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Here are some of the main questions driving ERS studies on bioenergy:

• How will the increased demand for biofuel feedstocks affect crop and livestock production?
• As agriculture becomes a larger producer of energy, are agricultural and energy markets more closely linked?
• What constraints impede the attainment of biofuel mandates?
• What are the likely environmental impacts of higher production of biofuels, and how are they distributed regionally?
• How will crop acreage, agricultural markets, trade, and environmental outcomes change as corn-based ethanol production levels off and cellulosic biofuel production expands?

With corn-based ethanol accounting for the vast share of U.S. ethanol output (and drawing one-third of the corn supply away from other uses), ERS research has focused on the direct impacts of ethanol production on corn production, prices, and trade. However, ERS also evaluates the implications for other crops and commodities, as increased corn prices draw land away from competing crops, raise input prices for livestock producers, and put moderate upward pressure on retail food prices. Similarly, at both the national and regional levels, ERS evaluates the environmental consequences of changing production practices and land use patterns. As corn-based ethanol use under the mandate levels off at 15 billion gallons after 2015, considerable uncertainty remains about the development of a cellulosic biofuel industry, from which The Energy Independence and Security Act of 2007 (EISA) requires 16 billion gallons of fuel by 2022.

This page does not represent the full scope of all research findings or ongoing research; it presents the current state of knowledge and points the reader to specific publications associated with these findings.

• Ethanol Production, Along With Other Factors, Affects Agricultural Commodity Markets
• Energy and Agricultural Markets Are Now Linked
• Mandates for Biofuel Use Face Constraints
• The Renewable Fuels Standard Will Have Long-Term, Economywide Impacts
• Next-Generation Feedstocks Will Have Less Impact on Conventional Ag Markets
• Biofuel-Induced Food Price Increases Are Limited
• Expanding Biofuel Production Will Increase Cropland Use
• Surface-Water and Groundwater Impacts of Meeting Biofuel Targets Vary by Region
• Changing Commodity Prices May Have a Limited Impact on the CRP
• Conclusions and Policy Implications
• References

In recent years, the agricultural sector has been challenged to provide not just food, feed, and fiber to U.S. and world consumers, but also to meet a larger share of our nation's transportation fuel needs. Ethanol made primarily from corn has been used as an additive to meet oxygenate standards designed to improve air quality, but recent legislation has called for renewable biofuels to supplant the use of fossil fuels, reduce dependence on petroleum imports, and lower greenhouse gas emissions. The Energy Independence and Security Act (EISA) of 2007 mandates an increase in biofuels use, from 9.0 billion gallons in 2008 to 36 billion gallons in 2022, which would equate to one-fifth of current U.S. gasoline and diesel consumption, and far higher than the 1.6 billion gallons of biofuels produced in 2000.

Responding to this development, ERS's role has been to interpret and to anticipate the implications of increased biofuel production for commodity and livestock markets, land use and environmental indicators, retail food prices, and other aspects related to the economics of food and agriculture. ERS has provided ongoing analysis of commodity markets with its market outlook program, the development of 10-year "baseline" projections for agriculture that incorporate EISA provisions, data development, and special studies. Many other institutions, such as universities, industry associations, and other government agencies have aimed research at issues similar to those addressed by ERS. Their findings generally accord with those of ERS, but differences naturally emerge because of varying assumptions, different starting points, and the use of tools designed for distinct purposes.

Ethanol Production, Along With Other Factors, Affects Agricultural Commodity Markets

Increased ethanol production has created a new source of demand for corn that affects prices, acreage allocations, exports, and the livestock sector. Corn prices rose in tandem with ethanol production, resulting in higher incomes from corn production. Although costs for users of corn such as livestock producers, the food industry, and foreign buyers increased with ethanol production, other factors, such as low global stocks, droughts, exchange rates, policy responses by some major trading countries, and rising incomes in some countries such as India and China have also contributed to price increases, especially during the 2006-08 period.

