Biofuel Impacts on Agriculture

Chad HartCenter for Agricultural and Rural Development

Iowa State University

March 29, 2007

ISU Livestock Field Specialist Meeting

Ames, Iowa

E-mail: chart@iastate.edu

Projected World Oil Consumption

Source: Energy Information Administration, International Energy Outlook 2006

Projected World Energy Sources

Source: Energy Information Administration, International Energy Outlook 2006

World Ethanol Production, 2006

39%

33%

8%

6%

1%

7%

6%

U.S. Brazil China Europe Africa Asia Rest of World

World Ethanol Imports, 2006

66%3%

9%

13%

7%2%

U.S. EU India Japan South Korea Rest of World

U.S. Ethanol Production

Source: Renewable Fuels Association

0

1

2

3

4

5

6B

illi

on G

allo

ns

U.S. Biodiesel Growth

Source: National Biodiesel Board

0

50

100

150

200

250

300

1999 2000 2001 2002 2003 2004 2005 2006

Mil

lion

Gal

lons

Renewable Fuels Standard

0

5

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011 2012 2017

Bil

lion

Gal

lons

Ethanol Industry Snapshots

Ethanol Plants Capacity (mgy)

Jan. 2000 54 1,749

Jan. 2001 56 1,921

Jan. 2002 61 2,347

Jan. 2003 68 2,707

Jan. 2004 72 3,101

Jan. 2005 81 3,644

Jan. 2006 95 4,336

Jan. 2007 110 5,386Source: Renewable Fuels Association

Ethanol – State by StateState Current Capacity

(million gallons)IA 1,706IL 894NE 681MN 557SD 555WI 230KS 211IN 162MO 155MI 150ND 134CO 88CA 69TN 67KY 35NM 30WY 10OH 4FL 4OK 2GA 1

Biodiesel – State by StateState Current Capacity

(million gallons)TX 143IA 139IL 66TN 65MN 63MO 47OH 39SC 36CA 36AL 35AR 27CO 27NJ 24OK 23VA 22FL 22GA 19IN 15LA 15MI 15PA 12

Continuing Ethanol Growth

0

3

6

9

12

15B

illi

on G

allo

ns

Ethanol – State by StateState Current Capacity Being Built Total

(million gallons)IA 1,706 1,740 3,446NE 681 1,424 2,105IL 894 291 1,185MN 557 451 1,008SD 555 425 980IN 162 687 849WI 230 282 512KS 211 295 506OH 4 399 403TX 0 370 370MI 150 107 257ND 134 100 234TN 67 138 205NY 0 164 164MO 155 0 155OR 0 143 143CO 88 50 138GA 1 100 101KY 35 50 85CA 69 0 69MS 0 60 60AZ 0 55 55WA 0 55 55

Biodiesel – State by StateState Current Capacity Being Built Total

(million gallons)IA 139 210 349TX 143 164 307NJ 24 150 174IL 66 80 146IN 15 120 135MO 47 78 125ND 0 117 117WA 8 101 109MS 9 99 108SC 36 61 97WI 1 83 84AR 27 53 80TN 65 13 78AL 35 40 75NV 6 60 66PA 12 54 66OH 39 26 65CA 36 29 64MN 63 0 63GA 19 40 59KY 7 50 57NE 0 55 55OK 23 31 54

