Renewable Energy & Climate Change Newsletter

Transcription

1 Renewable Energy & Climate Change Newsletter in this issue... Feedstocks Used for U.S. Biodiesel: How Important is Corn Oil?...Page 1 Corn Price Squeeze Emerging for Corn Farmers...Page 6 prices, profitability and supply/demand The following spreadsheets have been updated on the AgMRC Renewable Energy web site, org/renewable_energy/. prices midwest ethanol prices ethanol basis fuel vs. grain (annual) fuel vs. grain (monthly) profitability ethanol profitability corn profitability biodiesel profitability supply/demand corn/ethanol balance sheet soy oil biodiesel balance sheet soybean balance sheet distillers grains balance sheet T Feedstocks Used for U.S. Biodiesel: How Important is Corn Oil? by Dr. Robert Wisner, biofuels economist, rwwisner@iastate.edu he 2007 Energy Independence and Security Act (EISA) (1) provides flexibility for the EPA to increase the biodiesel mandate from the minimum 1.0 billion gallons that is specified for 2012 and later years. Biodiesel meets the requirements for advanced biofuel and is the one major domestically produced source of advanced biofuel that is currently available in large commercial volumes. (2) With the much slower emergence of cellulosic biofuels than Congress had anticipated when it passed the EISA and the rapid ramping up of the advanced biofuel mandate, biodiesel has a potentially very important role in meeting government mandates. Cellulosic biofuels are considered to be advanced biofuels and were originally intended to supply a major part of the EISA 2.75 billion gallon advanced biofuels mandate for That EISA mandate rises to 5.5 billion gallons in To put this mandate in perspective, the proposed 2013 advanced biofuels mandate is equivalent to about 21% of U.S corn starch ethanol The 2015 mandate increases to the equivalent slightly more than 40% of the 2012 U.S. corn starch ethanol A very modest amount of commercial cellulosic biofuel production is expected to emerge in a few plants next year, but the quantity appears certain to be far below the EISA s advanced biofuels mandates. If so, biodiesel may play a greatly increased role in meeting the nation s advanced biofuels mandates in the intermediate years before the emergence of a large commercial cellulosic biofuel industry. The future role of biodiesel in meeting advanced biofuels also will depend on how quickly a way can be found to increase the level of the ethanol blend wall. Unless it is increased, the blend wall will limit the size of the market that is available for an emerging cellulosic ethanol industry and will make it necessary for the increasing advanced biofuels mandates to be filled with other fuels. If biodiesel is required or expected to fill a substantial part of the increased advanced biofuels mandate, it is important to examine the sources of feedstocks used for biodiesel The experience of the corn ethanol industry is a caution for biodiesel producers. During the early years of the rapid expansion in corn starch ethanol production, corn was priced at or below $2 per bushel and was a very economical feedstock. But as demand increased, supplies tightened and the feedstock price increased sharply and depressed profit margins. Similar risks could occur in the biodiesel industry as well as in the emerging cellulosic biofuels industry. In the last few years, many ethanol production facilities have added technology to remove corn oil from distillers grains and solubles, thus generating an additional AgMRC encourages the use and distribution of material from this newsletter, but asks that individuals please inform us of your intention to reprint or distribute materials for our records at agmrc@iastate.edu.

2 Feedstocks Used for U.S. Biodiesel: How Important is Corn Oil?, continued from page 1 Feedstocks Used for U.S. Biodiesel: How Important is Corn Oil?, continued from page 2 income stream to help offset depressed profit margins. The vast majority of plants that have begun removing corn oil in the last few years use end-stream technology. End-stream technology produces corn oil that typically is not suitable for the food industry. Rapid expansion in use of this technology has resulted in a substantial increase in production of lower quality corn oil. The main uses of this added corn oil supply are for additional energy in livestock and poultry rations and for biodiesel For 2013, EPA has proposed increasing the basic biodiesel mandate by 28% from last year. If biodiesel would be expected to supply its proposed higher mandate and one-half of this year s proposed 2.75 billion gallon advanced biofuels mandate, the combined increases in mandates would require a very large increase in feedstocks. Supplies of presently used feedstocks currently are quite tight. In this article, we look at amounts of various feedstocks that are being used for U.S. biodiesel The Energy Information Administration in the U.S. Energy Department provides data on these feedstocks only for the past three years, so a lengthy historical analysis is not available. Biodiesel production is a relatively young industry. It its initial years, the major feedstocks were soybean oil and animal fats. Overview of U.S. Biodiesel Production Biodiesel production in the U.S. emerged in the early 2000s with growing concern about the need for energy independence and reduced greenhouse gas emissions. Production facilities are now spread over a large geographic area, as Figure 1 