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Biofuel profit margins will close quickly, study says

U.S. grain producers are likely to see excellent corn prices over the next 10 years even as ethanol profit margins tighten, according to a study by John Ferris, professor emeritus, economics, Michigan State University.

Ferris, a speaker at the Farm Foundation’s Biofuels, Food and Feed Tradeoffs conference in St. Louis, added that land values and livestock prices could rise with gross margins for farmers.

The study used an economic model which assumed: crude oil prices will remain somewhere around $60 a barrel; the blenders’ tax credits will be extended; the essence of the 2002 farm bill will continue; demand for feedstock will be driven by existing and planned ethanol and biodiesel plants; and demand for feedstock will come from domestic sources.

Ferris plugged in projections that the United States would have the capacity to produce 13.4 billion gallons of ethanol by 2009. Adding in planned construction would increase capacity to over 20 billion gallons by 2017. Meanwhile biodiesel production could move to about 1.5 billion gallons in 2010 and about 2 billion gallons by 2017.

According to Ferris’ economic model, ethanol production expected by 2017 would represent about 15 percent of gasoline used for transportation and about 10 percent of all energy used. Two billion gallons of biodiesel would represent about 4 percent of transportation usage.

Ferris said the implications of this growth are very significant for agriculture, since a large percentage of ethanol will be produced from coarse grain. “This year, corn use for ethanol will probably exceed use for exports. By 2017, ethanol will probably take half of our domestic grain crop.”

Meanwhile, biodiesel production would require about 15 billion pounds of feedstock to produce a forecasted 2 billion gallons by 2017. “However, we could be in real trouble because the price of soybean oil has increased to the point where it really doesn’t work in our current biodiesel plants. So we will be looking for cheaper sources of feedstock, particularly in the near-term because we going to see a drop in soybean production due to acreage declines.”

Eventually, soybean oil may find its way back into the biodiesel picture, according to Ferris, but it is not expected to supply more than 40 percent of biodiesel feedstock needs by 2017. “We will be needing sources for biodiesel other than soybean feedstock over the next 10 years.”

Some of the feedstock requirement for biodiesel will be filled with yellow grease and animal fats. In addition, “the biodiesel industry really needs the corn oil from distillers dried grains. My assumption is that we could squeeze oil from half of the DDGs, which are produced by dry milling, and that would fill the rest of the balance for biodiesel projection.”

The impact of rapid expansion of ethanol and biodiesel plants will continue to affect corn prices much more than soybean prices, noted Ferris. “For the 2006 crop year, the gross margin over variable cost is moving out much more on corn than on soybeans and will maintain a rather substantial margin over soybeans throughout the forecast period.”

As a result, “we’ll see a major shift away from soybeans and into corn this crop and some continuation of the increase afterwards. Eventually, soybean acreage will return to the acreage that we’ve seen in the recent past.”

The latter will be possible due to an increase in the total acreage allocated for corn, soybeans, wheat and other grains. “Between those crops, I see about a 28 million acre increase between 2006 and 2017. I’m assuming that about a third of this 28 million acres will come out of the Conservation Reserve Program.”

Ferris sees profit margins for both ethanol and biodiesel “moving down to very even levels very quickly. It’s already there with biodiesel, unless you’re talking about animal fats and yellow grease.”

The model projects two more profitable years for ethanol production before margins head toward breakeven levels for the next seven to eight years. “But I think expansion will still be encouraged, because there are cheaper ways of producing ethanol.”

Ferris does not see wide-scale commercial production of cellulosic feedstock for ethanol without substantial subsidy support within the next 10 years.

Department of Energy plans to invest up to $385 million for six biorefinery projects over the next four years could help bring cellulosic ethanol to market, according to Ferris. The plants will use a variety of feedstock such as urban yard and wood waste, wheat and barley straw, corn stover, switchgrass, wood residues and woody energy crops. When fully operational by 2011, these biorefineries are expected to produce about 130 million gallons of ethanol per year.

Ferris believes the technical and commercial success of these funded plants “will be a critical first step in the future commercial development of the cellulosic ethanol industry. However, we expect that cellulosic ethanol production will continue to be relatively minor through 2017.”

Overall, Ferris sees significant increases in the income of crop producers and reduced production and higher prices for livestock, particularly poultry. “I think returns of ethanol and biodiesel production will rapidly converge to breakeven levels, even when we’re bringing in the cheaper feedstocks.”

Ferris also believes a boom in land prices will come with projections for higher gross margins for corn and soybeans. “Farm land prices in the Corn Belt could rise from roughly $3,000 and acre to $5,000 an acre by 2017.”

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