An Analysis of the

Effects of an Expansion in Biofuel Demand

on U.S. Agriculture

An analysis prepared by:

The Economic Research Service

and

The Office of the Chief Economist

U.S. Department of Agriculture

May 2007

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EXECUTIVE SUMMARY

This report was done at the request of Senator Saxby Chambliss.
Additional specific issues addressed were developed in discussions with
Congressional staff. The main purpose of the report is to assess the
effects on agriculture of alternative levels of biofuels production from
corn and soybean oil. In addition, the potential for expansion of
cellulosic ethanol production is reviewed.

**Scenarios.** Two alternative scenarios of biofuel production are
examined for crop years 2007-16 using an econometric model of the U.S.
agricultural sector. Under Scenario 1, annual domestic ethanol
production increases to 15 billion gallons by 2016, and annual domestic
biodiesel production increases to 1 billion gallons. Under Scenario 2,
annual domestic ethanol production increases to 20 billion gallons by
2016, and annual domestic biodiesel production increases to 1 billion
gallons. The increase in ethanol production is assumed to use corn as
the feedstock, and the increase in biodiesel production is assumed to
use soybean oil. These scenarios compare with about 12 billion gallons
of ethanol production and 700 million gallons of biodiesel production in
2016 in USDA's long-term agricultural projections released in February
2007 (baseline). During 2007-16, domestic ethanol production increases
by an average of 2 billion gallons year under Scenario 1 compared with
the baseline and by almost 5 billion gallons per year under Scenario 2.
Domestic biodiesel production increases by an average of about 200
million gallons per year above the baseline during 2007-16 in both
scenarios.

**Corn and soybean market effects.** The increase ethanol production
increases the demand for corn. Corn used in ethanol is estimated at 2.15
billion bushels in 2006 crop year, accounting for 20 percent of corn
production. Under Scenario 1, corn used in ethanol rises by an
additional 1 billion bushels above the baseline by 2016, to 5.4 billion
bushels, accounting for 37 percent of corn production. The increased
corn demand attracts more acreage to corn and raises corn prices. Corn
area planted rises to over 92 million acres by 2016 under Scenario 1,
compared with 90 million acres in the baseline. The season-average
farm-level corn price increases to \$3.61 per bushel by 2016, \$0.31
above the baseline. On average over 2007‑16, corn prices rise by 6.3
percent (\$0.22 per bushel) above baseline levels. Under the higher corn
demand Scenario 2, corn used in ethanol production rises to 7.2 billion
bushels, 47 percent of corn production, and area planted to corn
increases to 98.5 million acres. Under Scenario 2, corn prices increase
to \$3.95 per bushel by 2016 and by 15.7 percent (\$0.54 per bushel)
above baseline levels on average over 2007-16.

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Increased demand for soybean oil used to produce biodiesel increases the
demand for soybeans. At the same time, the increase in the availability
of ethanol coproducts (distillers' dried grains) due to increased
ethanol production displaces some soybean meal in feed rations, which
lowers the demand for soybeans. The net change in the demand for
soybeans of these offsetting effects depends on the relative size of
each separate shift in demand for the products. On balance, soybean
prices increase less than corn prices, and soybean acreage declines
relative to the baseline. On average, soybean prices increase by 3.9
percent (\$0.27 per bushel) and 7.5 percent (\$0.51 per bushel) above
baseline levels over 2007-16 under Scenarios 1 and 2, respectively.
Soybean planted area declines to 68.1 and 64.1 million acres,
respectively, under Scenarios 1 and 2, by 2016, compared with 68.8
million in the baseline. Smaller acreage declines occur for wheat,
cotton, and rice as well.

Higher corn and soybean prices reduce exports of these commodities below
baseline levels. The quantity of corn exported declines by 4.8 percent
and 12.0 percent, respectively, under Scenarios 1 and 2. Exports of
soybeans decline by 2.8 and 5.3 percent under the corresponding
scenarios. However, due to generally higher commodity prices, the value
of total U.S. agricultural exports increases slightly under both
scenarios.

