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: [email protected]
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 $10/barrel higher than projected
• Margins on ethanol plants increase
• New incentive to invest in added capacity
• Major hurdle will be felt at 14 – 15 billion gallons due to E-10 saturation
• Drop in ethanol price will eventually encourage increase in flex-fuel cars
Changes from Base Case for 2010
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Cor
nA
crea
ge
Cor
n P
rice
Eth
anol
Pro
duct
ion
Cor
n F
ed
Soy
bean
Acr
eage
Soy
bean
Pric
e
Bee
fP
rodu
ctio
n
Bee
f R
etai
lP
rice
Por
kP
rodu
ctio
n
Por
k R
etai
lP
rice
Per
cent
Cha
nge
Proposals for the 2008Farm Bill
Chad HartCenter for Agricultural and Rural Development
Iowa State University
March 29, 2007
ISU Livestock Field Specialist MeetingAmes, Iowa
E-mail: [email protected]
Current Farm Support
• Three main programs– Direct Payment Program– Counter-cyclical Payment Program– Marketing Loan Program
• Direct payments are fixed; counter-cyclical and marketing loan payments vary with price
Key Settings
Crop Target Price
($/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