Biofuels Industry and Impacts on Agriculture

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Biofuels Industry and Impacts on Agriculture

• Dwight AakreFarm Management SpecialistJanuary
  2007
• Web Page http//www.ag.ndsu.nodak.edu/aginfo/farm
  mgmt/farmmgmt.htm

12-27-06
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Some Energy Statistics

• In 2005, the U.S.
• consumed 139.9 billion gallons of gasoline
• produced 3.9 billion gallons of ethanol
• consumed 43.2 billion gallons of diesel
• produced 75 million gallons of biodiesel
• imported 65 percent of all petroleum

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Sources of Imported Oil (2004)
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Oil Imports The Risk

• 30 percent of our oil comes from the Middle East,
  Venezuela and Nigeria (politically volatile
  areas)
• corn ethanol can provide about 10 percent without
  increasing food and feed prices
• reducing the risk requires moving to cellulosic
  ethanol

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Ethanol Industry Expansion

• As of June, 102 plants operating with 4.75 b
  gallons of capacity
• 32 new plants under construction with 3.03 b
  gallons of capacity
• another 127 plants announced with 8.21 b gallons
  of capacity
• Total capacity if all plants are built is 15.99 b
  gallons

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Ethanol Plant Ownership

• Current Plants
• 47 percent of plants are farmer owned
• 39 percent of production from farmer owned
• Plants under Construction
• 12 percent of plants are farmer owned
• 11 percent of production farmer owned

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Corn used for Ethanol U.S.

• 2005 11 percent of corn production used for
  ethanol
• 2007 25 percent of corn production used for
  ethanol
• by 2008 N.D. plants will use 90 percent of 2006
  production

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Some Biofuels Statistics

• 1 bushel of corn 2.7 gallons of ethanol
• 7.5 lbs of soybean oil 1 gallon B100
• ethanol has 1.25-1.33 to 1 energy ratio
• B100 has a 3.2 to 1 energy ratio

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What has driven ethanol expansion?

• MTBE replacement has been the biggest driver
• new energy bill RFS
• mandates total RF usage at 7.5 bn gals. by 2012
• renewable fuel is ethanol and biodiesel
• cellulosic/waste ethanol counts 2.5x
• state level RFS
• policy incentives for using renewable energy

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Projected Growth in Ethanol Supply

• supply likely to be 9-10 bn gallons by 2012
• by 2015 or earlier, ethanol from biomass will
  become commercially viable
• currently, an acre of Iowa corn produces about
  450 gallons of ethanol (N.D. 315 gallons)
• utilizing 25 percent of the stover could produce
  another 150 gallons of ethanol (N.D. 105
  gallons)

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Possible Expansion Ethanol Plants

• Agri-Ethanol announced financing for 20
  facilities East Coast 100 m gals and at 380,000
  tons each
• Illinois governor proposed building 20 (corn)
  ethanol plants, 5 biodiesel plants and 4 waste
  ethanol plants
• West Coast 14 large plants proposed in
  California and Oregon
• Iowa 50 m gallon waste to ethanol plant (waste
  coal, used tires, wood waste, biomass,
  cornstalks)
• Saskatchewan Husky Energy just opened a 50m
  gallon plant using wheat

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Impacts of Expanded Ethanol Industry

• significant number of rural-based, good-paying
  jobs
• localized improvement in basis leads to higher
  price to farmers, higher feedstock prices and
  less plant profitability
• impact traditional markets, livestock, exports,
  alternative crops
• some regions may overbuild

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Ethanol Risks

• lower oil prices
• surplus of DDGS
• slowing of RFS momentum
• shortage of feed stock
• relatively long lag on construction

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Ethanol Price

• Why is ethanol high priced when corn is cheap?
• Ethanol is a substitute for gasoline

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Market Breakers or Makers

• Demand picture could change if
• crude oil and gasoline prices decline
• clean air regulations relaxed
• Supply picture could change if
• corn prices increase
• ethanol incentives and tax subsidies reduced
• emission regulations on plants relaxed
• tariff on Brazilian imports eliminated

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Biodiesel Statistics

• plants can be relatively small
• cost about 1/gallon of capacity
• full economies of scale at around 10 m gallons
• currently about 395 m gallons of capacity
• 700 m gallons of new capacity under construction