Oil Futures As Of 3/27/2007

60

61

62

63

64

65

66

67

68

69

70

May2007

Dec.2007

Dec.2008

Dec.2009

Dec.2010

Dec.2011

Dec.2012

$ pe

r ba

rrel

Corn Outlook

70

75

80

85

90

95

2000 2002 2004 2006 2008 2010

Mill

ion

Acr

es

1.50

2.00

2.50

3.00

3.50

4.00

$ pe

r B

ushe

l

Planted Acres Farm Price

Soybean Outlook

66

68

70

72

74

76

2000 2002 2004 2006 2008 2010

Mill

ion

Acr

es

4.00

4.75

5.50

6.25

7.00

7.75

$ pe

r B

ushe

l

Planted Acres Farm Price

Wheat Outlook

57

58

59

60

61

62

63

2000 2002 2004 2006 2008 2010

Mill

ion

Acr

es

2.50

2.80

3.10

3.40

3.70

4.00

4.30

$ pe

r B

ushe

l

Planted Acres Farm Price

Hay Outlook

60

61

62

63

64

65

2000 2002 2004 2006 2008 2010

Mill

ion

Ton

s

80

90

100

110

120

130

$ pe

r T

on

Harvested Acres Farm Price

Corn Utilization

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per

cent

Feed Ethanol Exports Other

Corn Available for Export

Million Bushels

Corn in 2004

Less than -300

-299 - -150

-149 - 0

1 - 150

151 - 500

More than 500

Available in 2010

Million Bushels

Corn in 2010 - Baseline

Less than -300

-299 - -150

-149 - 0

1 - 150

151 - 500

More than 500

Distillers Grains Outlook

0

5

10

15

20

25

30

35

40

45

2000 2002 2004 2006 2008 2010

Mill

ion

Ton

s

50

60

70

80

90

100

110

120

130

140

$ pe

r T

on

Production Price, DDG, Lawrenceburg, IN

Distillers Grains Usage by Species

0

5000

10000

15000

20000

25000

30000

2007 2008 2009 2010

Tho

usan

d T

ons

Beef Pork Poultry Dairy

A Closer Look

0

1000

2000

3000

4000

5000

6000

2007 2008 2009 2010

Tho

usan

d T

ons

Pork Poultry Dairy

Beef Outlook

24

25

26

27

28

29

30

2000 2002 2004 2006 2008 2010

Bill

ion

Pou

nds

60

65

70

75

80

85

90

$ pe

r C

wt.

Production Price, Nebraska Direct Steers

Pork Outlook

18

19

20

21

22

2000 2002 2004 2006 2008 2010

Bill

ion

Pou

nds

20

27

34

41

48

$ pe

r C

wt.

Production Price, Sows, Iowa-S. Minn.

Broiler Outlook

30

32

34

36

38

2000 2002 2004 2006 2008 2010

Bill

ion

Pou

nds

1.50

1.60

1.70

1.80

1.90

$ pe

r P

ound

Production Price, Broiler Retail

Egg Outlook

7.0

7.2

7.4

7.6

7.8

8.0

2000 2002 2004 2006 2008 2010

Bill

ion

Doz

en

0.80

1.00

1.20

1.40

1.60

1.80

$ pe

r D

ozen

Production Price, Shell Egg Retail

Scenario with Higher Oil Prices

• Assume oil prices are $10/barrel higher than projected

• Margins on ethanol plants increase

• New incentive to invest in added capacity

• Major hurdle will be felt at 14 – 15 billion gallons due to E-10 saturation

• Drop in ethanol price will eventually encourage increase in flex-fuel cars

Changes from Base Case for 2010

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Cor

nA

crea

ge

Cor

n P

rice

Eth

anol

Pro

duct

ion

Cor

n F

ed

Soy

bean

Acr

eage

Soy

bean

Pric

e

Bee

fP

rodu

ctio

n

Bee

f R

etai

lP

rice

Por

kP

rodu

ctio

n

Por

k R

etai

lP

rice

Per

cent

Cha

nge

Proposals for the 2008Farm Bill

Chad HartCenter for Agricultural and Rural Development

Iowa State University

March 29, 2007

ISU Livestock Field Specialist MeetingAmes, Iowa

E-mail: chart@iastate.edu

Current Farm Support

• Three main programs– Direct Payment Program– Counter-cyclical Payment Program– Marketing Loan Program

• Direct payments are fixed; counter-cyclical and marketing loan payments vary with price

Key Settings

Crop Target Price

($/bu.)

Direct Payment

Rate ($/bu.)

National Loan Rate

($/bu.)

Corn 2.63 0.28 1.95

Soybeans 5.80 0.44 5.00

Wheat 3.92 0.52 2.75

When Payments Are Triggered

-$100.00

-$50.00

$0.00

$50.00

$100.00

$150.00

$200.00

$1.50 $1.70 $1.90 $2.10 $2.30 $2.50 $2.70 $2.90 $3.10 $3.30 $3.50

Price ($/bushel)

Ret

urns

($/

acre

)

Market Return less Variable Costs Direct PaymentCountercyclical Payment Marketing Loan BenefitNet Crop Insurance Benefit

Farm Bill Timing

• Debate will pick up this spring– Commodity groups presented their proposals to the

House yesterday

• Optimistic timeline: Farm bill will be passed and signed this summer, in time for winter wheat

• Both Ag. Committee chairmen (Harkin, Peterson) have stated they will pass a new farm bill, not an extension– Rep. Peterson has sounded more extension oriented

in recent reports

Farm Bill Budget

• Budget determined by Congress, but based on projections of spending for current farm bill

• With crop prices projected to remain high, current farm support program cost are projected to be low

• This doesn’t leave much room for farm bill changes

Farm Bill Proposals

• There are many proposals out there– USDA– National Corn Growers Association– American Soybean Association– National Association of Wheat Growers– American Farmland Trust

• Can be divided into two camps– Modify current structure– Move to revenue-based farm support

Wheat Proposal

• Higher target price– Wheat: $5.29/bu., up $1.37

• Higher direct payment rate– Wheat: $1.19/bu., up $0.67

• No change on loan rate

• No specifics on other crops

Wheat Proposal

• Proposal would more than double direct payments

• Counter-cyclical payments would trigger at prices below $4.10/bu.– Currently triggered at $3.40/bu.