**Livestock and livestock product market effects.** Overall, livestock
production is reduced. However, impacts vary by livestock category
because of the unique feeding requirements for each type of animal.
Nonetheless, production impacts are small. Cattle can best use ethanol
feed co-products compared with other livestock categories. Poultry
benefit from lower priced soybean meal. However, hogs and dairy face
higher feed costs increases. Consequently, under the higher corn demand
Scenario 2, average annual dairy and pork production decline a
respective 0.7 and 0.9 percent below baseline production levels over
2007-16. Poultry production declines 0.2 percent, and annual beef
production is 0.6 percent higher. The higher feed costs and production
declines are transmitted to higher farm and retail, prices. Hogs, milk,
and broilers exhibit the largest farm price increases, with average
price increases above the baseline of 5.4, 4.8, and 4.4 percent,
respectively, over 2007-16 under Scenario 2. Retail prices for pork,
dairy products, and poultry increase over the baseline by an average of
2.0, 1.4, and 1.9 percent annually during 2007-16 under Scenario 2.

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While higher meat and dairy prices increase the Consumer Price Index
(CPI) for all food, the increase is small. The CPI for all food
increases by an annual average of 0.5 percent above the baseline during
2007-16 under Scenario 2. The highest annual increases are 0.8-1.0
percent and occur during 2014-16.

**Income effects.** Cash receipts from farm marketings of crops increase
due to higher crop prices and higher aggregate crop demand under both
scenarios. Crop cash receipts increase by an annual average of \$3.2 and
\$7.7 billion above baseline levels, respectively, under Scenarios 1 and
2. Higher livestock prices cause livestock receipts to increase, on
average, by \$1.1 and \$4.3 billion above baseline levels under the two
scenarios. The increases in cash receipts outweigh increases in
production expenses in both scenarios. Net farm income increases above
baseline levels by an annual average of \$2.6 billion during 2007-16
under Scenario 1 and by an average of \$7.1 billion under Scenario 2.

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**Low yield effects.** Generally tight stocks during the analysis period
suggest that any production shortfalls, such as those caused by adverse
weather, would heighten impacts under both scenarios until markets
adjusted. A 10-percent reduction in corn yields was simulated to occur
in 2012 to assess the corn price effects of a short crop. As a result of
such a yield decline, corn prices rise in 2012 to \$4.71 per bushel,
\$1.02 above the Scenario 1 level, and to \$5.51 per bushel under
Scenario 2, \$1.46 above the Scenario 2 level.

**Environmental effects.** Regional analysis indicates that along with
bringing new land into production, induced changes in crop rotations and
tillage practices from increased corn production lead to increases in
soil erosion and nutrient loading, particularly in the Corn Belt and
Northern Plains, where adjustments are the greatest.

**Regional livestock effects.** Regional livestock sector analysis
suggests no major shifts in livestock production with the advent of
higher prices for corn and possibly other feeds driven by increased
ethanol demand. The extensive infrastructure in place to support
existing production, especially in vertically integrated industries, is
a significant factor constraining regional shifts.

**Cellulosic ethanol prospects.** Cellulosic ethanol production effects
were not considered in the analysis of Scenarios 1 and 2. While
cellulosic-based ethanol production holds promise in the longer term,
more research and development is needed to make the conversion process
commercially widely viable. A number of factors will be important in
determining which feedstocks will be used in producing cellulosic-based
ethanol, including the ability to compete with existing agricultural
commodities as well as the costs associated with producing, harvesting,
transporting, handling, storing, and processing these various biomass
materials. In the near term, agricultural and forest residues appear to
be the most commercially viable feedstocks for cellulosic ethanol
production.

**AN ANALYSIS OF THE EFFECTS OF AN EXPANSION IN BIOFUEL DEMAND ON U.S.
AGRICULTURE**

The purpose of this analysis is to examine the potential effects on the
U.S. agricultural sector of increasing domestic biofuel production above
currently projected levels. USDA\'s long-term projections baseline
assumes that by 2016 annual domestic ethanol production will reach 12
billion gallons and that annual domestic biodiesel production will reach
0.7 billion gallons. In this analysis, we examine two alternative
scenarios. Under the first scenario, annual domestic ethanol production
increases to 15 billion gallons, and annual domestic biodiesel
production increases to 1 billion gallons by 2016. Under the second
scenario, annual domestic ethanol production increases to 20 billion
gallons, and annual domestic biodiesel production increases to 1 billion
gallons by 2016. The analysis also examines the effects of a production
shortfall in corn under both scenarios.

