First Generation Biofuels Compete

Marshall A. MartinPurdue University

USA

Transgenic Plants for Food Security in the Context of Development

The Pontifical Academy of Sciences15-19 May 2009Casina Pio IVVatican City

An Overview of the Presentation

• Some recent history• Production of corn-based ethanol• U.S. government biofuel mandates• The food vs. fuel debate• Recent commodity and food price behavior• The livestock vs. fuel debate• Environmental issues• World and developing country perspective• Role of biotechnology• Concluding comments

The Food vs.

Fuel Debate

The Headlines

• Biofuel plant expansion

• Foreign oil independence

• High food prices cause riots

• Ethanol plant bankruptcy

• Hitting the blend wall

~200 ethanol plants in the United States

Source: www.renewable-ag.com

Expansions/New Construction

Currently in Production

Growth of Corn-Based Ethanol Production

• Six-fold increase in 10 years• Drivers of the growth:

– High petroleum prices– Government incentives and

mandates– Desire for less dependence on

imported oil– Effort to increase farm income

and create jobs in rural communities

Source: Fastech LLC, March 2009

Why the recent debate?• Rapid investment in ethanol

plants increased the demand for corn

• Economic growth in global markets increased demand for commodities

• Weak U.S. dollar encouraged grain exports

• High petroleum prices provided market incentives for ethanol use, but increased commodity prices and food costs

• U.S. EPA ruling to replace MTBE with ethanol

An Historic Perspective on Commodity Prices

Record high commodity prices in nominal but not real terms

Source: Abbott etal, What’s Driving Food Prices, Farm Foundation, July 2008

Net Returns to Ethanol Producers

Very profitable in 2007-08, but sharp decline in 2008-09 mainly due to weaker consumer demand for gasoline and lower petroleum prices.

Source: Glauber, USDA Chief Economist, February 2009

How is ethanol produced from corn?

Source: Enzyme Use for Corn Fuel Ethanol Production, Novozymes, July 2007

Use of Distillers Dried Grain with Solubles (DDGS)

U.S. Government Mandate:Renewable Fuel Standard

YearRenewable

BiofuelAdvanced

BiofuelCellulosic

BiofuelBiomass-based

Diesel

UndifferentiatedAdvanced

Biofuel

TotalRFS

2008 9 92009 10.5 0.6 0.5 0.1 11.12010 12 0.95 0.1 0.65 0.2 12.952011 12.6 1.35 0.25 0.8 0.3 13.952012 13.2 2 0.5 1 0.5 15.22013 13.8 2.75 1 1.75 16.552014 14.4 3.75 1.75 2 18.152015 15 5.5 3 2.5 20.52016 15 7.25 4.25 3 22.52017 15 9 5.5 3.5 242018 15 11 7 4 262019 15 13 8.5 4.5 282020 15 15 10.5 4.5 302021 15 18 13.5 4.5 332022 15 21 16 5 36

Source: Renewable Fuels Association

U.S. Renewable Fuel Standard

Renewable Biofuel --

Starch-Based

Advanced Biofuel

Cellulosic Biofuel

BioDiesel

0

5

10

15

20

25

30

35

40

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Billion Gallons

Source: Steve Meyer, Paragon Economics Inc., March 2009

The Biofuels vs.

Food Debate

Did corn prices drive

up food prices in

early 2008?

The Biofuels vs. Food DebateAre affluent car owners driving up the

price of food to the poor?

Food vs. Fuel Debate

• Sharp global food price increase in 2007-08 followed by a dramatic decline in 2008-09

Source: Brian Wright, University of California Berkley. Snyder Lecture, Purdue University, April 17, 2009

The Biofuels vs. Food Debate

The dietary transition

Increased grain and meat exports to countries with

population growth and increasing per

capita income

Currency Exchange Rate ImpactsWeaker U.S. dollar results in :•Increased U.S.exports•Higher priced oil

Source: Barchart.com, May 2009.

45% Depreciation2002 to June 2008

20% Appreciation SinceJune 2008

Global Grain Market Behavior

Global grain demand has outpaced supply for a decade

Lower stocks-to-use puts upward pressure on grain prices

Source: Chris Hurt, Indiana Ag Outlook 2009

U.S. Consumer Food PricesRecent U.S. consumer food price behavior

Source: Corinne Alexander, Department of Agricultural Economics, Purdue University, August 2008.