indicates. (3) Thirty seven sates report have at least one biodiesel production facility. The top four states in biodiesel production capacity are Texas, Iowa, Illinois and Missouri, in that order. These four states have slightly over half of the U.S. production capacity. Texas has large petroleum refining capacity which fits well with its need for biodiesel to blend with petroleum-based diesel fuel. The other three of the top four states are at the center of the nation s Soybean Belt and have large supplies of soybean oil available for biodiesel The Energy Information Administration (EIA) reports the U.S. biodiesel production capacity at 2.13 billion gallons per year. (4) In its peak calendar year of production (2012), EIA data indicate U.S. produced 969 million gallons of biodiesel, which is equivalent to 45.6% of the currently reported industry capacity. Thus, the biodiesel industry appears to have substantial capacity to increase production in response to the proposed sharp increases in biodiesel and advanced biofuels mandates. Figure 2 shows U.S. monthly biodiesel production since 2001 and reported biodiesel stocks. Production has fluctuated in a wide range and has been influenced by an off and on-again blenders tax credit as well as loss of the EU export market. In the last two years, stocks have increased substantially and at times have exceeded Figure 3 shows exports and imports of U.S. biodiesel. Exports were large during the period before the EU implemented import tariff restraints on U.S. biodiesel, as the chart indicates. Since February of 2011, net exports have ranged from a low of -7.5% to a high of 16% of total Net exports are shown on the right-hand vertical axis of the chart. The negative number at the low end of this range means U.S. at that time was a net importer, with net imports equal to 7.5% of that month s Major feedstocks used for U.S. biodiesel production The U.S. Energy Information Administration (EIA) in the last three years has provided monthly data on the amount of selected feedstocks used for biodiesel Feedstocks used in 2010, 2011, and 2012 are shown in Figures 4 through 6 below, in millions of pounds. EIA also lists cottonseed oil, palm oil and other vegetable oils as biodiesel feedstocks in their monthly data base but withholds the numbers to avoid disclosure of individual company data. It appears that use of these feedstocks may be very small. As Figure 2 above indicated, biodiesel production was much smaller in 2010 than in the following two years. The same vertical scale is used in each of Figures 4, 5 and 6. As the biodiesel industry emerged, soybean oil was its dominant feedstock, accounting for more than half of the total feedstocks used in 2011 and Other feedstocks included canola oil, tallow, poultry fats, yellow grease, white grease, and a very small amount of corn oil. Yellow grease is a term used for recycled cooking oils. Figures 5 and 6 reflect a substantial recovery of biodiesel production in 2011 and 2012 after adjustment to the loss of the EU export market. Most of the feedstock used for the increase in production was soybean oil, as Figure 5 clearly indicates. Use of canola oil for U.S. biodiesel gradually declined during the last two-thirds of 2011 after reaching a peak in April. The decline in its use for biodiesel may partly reflect its increased use as a partial replacement for soybean oil in the food industry. With much narrower profit margins for ethanol production than in early years of the industry s expansion, a sizeable number of ethanol plants began adding AgMRC Renewable Energy & Climate Change Newsletter Page 2 AgMRC Renewable Energy & Climate Change Newsletter Page 3

3 Feedstocks Used for U.S. Biodiesel: How Important is Corn Oil?, continued from page 3 Feedstocks Used for U.S. Biodiesel: How Important is Corn Oil?, continued from page 4 end-stream technology to remove corn oil from distillers grain and solubles. The oil produced from this process is useable largely as a biodiesel feedstock or as an energy source in livestock and poultry rations. As this type of corn oil production increased, its use in biodiesel production gradually increased but remained a much smaller portion of the total feedstocks than soybean oil. Figure 6 indicates that biodiesel production trended downward beginning in late spring of Most of the decrease was accommodated by reductions in use of canola oil and soybean oil. Loss of the biodiesel tax credit likely was a major reason for the decline, along with rising feedstock costs in the summer and early fall. Even with declining production, soybean oil remained the dominant feedstock by a large margin. Use of corn oil and yellow grease as feedstocks gradually increased in 2012 but remained a relatively small part of the feedstock mix. Figure 7 shows the relative shares of the various biodiesel feedstocks on an annual basis for 2010 through Soybean oil accounted for 55.5 to 57 percent of EIA s reported feedstocks used for biodiesel production in 2011 and However, its total volume used for biodiesel fluctuated more than those of other feedstocks when total biodiesel production fluctuated. Corn oil accounted for 4.6 to 7.9 percent of the total feedstocks. Thus, it is significant as a biodiesel feedstock but still has only a small share of the total biodiesel feedstocks. Yellow grease s share of the total fluctuated from 6.4 percent to 10 percent of the total feedstocks. White grease s share declined from 13.6% in 2010 to 