**The USDA Baseline**

The Renewable Fuel Program of the Energy Policy Act of 2005 increased
the incentives to expand the use of biofuel within the United States. As
a result of these and other incentives, including higher gasoline and
diesel prices, domestic use of both ethanol and biodiesel has grown in
recent years. Furthermore, the latest baseline released by USDA projects
that biofuel consumption will continue to increase over the next 10
years.[^1]

The USDA baseline assumptions on biofuel production over 2007-16 have a
profound effect on the 10-year projections for agricultural commodities.
Ethanol production is assumed to increase sharply through the 2009
marketing year. Thereafter, ethanol production is projected to increase
at a more moderate rate. USDA is projecting that, by 2016, the United
States will be using about 4.3 billion bushels of corn to produce about
12 billion gallons of ethanol per year, accounting for 31 percent of
U.S. corn production and representing about 8 percent of gasoline use in
the United States (Figure 1).

The USDA baseline also assumes that biodiesel production expands through
the 2011 marketing year and then levels off. Our latest long-term
projections estimate that, by 2016, the United States will be using
about 5.1 billion pounds of soybean oil to produce about 700 million
gallons of biodiesel per year, accounting for about 22 percent of U.S.
soybean oil production, but less than 2 percent of U.S. highway diesel
fuel use (Figure 2).

The price projections for corn and other commodities reflect these
market forces. The season-average farm price of corn is projected to
rise until 2009 when it reaches a high of \$3.75 per bushel. Afterwards,
prices adjust downward, as the rate of expansion in ethanol slackens and
producers have time to adjust to the new market environment. By the end
of the 10-year projection period, the price of corn is \$3.30 per
bushel. Prior to 2007, the highest corn price on record was \$3.24 per
bushel in the mid 1990's, a result of drought-reduced corn production.

As corn prices rise, the incentives to plant corn increase.
Consequently, the baseline shows an expansion in area planted to corn.
Area planted increases from 86 million acres in 2007 to 90 million acres
in 2010. Thereafter, corn acreage remains constant. The area planted to
corn has not been above 90 million acres since the 1940\'s.

The baseline therefore depicts a significant departure from historical
price and production levels for corn. Because corn is one of the
principal crops grown in the United States and because it is also the
principal feed ingredient in livestock production, the baseline
projections for corn also have ramifications for all the other major
agricultural commodities. Their prices are higher than they would have
been in the absence of the expansion in biofuel use.

**Assumptions**

To implement the scenarios, the increase in domestic biofuel production
above baseline levels was assumed to occur gradually over 2007-16. The
target levels of domestic production in each scenario are attained only
in the final year of the analysis. Because virtually all current ethanol
and biodiesel production is derived from corn and soybean oil, we
assumed that all of the additional ethanol and biodiesel production
implied by the scenarios would be manufactured from corn and soybean
oil, respectively.

Tables 1 and 2 indicate the time-path of domestic ethanol and biodiesel
production under both scenarios. For purposes of presentation, the
15-billion-gallon scenario is denoted as Scenario 1 and the
20-billion-gallon scenario is denoted as Scenario 2. The results from
both scenarios are compared with the current USDA baseline.

The changes in the demand for corn used for ethanol implied by both
scenarios are significant (Figure 3; Tables 1 and 2). Under Scenario 1,
the annual demand for corn to produce ethanol increases by an additional
1 billion bushels over the USDA baseline by 2016. The increase in corn
demand alone represents approximately 7.5 percent of the baseline
production of corn in 2016. Under Scenario 2, the demand for corn to
produce ethanol increases by an additional 2.85 billion bushels over the
USDA baseline by 2016. This increase represents 20 percent of baseline
corn production in 2016. In 2016, the total corn used in ethanol
accounts for 37 percent of corn production in Scenario 1 and 47 percent
in Scenario 2.

The increase in the annual demand for soybean oil used to produce
biodiesel reaches 2.2 billion pounds by 2016 under both scenarios
(Figure 4; Tables 1 and 2). This increase in soybean oil demand
represents approximately 9.3 percent of the baseline soybean oil
production in 2016. If biodiesel from soybean oil reached 1 billion
gallons per year by 2016, about 31 percent of projected total domestic
soybean oil production would be devoted to biodiesel production.

Ethanol can be produced from corn using either a wet milling or dry
milling process. Most of the current expansion in ethanol production is
based on dry milling. To simplify the analysis, we assume that all of
the additional ethanol production from corn is manufactured through a
dry milling process. Each additional 56-pound bushel of corn used in
this process is assumed to produce 2.8 gallons of ethanol.

