First Generation Biofuels Compete Marshall A. Martin Purdue University USA Transgenic Plants for Food Security in the Context of Development The Pontifical Academy of Sciences 15-19 May 2009 Casina Pio IV Vatican City Original file of this presentation www.pitt.edu/~super1/PPT/35451.htm

An Overview of the Presentation Some recent history Production of corn-based ethanol U.S. government biofuel mandates The food vs. fuel debate Recent commodity and food price behavior The livestock vs. fuel debate Environmental issues World and developing country perspective Role of biotechnology Concluding comments

The Food vs. Fuel Debate The Headlines Biofuel plant expansion Foreign oil independence High food prices cause riots Ethanol plant bankruptcy Hitting the blend wall

~200 ethanol plants in the United States Source: www.renewable-ag.com ~200 ethanol plants in the United States Source: www.renewable-ag.com

Growth of Corn-Based Ethanol Production Six-fold increase in 10 years Drivers of the growth: High petroleum prices Government incentives and mandates Desire for less dependence on imported oil Effort to increase farm income and create jobs in rural communities Source: Fastech LLC, March 2009

Why the recent debate? Rapid investment in ethanol plants increased the demand for corn Economic growth in global markets increased demand for commodities Weak U.S. dollar encouraged grain exports High petroleum prices provided market incentives for ethanol use, but increased commodity prices and food costs U.S. EPA ruling to replace MTBE with ethanol

An Historic Perspective on Commodity Prices Record high commodity prices in nominal but not real terms Source: Abbott etal, What’s Driving Food Prices, Farm Foundation, July 2008

Net Returns to Ethanol Producers Very profitable in 2007-08, but sharp decline in 2008-09 mainly due to weaker consumer demand for gasoline and lower petroleum prices. Source: Glauber, USDA Chief Economist, February 2009

How is ethanol produced from corn? Source: Enzyme Use for Corn Fuel Ethanol Production, Novozymes, July 2007

Use of Distillers Dried Grain with Solubles (DDGS)

U.S. Government Mandate: Renewable Fuel Standard Source: Renewable Fuels Association

U.S. Renewable Fuel Standard Source: Steve Meyer, Paragon Economics Inc., March 2009

The Biofuels vs. Food Debate Did corn prices drive up food prices in early 2008?

The Biofuels vs. Food Debate Are affluent car owners driving up the price of food to the poor?

Food vs. Fuel Debate Sharp global food price increase in 2007-08 followed by a dramatic decline in 2008-09 Source: Brian Wright, University of California Berkley. Snyder Lecture, Purdue University, April 17, 2009

The Biofuels vs. Food Debate The dietary transition Increased grain and meat exports to countries with population growth and increasing per capita income

Currency Exchange Rate Impacts Weaker U.S. dollar results in : Increased U.S.exports Higher priced oil 45% Depreciation 2002 to June 2008 20% Appreciation Since June 2008 Source: Barchart.com, May 2009.

Global Grain Market Behavior Global grain demand has outpaced supply for a decade Lower stocks-to-use puts upward pressure on grain prices Source: Chris Hurt, Indiana Ag Outlook 2009

U.S. Consumer Food Prices Recent U.S. consumer food price behavior Source: Corinne Alexander, Department of Agricultural Economics, Purdue University, August 2008.

U.S. Consumer Food Price Changes Sharp increase in 2007-08 Greater increase for poultry and dairy than other livestock products Greater increase for those requiring further processing Source: USDA-ERS, Briefing Room, March 25, 2009

Differential Impacts of Food Price Increases Higher income consumers spend a relatively small portion of their budget on food and price increases have a relatively small impact U.S. consumers spend only 5.7% on food consumed at home Low-income consumers spend a large proportion of their budget and food price increases can have a substantial adverse impact In India and China consumers spend about 35% on food consumed at home

Livestock Producer vs. Fuel Debate 2004 2005 2006 2007 2008 2009 Higher feed costs reduced profit margins Livestock producers requested government policy modifications Source: Chris Hurt, Department of Agricultural Economics, Purdue University, April 2009

Ethanol Industry Subsidies $.54/ gallon import tariff $.45/gallon blenders subsidy Some local communities have provided incentives for plant locations

The Petroleum & Corn Value Proposition

Ethanol Industry Response Stopped plant construction Idled some plants VeraSun filed bankcuptcy and sold some plants

Ethanol plants and capacities March 2009: 193 plants 12.4 billion gallons of capacity 23 plants with capacity of 2.1 billion gallons still under construction or expanding Ethanol plants are currently operating at 16% under capacity

The Blending Wall Currently 10% blend Relatively few flex-fuel cars U.S. Blended Motor Gasoline Consumption Currently 10% blend Relatively few flex-fuel cars Approaching maximum ethanol to gasoline use relationship One of the biggest factors influencing the biofuel industry is the overall usage of fuel. This graph shows the dramatic decline in projected gasoline consumption for this year and next. The higher energy prices earlier this year had a definite impact. Source: Energy Information Administration

U.S. Corn Production & Usage By Category Source: Steve Meyer, Paragon Economics, Inc., March 2009

Farmer Response and Environmental Issues Changes in corn production imply: More tillage and potential soil erosion More fertilizer and ag chemical use and potential water contamination More trucks on highways U.S. Corn, Soybean, Wheat & Cotton Planted Acreage Source: Glauber, Chief Economist, USDA, February 2009

Corn Outlook

World Fuel Ethanol Production USA (corn-based) and Brazil (sugarcane-based) about equal Source: Enzyme Use for Corn Fuel Ethanol Production, Novozyme, July 2007

Transgenic Crop Adoption Adoption of Transgenic Corn Million Hectares Source: Clive James, ISAA Source: GMO Compass, October 9, 2008, www.gmo-compass.org Rapid adoption in the Western Hemisphere

Transgenic Crop Adoption Transgenic Corn as Share of Total Area

Biotechnology Developments to Enhanced Corn-Based Ethanol Drought-tolerant varieties to increase yield Selection for higher starch content Enzymes to increase corn grain and residue conversion efficiency to ethanol

Concluding Thoughts Several market and policy factors are driving commodity, food, and fuel prices. U.S. ethanol production capacity is approaching the renewable fuel standard. Increased production and processing efficiency will likely make it possible to meet food, feed, and fuel demands. But policy and weather events can distrupt markets and the recent food vs. fuel debate could reoccur. The challenge is to encourage adoption around the world of known agricultural technologies and develop new ones if society is going to meet our food, feed, and fuel demands in a sustainable manner.

Questions? Thank You!