ERS Research Findings

• Government biofuel use mandates such as the Renewable Fuel Standard (RFS) indirectly support corn producers by ensuring biofuel use, which is currently fulfilled mostly by corn-based ethanol. Mandated biodiesel production also supports demand for soybeans. With the RFS, corn prices were projected at 15 billion gallons, 2.2 percent higher than a pre-RFS baseline of 12 billion gallons of corn ethanol production in 2016. [1, 9, 12, 13]
• Market impacts of higher biofuel production include higher commodity prices, higher farm income for most crop producers, lower government expenditures for commodity programs, and higher retail food prices. [7, 11]
• Government expenditures on biofuel credits have been partly offset by savings in government payments for commodity programs triggered by low prices. [7, 12]
• Higher prices for corn reduce the livestock sector's profitability, thereby reducing livestock output, but that reduction is offset partly by the availability of distillers' grains (from ethanol production) as a substitute source for feed. Distillers' grains are high in protein and compete with other protein sources such as soy meal, mitigating price increases and feed ration costs. [9]

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Energy and Agricultural Markets Are Now Linked

Government biofuel use mandates--combined with tax credits, an import tariff and surcharge, and research fundin--have encouraged renewable energy alternatives to fossil fuel. However, a major impetus has come from the energy sector: high oil prices and the need for oxygenates strengthen demand for ethanol and the corn used to produce it, creating a link between corn and gasoline markets. When oil prices fall, the link between energy and agricultural markets is weakened, but will still impact agriculture.

ERS Research Findings

• Barrels and bushels are now more intertwined through corn-based ethanol. While energy as an input remains a cost for corn production, it is now also an indirect competitor as it influences corn demand and prices. Swings in fossil fuel prices can shift demand for corn. High oil prices boost demand for ethanol when ethanol is priced lower than gasoline on an energy-equivalent basis. [1, 12]
• Although ethanol has a large impact on the corn market (33 percent of use), its impact on the massive gasoline market is limited (less than 8 percent of use). However, its role in both markets is growing. [12]
• Mandates, tax credits for biofuels production, and tariffs on imported ethanol increase the profitability of the ethanol industry, and corn producers as well. [12, 13]
• Once the mandate reaches its implicit maximum level of 15 billion gallons for corn-starch ethanol in 2015, future biofuel production growth is expected to shift more to non-food feedstocks, and impacts on the agriculture sector will likewise change. Corn use for ethanol under the RFS will level off at around 5-6 billion bushels. Greater volumes could be consumed outside the mandate, but are limited by the effective 10-percent maximum for ethanol in gasoline for most vehicles. (See following section) [1, 7]

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Mandates for Biofuel Use Face Constraints

Constraints to future growth of the ethanol industry will present challenges to meeting the ambitious mandates under the RFS. Currently, the motor gasoline market is capable of absorbing the U.S.-produced ethanol (along with imports). However, as mandates increase over time, the volumes required will be difficult to absorb into the transportation sector as it is currently structured. Either the distribution infrastructure and the vehicle fleet will need to accommodate greater volumes of biofuels, or else, new "drop-in" fuels--those that are near-perfect substitutes for gasoline or diesel--need to be developed.

ERS Research Findings

• Raising the blend limit to 15 percent, as is currently allowed for cars and light trucks manufactured since 2001, will forestall the effects of a blend wall, but only temporarily and only if the higher blends are available to consumers. [14]
• If the mandate for cellulosic biofuels under the RFS is met with ethanol after 2015, alternative methods of using ethanol must be found. Increasing the number of vehicles that consume E85 or blends greater than 10 percent ethanol is one option, but it would require time-consuming and costly development of supporting infrastructures, as well as an updated vehicle fleet. [3, 4]
• Using fuels that do not face the volume constraints of ethanol is another option. For instance, research into "drop-in" fuels that are nearly identical to conventional fuels is underway. Drop-in fuels are nearly perfect substitutes for gasoline or diesel and do not face vehicle or infrastructure constraints.[3]
• Public policy, such as the 2008 Farm Bill, supports research and development of alternative fuels that circumvent the blend wall issue and also provides incentives for alternative ethanol blends such as E85.[5]
• For cellulosic biofuels to become commercially viable, the cost of conversion must be reduced. [3, 4]
• To meet the mandate, next generation feedstock availability must expand to meet future demands. Significant obstacles exist to the production, harvesting, transport, and storage of these bulky feedstock materials. [12, 14]

