Why ethanol? 2 2 0 0 7 I llinois Farm Econom ic Sum m it Reason - - PDF document

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Dec 19, 2022 269 likes •405 views

I m pact of Ethanol on I m pact of Ethanol on Crop and Livestock Sectors Crop and Livestock Sectors Bob Hauser r-hauser@uiuc.edu University of I llinois 2 0 0 7 I llinois Farm Econom ic Sum m it The Profitability of I llinois Agriculture:

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2 0 0 7 I llinois Farm Econom ic Sum m it

The Profitability of I llinois Agriculture: W here to from Here?

I m pact of Ethanol on I m pact of Ethanol on Crop and Livestock Sectors Crop and Livestock Sectors

Bob Hauser r-hauser@uiuc.edu University of I llinois

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Why ethanol?

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Reason #1

10 20 30 40 50 60 70 80 90 100 1/2/1986 1/2/1987 1/2/1988 1/2/1989 1/2/1990 1/2/1991 1/2/1992 1/2/1993 1/2/1994 1/2/1995 1/2/1996 1/2/1997 1/2/1998 1/2/1999 1/2/2000 1/2/2001 1/2/2002 1/2/2003 1/2/2004 1/2/2005 1/2/2006 1/2/2007 Crude Oil Price ($/barrel)

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Reason #2

0.50 1.50 2.50 3.50 4.50 5.50 Jan- 60 Jan- 65 Jan- 70 Jan- 75 Jan- 80 Jan- 85 Jan- 90 Jan- 95 Jan- 00 Jan- 05 Month/Year Price ($/bu.)

Source: USDA

$1.14 $2.42

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Reason #3

51 cents

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Resulting in:

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Valuation of ethanol

$2.00 corn $4.00 corn Mfg costs: $1.62 ethanol $2.34 ethanol Effect of: Co-products $1.39 $1.90 Subsidy $0.88 $1.39

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Other effects on value

+

Meets RFS Octane Booster Oxygenate State tax breaks

_

Gasoline substitute at about 67% Blending, logistics, and transportation

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World Biofuels

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Ethanol and Gasoline Prices

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Omaha w holesale

Gasoline Ethanol 2004: $1.25 $1.69 2005: $1.66 $1.80 2006: $1.94 $2.58 Jan 2007: $1.49 $2.26 Jul 2007: $2.49 $2.51 Oct 2007: $2.24 $1.79

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Ethanol-Corn Spread

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Long run equilibrium corn price results from entry/exit into ethanol industry, driven mostly by:

Long run expectation of crude oil price Expected level of federal subsidy

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Why is entry/exit so important w ith ethanol and not other uses?

1. Long run equilibrium price has been well

below $3.50

2. Ethanol production will have a negligible

effect on gasoline price, yet

3. It is a significant part (greater than 20%)
f corn production

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What adjustments w ill be needed to reach the new , $3.50 equilibrium

1. Depends on the elasticity of demand for

ther uses of corn

2. Depends on the elasticity of supply for corn as well as other crops 3. See Chapter 2 of Ethanol Report on CD if interested in details

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Where does it end?? A high long-term oil price expectation dictates the corn price There will be a movement up the non- ethanol demand curves for corn (mostly feed demand domestically and abroad), causing substitution of land The form of this substitution world wide will depend on supply responses in those parts

f the world that can add crop acres,

perhaps Brazil and the Ukraine

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Ultimately, in the U.S., the biggest effects are:

Increase in food prices (meat in particular) with relatively little decrease in consumption A significant reduction in U.S. crop exports Higher land prices/rents

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The push back to these conclusions tend to focus on: Yields Exports CRP

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Current CRP acreage

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Other factors determining the new state of equilibrium

U.S. subsidy policy – very important RFS level -- ?? 10% ethanol versus …? Tariff policies – important but unlikely to change Breakthroughs in cellulosic technology.

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Cellulose versus corn We know little about the economics of cellulosic processing, transportation, or production Many questions remain at both the firm and sector levels Appeal of cellulose usually based on

yield of ethanol per acre (miscanthus) potential to grow it on “marginal” land avoid direct food vs energy tradeoff carbon valuation

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Preliminary estimates indicate About a 60-cent per-gallon difference in ethanol cost when using miscanthus vs corn, when corn is $3.50

Accounts for production, opportunity cost of land, storage/transportation, processing, with carbon value = 0 Even when carbon is assumed to be $10/ton, the difference is close to 50 cents If this is in the ball park then what would happen if the subsidy is aimed differently?

About a 90-cent per-gallon difference in ethanol cost when using miscanthus vs corn, when corn is $2.00

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Finally, community impacts

Three locations in Illinois considered Details are in Chapter 5 General results

Local economic effects relatively small Varies by level of urbanization

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