Department of Economics The Economics of Biofuels North Central Regional Association of Assessing Officers 34 th Annual Conference Coralville, Iowa June 17, 2009 Chad Hart Assistant Professor/Grain Markets Specialist

Department of Economics Population (billion) World6.678World7.601World9.393 China1.330China1.431India1.808 India1.148India1.362China1.424 U.S.0.304U.S.0.336U.S Indonesia0.238Indonesia0.268Nigeria0.357 Brazil0.192Brazil0.212Indonesia0.313 Pakistan0.168Pakistan0.204Bangladesh0.280 Bangladesh0.154Bangladesh0.190Pakistan0.278 Russia0.141Nigeria0.184Brazil0.228 Nigeria0.138Russia0.132Congo0.189 Japan0.127Mexico0.125Mexico0.148 Source: U.S. Bureau of the Census, International Data Base

Department of Economics Liquid Fuel Usage (Million Barrels Oil Equivalent per Day)(Percent of 2006 Value) United States20.795%98% 100%105% Canada2.3100% 104%109% Mexico2.171%81%90%95%100% Europe15.792% 95%96% Japan5.288%92%96%92%90% China7.2118%139%168%192%213% India2.789%115%144%159%174% Africa3.0117%120%123%127%130% Central and South America5.7116% 119%125%133% World %107%113%119%125% Source: Energy Information Administration

Department of Economics Crude Oil Prices Source: Energy Information Administration

Department of Economics Crude Oil Futures Prices Source: NYMEX

Department of Economics Iowa’s Alternative Energy Sources Ethanol:Over 40 plants in operation/construction Ranked 1 st in ethanol production Biodiesel:Over 15 plants in operation/construction Wind:Ranked 3 rd in wind energy production Ranked 1 st in ratio of wind/total energy

Department of Economics Ethanol Plant Locations Source: Ethanol Producer Magazine

Department of Economics Ethanol Production Based on the pace over the 1 st 2 months of 2009 Sources: Renewable Fuels Association, Energy Information Administration

Department of Economics Biodiesel Plant Locations Source: Biodiesel Magazine

Department of Economics Biodiesel Production Based on the pace over the 1 st 2 months of 2009 Sources: National Biodiesel Board, Energy Information Administration

Department of Economics Ethanol Margins Source: ISU, CARD

Department of Economics Biodiesel Margins Source: ISU, CARD

Department of Economics U.S. Blended Motor Gasoline Consumption Source: Energy Information Administration

Department of Economics Fuel Prices Source: Nebraska Energy Office Rack prices in Omaha

Department of Economics Fuel Futures Prices Sources: NYMEX and CBOT

Department of Economics Ethanol Blending Advantage

Department of Economics % of Gasoline Blended with Ethanol Source: Energy Information Administration

Department of Economics Price Movements Since 2007

Department of Economics Estimated Hog Returns Source: ISU Extension, Farrow-to-Finish

Department of Economics Estimated Cattle Returns Source: ISU Extension, Yearling Steers

Department of Economics Hog Returns vs. Corn Prices Sources: ISU Extension, Farrow-to-Finish; USDA-NASS

Department of Economics Cattle Returns vs. Corn Prices Sources: ISU Extension, Yearling Steers; USDA-NASS

Department of Economics Factors Leading to Higher Commodity Prices Source: USDA-ERS, Trostle, July 2008

Department of Economics Commodity Price Indexes Source: International Financial Statistics

Department of Economics Events in 2007 Droughts: Northern Europe, Ukraine, Russia, Northwest Africa, Turkey, Australia, and Argentina Increased export taxes: China, Argentina, Russia, Kazakhstan, Malaysia, and Indonesia Export restrictions: Argentina, Ukraine, India, Vietnam, Serbia, Egypt, Cambodia, Indonesia, and Kazakhstan

Department of Economics The Food Dollar Source: USDA-ERS

Department of Economics Farm to Retail Food Price Spread FoodFarm Value Share of Retail Food Price FoodFarm Value Share of Retail Food Price Eggs53Canned Corn22 Beef49Sugar27 Chicken48Wheat Flour19 Milk34Bread5 Pork31Corn Flakes4 Orange Juice33Corn Syrup3 Source: USDA-ERS, 2001

