The Ethanol Boom Colin Carter University of California, Davis Oct 11, 2007
Outline of Talk • Background on U.S. Industry & Policy • Other major world players • Ethanol Economics & Impact on Corn Market • Where is the ethanol boom headed?
“.. ethanol contributes to the American economy, creating jobs, increasing market opportunities for farmers, generating income & tax revenues” Renewable Fuels Association • "If ethanol were an economically intelligent investment, you would not need to subsidize it from stem to stern" Cato Institute • “Ethanol Industry is Losing Clout” Wall St Jo 10/11/07
World Ethanol Production: 2006 13.5 billion gals: 2006 Starch Crops 53% Sugar Crops 47% Projected 30 billion gals: 2015
U.S. Biofuel Overview • U.S. is world’s largest ethanol producer & user. • U.S. EPAct (2005) mandated renewable fuel standards (RFS) in gasoline (& credits for biodiesel) to reach 7.5 billion gallons by 2012. • EPAct eliminated mandatory MTBE additive. • RFS contained sugarcane program • Additional State programs • US will remain heavily reliant on oil, despite efforts to increase ethanol use
U.S. Ethanol Production 9.6 B. gals by 2008; 3.5 billion bu. corn Billion Gallons Source: Renewable Fuels Association
U.S. Corn use for Ethanol 10% blend would require 5.2+ billion bushels corn Million Bushels
U.S. Policy • Tax credit = 51¢/gal for ethanol & $1/gal for biodiesel (50¢ for biodiesel made from recycled veg oil & animal fats). • Import tariff of 54 ¢/gal, with duty-free status on up to 7% of U.S. ethanol market for imports from Caribbean Basin Initiative countries.
U.S. Policy • U.S. aims to reduce gasoline use by 20% in 10 years; this would take entire U.S. corn crop, or 40% of world's corn supply. • Goal is infeasible without significant technological advances • Why not ease import restrictions?
USDA Projections 4.3 B bu corn; 12 B gals eth 30% of corn crop Source: USDA
Other Global Players • Brazil’s production 4.5 B gals; expected to be 7 B gals by 2010; competitive with $30-$40 oil/barrel • Energy output/input ratio about 8.3 for sugarcane; 1.3 for corn • EU's target of 10% blend will require 18% of agric land (rapeseed, wheat, & sugar beets). IMF • China & India expected to produce about 2 B gals ethanol by 2015
Global Ethanol Production: 2006 Source: RFA
Ethanol Yields Litres per ha Source: F.O.Licht
Ethanol Economics • A bushel of corn produces about 2.7 gals ethanol & 17.5 lbs of dried distillers grains. Break-even corn price Price of corn = 2.7* ((price of gasoline*0.667) + tax credit) + price of DDG – cost of capital – operating cost
Iowa State Calculations • Ethanol valued at BTU content is 2/3 that of gasoline • Distillers grains valued at $77/ton • Cost of running an ethanol plant = 52 ¢/gal • Cost of building an ethanol plant = 24 ¢/gal • Future production efficiency = 3 gals/bushel
Corn Breakeven Price for Ethanol Corn/bu. With Subsidy Energy Value Crude oil/barrel
Where is the ethanol boom headed? Drivers: Policy, Economics,Technology & Weather • Risk of supply disruption is high (weather) • Lots riding on price of oil • Additional acres; including conversion of pasture & grassland to crops • Investment in yield boosting technology • Biomass Ethanol • Supply response in Brazil & elsewhere
Where is the ethanol boom headed? • Ethanol is a political commodity • Renewable Fuels Standards (RFS) ensures a market for ethanol • World production of ethanol (especially in U.S. & Brazil) will continue to grow strongly, as will trade • Food vs. Fuel debate will continue • Ethanol Boom may be running out of gas