2012 Risk and Profit Conference Breakout Session Presenters. 9. Bio-Energy's Impact on U.S. and World Grain and Feed Markets

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1 2 Risk and Profit Conference Breakout Session Presenters 9. Bio-Energy's Impact on U.S. and World Grain and Feed Markets Daniel O Brien <dobrien@ksu.edu> Daniel O Brien was raised on a grain and livestock farm in south central Nebraska, in which he still has an interest with his father and three brothers. He received both Bachelor of Science (197) and Master of Science (19) degrees in Agricultural Economics from the University of Nebraska-Lincoln. The focus of his M.S. thesis was on analyzing the impact of agricultural cooperatives on rural Nebraska fertilizer markets. O Brien then worked as an extension agent in western (Lincoln County) and northeastern (Pierce County) Nebraska for seven years beginning in early 191. While attending graduate school at Iowa State University beginning in 197, O Brien worked as an Extension Assistant in Agricultural Marketing, focusing on analysis of grain and livestock markets and price risk management strategies. He completed his Ph.D. in December 1993, focusing his dissertation research on developing a method by which to forecast the probability of alternative U.S. harvest time corn futures price outcomes. While working as Extension Farm Management Specialist in Northwest Iowa during 1993 through early 1995, he became heavily involved in analysis of the structural changes in the Iowa livestock industry associated with contract hog production. From March 1995 through May 23, O Brien worked as the Extension Agricultural Economist in Northwest Kansas based out of the Northwest Research and Extension Center in Colby. He held the position of Northwest Area Extension Administrative Director starting in June 23 before returning to his Extension Agricultural Economist position in January 27. Daniel O Brien s ongoing extension and applied research interests and efforts are in the areas of a) grain market supply-demand analysis, bioenergy impacts and price-income risk management strategies, b) grain industry market structure, conduct and performance focusing on grain handling and transportation issues, and c) economic analysis of irrigated and dryland cropping systems, and associated cropland leasing arrangements. Abstract/Summary Growth in bioenergy production in the U.S. since 26 has had a large impact on U.S. grain acreage, production and supply-demand balances, as well as on the agricultural industries using feedgrains and oilseeds. A report titled "Future Patterns of U.S. Grains, Biofuels and Livestock and Poultry Feeding" co-authored by Daniel O'Brien of KSU, and sponsored by the Council on Food, Agricultural and Resource Economics (CFARE) and other feed industry groups, examines several issues such as 1) biofuels' impact on livestock feed costs, 2) how saturation of the domestic ethanol market may slow growth in corn demand, 3) how livestock sector adjustments to grain market changes vary by species, and ) the longer term challenges facing the ethanol industry. These issues will be addressed and discussed in this session.

2 Bio-Energy's Impact on U.S. & World Grain and Feed Markets Daniel O Brien, Ph.D. Extension Agricultural Economist Kansas State University Overview Profitability of U.S. Ethanol & Biodiesel Trends in U.S. Ethanol Production & Corn Use U.S. Renewable Fuels s History & the Future Carryover RINs & their Potential Impact on Corn Use How Renewable Fuels s & Blend Walls affect U.S. Ethanol Production & Corn Prices Thoughts on U.S. Corn Supply-Demand & Ethanol Production Trends in Years Profitability of Corn Ethanol & Soybean Biodiesel Ethanol Price, Cost & Profits ISU Ethanol Plant Model (January 25 August 1, 2) f Ethanol $ Per Gallon of $3.5 Periods of Exteded Losses Dec. May 9: ($.5/g) Jan. August* : ($.1/g) $1.5 $1. $.5 $. Cost $2.5 Price $2.52 $.5 Net ($.6) ($.5) Jan 5 May 5 Sep 5 Jan 6 May 6 Sep 6 Jan 7 May 7 Sep 7 Jan May Sep Jan 9 May 9 Sep 9 Jan 1 May 1 Sep 1 Jan 11 May 11 Sep 11 Jan May Sep 13 Profit Loss $/gal Ethanol $/gal Ethanol Breakeven $/gal