When a dry milling process is used to produce ethanol from corn, dried
distillers' grains (DDGs) are manufactured as a co-product. The DDGs may
be used as an animal feed, and any increase in their supply would
displace other feeds used in livestock rations. The assumptions used in
the analysis to account for this displacement are consistent with those
used to develop the current USDA baseline.[^2]

We assumed that 17.5 pounds of DDGs are produced for every bushel of
corn used to produce ethanol. Of the additional DDGs entering the
market, 75 percent displace other domestic feeds. The remainder is
either exported or used for other nonfeed purposes domestically.

Ruminants assimilate the nutritional value of DDGs much more easily than
monogastric animals. Consequently, most DDGs are fed to cattle. We
assume that, of the DDGs used for feed domestically, 80 percent is used
for beef cattle, 10 percent is used for dairy cattle, and 5 percent is
used for both hogs and poultry.

The displacement factor of DDGs for corn in the feed ration depends on
the type of animal. One pound of DDGs is assumed to displace one pound
of corn for beef cattle, 0.45 pound of corn for dairy cattle, 0.85 pound
of corn for hogs, and 0.55 pound of corn for poultry.

If we combine all of these assumptions, they imply that each additional
bushel of corn used in the production of ethanol decreases the feed use
of corn by approximately 0.2 bushel because of displacement by DDGs. The
balance of the DDGs used in the domestic feed market displaces soybean
meal in the feed rations. Thus, each additional bushel of corn used in
ethanol production produces DDGs that displace approximately 1.2 pounds
of soybean meal.

The price of DDGs is assumed to be related to the price of corn because
DDGs primarily displace corn in the feed rations. As the quantity of
DDGs increases, its price in relation to corn is assumed to decline.

The analysis assumes that 1 gallon of soybean oil is required to produce
1 gallon of biodiesel and that each gallon of soybean oil weighs 7.35
pounds, consistent with the assumptions used in the USDA baseline.

**National Level Impacts**

*National Modeling Framework.* To estimate the impacts of greater
biofuels production on the agricultural economy at a national level,
this study uses the Food and Agricultural Policy Simulator (FAPSIM).
FAPSIM is an annual econometric model of the U.S. agricultural sector.
Commodities included in FAPSIM are corn, sorghum, barley, oats, wheat,
rice, upland cotton, soybeans, cattle, hogs, broilers, turkeys, eggs,
and dairy. Each commodity submodel contains equations to estimate
production, prices, and the different demand components. The submodels
are then linked together through common variables that are important to
the different commodities. The model solution computes the market prices
that equilibrate supply and demand in all commodity markets
simultaneously.

*Crop Prices.* The increase in the quantity of corn used for ethanol
leads to a net increase in the total demand for corn, even though some
corn that would have been used for feed is displaced by DDGs. As a
result, the price of corn received by farmers increases under both
scenarios.[^3] Under Scenario 1, corn prices increase by 6.3 percent
above baseline levels, on average, over 2007-16. This compares with a
15.7-percent average increase under Scenario 2 (Figure 5; Tables 3 and
4). As would be expected, larger price impacts on corn are associated
with larger increases in ethanol demand.

The higher corn prices cause producers to shift land from soybean
production to corn. Lower soybean supplies exert upward pressure on farm
prices. The net result on soybean prices is determined by the shifts in
demand for its co-products.

There are two opposing forces operating on soybean demand. The increase
in the availability of DDGs due to increased ethanol production
displaces some soybean meal in feed rations. This displacement reduces
the demand for soybeans. At the same time, the increased demand for
soybean oil used to produce biodiesel increases the demand for soybeans.
The net change in the demand for soybeans depends on the relative size
of these separate shifts in the demand for the products.

Beef cattle account for 80 percent of the consumption of DDGs, and the
cattle feeding industry primarily uses urea as a protein supplement in
animal diets. The increase in DDGs used in their feed ration therefore
has little effect on soybean meal demand. Of the remaining 20 percent,
less than half of the DDGs displace soybean meal in the animal ration.
Because the additional DDGs displace only a small portion of soybean
meal, the increase in the demand for soybean oil dominates the decrease
in the meal under both scenarios.

Because there is a net increase in the demand for soybeans, soybean
prices increase under both scenarios. On average, soybean prices
increase by 3.9 and 7.5 percent above baseline levels over 2007-16 under
Scenarios 1 and 2, respectively (Figure 6, Tables 3 and 4).