• Counter-cyclical payment rate would max at $1.35/bu.– Current max of $0.65/bu.

Soybean Proposal

• Higher target prices– Higher of current target price or 130% of 2000-2004

Olympic average of season-average prices

• Higher loan rates– Higher of current loan rate or 95% of 2000-2004

Olympic average of season-average prices

• No change on direct payments

Soybean Proposal

Crop Target Price

($/bu.)

Direct Payment

Rate ($/bu.)

National Loan Rate

($/bu.)

Corn 2.75 0.28 2.01

Soybeans 6.85 0.44 5.01

Wheat 4.15 0.52 3.03

Payments under Soybean Proposal

-$100.00

-$50.00

$0.00

$50.00

$100.00

$150.00

$200.00

$1.50 $1.70 $1.90 $2.10 $2.30 $2.50 $2.70 $2.90 $3.10 $3.30 $3.50

Price ($/bushel)

Ret

urns

($/

acre

)

Market Return less Variable Costs Direct PaymentCountercyclical Payment Marketing Loan BenefitNet Crop Insurance Benefit

Payment Changes

-$100.00

-$50.00

$0.00

$50.00

$100.00

$150.00

$200.00

$1.50 $1.70 $1.90 $2.10 $2.30 $2.50 $2.70 $2.90 $3.10 $3.30 $3.50

Price ($/bushel)

Ret

urns

($/

acre

)

Market Return less Variable Costs Direct PaymentCountercyclical Payment Marketing Loan BenefitNet Crop Insurance Benefit

-$100.00

-$50.00

$0.00

$50.00

$100.00

$150.00

$200.00

$1.50 $1.70 $1.90 $2.10 $2.30 $2.50 $2.70 $2.90 $3.10 $3.30 $3.50

Price ($/bushel)

Ret

urns

($/

acre

)

Market Return less Variable Costs Direct PaymentCountercyclical Payment Marketing Loan BenefitNet Crop Insurance Benefit

Corn Proposal

• Revenue-based support program– County-level (Revenue Counter-Cyclical

Program)

• Marketing loans changed to recourse loans (means farmers could not forfeit crop as payment for loan)

• No change on direct payments

Revenue Counter-Cyclical Program

• Somewhat like current counter-cyclical program

• Revenue guarantee = Percentage*County trend yield*Projected price

• Actual county revenue = County yield*National price

• Payments made when actual county revenue is below revenue guarantee

• May be integrated with crop insurance

American Farmland Trust Proposal

• Similar to National Corn Growers’ Proposal– Revenue-based counter-cyclical program

• Revenue guarantee = Percentage*National trend yield*Projected price

• Actual revenue = National yield*National price

• Payments made when actual revenue is below revenue guarantee

• Planned integration with crop insurance– Premiums and indemnities reduced by payments from revenue

counter-cyclical program

Why Switch to Revenue?

• Critics of the current farm bill point to two main factors– Continuing need for disaster assistance– Possible overcompensation from price-based

programs• Example: 2004 for corn, record corn yields, 3rd highest corn

crop value, large corn government payments

• Targeting revenue, instead of price, can address these factors

USDA Proposal

• Set loan rate at minimum of loan rates in House-passed version of 2002 farm bill or 85% of 5-year Olympic average prices

• Change marketing loan program from daily price settings to monthly price settings

• Increase direct payment rates

• Change counter-cyclical program to be revenue-based

USDA Proposal

Crop Target Price

($/bu.)

Direct Payment

Rate ($/bu.)

Max. Nat. Loan Rate

($/bu.)

Corn 2.63 0.30 1.89

Soybeans 5.80 0.50 4.92

Wheat 3.92 0.56 2.58

USDA’s Revenue Counter-Cyclical Program

• Revenue guarantee = 2002-2006 National Olympic average yield*Effective target price– Effective target price = Target price – Direct payment rate

• Actual revenue = National yield*Max(Season-average price, National loan rate)

• Payments made when actual revenue is below revenue guarantee

• Pays on base acres and yields, not planted acres and actual yields

Corn Example

• 2002-2006 National Olympic average yield = 146.4 bu./acre• Effective target price = $2.35/bu.• Target revenue = $344.04/acre

• National yield = 130 bu./acre• Season-average price = $2.30/bu.• Actual revenue = $299.00/acre

• Farm program yield = 114.3 bu./acre

• Current program payment = $0.05/bu.– ($2.35 - $2.30)

• Proposed program payment = $0.394/bu.– (($344.04 - $299.00)/114.3)

The Next Farm Bill?

• May look like some of these proposals– As time proceeds, the odds increase for packages

that look like the wheat and soybean proposals

• Congress usually blazes its own trail– USDA proposals do not carry significant weight in

Congress

• Cost will be a major consideration