3 Ethanol DDGS & Corn Input Prices ISU Ethanol Plant Model (January 25 August 1, 2) ton DDGS $ / t $5 Since July 9 $5 Corn$ up 16% $ DDGS$ up 23% $35 $3 $25 $2 $15 $1 $5 $ $6.5 $16 July 9 $3. July 9: $91 Corn$ Aug. 1, 2 $1. $.13 / bu $9. $. $7.21 $7. $29 DDGS$ Aug. 1, 2 $3 /ton Jan 5 May 5 Sep 5 Jan 6 May 6 Sep 6 Jan 7 May 7 Sep 7 Jan May Sep Jan 9 May 9 Sep 9 Jan 1 May 1 Sep 1 Jan 11 May 11 Sep 11 Jan May Sep DDGS $/ton Corn $/bu $6. $5. $. $1. $. Co orn $ / bus shel Ethanol Revenues & Net Returns ISU Ethanol Plant Model (January 25 August 3, 2) f Ethanol Gallon of $ Per $.5 $. DDGS % of Total Revenue DDGS % up 1.3% annually Jan Aug 2 = 21.9% vs Preliminary August 2 Ethanol = $2.52 /g (73%) DDGS = $.91 /g (27%) 1.9% (211) & 16.7% (2) $3.5 $1.5 $1. $.5 $. ($.5) Jan 5 May 5 Sep 5 Jan 6 May 6 Sep 6 Jan 7 May 7 Sep 7 Jan May Sep Jan 9 May 9 Sep 9 Jan 1 May 1 Sep 1 Jan 11 May 11 Sep 11 Jan May Net ($.6) Ethanol Revenue $/gal DDGS Revenue$/gal Profit Loss $/gal Biodiesel Price, Cost & Profits ISU Biodiesel Plant Model (April 27 August 3, 2) f Biodiesel $ Pe er Gallon of $6.5 $5.55 $.5 $3.5 $1.5 $.5 ($.5) Net losses in July-Aug as Biodiesel prices have fallen Net Returns $/g Biodiesel $/g Breakeven $/g Soybean Oil $/cwt $.2 Apr 7 Jul 7 Oct 7 Jan Apr Jul Oct Jan 9 Apr 9 Jul 9 Oct 9 Jan 1 Apr 1 Jul 1 Oct 1 Jan 11 Apr 11 Jul 11 Oct 11 Jan Apr Jul Oct $15 $9 $75 $6 $5 $3 $15 $ $ Per cwt of Soy ybean Oil Trends in U.S. Ethanol Production & Corn Usage Profit Loss $ Biodiesel $ Biodiesel Breakeven $ Soybean Oil $

4 U.S. Ethanol Capacity & Production Years: Estimate (Source: Renewable Fuels Association) Billion ga allons / yea ar Ethanol production > Name plate capacity in 5 of last 7 years (except 29 & 2 to date) In 2: 13.7 e bgproduction vs 1.7 bg capacity Little ethanol expansion now occurring U.S. Corn Use Long Term 1975/76 2/13 Marketing Years of Corn Billion bushels Ethanol has expanded U.S. corn use, especially since MY 199/99 Livestock Feed Use was trending up through MY 25/6, then down for 7 years Other FSI Livestock Feed Use Ethanol Plant Capacity (Start of Year) Expansion (Start of Year) July 31, 2 Capacity in Operation Annual Production Recent U.S. Corn Use With DDGS #s 199/9-2/13 Marketing Years Equivalent Billion bu Corn or Ethanol DDGS adjustments offset some of the Feed & Export Use declines since MY 25/6 DDGS Other FSI Livestock Feed Use Ethanol Fuel DDGS Feed U.S. Corn Production & Use (+DDGSs) 199/9-2/13 Marketing Years Billion bu Corn or eq quivalent Corn Production Other FSI Since MY 2/1-22/3 period most of increase in U.S. corn production has ended up in Ethanol for Fuel use DDGS Livestock Feed Use End Stocks Ethanol Fuel DDGS Feed

