1. Office of the Chief Economist Office of Energy Policy and New Uses National Agricultural Credit Committee Harry S. Baumes Associate Director Office of Energy Policy and New Uses Washington, DC March 19, 2009 ETHANOL OUTLOOK

2. Office of the Chief Economist Office of Energy Policy and New Uses BIOFRENZY

3. Office of the Chief Economist Office of Energy Policy and New Uses REVIEW CURRENT ENVIRONMENT FUTURE Overview

4. Office of the Chief Economist Office of Energy Policy and New Uses Source: Renewable Fuels Association

5. Office of the Chief Economist Office of Energy Policy and New Uses Policy –Farm Security and Rural Investment Act of 2002 –Energy Policy Act of 2005 –Energy Independence and Security Act of 2007 –Food, Conservation, and Energy Act of 2008 Review: 2005 - 2008

6. Office of the Chief Economist Office of Energy Policy and New Uses Environment –High Energy Prices –Low commodity price –Accessible credit –Global economic expansion –Political Support Bush State of the Union Addresses Advanced Energy Initiative 20X25 Review: 2005 - 2008

7. Office of the Chief Economist Office of Energy Policy and New Uses Production 9.2 bg Jan 2008 to Jan 2009 –Added 4.6 bil. gal. capacity –Added 53 plants Ethanol Industry Utilized –23% ’07/08 corn crop –31% ’08/09 corn crop Ethanol about 7.0% gasoline market (volume basis) Review: 2008 Industry Perspective

8. Office of the Chief Economist Office of Energy Policy and New Uses Historic rise and collapse commodity prices – including energy prices Food and Fuel Issues Texas Waiver Request of RFS RFS2 Rulemaking (EISA) –Greenhouse Gas Emissions –Indirect Land Use Current Environment: 2008 - today

9. Office of the Chief Economist Office of Energy Policy and New Uses Financial Market Collapse & Tight Credit (decline in wealth) CONTRACTING ECONOMIES Dec ’08 annualized running rate ethanol production, 10 mmg Current Environment: 2008 - today

10. Office of the Chief Economist Office of Energy Policy and New Uses RFS1 Conventional Corn Starch Gasoline WTI Market Factor: Energy Prices Source: EIA

11. Office of the Chief Economist Office of Energy Policy and New Uses Profitability of Ethanol Sector: Ethanol Prices Lower than past 3 years

12. Office of the Chief Economist Office of Energy Policy and New Uses Profitability of Ethanol Sector: Corn Prices Lower than last year

13. Office of the Chief Economist Office of Energy Policy and New Uses Market Factor: Corn – Ethanol Prices Ethanol – Corn Price Spread Profitability Indicator

14. Office of the Chief Economist Office of Energy Policy and New Uses Profitability of Ethanol Sector: Profits down

15. Office of the Chief Economist Office of Energy Policy and New Uses

16. Ethanol Plants and Capacity Existing and Under Construction 77 113 6244 5583 31 4336 95 1778 Source: Renewable Fuels Association MARCH 2007

17. Office of the Chief Economist Office of Energy Policy and New Uses Source: Renewable Fuels Association Today

18. Office of the Chief Economist Office of Energy Policy and New Uses Source: Renewable Fuels Association

19. Office of the Chief Economist Office of Energy Policy and New Uses Source: Renewable Fuels Association, March 5, 2009 Ethanol Capacity –12.4 bg capacity –2.1 bg capacity under construction/expansion –14.2 bg total capacity –2.0 bg capacity / 23 plants idled RFS 2009 –10.5 bg ethanol –0.6 bg advanced biofuel (0.5 biodiesel) –11.1 bg renewable fuels

20. Office of the Chief Economist Office of Energy Policy and New Uses FUTURE LOOKING FORWARD

21. Office of the Chief Economist Office of Energy Policy and New Uses Relevant Policy Energy Independence Act of 2007 (EISA) –RFS2 36 bgpy by 2022 –Caps corn starch ethanol at 15 bgpy –Focus on advanced biofuels – cellulosic –GHG Thresholds –Research and Development Food, Conservation, and Energy Act of 2008 (FCEA) –Biofuel Production Incentives –Rural Development Programs –Research, Development & Commercialization