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Biodiesel Outlook

• much better energy balance than ethanol
• smaller, more dispersed plants
• higher feedstock costs as percent of input
• less fuel specifications certainty and research
  than ethanol
• 1 to 3 years behind ethanol in consumer acceptance

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Possible Expansion Biodiesel Plants

• Dakota Skies Biodiesel Minot 30 m gals
• ADM Velva 85 m gals
• Advanced Biodiesel Group plans two plants in the
  U.S., one in Canada
• Sunflower Electric Power Co. looking at
  biodiesel and ethanol plants
• Renewable Energy Group - Ralston, Iowa
  announced plans to build 12 biodiesel plants.
  Capacity 640 m gals (8 x 2005 usage)
• Green Star Products Idaho plans super clean
  biodiesel plant. Would run on its own biodiesel
  rather than natural gas.
• Rabobank estimates there are about 50 biodiesel
  plants under construction in the U.S. today

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Biggest Boost for Biodiesel is the Federal Tax
Credit

• A per gallon write-off for biodiesel blenders
• 0.50 per gallon for fuel from recycled grease
• 1.00 per gallon for fuel from fresh vegetable
  oil
• Recycled grease is the preferred feedstock
  because it is cheaper

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U.S. Acreage of Annual Crops

• 2006 Corn 78,561,000
• Soybeans 75,565,000
• Wheat 57,344,000
• Other 44,539,000
• All 256,009,000

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Corn Acres Needed

• In order to maintain existing markets
• by 2011, we will need 14 million additional corn
  acres at trend-line yields
• Expected ethanol production of 10 to 11 billion
  gallons

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Soybean Acres Needed

• If the majority of expansion uses soybean oil
• By 2011 we will need 4.5 million additional acres
  of soybeans at trend-line yields
• SBO has competition from corn oil, white or
  yellow grease, other

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Impact on Soybeans (FAPRI)

• planted acreage decreases 3.3 million acres from
  06/07 to 10/11 crop years
• oil used for biodiesel doubles from 107 million
  gallons to 216 million gallons
• Soybean oil price increases 27 percent
• Soybean meal price decreases 8 percent
• farm price of beans increases 4 percent

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Potential Crop Acreage Shift

• Corn Belt
• soybeans and winter wheat to corn
• CRP will come back into production
• Great Plains
• increase in corn and sorghum
• decrease in small grains
• increase in minor oilseeds
• little change in soybeans
• CRP will be reduced

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Ethanol and Biodiesel Represent New Demand

• increased demand leads to a higher price
• higher price leads to increased supply
• higher price leads to less quantity demanded and
  a search for a substitute
• cellulose feedstock for ethanol

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Biomass Potential from Crop Residue

• Corn Belt 98.9 m tons (corn stover)
• Great Plains 35.5 m tons (corn and soybean
  stover, wheat, barley and oat straw)
• West Coast 2.4 m tons (corn stover, wheat,
  barley and oat straw)
• Delta 4.6 m tons (rice straw)
• Southeast 3.6 m tons (sugarcane bi-product)

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Difficulties with Biomass

• bulky high transportation cost
• inconsistent quality characteristics
• contamination, impurities

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Livestock Impacts

• DDGS is a partial replacement for soybean meal
  and corn
• SBM is higher in amino acids and is more
  digestible
• U of M dietary recommendations
• grow finish hogs 10 to 20 percent of ration
• lactating sows 20 percent
• gestating sows 30 to 40 percent
• broilers, layers, turkeys 10 to 15 percent
• lactating dairy cows 20 percent
• beef cattle 30 to 40 percent

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Livestock and Poultry Impacts (FAPRI)

• production of all livestock species increase
• net returns to all species are down
• turkeys, broilers and hogs experience the biggest
  reduction in net returns

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Transportation is a Big Challenge for DDGS

• costs 50 per ton to ship to California dairies
• costs 6 per ton to ship to Midwest swine and
  poultry outlets
• increased costs of containers hurts exports

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Will the livestock industry move back to the
Midwest?orWill new ethanol plants locate
nearer livestock or energy source?
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Risk

• Who will blink when the next short corn crop
  arrives?
• Will exports drop off?
• Will livestock feeders buy less?
• Find substitutes
• Liquidate herds
• Will ethanol plants shut down?
• Will food processors back away from corn?

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Will ND/MN farmers change cropping plans for 2007?

• market prices
• rotations
• risk
• equipment
• rents

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