4.6% in Canola oil was the second-largest feedstock source for biodiesel production in 2011 and 2012, with 11.6 and 10.9 percent market shares respectively in those years. Trade sources indicate that because of tight supplies, use of canola oil for U.S. biodiesel will drop sharply this year. Concluding Comments Biodiesel production capacity is spread across numerous states although the largest share of production is in the petroleumrefining state of Texas and in the heart of the Corn and Soybean Belt where soybean oil is readily available as a feedstock. In contrast to its sister biofuel, corn-starch ethanol, biodiesel production has been erratic from year to year. Reasons behind the fluctuations in its production include off and on-again policies related to biofuels tax credits and loss of the formerly very large EU biodiesel market. Soybean oil continues to be the dominant U.S. biodiesel feedstock by a large margin. It usually accounts for more than half of the nation s biodiesel feedstocks. Canola oil s market share of total feedstocks has been in a narrow range of about 10 to 12 percent of the total. Yellow grease in the last year has become the third largest U.S. biodiesel feedstock. Its share was slightly above that of corn oil. Despite a rapid increase in the number of corn-starch ethanol plants producing corn oil, its share of the total biodiesel feedstock market remains quite small. Looking ahead to the future, the proposed large increases in 2013 biodiesel and advanced biofuels mandates could have a large positive impact on the biodiesel industry if feedstock supplies were more plentiful. (5) It is almost certain that a sizeable share of the increased feedstocks needed to meet the proposed mandates, if they are implemented, would be soybean oil. This year, that would create a major challenge because of very tight old-crop U.S. soybean supplies. Supplies of other feedstocks are limited and face alternative demands in the feed industry to provide additional energy during the very tight grain supply situation. Some have suggested importing palm oil for biodiesel production but a December 2011 EPA release indicates its studies found that biodiesel and renewable diesel from palm oil do not meet the life-cycle 20% minimum greenhouse gas reduction needed to qualify as a biofuel. (6) References 1 U.S. Congress, Energy Independence and Security Act of Limited production of a few other alternative advanced biofuels may be available this year, as indicated by Environmental Protection Agency, 40 CFR Part 80 [EPA- HQ-OAR ; FRL ],RIN 2060-AR43: Regulation of Fuels and Fuel Additives:2013 Renewable Fuel Standards. Also see Real Fuels, and Ron Kobrta, KiOR ships first cellulosic diesel volumes from Miss. Biorefinery, Biodiesel Magazine, March 19, Energy Information Administration, Monthly Biodiesel Production Report, December 2012, 4 Ibid. 5 For details on the mandates see R. Wisner, EPA s Proposed Biofuels Mandates for Challenges for the Biofuels Industry, Renewable Energy and Climate Change Newsletter, Ag Marketing Resource Center, March Environmental Protection Agency, Regulatory Announcement, EPA Issues Notice of Data Availability Concerning Renewable Fuels Produced from Palm Oil Under the RFS Program, Office of Transportation and Air Quality, EPA- 420-F , December AgMRC Renewable Energy & Climate Change Newsletter Page 4 AgMRC Renewable Energy & Climate Change Newsletter Page 5

4 Cost Price Squeeze Emerging for Corn Farmers Cost Price Squeeze Emerging for Corn Farmers, continued from page 6 C Cost Price Squeeze Emerging for Corn Farmers by Don Hofstrand, agricultural economist, dhof@iastate.edu orn prices have risen precipitously since the turn of the century due primarily to the emergence of the corn ethanol industry. In 2000, the average Iowa corn price was $1.78. By 2012 it had risen to $6.67. This rise greatly increased corn farmer profits. However, a significant portion of this increase has been offset by higher production costs. This article examines the increased crop production costs and its implications for farmers. The cost information comes from Ag Decision Maker Information File Monthly Profitability of Corn Production agdm/info/outlook.html. Corn production costs are divided into three sections. The first is annual production inputs such as seed, fertilizer, herbicides, fuel, repairs, insurance and other direct costs. The second is the cost of machinery ownership. These costs are depreciation (an estimate of actual deprecation, not tax depreciation) and interest payments on machinery debt. The third is the cost of cropland. The annual cost of cropland is estimated using the cash rental rate. By charging a land cost equal to the cash rental rate, the return for producing corn is the return to the farm operator (does not includes the landlord s return). Although production cost varies from farmer to farmer, these cost estimates are believed to be typical of Iowa corn farmers. The cost of producing corn has risen substantially since 2000, as shown in Table 1. Seed cost per acre has more than tripled from $30 in 2000 to over $100 in The unit cost of seed ($ per 1,000 seeds) shown in Table 2 indicates a similar increase. The cost of fertilizer and lime per acre has also tripled rising from $52 to $145 during the same period. Although nitrogen, phosphorus and potash have all increased in price, the prices of nitrogen and potash have increased the most. Contrary to the cost trend of other production