Daniel De La Torre Ugarte Burton English Kim Jensen Chad Hellwinckel Jamey Menard and Brad Wilson

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December 2006

* Associate Professor, Professor, Professor, Research Associate, Research Associate and Programmer/Analyst respectively. Department of Agricultural Economics, 310 Morgan Hall, 2621 Morgan Circle, The University of Tennessee, Knoxville, TN 37996, ph. 865-974-5005.

Study funded in part by the Governors' Ethanol Coalition and the National Commission on Energy Policy.

Executive Summary

This study was undertaken to examine the impacts of expanded levels of ethanol and biodiesel production and to provide a better understanding of the potential economic and agricultural impacts of this expansion. The study results indicate that producing 60 billion gallons of ethanol and 1.6 billion gallons of biodiesel from renewable resources by the year 2030 is projected to result in the development of a new industrial complex with nearly 35 million acres planted to dedicated energy crops. This industrial complex is estimated to have an economic impact in excess of $350 billion within the U.S., creating 2.4 million additional jobs, many in Rural America. Not only can U.S. agriculture meet the nation's food and feed demand, but it has sufficient resources to produce significant quantities of biofuels. Bioenergy allows for a potential win-win-win scenario for energy security, agriculture, and rural economic development.

Using POLYSYS, an agricultural simulation model developed at the University of Tennessee, and IMPLAN, an input output model, this report assesses the potential impacts of increasing production of ethanol and bio-diesel beyond current market levels and the levels specified in the recently enacted renewable fuel standard. Specifically, the objective of the study is to analyze the impacts on agriculture and the economy from increased ethanol (starch and cellulosic) production. The levels of production analyzed are 10, 30, and 60 billion gallons of ethanol by 2010, 2020 and 2030, respectively. In addition, sensitivity to the timing of cellulosic to ethanol commercial introduction and impacts cellulosic introduction has on the corn to ethanol industry are projected. The study also includes an assessment of the impacts of producing 1 billion gallons of biodiesel production by 2012.

For the agricultural sector, this new demand for agricultural cropland and crops implies an additional $11 billion of net farm income by 2030, and savings of more than $5 billion dollars in government payments in that year. Overall for the period 2007 to 2030, the estimated accumulated gains in net farm income are over $210 billion.

Between 2007 and 2012, corn grain is the primary feedstock for ethanol production at a little more than 12 billion gallons per year resulting in an increase in corn price of about $0.90/bushel in 2010. Cellulosic ethanol is assumed to be commercially viable in 2012 and initially wood from forest residues and mill wastes are used. By 2014, dedicated energy crops are utilized and become the primary cellulosic feedstock by 2017. Crop residues in the form of wheat straw and corn stover become significant feedstocks after 2020.

In order to meet the specified goals, if cellulosic ethanol is not commercially viable until 2015, 20 billion gallons of ethanol will need to come from corn. This results in the price of corn increasing to $4.65/bushel. This high corn price is likely prohibitive to attainment of the ethanol goal.

Study Highlights

Achievement of 60 billion gallons of ethanol and 1.6 billion gallons of biodiesel per year:

• Can be achieved without using CRP lands,

• Will be fostered by research increasing agricultural productivity and commercialization of cellulosics to ethanol,

• Is projected to result in a cumulative increase in net farm income over the 2007-2030 period of $210 billion,

• Is estimated to impact the nation's economy by $350 billion and 2.4 million jobs, with much of these impacts occurring in the nation's rural economies,

• Will provide for displacement of more than 20% of the gasoline by 2030; potentially reducing oil imports by $52 billion, and

• Can result in cumulative displacement of 10.48 billion barrels of oil, and a potential import reduction of $629 billion through 2030.

By 2030, agricultural exports are reduced by $3 billion, with most of the reduction occurring in the soybean market. However, in that same year, ethanol is projected to displace more than 20 percent of domestic gasoline consumption, potentially reducing oil imports by $52 billion dollars. For the entire period through 2030, the displacement would be 10.48 billion barrels of oil, and a potential import reduction of $629 billion dollars.

