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

2-13-07
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Prices For New Crop Dec/Nov Futures 2/9/07
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The Global Setting Tight World Coarse Grain
Stocks
of total use
2006/07 12
19
15
Crop Year
Source Keith Collins, USDA
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Ethanol Industry Expansion

• As of Jan 1, 110 plants operating with 5.39 b
  gallons of capacity
• 73 new plants and 8 expansions under construction
  with 6.0 b gallons of capacity
• Total capacity of all plants is 11.39 b gallons
• Numerous additional plants announced

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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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Impacts of Expanded Ethanol Industry

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

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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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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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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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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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Ethanol Impact on Planted Acreage

• 2007 corn acres will come primarily from
  soybeans. A substantial amount will also come
  from cotton and some may come from fallow, flax
  others. CRP could be a source of acres in
  subsequent years.

Source Fapri Preliminary Baseline Nov '06
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Will ND/MN farmers change cropping plans for 2007?

• market prices
• rotations
• risk
• equipment
• rents

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Ethanol Economics

• 60 crude oil 2.07 wholesale gasoline
• 2.07 gasoline 1.38 ethanol (.667 energy
  value)
• 1.38 ethanol plus 0.51 tax credit 1.89 per
  gallon

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Ethanol Economics (contd)

• If DDGS are valued at 77.56/ton 0.66/bu of
  corn
• Plant operating costs 0.52/gal or 1.56/bu
• Plant capital costs 0.24/gal or 0.72/bu

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Ethanol Economics (contd)
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Ethanol Economics (contd)
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Long-Run Equilibrium Impact of 60 Oil 4.05
Corn
USDA 2005
Estimated Long-Run Equilibrium
Percent Change
Corn Price (/bu)
2.00
4.05
103
Corn Area (mil ac)
81.80
95.60
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Soybean Price (/bu)
5.66
5.22
-8
Soybean Area (mil ac)
72.00
59.30
-18
Sbn Meal Price (/ton)
174.20
92.70
-47
Sbn Oil Price (/cwt)
23.41
32.50
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Wheat Price (/bu)
3.42
4.60
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Wheat Area (mil ac)
57.20
46.30
-19
Source Center for Ag and Rural Development, Iowa
State University, Paper 06-BP49, November 2006.
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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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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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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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Ethanol and Corn Prices Changing economics
/ gallon
Source Keith Collins, USDA
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Summary

• A shift in the demand curve
• 3-5 per bushel trading range
• Likely to last 3-5 years
• Impact is far ranging
• Acreage reallocation
• Land value and rents
• Prices of inputs, both capital and supplies
• Livestock and poultry sector
• May be a close analogy to the mid 70s