The Economy and Biofuels: Implications of a Recession Iowa Renewable Fuels Association January 27, 2

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The Economy and Biofuels Implications of a
RecessionIowa Renewable Fuels
AssociationJanuary 27, 2009John M.
UrbanchukDirector, LECG LLC
1255 Drummers Lane, Suite 320 Wayne, PA
19087 Tel [phone] E-mail
jurbanchuk_at_lecg.com
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Both the economy and ethanol industry are
experiencing a shakeout

• The economy slipped into recession in December
  2007 ending a 6 year expansion
• In the last year 23 ethanol plants have closed
  nationwide representing nearly 1.7 billion
  gallons of capacity

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This recession ends 73 months of continuous growth
Source BEA
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Causes were many but the major culprits included

• Housing market crash
• Loss of household net worth
• Financial market collapse
• Record high oil prices
• Weak dollar
• Loss of confidence

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This is the 11th recession since 1945 and fifth
since 1980
Source NBER
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The biofuels industry fell victim to many of the
same problems that affected other industries

• Overexpansion
• (81 plants, 5.4 bil gal capacity in 2005 to 172
  plants with 10.6 bil gal capacity today)
• Excessive debt
• Unavailability of credit
• Managerial inexperience and bad decisions
• Commodity boom/bust cycle
• High raw material costs
• Collapsing oil and gasoline prices

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Outlook for the ethanol industry will depend on
several key economic factors

• Economic growth
• Consumer spending and gasoline demand
• Credit availability
• Oil and gasoline (and ethanol) prices
• Inflation
• Corn supply and price

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Gasoline prices are driven by crude oil. Both
reached record levels in 2008.
Source EIA
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Gasoline use fell 3.3 in 2008 as prices hit
record levels (sharpest decline since 1992).
Source EIA
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However crude and gasoline prices have fallen due
in large part to weak demand from a slowing world
economy.
01/22/2009
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Falling gasoline prices have dragged ethanol
along putting pressure on revenue
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Profitability has suffered. Ethanol producers
continue to cover variable costs but margins are
shrinking. as ethanol prices fall.
Source Iowa State Univ. Jan 2009 month to date
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This recession will be relatively deep but should
end in late 2009.

• Obamas 825 bil recovery plan will improve
  consumer sentiment but add little to growth this
  year.
• Housing is expected to recover slowly, improving
  household net worth.
• The financial bailout is expected to improve
  credit availability.

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Stronger growth will stimulate consumer spending
on motor fuel. Oil prices will recover to the
80/bbl level by 2010.
Source LECG LLC Moodys Economy.com
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Inflation will moderate despite massive infusions
of credit. Unemployment should peak at 9 by
year-end then decline as the economy expands.
Source LECG LLC Moodys Economy.com
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Commercial and industrial loan volume is expected
to recover slowly improving credit availability.
Interest rates will remain low through most of
2010.
Source LECG LLC Moodys Economy.com
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Admittedly this is an optimistic outlook. What
can go wrong?
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Upsides and downsides to the outlook
Upside Risks
Downside Risks

• Failure of banks to begin lending
• More bad surprises from financial institutions
• Deflation
• Foreign contagion/collapse of export markets
• Another oil price shock

• Quick action on a stimulus bill that gets into
  consumer hands.
• Improved consumer confidence that stimulates
  spending.
• A return to sanity to the financial system.

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Conclusion What to expect.

• A deeper and longer recession with recovery by
  year-end 2009.
• A big stimulus plan that should have more impact
  next year than this year.
• Slowly improving credit markets
• Strengthening of oil, gasoline, and ethanol
  prices by mid-year.
• Increased gasoline (and ethanol use)
• No meaningful change to existing biofuels policy
  (RFS, VEETC, tariff)

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Going out on a limb

• Look for 88.9 million acres of corn and 71.7
  million acres of soybeans to be planted next
  spring.
• With a corn yield of 155.6 bu/ac, expect a 12.7
  bil bu crop next year!
• Farm level corn prices are projected to average
  3.98/bu for the 08/09 crop and 3.81/bu for
  09/10.
• Soybean prices will average 9.84/bu this season
  and 8.50/bu next season.
• Net farm cash income will fall 3.2 in 2009 from
  this years record level of 90.7 billion.
• The CPI for food will increase 3.5 - 4 in 2009
  after a nearly 6 increase in 2008.

01/22/09
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Thank you! Questions?