Acreage shifts cause the price impacts to be greater under Scenario 2.
The increase in the price of corn causes producers to shift land from
the production of soybeans into corn. Because corn prices increase more
in Scenario 2 than in Scenario 1, the shift in acreage is larger under
Scenario 2. As a result, soybean production is lower under Scenario 2,
which leads to greater price increases.

The price impacts on the markets for processed soybeans reflect the
demand shifts already mentioned. The increased demand for soybean oil
increases its price relative to the baseline, and the reduced demand for
soybean meal decreases its price. Over 2007-16, soybean oil prices
increase on average by 14.4 and 19.1 percent above baseline levels under
Scenarios 1 and 2, respectively. The corresponding price declines in
soybean meal prices are 5 and 3.9 percent.

Because soybean prices are higher under Scenario 2, the profit margin
associated with crushing soybeans to produce meal and oil is lower. As a
result, Scenario 2 yields less soybean crush, leading to lower supplies
of both meal and oil. Therefore, both soybean oil and soybean meal
prices are higher under Scenario 2 than Scenario 1.

Prices for minor feed grains likewise increase under both scenarios.
Higher corn prices induce livestock producers to substitute other feed
grains for corn in their animal rations, thereby leading to higher
demand for these products. As would be expected, the price increases are
larger under Scenario 2.

Prices for wheat, upland cotton, and rice also increase under both
scenarios. The increases in the prices of corn and soybeans cause
producers to shift acreage from wheat, upland cotton, and rice into corn
and soybeans. This shift leads to reduced production of wheat, upland
cotton, and rice, which causes their prices to increase. In addition,
wheat competes with corn as cattle feed. Thus, with higher corn prices,
producers substitute wheat for corn, placing additional upward pressure
on wheat prices.

# Area Planted. The increases in corn prices implied under both scenarios increase the profitability of producing corn versus producing soybeans. Producers respond by shifting land from the production of soybeans into corn. Corn area planted increases by 1.3 and 3.8 million acres, on average, from the baseline over 2007-16 under Scenarios 1 and 2, respectively. Corresponding to these changes, soybean area planted declines by 0.4 and 1.9 million acres from the baseline (Tables 5 and 6).

Because prices for minor feed grains increase under both scenarios, the
incentives to plant these crops also increase. Their production
increases slightly under both scenarios. Finally, the area planted to
wheat, upland cotton, and rice declines somewhat under both scenarios,
as producers expand the area planted to feed grains.

Total area planted increases under both scenarios due to the overall
increase in profitability in the crop sector. Total area planted
increases by 0.9 and 1.9 million acres, on average, under Scenarios 1
and 2, respectively. Thus, the area required to accommodate the
expansion in ethanol production is composed of area planted to competing
crops and from an overall expansion of area planted.

*Other Crop-Sector Adjustments.* Stocks and nonindustrial uses also
adjust with the expansion in ethanol demand. In response to higher
prices, corn export volume declines, on average, by 4.8 and 12 percent
below baseline levels over the period of analysis under Scenarios 1 and
2, respectively. Feed use of corn declines for two reasons. First, DDGs
are substituted for some corn in feed rations. Second, livestock
producers, in aggregate, reduce production in response to higher corn
prices. With fewer animals on feed, feed use declines by 5.9 and 13
percent below baseline levels under Scenarios 1 and 2, respectively.
Stocks, however, register the largest declines. Stocks are reduced each
year of the analysis in response to higher corn prices. Under Scenarios
1 and 2, stocks decline 27.3 and 62.8 percent below baseline levels,
respectively (Tables 7 and 8).[^4]

The situation is somewhat different for soybeans. The net shifts in
demand for corn and soybeans caused by the increase in demand for
biofuels are relatively stronger for corn. Consequently, soybean
production declines under both scenarios. At the same time, the demand
for soybean products also increases. Under Scenario 1, the demand
effects are relatively stronger than the supply effects, causing the
soybean crush to increase. Under Scenario 2, the reverse is true, and
soybean crush declines below baseline levels. In both scenarios, both
export and stock levels decline due to higher soybean prices. Exports
decline by 2.8 and 5.3 percent below baseline levels, on average, under
Scenarios 1 and 2, respectively. These changes correspond with a decline
in stock levels of 7.4 and 14.1 percent (Tables 9-14).

*Livestock.* The livestock production impacts vary by livestock category
because of the unique feeding requirements for each type of animal.
Poultry producers use relatively more protein in feed rations than do
other livestock producers. Thus, although poultry producers experience
higher corn prices, they also benefit from lower soybean meal prices.
Beef cattle producers also experience higher corn prices, but are able
to substitute cheaper DDGs to replace a portion of corn in the feed
rations. The analysis also assumes that the price paid by cattle
producer for DDGs will be discounted more as the supplies of DDGs
increase.

