CARD Ethanol Impact Study Posted to Internet

Grainnet, IL

05-14-07

CARD Ethanol Impact Study Posted to Internet

by Myke Feinman, BioFuels Journal Editor

A six-month study looking at four scenarios of the ethanol industry and its potential impact on corn and livestock producers is now available on the web.

The study was conducted by the Center for Agricultural and Rural Development (CARD) at Iowa State University.

Chad Hart, one of the study's nine authors, Agricultural Economist with CARD and head of CARD's Biorenewable Policy Division, said these four scenarios will be followed in about two months by two more scenarios currently being researched.

The scenarios use computer projections which look forward in time to 2016, and use several assumptions such as: > Continued government support in the ethanol and agriculture industries such as the tariff on foreign ethanol.

> The ability of livestock to handle dried distillers grains with solubles (DDGS), a co-product of ethanol.

> There are no cellulosic ethanol plants coming online before 2016.

"We tried to look at how ethanol production is going to ramp up and its impact on agriculture over the next decade if plants being built today go online as expected," he continued.

The four scenarios are:

1) Baseline: A baseline scenario which looks at oil prices starting at approximately $58 per barrel in 2008 and finished at $54 per barrel in 2016. In this case, corn acreage increases to 93.5 million acres and stays between 92 and 94 million until 2016. The price of corn at $3.20 per bushel increases to $3.40 in 2010 and drops to $3.15 by 2016. Ethanol levels out at 14.9 billions gallons of production per year by 2016, up from 5 billion in 2006.

2) Higher Oil Prices: Under this scenario, oil is $10 per barrel higher than the baseline ($58). This strengthens the ethanol industry in the United States. The scenario assumes there is no bottleneck for ethanol, meaning that ethanol demand will not be limited to current ethanol blends. Hart said studies have shown that with blending ethanol at 10 percent, there is a bottleneck at between 14 and 15 billion gallons produced per year. The scenario shows a higher demand and higher supply of DDGS, and the price of DDGS will increase by 40 percent. Also, corn will increase to $4.40 per bushel. "This tightens the margins for our livestock producers. We will see some pulling back of the livestock industry." For example, beef production will go from 28.3 billions pounds in 2016 in the baseline projections to 27.8 billion pounds under the higher oil price scenario.

3) CRP Land in Production: Under this scenario, about 7 million acres under the Conservation Reserve Program is brought back into production, with most of it going to corn. Corn price drops from $3.15 in the baseline to $3.09 by 2016. For the ethanol industry, production increases from 14.9 billion gallons to 15.3 billion gallons by 2016.

4) Drought Year: In the final scenario, the model looked at what would happen if there was a severe drought year, similar to the one which occurred in 1988. The year chosen is 2012. The impact shown is a significant drop in corn production, a reduction in stored corn between 65 and 70 percent, and a 60 percent reduction in exported corn. "We see everything backing off slightly; feed usage of corn falls 15 percent because of the increase in corn prices." He said for one year, ethanol production goes down by 8 to 10 percent. The next year, production increases in corn and ethanol, so the impact is for one year only.

"These are computer-based, economic models that look at each agricultural sector," Hart said. "We try to look at production, consumption, how commodities are traded and government support."

The next two scenarios will examine the impact of: > The bottleneck for ethanol under higher oil prices, and > The possible impacts of removing the ethanol tariff on foreign imports.

For more information, contact CARD at (515) 294-1183.