U.S. Consumer Food Price ChangesRelative Final Final Final Final Forecast

Importance 1 2005 2006 2007 2008 2009 2

Consumer price indexes Percent

All food 100.0 2.4 2.4 4.0 5.5 3.0 to 4.0 Food away from home 44.3 3.1 3.1 3.6 4.4 3.5 to 4.5 Food at home 55.7 1.9 1.7 4.2 6.4 2.5 to 3.5 Meats, poultry, and fish 12.2 2.4 0.8 3.8 4.2 2.0 to 3.0 Meats 7.9 2.3 0.7 3.3 3.5 1.5 to 2.5 Beef and veal 3.8 2.6 0.8 4.4 4.5 1.5 to 2.5 Pork 2.4 2.0 -0.2 2.0 2.3 1.5 to 2.5 Other meats 1.7 2.4 1.8 2.3 3.1 0.0 to 1.0 Poultry 2.3 2.0 -1.8 5.2 5.0 2.0 to 3.0 Fish and seafood 2.1 3.0 4.7 4.6 6.0 4.0 to 5.0 Eggs 0.7 -13.7 4.9 29.2 14.0 -5.0 to -4.0 Dairy products 6.2 1.2 -0.6 7.4 8.0 -4.0 to -3.0 Fats and oils 1.6 -0.1 0.2 2.9 13.8 3.0 to 4.0 Fruits and vegetables 8.2 3.7 4.8 3.8 6.2 3.5 to 4.5 Fresh fruits and vegetables 6.2 3.9 5.3 3.9 5.2 4.0 to 5.0 Fresh fruits 3.1 3.7 6.0 4.5 4.8 4.0 to 5.0 Fresh vegetables 3.1 4.0 4.6 3.2 5.6 3.5 to 4.5 Processed fruits and vegetables 1.9 3.3 2.9 3.6 9.5 3.0 to 4.0 Sugar and sweets 2.1 1.2 3.8 3.1 5.5 3.0 to 4.0 Cereals and bakery products 7.9 1.5 1.8 4.4 10.2 2.5 to 3.5 Nonalcoholic beverages 6.7 2.9 2.0 4.1 4.3 3.0 to 4.0 Other foods 10.1 1.6 1.4 1.8 5.2 3.0 to 4.0Market basket of farm foods: Farm value N.A. -0.4 -3.1 18.3 3.8 N.A. Farm to retail price spread N.A. 5.2 0.4 0.9 7.5 N.A. Retail price N.A. 3.9 -0.3 4.5 6.7 N.A.

[Contact: Ephraim Leibtag 202-694-5349, eleibtag@ers.usda.gov]

Percent Change

Forecasts by Economic Research Service. Source of historical data: Bureau of Labor Statistics

1BLS estimated expenditure shares, December 2008.2Forecasts updated by the 25th of each month.

N.A. = Not available.

•Sharp increase in

2007-08•Greater increase for poultry and dairy than other livestock products

•Greater increase for those requiring further processing

Source: USDA-ERS, Briefing Room, March 25, 2009

Differential Impacts of Food Price Increases

Higher income consumers spend a relatively small portion of their budget on food and price increases have a relatively small impact

U.S. consumers spend only 5.7% on food consumed at home

Low-income consumers spend a large proportion of their budget and food price increases can have a substantial adverse impact

In India and China consumers spend about 35% on food consumed at home

Livestock Producervs.

Fuel Debate

•Higher feed costs reduced profit margins

•Livestock producers requested government policy modifications

2004 2005 2006 2007 2008 2009

Source: Chris Hurt, Department of Agricultural Economics, Purdue University, April 2009

Ethanol Industry Subsidies

• $.54/ gallon import tariff

• $.45/gallon blenders subsidy

• Some local communities have provided incentives for plant locations

The Petroleum & Corn Value Proposition

Ethanol Industry Response •Stopped plant construction

•Idled some plants

•VeraSun filed bankcuptcy and sold some plants

Ethanol plants and capacities

• March 2009:– 193 plants – 12.4 billion gallons of capacity– 23 plants with capacity of 2.1 billion

gallons still under construction or expanding

• Ethanol plants are currently operating

at 16% under capacity

The Blending Wall

Source: Energy Information Administration

115

120

125

130

135

140

145

Bill

ion G

allo

ns

U.S. Blended Motor Gasoline Consumption

•Currently 10% blend

•Relatively few flex-fuel cars

•Approaching maximum ethanol to gasoline use relationship

U.S. Corn Production & Usage By Category

U.S. CORN PRODUCTION & USAGE BY CATEGORY

0

1000

2000

3000

4000

5000

6000

7000

1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Usage - Mil. bu.

Ethanol

FSI-Non Ethanol

Feed & Residual

Exports

Source: Steve Meyer, Paragon Economics, Inc., March 2009

Farmer Response and Environmental Issues

• Changes in corn production imply: More tillage and potential soil erosion

• More fertilizer and ag chemical use and potential water contamination

• More trucks on highways

U.S. Corn, Soybean, Wheat & Cotton Planted Acreage

Source: Glauber, Chief Economist, USDA, February 2009

Corn Outlook

World Fuel Ethanol Production

USA (corn-based) andBrazil (sugarcane-based) about equal

Source: Enzyme Use for Corn Fuel Ethanol Production, Novozyme, July 2007

Transgenic Crop Adoption

Rapid adoption in the Western Hemisphere

Adoption of Transgenic Corn

Mill

ion

Hec

tare

s

Source: GMO Compass, October 9, 2008, www.gmo-compass.orgSource: Clive James, ISAA

Transgenic Crop Adoption

Transgenic Corn as Share of Total Area

Biotechnology Developments to Enhanced Corn-Based Ethanol

• Drought-tolerant varieties to increase yield

• Selection for higher starch content

• Enzymes to increase corn grain and residue conversion efficiency to ethanol

Concluding Thoughts•Several market and policy factors are driving commodity, food, and fuel prices.

•U.S. ethanol production capacity is approaching the renewable fuel standard.

•Increased production and processing efficiency will likely make it possible to meet food, feed, and fuel demands.

•But policy and weather events can distrupt markets and the recent food vs. fuel debate could reoccur.

•The challenge is to encourage adoption around the world of known agricultural technologies and develop new ones if society is going to meet our food, feed, and fuel demands in a sustainable manner.

Questions?

Thank You!