Tables 15 and 16 summarize the production impacts. Because hog and dairy
producers experience the greatest increases in feed costs relative to
other livestock producers, production of pork and milk declines under
both scenarios. The reduction in pork supplies places upward pressure on
retail pork prices. As a result, the retail prices of beef and poultry
increase as consumers substitute other meats for pork (Tables 17 and
18). This, in turn places upward pressure on farm-level prices of all
meats. In addition, farm and retail prices for milk increase due to
lower milk production under both scenarios (Tables 19 and 20).

Because of the substitution effects at the retail level, poultry prices
rise as feed costs rise. As a result, poultry production changes only
slightly under both scenarios. Similarly, beef production is virtually
unchanged under Scenario 1. Under Scenario 2, however, the retail
substitution effects dominate the feed cost effects and beef production
increases somewhat above baseline levels.

*Farm Income.* Cash receipts from farm marketings of crops increase due
to higher crop prices and higher aggregate crop demand under both
scenarios. Crop cash receipts increase by \$3.2 and \$7.7 billion above
baseline levels, on average over the projection period, under Scenarios
1 and 2, respectively (Tables 21 and 22). Although aggregate livestock
production declines somewhat under both scenarios, livestock prices
increase proportionally more. As a result, livestock receipts increase,
on average, by \$1.1 and \$4.3 billion above baseline levels under
Scenarios 1 and 2, respectively.

As crop producers expand aggregate production to meet the increased
demand for biofuel, they increase input usage. As a consequence, their
total expenses increase. In addition, livestock producers must pay more
for both feed and for purchased livestock due to higher crop and
livestock prices. Production expenses under Scenarios 1 and 2 increase
by \$1.6 and \$4.9 billion on average, respectively.

As would be expected, the increases in cash receipts outweigh the
increases in production expenses in the scenarios. Net farm income
increases above baseline levels by \$2.6 and \$7.1 billion, on average
over 2007-16, under Scenarios 1 and 2, respectively.

# Value of Exports. The price increases for all of the commodities are proportionally larger than the corresponding export volume decreases under both scenarios. As a consequence, the total value of exports increases somewhat for agricultural products. Under Scenario 1, the total value of agricultural exports increases by \$0.1 billion, on average, over 2007-16 versus \$0.4 billion under Scenario 2 (Tables 23 and 24).

# **A Production Shortfall for Corn**

Two additional scenarios were examined to determine how market prices
might respond to a shortfall in the production of corn under the
scenarios just discussed. Both scenarios imposed an identical
single-year shock to corn yields. The yield per area harvested was
reduced 10 percent below its baseline level in 2012.

Although the yield shock applied to both Scenarios 1 and 2 was the same,
the yield shock implies somewhat different production shocks between the
scenarios because the area harvested is higher under Scenario 2. The
decline in corn production is 1,371 million bushels in Scenario 1, as
opposed to 1,410 million bushels in Scenario 2. Thus, we would expect a
somewhat higher price response in Scenario 2.

However, the difference in the production shocks applied to the
scenarios has only a minor influence on the relative size of their price
impacts. The key factors influencing the magnitude of the price impacts
are the 2012 beginning stock levels under Scenarios 1 and 2.

The stocks-to-use ratio in both Scenarios 1 and 2 was constrained so as
not to fall below approximately 1 percent in any year of the analysis.
By 2012, the stocks-to-use ratio in Scenario 2 is close to this minimum.
This implies that there are few stocks to buffer the market against a
production shortfall. The situation in Scenario 1 is less severe. The
stocks-to-use ratio in Scenario 1 is above 3 percent in 2012.

The price for corn increases \$1.02 per bushel above 2012 baseline level
in Scenario 1 with the production shortfall\--equivalent to a
27.6-percent increase. The impacts are even larger under Scenario 2
where no buffer stocks exist. The corn price increases \$1.46 per bushel
above the value attained in Scenario 2, corresponding to a 36-percent
increase.