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The Renewable Fuels Standard Will Have Long-Term, Economywide Impacts

The expansion of biofuels under the RFS through 2022 will affect various key components of the U.S. economy as biofuel production increases. Prior to the oil price spike in 2008, greater energy independence was generally expected to burden the U.S. economy. However, increasing costs of foreign petroleum means that, in the future, greater energy independence will likely affect overall the economy positively overall. [15]

ERS Research Findings [14]

• Given projected advances in biofuel production and higher petroleum prices, the RFS could boost real wages, increase household income, and lower import prices compared with the no-RFS scenario.
• Demand for crude oil would fall as ethanol replaced a portion of consumption, resulting in lower crude prices. The smaller import bill would lead to U.S. dollar appreciation and reduce the cost of other imported goods.
• By substituting domestic biofuels for imported petroleum, the United States would pay less for imports overall and receive higher prices for exports of goods and services, providing a gain for the economy from favorable terms of trade.
• Increases or decreases in GDP depend on the level of tax credits provided to biofuels and future oil prices. The greater the value of displaced petroleum for each dollar of biofuel produced and the lower the tax credits, the greater the benefit to the U.S. economy.
• Household welfare would increase regardless of whether or not tax credits were retained, and household purchasing power would be enhanced by because of a higher real income, favorable terms of trade with relative lower import prices, and, hence, greater household purchasing power.
• Meeting the RFS in 2022 would reduce U.S. agricultural commodity exports and increase the demand for agricultural imports as crops compete for limited land.
• Households would spend less on motor fuels, but consume greater volumes.

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Next-Generation Feedstocks Will Have Less Impact on Conventional Ag Markets

The shift to "next generation" biofuels--those produced from non-food feedstocks and wastes--will change the resources used for biofuels production. Feedstocks will increasingly come from crop residues, energy crops such as switchgrass, and fast-growing woody biomass. These feedstocks will have a smaller effect on food and feed markets. In addition, their production will likely be more dispersed geographically, unlike corn, which is concentrated in the Midwest and upper Midwest.

Corn Ethanol Plants are Concentrated in Midwest while Next Generation Plants May Be Located across the Nation near Biomass Supplies

Source: Oak Ridge National Laboratory (Biomass Research and Development Initiative, December 2008, p.79).

ERS Research Findings

• Diversity of feedstocks reduces regional impacts and distributes benefits and costs. [3, 4]
• Use of many feedstocks (feed grains, crop residues, energy crops) reduces the vulnerability of dependence on a single feedstock type and distributes benefits of feedstock production more widely. [2, 3]
• Use of non-food feedstocks can result in less direct impact on commodity markets, livestock feed, and food markets as long as competition for land is minimal. [2, 3]
• The future of next generation biofuels hinges on:

  o reducing high production and capital costs,
  o securing financial support during precommercial development,
  o establishing feedstock supply arrangements, and
  o overcoming blend wall constraints that could limit biofuel use. [3]

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Biofuel-Induced Food Price Increases Are Limited

Field corn is the predominant corn type grown in the United States. Currently, less than 10 percent of the U.S. field corn crop is used for direct domestic human consumption in foods such as corn meal, corn starch, and corn flakes, while the remainder is used for animal feed, exports, ethanol production, seed, and industrial uses. Given that livestock feed rations traditionally contain a large amount of corn; a bigger impact would be expected in meat and poultry prices from higher feed costs than in other food products. Currently, about 40 percent of U.S.-produced corn produced is used directly as animal feed for livestock and poultry. The rise in corn prices is somewhat offset by distillers' grains, a high-protein byproduct of ethanol production used increasingly in livestock rations.

Source: USDA, Economic Research Service.

ERS Research Findings

• Biofuel-induced food price increases are limited. Because U.S. ethanol production uses field corn, the most direct effect of increased ethanol production should be on field corn prices and on the price of food products containing field corn. However, even for those products heavily based on field corn, the effect of rising corn prices is dampened by other market factors. Higher corn prices increase animal feed and ingredient costs for farmers and food manufacturers, but the change in the retail prices is less than 10 percent of the corn price change. [8]
• ERS research shows foods using corn as an ingredient make up less than a third of retail food spending. Overall retail food prices would rise less than 1 percentage point per year above the normal rate of food price inflation when corn prices increase by 50 percent. [8]
• While higher commodity prices may have a relatively modest effect on U.S. retail food prices, there may be a greater effect on the price of staple goods in low-income countries. Price increases for grains and oilseeds are of particular concern, as these commodities constitute a large share of their citizens' diets. [10]

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Expanding Biofuel Production Will Increase Cropland Use

Greater biofuel demand increases pressure on the agricultural land base as more land is put into production. Expanded biofuel feedstock production can come from three main sources: acreage not currently in production, acreage shifted from other crops, and increased productivity. The relative profitability of alternative land uses will determine how land is allocated between biofuel feedstock production, use for other crops, and non-crop uses including grazing and idling.

ERS Research Findings [2, 9]

• ERS research shows that the amount of additional land and displaced crops associated with increased biofuel production differs by region.
• If the RFS targets are met, total cropland is projected to increase by 1.6 percent over baseline (without the expanded RFS) conditions by 2015, with corn acreage expanding by 3.5 percent and accounting for most of the overall cropland increase.
• While corn acreage expands in every region, traditional corn-growing areas would likely see the largest increases--up 8.6 percent in the Northern Plains, 1.7 percent in the Corn Belt, and 2.8 percent in Lake States.
• Some of these acres were shifted from other crops such as soybeans or wheat. Other acres came from land that was not planted to crops, and some came from land freed up as Conservation Reserve Program (CRP) contracts were not renewed.

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Surface-Water and Groundwater Impacts of Meeting Biofuel Targets Vary by Region

Ramping up corn production to meet biofuel production targets raises environmental concerns. Potential environmental effects result from an expansion in cropland under production, a shift in cropping practices toward corn production, and an intensification of production caused by increased continuous corn and fertilizer use. Differences in geography, soil type, and prevailing agricultural production activities can lead to considerable variation in environmental effects among regions.

ERS Research Findings [2, 9]

• Increased corn production can be realized through the expansion of land allocated and higher yields. Production can increase through changes in management practices such as more intensive rotations--e.g., planting corn in consecutive seasons, rather than alternating with another crop.
• Nitrogen losses to surface water and groundwater increase by 1.7 and 2.8 percent, respectively, while soil runoff increases by 1.6 percent relative to the baseline through 2016.
• Increases in nitrogen leaching into groundwater is greatest in the Lake States and Southeast, while increases in runoff to surface water are greatest in the Corn Belt and Northern Plains.
• Production of livestock declines slightly by 2015 relative to the baseline--0.6 percent for farm-fed cattle and 0.5 percent for poultry--which may result in reduced manure-nutrient runoff and leaching in some areas.

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Changing Commodity Prices May Have a Limited Impact on the CRP

How might higher commodity prices, along with a lower maximum acreage enrollment mandated in the 2008 Farm Act, affect the Conservation Reserve Program (CRP)? ERS considered several scenarios, both with and without increases in CRP rental rates. These include (1) continuation of current commodity prices, which are well above prices prevalent when most CRP contracts were first enrolled; (2) predicted prices caused by an increase in biofuels production to 15 billion gallons; and (3) a scenario in which summer 2008 prices are the norm.

 ERS Research Findings [6, 2]

• Commodity prices prevalent when most CRP contracts were enrolled (i.e., the 2005 prices) are lower than current commodity prices.
• If commodity prices remain high, then it will be more expensive to enroll new CRP acreage. Thus, the cost of the program will increase as rental rates are adjusted to reflect current prices, or the quality of enrolled acres will drop if rental rates are not increased sufficiently.
• The impact on the CRP of the corn price increase from 2005 to 2007 is much more noticeable than the impact of price increases attributable to the established 15 billion gallon target for ethanol production.
• Land exiting the CRP to produce biofuel will vary by production region.

