYMEX - $6.70)