inputs, herbicide cost has actually dropped slightly over this period. The cost of fuel and repairs has also increased, driven in part by the price of diesel fuel. Although the need for corn drying varies from year to year, the cost of LP gas has also risen. Cropland cash rent, a major cost of producing corn, has more than doubled over this time period. The increase in corn production costs is shown graphically in Figure 1. Production costs started to increase rapidly in 2004 with the major expansion of the ethanol industry. In 2009 production costs spiked to over $700 per acre but fell back in Subsequent to 2010, production costs have resumed their upward climb. Costs are estimated to reach $777 per acre in Cost per acre can be converted to cost per bushel to provide a different perspective of production costs. Because corn yield varies from year to year, the cost per bushel follows a somewhat different pattern than cost per acre. As shown in Table 3, corn yield has tended to trend upward since This trend has helped offset some of the rise in cost per acre. Yield can also vary greatly between years, resulting in a significant impact on cost per bushel, as shown in Figure 2. Cost per bushel was relatively low in 2004 and 2009 due to corn yields over 180 bushels per acre. Conversely, cost per bushel was well over $5.00 per bushel in 2012 due to the drought reduced yield. A return to more normal yields in 2013 would result in a cost of about $4.50 per bushel. Although comparing the cost per bushel relative to its selling price indicates the profitability of corn production, examining the total cost of producing a corn crop provides an estimate of the increase in working capital required for corn As shown in Table 4, the cost of producing 500 acres of corn has risen from about $175,000 in 2000 to almost $390,000 in Because these costs are generally cash costs, the working capital requirements of a corn farmer have more than doubled during this period. This means that a significant portion of a year s corn profits are required to fund the increase in working capital needed for the subsequent year s corn Implications Although corn production costs have risen substantially in recent years, the cost per bushel has not exceeded selling price. If corn prices are above cost per bushel in coming years, production costs will continue to rise to fill the gap between cost and price. If production input costs don t rise sufficiently to fill this gap, cash rental rates will fill it due to competition among farmers for farmland. Moreover, the current generous revenue insurance program reduces the need for a risk premium in the profit structure of corn production, allowing corn farmers to bid cropland rents even higher. So, the higher corn prices generated by the corn ethanol industry are, or will soon be, fully capitalized into the corn farmer s cost structure. A decline in the ethanol industry would have a significant detrimental impact on the profitability of corn Although corn ethanol is viable as an octane enhancer (3 to 5% blend rate), its market value as a gasoline substitute is questionable, except at a deep price discount to gasoline (ethanol has 2/3 the energy content of gasoline). If it were not for the corn-ethanol mandates contained in the Renewable Fuel Standard, the market for ethanol blends at 10 percent or higher may not be viable except at discounted ethanol prices. Depending on gasoline price, producing corn-ethanol at the discounted price will probably not be profitable due to the increased cost of producing corn. The Renewable Fuel Standard needs to continue to support the corn-ethanol industry so corn demand and price are sufficiently high to cover the increased corn production costs plus provide a profit for corn farmers. Of course, other demand factors AgMRC Renewable Energy & Climate Change Newsletter Page 6 AgMRC Renewable Energy & Climate Change Newsletter Page 7

5 Cost Price Squeeze Emerging for Corn Farmers, continued from page 7 also impact the situation. The impact of a decline in the demand for corn-ethanol would be felt beyond the corn farmer. As corn acreage has expanded due to the demand for corn for producing ethanol, it has impacted other crops such as soybeans and minor oilseeds, wheat and other small grains, cotton, etc.. Because of the relatively fixed size of the U.S. cropland acreage, more acres of corn mean fewer acres of other crops. To maintain their acreage, the selling prices of other crops have also risen to be competitive with corn. Higher prices for these other crops means improved profits for a large number of noncorn farmers. If the demand for corn ethanol drops, the demand for corn will also drop, reducing the competition for acres and causing a price drop for other crops. This will result in a cost-price squeeze for growers of corn and other crops. and justice for all The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, gender, religion, age, disability, political beliefs, sexual orientation, and marital or family status. (Not all prohibited bases apply to all programs.) Many materials can be made available in alternative formats for ADA clients. To file a complaint of discrimination, write USDA, Office of Civil Rights, Room 326-W, Whitten Building, 14th and Independence Avenue, SW, Washington, DC or call The Ag Marketing Resource Center Renewable Energy & Climate Change Newsletter is available on-line at: AgMRC Renewable Energy & Climate Change Newsletter Page 8