Table of Contents

I. Introduction 8

II. Objective 10

III. Methodology 11

3.1. Biofuels Goals 12

3.2. Conversion Technologies 14

3.2.1 Modeling Methodology 14

3.2.2 Outlook for a cellulose-to-ethanol industry 14

3.2.2.1 Enzymatic Breakdown 15

3.2.2.2 Gasification 16

3.3. POLYSYS 17

3.3.1. Crop Supply Module 19

3.3.2. Crop Demand Module 20

3.3.3. Livestock Module 21

3.3.4. Biomass Feedstock Sources 21

3.3.4.1. Dedicated Energy Crop 21

3.3.4.2. Crop Residues 22

3.3.4.3. Wood Residues 22

3.3.4.4. Yellow Grease and Tallow 23

3.3.5. Optimal Feedstock Allocation 23

3.3.6. Conversion Costs and Coefficients 25

3.4.2. POLYSYS/IMPLAN Integrator (PII) 27

3.4.2.1. Impacts to the Agricultural Sector 28

3.4.2.2. Impacts to the Renewable Energy Sector 28

3.4.2.3. Impacts That Occur As A Result Of Interstate Commerce 28

3.5. Key Study Assumptions 28

3.5.1. Dedicated Energy Crops Yield 29

3.5.2. Adoption of No-till Practices 30

3.5.3. Augment the Landbase 31

3.5.4. Yields of Traditional Commodities 31

3.6. Scenarios 32

3.6.1. Scenario 1: Ethanol 60 Billion gallons (ETH60) 32

3.6.2. Scenario 2: Corn Grain for Ethanol Adjustment (ETH60CA) 33

3.6.3. Scenario 3: Delay in the Cellulose-to-Ethanol Technology to 2015 (ETH60CADC) 33

IV. Results 33

4.1. Agricultural Sector Impacts 33

4.2. Bioenergy Production and Fuels Imports Reduction 34

4.3. Feedstock Utilization 35

4.4. Changes in Land Use 38

4.5. Price Impacts 40

4.6. Biofuels Cost 41

4.7. Exports 43

4.8. Regional Impacts: Feedstock and Net Returns 44

4.9. Livestock Sector 46

4.10. Corn Utilization 48

4.11. Government Payments and Net Farm Income 50

4.12. Impacts on the Nation's Economy 52

4.13. Impacts in the Ethanol Energy Conversion Sector 54

4.14 Tax Implications of producing 60 Billion Ethanol Gallons 55

4.15. Summary of Key Findings 56

V. Conclusions 58

VI. References 60

APPENDIX A: Renewable Conversion Technologies —Expenditures In IMPLAN 66

APPENDIX B: 2006 USDA Baseline Extended to 2030 (USDAExt) 82

APPENDIX C: Definitions, Data Sources for numbers generated in IMPLAN's Tax

Impact Report, and Results 86

List of Tables

Table 1. Summary of Conversion Technologies and Cost Information Sources 18

Table 2. Key Study Assumptions and Descriptions 29

Table 3: Changes in Dedicated Energy Crop Yields Assumed Through the Year 2030 30

Table 4. Change in Percentage Tillage Mix for Corn and Wheat 30

Table 5. Crop Yields under Bioenergy Outlook 32

Table 6. Projected Bioenergy Production Under the ETH60 Scenario 34

Table 7. Estimated Savings in Gasoline Consumption / Imports Under the ETH60

Scenario 35

Table 8. Impact on the Average Crop Price by Scenario for Selected Simulated Years 42

Table 9. Estimated Cost of Biofuels for ETH60 Scenario 42

Table 10. Projected Volume of Exports for ETH60 Scenario and Baseline 43

Table. 11. Projected Value of Agricultural Exports for Corn, Wheat, Soybeans, and Cotton by Selected Year and Scenario 44

Table 12. Change in Livestock Sector Costs and Returns Under the ETH60 Scenario 47

Table 13. Change in Livestock Sector Costs and Returns Under the ETH60CA Scenario 48