**Regional Implications of Increased Corn-Based Ethanol Production in
2016**

*Regional Modeling Framework.* To analyze how the national results break
down regionally, the Regional Environmental and Agricultural Programming
(REAP) model was used to assess the effects of corn-based ethanol
production for the regions shown in table 25. The model contains
detailed data at the regional level on crop yields, input requirements,
costs and returns, and environmental parameters to simulate long-run
equilibrium outcomes from assumptions different from the USDA baseline.
REAP explicitly models regional differences in crop rotations, tillage
practices, and input use. To evaluate the impact of greater demand for
biofuel feedstocks, REAP was run under the two ethanol demand scenarios
and the output was compared with the results obtained when using the
USDA baseline as a benchmark.

An increase in the demand for biofuel feedstocks will drive adjustments
in the crop mix planted in each region of the country. Changes in
production practices, expressed as the choice of crop rotations and
tillage practice, lead to changes in fertilizer and pesticide use. These
changes, in turn, affect soil, water, and air quality. This analysis
uses the REAP model to estimate the deviations from the USDA baseline
under the two alternative biofuel demand scenarios. The last year in the
USDA baseline, 2016, is chosen as the REAP analysis year.

The main conclusion is that along with bringing new land into
production, induced changes in crop rotations and tillage practices from
increased corn production lead to increases in soil erosion and nutrient
loading, particularly in the Corn Belt and Northern Plains, where
adjustments are the greatest.

One limitation of the model is that crops not historically grown (as
measured by the 1992 Natural Resources Inventory) in a region will not
appear in the crop mix in an alternative scenario. Because corn is grown
in all regions of the country, corn acreage will adjust in each region
to the higher demand for ethanol. However, because soybeans are not
grown in some regions (that is, soybean acreage equals zero in the
baseline in some regions), soybean acreage will remain zero in those
regions regardless of national price signals in this modeling framework.

A significant amount of cropland is allocated by contracts under the
Conservation Reserve Program (CRP). This analysis assumes the acreage
enrolled in the CRP, which is 39.2 million acres in 2016 under the
baseline, remains constant in both scenarios. The actual allocation of
CRP acreage among regions will depend on rental payments relative to the
value of producing on eligible land.

The same biofuel demand scenarios discussed earlier are examined in the
regional component of this study. The results of the two scenarios are
compared with the USDA baseline in three areas: 1) the effect on planted
acreage, 2) the effect on production practices and input use, and 3) the
effect on key environmental indicators. Results are reported regionally
with the USDA Farm Production Regions as the geographical units. See
table 25 for the states that define the regions. Results are reported as
total quantities and as percentage changes from the baseline values.

## Regional Land Use Adjustments. Because of regional differences in the mix of crops planted, average yields, and production costs, the redistribution of crops under the biofuel demand scenarios will vary among regions. The increase in demand for corn leads to an increase in corn acres planted in all regions. A total of 2.2 million additional acres of corn are planted above the baseline in Scenario 1 and 8.5 million acres above the baseline in Scenario 2. Figure 7 shows the percentage increase in planted corn acres in each region. In Scenario 1, the increase over the baseline in each region ranges from about 2 percent (Pacific) to 5 percent (Delta). In Scenario 2, the increase ranges from 5 percent (Pacific) to over 30 percent (Delta). While some of the additional corn acreage comes from bringing new land into production, some corn acreage comes from reductions in planting of other crops. Soybean acreage declines in all regions in Scenario 1, except for an increase of 0.7 percent in the Corn Belt (Figure 8). Declines on the order of a half million soybean acres are seen in the Lake States, Northern Plains, and Appalachian regions, with a decline of nearly 2.5 million soybean acres in the Delta. All regions show a decrease in soybean acreage under Scenario 2.

*Crop Rotations.* As the demand for corn increases, farmers will have
incentives to devote more acreage to corn. There are two means to
achieve this. One is to bring new land into production. In REAP, idle
land can be brought into production if the return is positive for doing
so. Another means is to reduce the practice of multi-crop rotations in
favor of continuous corn rotations, or to increase the amount of
multi-crop rotations that include corn at the expense of crop rotations
that do not include corn. The model seeks the allocation of crop acreage
and practice such that the marginal returns on each additional acre are
equal. If this were not the case for a given rotation, farmers would
have an incentive to plant that extra acre, further driving the price
down and reducing the marginal return.