22. Office of the Chief Economist Office of Energy Policy and New Uses EISA – EPACT Renewable Fuels Standard RFS1 Conventional Corn Starch Cellulosic Biofuels Other Biofuels Biobased Diesel Years

23. Office of the Chief Economist Office of Energy Policy and New Uses Second Generation Biofuels Cellulosic Feedstocks

24. Office of the Chief Economist Office of Energy Policy and New Uses RFS1 Conventional Corn Starch Source: Renewable Fuels Association Cellulosic Ethanol Projects Under Development and Construction 26 Projects 400 million gallons capacity

25. Office of the Chief Economist Office of Energy Policy and New Uses

27. Nuclear Natural Gas Liquid Fuels Coal Renewables (excl liquid biofuels) Non-fossil energy use grows rapidly, but fossil fuels still provide 79 percent of total energy use in 2030 HistoryProjection Liquid Biofuels quadrillion Btu Source: EIA, AEO 2009, early release

28. Office of the Chief Economist Office of Energy Policy and New Uses Industrial Transportation Residential and Commercial Electric Power Petroleum-based liquids consumption is projected to be flat as biofuels use grows Biofuels million barrels per day HistoryProjections Source: EIA, AEO 2009, early release

29. Office of the Chief Economist Office of Energy Policy and New Uses Issues and Concerns –Climate Change –Sustainability –Environment (Land, Water, Air) –Supply and Consistency of feedstock quality –LOW CARBON FUEL STANDARD Policy Objectives –ECONOMY –Energy security –Food security –Climate Change –Implementation EISA –Implementation FCEA Bioenergy Complicated and Interdisciplinary

30. Office of the Chief Economist Office of Energy Policy and New Uses Energy Independence and Security Act of 2007 Fuel categories must meet greenhouse gas life cycle performance threshold  20% life cycle reduction threshold – Conventional Biofuels (ethanol derived from corn starch from new facilities)  50% life cycle reduction threshold – Advanced Biofuels  50% life cycle reduction threshold – Biomass-based Biofuels  60% life cycle reduction threshold – Cellulosic Biofuels Life Cycle Analysis must include  direct and indirect land use change due to biofuel feedstock production  Baseline fuel comparison to gasoline and diesel fuel in 2005

31. Office of the Chief Economist Office of Energy Policy and New Uses Moving Forward – Which Way to Go? Economy must improve – demand for gasoline dropped in 2008 and is expected to fall further in 2009 New Administration’s team is being put in place – seems clear of support for bio or renewable energy – commitment to alternative energy (beyond transportation fuels) Recognition that bioenergy is not independent of climate change, environment, and sustainability Alternatives to fossil based energy is a global concern

32. Office of the Chief Economist Office of Energy Policy and New Uses Moving Forward – What will it take? Recognize the complexity of developing, deploying, and using alternative bioenergy - Systems approach to solutions Interdisciplinary cooperation and collaboration – research teams Commitment to Research and Development Continue to be a role for STABLE public policy especially in the short-term

33. Office of the Chief Economist Office of Energy Policy and New Uses Moving Forward - What we need to know Overcoming Infrastructure Constraints –Blend Wall Vehicles E-85 availability –Transport of “ethanol” –Production, harvest, transport, & storage biomass Concentrate or improve energy density of biomass –Other uses Marine, motorcycles, small engines

34. Office of the Chief Economist Office of Energy Policy and New Uses Biomass Production –Alternative Feedstocks Switchgrass, miscanthus, algae, … –Supply, Use & Price –Feedstocks for energy (not exclusively transportation fuels) –Land Use and availability Direct & Indirect effects –Life Cycle Analysis Moving Forward - What we need to know

35. Office of the Chief Economist Office of Energy Policy and New Uses What We Need To Know Technology Development –Crop productivity – across potential feedstocks Implications for other input use (fertilizer, water, chemicals,…) –Conversion

36. Office of the Chief Economist Office of Energy Policy and New Uses THANK YOU! Contact Information: Harry S. Baumes hbaumes@oce.usda.gov 202-401-0497