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Renewable Fuels Association

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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
Sugar Crops
47%
Starch Crops
53%
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
6
5
4
3
2
1
0
1996
1997
1998
1999
2000
2001
Source: Renewable Fuels Association
2002
2003
2004
2005
2006
U.S. Corn use for Ethanol
Million Bushels
1,900
10% blend would require
5.2+ billion bushels corn
1,700
1,500
1,300
1,100
900
700
500
300
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
U.S. Policy
• Tax credit = 51¢/gal for ethanol & $1/gal for
biodiesel (50Вў 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
Other
19%
Brazil
33%
India
4%
China
8%
US
36%
Source: RFA
Ethanol Yields
Sugar Cane
Corn
0
1000
2000
3000
4000
5000
6000
7000
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
$6
$5
$4
$3
$2
$1
п‚·
Energy
Value
п‚·
$30
$40
$50
$60
$70
$80
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
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