5 U.S. Corn Use Trends (+ DDGSs) MY 2/5 thru MY 2/13 hels illion Bus Bi Total Feed = Corn Livestock Feed + DDGS Feed Total = Corn + DDGS Ethanol Fuel DDGS Wet Mill - Other FSI DDGS Feed United States t Renewable Fuels s History & the Future Livestock Feed Marketing Years RFS2 Renewable Fuel Volumes Source: 27 U.S. Energy Independence & Security Act / EPA s / year ion gallons Bill 25 RFS2 Corn Starch Ethanol increases from 13.2 bg/yr in 2 up to 15. bg/yr in 215, then stays level there after. 2 Advanced Biofuel to increase in 213 (unless waived by EPA) Renewable Fuel - Corn Starch Advanced BioFuel EPA Blending s for 2 Actual Gallons EPA Corn-Starch Equivalent Gallons Total Renewable Fuels + Corn-starch Ethanol 13.2 bln. gal bln. gal. + Advanced Biofuels 2 2. bln. gal bln. gal. (see below) = Total Renewable Fuels 15.2 bln. gal bln. gal. Advanced Biofuels + Biomass-based Diesel 1. bln. gal. *1.5 bln. gal. + Cellulosic Biofuel.65 million gal. 1.5 million gal. Advanced Biofuels 2. bln. gal. 2. bln. gal.

6 U.S. Ethanol Production vs RFS2 For Years 27 2 (Sources: Paulson-Purdue & RFA) / year on gallons Billi 2. U.S. Ethanol Production > U.S. Corn RFS2 mandates since 27 Net difference due to ethanol exports, generation of excess of RINs, etc RFS2-Corn Net Difference (Trade, RINs,...) Ethanol Production U.S. Ethanol Production vs RFS2 For Years / year on gallons Billi Projected 2 increases in RFS2 & U.S. corn-for-ethanol use for period 16. Key Question: Will 2 drought, short corn crop, & high corn $s throw a wrench 1. in 2these RFS2 mandated production levels? bg 1. bg 15. bg 13.3 bg 13.9 bg 13.6 bg bg 2. bb 9.3 bg 1.9 bg. bb 5.1 bb. bb 5. bb 5.2 bb 5.5 bb bb 3.9 bb RFS2-Corn Ethanol Production Corn 2.75 gl/bu of Corn Billion bushels What are Ethanol RINs? Source: John Gelbard, RINXchange The EPA requires that each gallon of renewable fuel produced have a unique serial number attached to it These "Renewable Identification Numbers (RINs)" are turned into the EPA each year by petroleum refiners to prove they have blended the required amount of renewable fuel into their gasoline Refiners can avoid blending renewables into gasoline themselves by purchasing excess RINs from other refiners who have used more renewable fuel than was required of them Anyone registered with the EPA can buy & sell RINs, which means that RINs function as somewhat of a renewable energy currency Ethanol RIN Stocks Calculations RINs = Renewable Identification Numbers for ethanol; (million gallons) RINs Less Less RFS Ending Banking Actual Starting Ethanol Ethanol RIN Cap (2% Banked (For only to Year RINs Production non advanced ) Stocks x ) RINs 27 6,521,7 1,21 1, 1, 2 1, 9,39 9, 2,19 2,1 2,1 29 2,1 1,93 1,5 2,53 2, 2, 21 2, 13,29 39, 3,3 2,52 2, ,52 13,9 1,195195,6 2,673 2,6 2,6 2(a) 2,6 13, ,2 2,163 2,76 2,163 2(b) 2,6 1, ,2 2,53 2,76 2,53 213** 13, 21** 1, 215** 15,