Department of Economics Changes in Food Price Indexes Sources: Bureau of Labor Statistics, USDA-ERS Consumer price indexesRelative importance 1 Final 2005 Final 2006 Final 2007 Final 2008 Forecast (Percent) All food Food away from home Food at home Meats, poultry, and fish Eggs Dairy products Fats and oils Fruits and vegetables Sugar and sweets Cereals and bakery Nonalcoholic beverages Other foods BLS estimated expenditure shares, December Forecasts updated May 20, 2009

Department of Economics Renewable Fuels Standard (RFS) Crop Year Billion Bushels

Department of Economics Renewable Fuels Standard (RFS) 60% GHG Emission Reduction 50% GHG Emission Reduction 20% GHG Emission Reduction If construction started after Dec. 2007

Department of Economics Countries Pursuing Biofuels  US  Brazil  Argentina  Colombia  Paraguay  Canada  Uruguay  Mexico  Thailand  New Zealand  South Africa  South Korea  Philippines  Indonesia  Pakistan  China  India  Malaysia  Australia  Japan  EU  Russia  Not a complete list

Department of Economics Government Policies for Biofuels Ethanol  Ad valorem tariff of 2.5%  Import duty of $0.54 per gallon  Volumetric Ethanol Excise Tax Credit (VEETC)  $0.45 per gallon starting in 2009 Biodiesel  Biodiesel Mixture Excise Tax Credit  $1.00/0.50 per gallon Cellulosic  Cellulosic Biofuel Producer Tax Credit  $1.01 per gallon

Department of Economics Cellulosic Biofuel Waiver Provisions  EPA (in consultation with DOE and USDA) can reduce the cellulosic biofuel mandated volume  Waiver trigger based on EIA projections  EPA will also sell cellulosic biofuel credits  Price set at Max($0.25 per gallon, $3.00 – Average wholesale gasoline price per gallon)

Department of Economics Components of 2007 Energy Act  Up to $500 million per year in grants for the production of advanced biofuels (with at least an 80% reduction in GHG emissions relative to current fuels)  Up to $25 million per year in grants for R&D for biofuel production in states with low rates of biofuel production

Department of Economics Energy in the Farm Bill  Grants for the development and construction of advanced biofuel biorefineries, up to 30% of the cost of the project  Loans for the same, up to $250 million or 80% of the cost per project

Department of Economics Biomass Crop Assistance Program  To support production of crops for bioenergy and assist with collection, harvest, storage, and transportation of biomass to conversion facilities  Excluded materials  Farm program crops, animal byproducts, food waste, yard waste, algae

Department of Economics Biomass Crop Assistance Program  Requires producers and conversion facilities to submit proposal establishing a project area  Establishes contracts between USDA, producers, and facilities to promote project  Sets up establishment payments for perennial crops and annual payment to biomass producers

Department of Economics Biomass Crop Assistance Program  Payments are also authorized for biomass collection, harvest, storage, and transportation  Matching payments  $1 for each $1 per ton paid by conversion facility, up to $45 per ton, for 2 years

Department of Economics Draft Lifecycle GHG Reductions Source: EPA, May 2009

Department of Economics CARB Fuel Carbon Values Source: CA Air Resources Board, April 2009

Department of Economics Hay Acreage Source: USDA-NASS

Department of Economics CRP Expiring Contracts Source: USDA-FSA April 2009: million acres Cap in 2010: 32 million acres

Department of Economics Land Availability Data from Census of Agriculture Land in farms Total cropland Harvested cropland Cropland in pasture Other cropland Total woodland Pastureland (not crop) Land in other uses Source: USDA-NASS

Department of Economics

Renewable Fuels Standard (RFS)

Department of Economics Currently Available Biomass Source: NREL, 2005

Department of Economics Spectrum of Biofuels Source: NREL, 2006  Grain/Sugar Ethanol  Biodiesel  Green Gasoline/Diesel  Cellulosic Ethanol  Butanol  Pyrolysis Liquids  Syngas Liquids Most Mature Least Mature

Department of Economics Biofuel Challenges  Production costs  Conversion, ag. production, etc.  Infrastructure barriers  Developing supply chain for biomass  Continued development of biofuel distribution system  Growth in biofuel-compatible vehicles

Department of Economics Biofuel Challenges  Investment risks  Higher capital costs, emerging technology  Biomass production shifts  Inducing farmers to produce new crops  Consumer understanding  About the fuels  About the tradeoffs

Department of Economics Thank you for your time! Any questions? My web site: