U'S' Biofuels Policy and Its Impact On Global Commodity Prices Michael J' Dwyer Chief Economist and

1
U.S. Biofuels Policy and Its Impact On Global
Commodity PricesMichael J. DwyerChief
Economist and Director of Global Trade and
Biofuels AnalysisForeign Agricultural
Service/USDA
2
Biofuels Production Trends, Trade, and U.S.
Policy
3
Global Ethanol Production Dominated by the United
States and Brazil
Billion Liters
Source F.O Licht
4
Global Biodiesel Production IsIncreasingly
Competitive But dominated by EU and U.S.
Billion Liters
Source F.O Licht
5
U.S. Biofuels Policy Will Shape Future U.S.
Production

• The Energy Independence Security Act (EISA) of
  2007 expands Renewable Fuel Standard (RFS)
• Mandates the use of 34 billion liters of
  renewable fuel in 2008, increasing to 136 billion
  liters by 2022
• 1st generation corn ethanol production is capped
  at 57 billion liters
• 2nd generation biofuels component increases over
  time
• Requires greenhouse gas reductions

6
U.S. EISA Mandates Rapid Development of 2nd
Generation Biofuels
7
U.S. Ethanol Production Changes the Composition
of U.S. Corn Use
Prepared by OGA/FAS/USDA
8
More U.S. Corn Is Used For Ethanol Than Exports
Prepared by OGA/FAS/USDA
9
U.S. Ethanol Expansion Boosts Exports of
Distillers Dried Grains
08/09f
10
U.S. Import Provisions For Biofuels

• Fuel Ethanol
• Basic import duties 1.9 - 2.5
• Additional duty of 14.27 cents per liter
• CBI beneficiaries granted conditional duty-free
  access
• Unlimited quantities if made from local
  feedstocks
• TRQ if made from non-local feedstocks equal
• to 7 of U.S. ethanol consumption
• FTA partners not subject to the basic duty
• Some FTA partners granted an additional duty-free
  TRQ others enjoy complete duty-free access
• Biodiesel 4.6 tariff
• Duty-free to CBI and FTA partners

11
U.S. Ethanol Imports Supplied Directly and
Indirectly by Brazil
12
Biodiesel Splash and Dash

• Biodiesel receives a tax credit of 1/gallon when
  blended with petroleum diesel in the United
  States
• The EU also offers biodiesel tax incentives
• U.S. firms are taking advantage of these
  incentives and importing B100 into the United
  States, blending in 1 petroleum diesel, then
  re-exporting the blend to the EU
• The EU claims that this undercuts their biodiesel
  industry and filed anti-dumping and CVD case
  against the U.S.

13
Situation and Outlook for Commodity Prices
14
These Factors Had Pushed Grain and Oilseed Prices
Higher And Now Lower 6 factors formed the
perfect storm but now on the downside

• Global economic growth previously strong but
  quickly weakening. Impact on the developing
  worlds middle class?
• Value of the U.S. dollar previously weak but
  now strengthening
• Energy, freight rates, and ag input prices
  previously strong quickly weakening
• Supply situation -- bad weather reduced
  exportable supplies by foreign competitors in
  2008, particularly wheat. Supply to rebound in
  2009
• Export restrictions problematic in the spring
  but now easing
• Global biofuels market still strong in US, EU,
  Brazil and providing support

15
How Are Ag Commodity Prices Faring?Wheat, corn,
soybeans, and rice have all dropped sharply from
recent highs
Rough rice futures
Wheat futures
Down 55
Down 32
Corn futures
Soybean futures
Down 46
Down 45
16
How About Broader Commodity Prices?

• Goldman Sachs Commodity Index

Petroleum futures
Down 49
Down 45
Prepared by OGA/FAS/USDA
17
Dollar Has Eased As WellAgainst the Euro and
against other currencies, too
Down 15
Prepared by OGA/FAS/USDA
18
Likewise, Ocean Freights Are Easing Due to Lower
Fuel Costs and Reduced Transportation Demand
Source International Grains Council chart
prepared by OGA/FAS/USDA
19
Middle Class Outside the U.S. Expected to
Double By 2020 Approaching 1 Billion
HouseholdsDeveloping countries to account for 87
percent of the growth, which has major
implications for food demand and LONG TERM
prices
Foreign households w/real PPP incomes greater
than 20,000 a year (in millions of households)
Middle class in developing countries projected to
increase 160 by 2020 vs. just 15 in developed
countries
Developing countries
Developed countries (ex US)
Source Global Insights Global Consumer Markets
data as analyzed by OGA/FAS/USDA
20

• Middle Class in Developing Countries Could
  Reach 715 Million Households By 2020, Up 160
  From 2004 Levels
• 24 of households in these countries are middle
  class. By 2020, this could exceed 50 and the
  impact on food demand will be huge

Developing countries with fast growing middle
class
Source Global Insights Global Consumer Markets
data as analyzed by OGA/FAS/USDA
21
Biotechnology - The Solution to Meeting Future
Food Needs

• Benefits of Biotechnology
• Boost yields
• Reduce pesticide and fertilizer use
• Improve conservation tillage practices
• Improve drought tolerance
• U.S. Position
• Science should guide government policy, not
  misinformation or fear

Prepared by OGA/FAS/USDA
22
Advances in Biotechnology Reduce Application
Rates of Inputs
Herbicide and Pesticide Use
Fertilizer Use
Fertilizer/bushel (lbs)
Insecticide/acre (lbs)
Herbicide/acre (lbs)
Source USDA/NASS, Agricultural Chemical Usage
Report
Source USDA/ERS