7 2 Ethanol RINs Availability & Corn Use Equivalents f Ethanol gallons of Billion.5 Gasoline blenders can use carryover RINs to offset short 2 supplies,5. If blenders use bln gal of RINs, then it would replace , mb 3.5 of corn-for-ethanol. 3, bg 3, 2.53 bg 2. bg 2.52 bg bg bg 2, bg 2, -Or ,5 655 mb 76 mb 73 mb 916 mb 96 mb 939 mb mb 1, (a) 2(b) "Banked" RINs Corn Use Equivalents of Corn Million bushels How Renewable Fuels s & Blend Walls affect U.S. Ethanol Production & Corn Prices U.S. RFS s Give Ethanol a Corn Input Purchasing Advantage (i.e., Inflexible demand) p g g Corn d level of U.S. ethanol blending 2 Price 213 in billion gallons $/bu BUT, also need to consider the Blend Wall in determining impact of Ethanol-corn use 5.36 bb (215 mandate) Billion bu. processed into Ethanol & DDGS Total U.S. Corn-for-Ethanol Demand Ethanol Corn Use Billion Bushels What is the Ethanol Blend Wall? The blend wall is the upper limit to the total amount of ethanol that can be blended into U.S. gasoline. The blend wall is set by the 1% limit to blending ethanol in gasoline, with the exception of fuels sold to flex-fuel vehicles (FFVs) that are approved for higher blends such as E3 or E5. FFVs make up < 2 % of the car pool, but with limited availability of blender pumps in locations where the majority of those FFVs are located, the market share is much less. Increasing gasoline blends from E1 to E15 could solve the blend wall issue, but it creates other problems that would need to be resolved. The U.S. consumes billion gallons of gasoline / year If every gallon of gasoline included in the RFS were blended with 1% ethanol, refiners would hit the "blend wall" around billion gallons in 2

8 Ethanol Impact on Corn $s Full, Flexible & No Effect in MY 2/13 (Babcock ISU) Full (RFS2 met in full) U.S. Corn Price ($/bu) $6.97 Renewable Fuels Standard (RFS2) U.S. Ethanol Production (billion gallons) U.S. Corn Use for Ethanol (billion bu.) Ethanol RINs Used (billion gallons) 13.6 bg 1.3 bg bb bg Ethanol Price ($/ (BrkEvn$) $2.62 Ethanol RIN Price ($/ (High $s) $1.1 What happens to U.S. corn use & price as the RFS2 is relaxed by using carryover RINs? Ethanol Impact on Corn $s Full, Flexible & No Effect in MY 2/13 (Babcock ISU) Full (RFS2 met Flexible (RFS2 met using in full) 2. bg of RINs) U.S. Corn Price ($/bu) $6.97 $6.6 What if the RFS2 Renewable Fuels Standard (RFS2) 13.6 bg 13.6 bg is eliminated? U.S. Ethanol Production (billion gallons) 1.3 bg.9 bg U.S. Corn Use for Ethanol (billion bu.) bb 7.7 bb Ethanol RINs Used (billion gallons) bg 2. bg Ethanol Price ($/ (BrkEvn$) $2.62 (BrkEvn$) $2.37 Ethanol RIN Price ($/ (High $s) $1.1 (corn $) $.16 U.S. Ethanol (to Brazil) (billion gallons) U.S. Ethanol Imports (from Brazil) (bln gallons).67 bg. bg U.S. Ethanol (to Brazil) (billion gallons).67 bg 1.16 bg U.S. Ethanol Imports (from Brazil) (bln gallons). bg. bg Ethanol Impact on Corn $s Full, Flexible & No Effect in MY 2/13 (Babcock ISU) Full (RFS2 met Flexible (RFS2 met using No ( Blend Wall in full) 2. bg of RINs) demand only) U.S. Corn Price ($/bu) $6.97 $6.6 $5.7 Renewable Fuels Standard (RFS2) 13.6 bg 13.6 bg bg U.S. Ethanol Production (billion gallons) 1.3 bg.9 bg.3 bg U.S. Corn Use for Ethanol (billion bu.) bb 7.7 bb 5.5 bb Ethanol RINs Used (billion gallons) bg 2. bg bg Ethanol Price ($/ (BrkEvn$) $2.62 (BrkEvn$) $2.37 (BrkEvn$) $2.3 Ethanol RIN Price ($/ (High $s) $1.1 (corn $) $.16 (no RFS2) $. U.S. Ethanol (to Brazil) (billion gallons).67 bg 1.16 bg.95 bg U.S. Ethanol Imports (from Brazil) (bln gallons). bg. bg bg Ethanol Demand Model for 2 Depends on Blend Wall, RBOB vs Ethanol $s, limited fuel substitution $3.5 Oxygenated Fuel Floor 5. bln gal 2 RBOB$ = $2.7 Demand for Ethanol 2 Ethanol$ = Blend Wall Maximum 13.3 bln gal Ethanol Quantity (billion gallons) Model from Irwin, Good Illinois, August 2)