Table 14. Change in Livestock Sector Costs and Returns Under the ETH60 CACD

Scenario 49

Table 15. Corn Utilization for Selected Scenarios and Years 49

Table 16. Dry Distillers Grains for Selected Scenarios and Years 50

Table 17. Estimated Level of Government Payments by Government Program Under the

ETH60 Scenario and the Extended USDA Baseline 51

Table 18. Amount of Ethanol and Biodiesel Production Assumed in the POLYSYS Baseline and the Amount of Additional Gallons Required to Meet the

Estimated Goal 52

Table 19. Estimated Annual Economic Impacts from Meeting 10, 30, and 60 Million

Gallon Ethanol Goals in 2010, 2020, and 2030, Respectively 53

Table 20. Summary of Key Results 56

Table A.1. IMPLAN Expenditures for Ethanol from Shelled Corn (Dry Mill) 68

Table A.2. IMPLAN Expenditures for Ethanol from Cellulosic Residues (Stover,

Switchgrass, Rice Straw, and Wheat Straw) 70

Table A.3. IMPLAN Expenditures for Ethanol from Food Residues 73

Table A.4. IMPLAN Expenditures for Ethanol from Wood Residues 76

Table A.5. IMPLAN Expenditures for Biodiesel from Soybeans 78

Table A.6. IMPLAN Expenditures for Biodiesel from Yellow Grease 80

Table B.1. Export Projections for Estimated Baseline, USDAExt 84

Table B.2. Yield Projections for Estimated Baseline, USDAExt 85

Table B.3. Population Projections for Estimated Baseline, USDAExt 85

Table C.1. Estimated annual impact on taxes in the year 2030 as a result of producing 60

billion gallons of ethanol 92

Table C.2. Estimated annual impact on taxes from the economic activity from the agricultural sector in the year 2030 as a result of producing 60 billion gallons of ethanol 93

Table C.3. Estimated annual impact on taxes from the economic activity of the renewable energy sector in the year 2030 as a result of producing 60 billion gallons of ethanol 94

List of Figures

Figure 1. Renewable Energy Sources 8

Figure 2. Bioenergy Sources 9

Figure 3. Process for Definition of Renewable Energy Targets and Impacts on

Agricultural Variables 11

Figure 4. Process to Estimate the Economic Impacts of Producing Renewable Energy 12

Figure 5. Ethanol Production and Production Targets with the Current Renewable Fuel

Standard, 1999-2030 13

Figure 6. Biodiesel Production and Production Targets, 1999-2030 13

Figure 7. Land Use by Major Use Category, 2002 19

Figure 8. Schematic of the Methods Employed to Determine Feedstock Price Required to

Meet Ethanol Demand 24

Figure 9. Ethanol Production Path Under the ETH60 Scenario 35

Figure 10. Ethanol Quantities from Selected Feedstock Under the ETH60 Scenario 36

Figure 11. Biodiesel from Selected Feedstock Under the ETH60 Scenario 37

Figure 12. Ethanol from Selected Feedstock Under the ETH60CA Scenario 38

Figure 13. Ethanol from Specified Feedstock under the ETH60CACD Scenario 39

Figure 14. Changes in Land Use for Selected Years Under the ETH60 Scenario 39

Figure 15. Changes in Soybean Acres from Baseline Under the ETH60 Scenario 40

Figure 16. Distribution of All Cellulosic Feedstock (Crop Residues, Dedicated Energy

Crops, Forest Residues, Mill Wastes, and Wood from Fuel Reduction) Under the ETH60 Scenario 45

Figure 17. Distribution of Changes in Farm Net Returns Under the ETH60 Scenario 46

Figure 18. Changes in Net Farm Income and Government Payments 51

Figure 19. Estimated Impacts to the National Economy as a Result of Changes in

Agricultural Production, Prices, and Government Payments to Meet the 60

billion Gallon Ethanol Demand in 2030 54

Figure 20. Estimated Impacts to the National Economy as a Result of Establishing a Larger Renewable Energy Sector to Meet the 60 billion Gallon Ethanol

Demand in 2030 55

Figure 21. Estimated annual increase in tax collections as a result of producing 60 billion gallons of ethanol 56

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