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Conclusions and Policy Implications

ERS research helps to understand how biofuel production affects markets, commodity prices, resource use, and environmental quality. ERS research shows the following:

• Increased ethanol production has created a growing source of demand for corn that affects prices, acreage allocation, exports and the livestock sector. Importantly, however, other influences such as exchange rates, production advances, foreign government trade policies, and changing food preferences in other countries have also had effects.
• Growth of the corn-based ethanol sector has resulted in stronger links between energy and agricultural markets.
• Constraints to future growth of the ethanol industry will present challenges to meeting the ambitious mandates under the RFS, notably the 16-billion gallon mandate for cellulosic biofuels in 2022.
• Next-generation feedstocks will likely have a smaller impact on food and feed markets than today's use of food and feed crops as biofuel feedstocks.
• Biofuel-induced food price increases are likely to be small.
• Greater demand for biofuel increases can be met through both intensifying crop production and expanding cropland use.
• Adoption of best management practices can limit the potential for an increase in nutrient leaching and runoff under expanded biofuel production.
• Biofuel-induced commodity price increases would have to be substantial to have a significant impact on CRP enrollment.

The following policy implications follow from ERS research:

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References

1. Baker, A., and S. Zahniser. 2007. Ethanol Reshapes the Corn Market, Amber Waves, May, U.S. Department of Agriculture, Economic Research Service.
2. Biomass Research and Development Board. 2008. Increasing Feedstock Production for Biofuels, Economic Drivers, Environmental Implications, and the Role of Research , U.S. Department of Agriculture, Dec.
3. Coyle, W. 2010. Next-Generation Biofuels: Near-Term Challenges and Implications for Agriculture, Outlook Report No. (BIO-01-01), U.S. Department of Agriculture, Economic Research Service, May.
4. Coyle, W. 2007. The Future of Biofuels: A Global Perspective, Amber Waves, November, U.S. Department of Agriculture, Economic Research Service.
5. Young, C. E., Effland, and L. Glaser, coordinators. 2010. 2008 Farm Bill Side-By-Side. U.S. Department of Agriculture, Economic Research Service.
6. Hellerstein, D. 2010. Challenges Facing USDA's Conservation Reserve Program, Amber Waves, June, U.S. Department of Agriculture, Economic Research Service.
7. Inter Agency Projections Committee. 2010. USDA Agricultural Projections to 2019, Long-term Projections Report, OCE-2010-1, Office of the Chief Economist, U.S. Department of Agriculture, Feb.
8. Leibtag, E. 2008. Corn Prices Hit Record High, But What About Food Costs?, Amber Waves, February, U.S. Department of Agriculture, Economic Research Service.
9. Malcolm, S., M. Aillery, and M. Weinberg. 2009. Ethanol and a Changing Landscape, ERR-86, U.S. Department of Agriculture, Economic Research Service, Nov.
10. Rosen, S., and S. Shapouri. 2008. Rising Food Prices Intensify Food Insecurity in Developing Countries, Amber Waves, February, U.S. Department of Agriculture, Economic Research Service.
11. Trostle, R. 2008. Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices, Outlook Report No. (WRS-0801), U.S. Department of Agriculture, Economic Research Service, July.
12. Westcott, P. 2007. Ethanol Expansion in the United States, How Will the Agricultural Sector Adjust? Outlook Report No. (FDS-07D-01), U.S. Department of Agriculture, Economic Research Service, May.
13. Westcott, P. 2007. U.S. Ethanol Expansion Driving Changes Throughout the Agricultural Sector, Amber Waves, September, U.S. Department of Agriculture, Economic Research Service.
14. Westcott P. 2009. Full Throttle U.S. Ethanol Expansion Faces Challenges Down the Road, Amber Waves, September, U.S. Department of Agriculture, Economic Research Service.
15. Gehlhar, M., Winston, A, and Somwaru, A., 2010 Effects of Increased Biofuels on the U.S. Economy in 2022, ERR 102, U.S. Department of Agriculture, Economic Research Service, Nov.

Last updated: Sunday, May 27, 2012

For more information contact: Thomas Capehart and Utpal Vasavada