9 Ethanol Blending Profits Depend on RBOB Gasoline $ s vs Ethanol $ s RBOB gasoline SEP 2 futures (/17/2) Ethanol SEP 2 futures (/17/2, 1:3 a.m) = $ /gallon = $2.59 /gallon RBOB$/Ethanol$ = 117%, or a $.3 66 / gallon differential Ethanol Futures$ CBOT Ethanol Demand Model: MY 2/13 Depends on Blend Wall, RBOB vs Ethanol $s, limited fuel substitution $3.5 Oxygenated Fuel Floor 5. bln gal 2 RBOB$ = $2.7 Drastic Switch to other oxygenates If Eth$ > RBOB$ by > $. $.2 difference Moderate Switch to other oxygenates If Eth$ > RBOB$ by $.2-$. No Change if Eth$ > RBOB$ by up to $.2 2 Ethanol$ = Blend Wall Maximum 13.3 bln gal RBOB$ NYH Unleaded Gasoline Ethanol Quantity (billion gallons) Model from Irwin, Good Illinois, August 2 Ethanol Supply-Demand for 2 Supply responds to price up to maximum ethanol plant capacity $3.5 (S ) Ethanol Supply = f[ P Ethanol, P Corn, Plant Capacity, ] 2 RBOB$ = $2.7 2 Ethanol$ = S 2 Blend 13.3 bg Ethanol Plant 15. bg Ethanol Quantity (billion gallons) Model from Irwin, Good Illinois, August 2 2 Shift in Corn Ethanol Supply Small-Medium shift in ethanol supply from higher U.S. Corn Prices $3.5 S 1 = f[ Either P ethanol &/or P corn ] BUT, the blend wall still keeps 2 Ethanol Production at bln gallons 2 RBOB$ = $2.7 2 Ethanol$ = S 1 S 2 Blend 13.3 bg Ethanol Quantity (billion gallons) Model from Irwin, Good Illinois, August 2

10 Large Shift in Ethanol Supply Large shift in ethanol supply from much higher U.S. Corn Prices $3.5 S 2 = f[ Large P corn &/or P ethanol ] Blend wall effect reduced & 2 Ethanol Prodn to 11- bg S 2 S 2 Blend 13.3 bg Ethanol Quantity (billion gallons) Model from Irwin, Good Illinois, August 2 Ethanol S-D & RFS2 in 213 Corn RFS2 (13. bg) > Blend Wall (13.3 bg) $ RBOB$ = $ Ethanol$ = bg S 213 RINs = 5 mg or = RFS2 Wall Ethanol Quantity (billion gallons) Blend 13.3 bg Model from Irwin, Good Illinois, August 2 Partial Waiver of RFS2 in Ethanol Production (to say 11. bg) by Waiver or RINs $ RBOB$ = $2.7 Partial Waiver of RFS2 in bg 213 Ethanol$ = Or use RINs = 2.3 bg or = Wall Adj RFS Ethanol Quantity (billion gallons) Blend 13.3 bg Model from Irwin, Good Illinois, August 2 S Thoughts ht on U.S. Corn Supply-Demand & Ethanol Production Trends in Years

11 #1: Blend Wall vs Future RFS2 In 2, Ethanol Blend Wall of bg Corn Ethanol RFS2 of 13.2 bg For 213 if U.S. gasoline use =133. bg 1% blend wall at 13.3 bg of ethanol, while RFS2 = 13. bg, then need to use 5 mg of banked RINs (iff available after 2) Blend Wall less RFS2 shortfall may grow in 21 (RFS2 = 1. bg) & 215 (RFS2 = 15. bg) E-15 &/or E-5 adoption would be solution (problematic) (Long Term) U.S. gasoline demand will drive U.S. Ethanol policy (D. O Brien opinion) Unless > E1 used, ethanol program may need to adjust #2: 2 Action to Waive RFS2? U.S. Agricultural interests & some in U.S. Congress are now requesting that EPA lower or waive RFS2 in years in response to the 2 drought & fears of damage to livestock & export industries RFS2 Flexibility from Banked RINs will help reduce MY 2/13 corn use some (up to 7-95 mb) Economic analysis shows that large reductions in U.S. ethanol production will not occur unless both the RFS2 and the blend wall are adjusted