The distribution of crop rotations changes under both biofuel demand
scenarios in all regions. Because of the large number of crop rotations
contained in the model, rotations have been grouped into representative
classes: corn only, corn with another (non-soybean crop), corn with
soybean, soybean with other crop, and other crops (including single
cropping and multi-crop rotations). The distributions for the three
largest crop acreage regions (Corn Belt, Northern Plains, and Lake
States) are shown in figures 9-11, along with the change in acreage
relative to the baseline scenario. In all three regions, the acreage
devoted to continuous corn rotations increases, as does acreage in
corn/other crop rotations. The acreage under corn/soybean rotation
changes very little, in percentage terms. In the Corn Belt under
Scenario 1, both continuous corn and corn/soybean acres increase, with a
slight reduction in planting of other crops. Corn in rotation with
non-soybean crops increases significantly in Scenario 2 in the Lake
States and Northern Plains, whereas a modest increase is shown in the
Corn Belt.

*Tillage Practices.* The economics that drives the move toward different
crop rotations also drives the choice of tillage practice. Farmers will
employ the practice that generates the highest returns and is in
compliance with soil conservation requirements. The choice of tillage
practice has environmental implications. Tillage may be unmanaged,
whereby the soil is turned and weeds and crop residue removed, or a
conservation tillage practice may be used. Conservation tillage refers
to a number of strategies and techniques for establishing crops in a
previous crop's residues, which are purposely left on the soil surface.
The principal benefits of conservation tillage are improved water
conservation and reduced soil erosion. Additional benefits include
reduced fuel consumption, reduced compaction, planting and harvesting
flexibility, and reduced labor requirements. REAP models five tillage
practices: two unmanaged practices (conventional and moldboard plowing)
and three conservation practices (mulch, ridge till, and no-till).

Figures 12 and 13 show the distribution of tillage practices used in the
two major crop- growing regions, the Corn Belt (corn and soybeans) and
the Northern Plains (wheat and corn). In the Corn Belt, the increase in
crop acreage leads to an increase in use of all tillage types except
moldboard. Mulch tillage increases more than conventional tillage. In
the Northern Plains, no-till and conventional tillage increase, with
mulch tillage use decreasing.

# Fertilizer and Pesticide Use. The rotation and tillage practices chosen dictate the fertilizer regimen required for achieving maximum crop yield for a given region. A move away from multi-crop rotations to continuous corn rotation, and away from conservation tillage to conventional tillage, leads to an increase in fertilizer requirements. Tables 26-28 show total nitrogen, phosphorus, and potash fertilizer application regionally and nationally, along with percentage changes from the baseline. Nitrogen fertilizer use increases in every region except for the Pacific region. The percentage increase is at or above the national average in the main corn-growing regions under both scenarios. Phosphorus fertilizer use also increases, but to a lesser extent than for nitrogen fertilizer. Potash fertilizer use increases nationally, but decreases in the Southeast, Delta, Mountain, and Pacific regions. This is mainly a consequence of the shift toward more corn acreage in the traditional corn- producing regions. In Scenario 2, nitrogen fertilizer use increases by over 6 percent nationally. Similar results are seen for pesticide application (table 29), with the largest percentage increases in the Northern Plains and Appalachian regions. 

## Nutrient Deposition to Groundwater. Nutrients that are applied to the soil and not taken up by crops have the potential to contaminate groundwater through the process of leaching. Table 30 shows the level of nitrogen leaching in each region under the fuel demand scenarios. All regions show an increase in nitrogen leaching in both scenarios, except for the Mountain and the Pacific regions. In these two regions, this result is a consequence of the reduction in conventional tillage used, in combination with a small reduction in crop acreage planted. Similar results are found for phosphorus leaching, the other major nutrient of concern for water quality.

## Soil Erosion. Management practice, climate, and geography play a role in soil erosion potential. The move away from conservation tillage toward more soil-intensive conventional tillage leads to an increase in soil erosion. The erosion that occurs in each region is shown in table 31, along with the percentage change from the baseline. The major crop producing regions all show increases in soil erosion, with significantly more erosion in the Northern Plains. The major factor driving this result is the large portion of new acreage planted under conventional tillage.

**Ethanol Impacts on Livestock Sectors:\
Regional Implications**

*Livestock Production Currently Has Regional Patterns.* Cattle feeding
is concentrated in the Great Plains and Southwest. Beef cow-calf and
feeder calf operations are well represented in the Southeast, Great
Plains, and Midwest. Poultry is concentrated in the Southeast and
Mississippi Valley, hogs in the Corn Belt and parts of the South, and
dairying in the Northeast, Upper Midwest, and West. Additional
background material on livestock production is presented in Table 32.

Growth in the ethanol industry has driven corn prices higher and thus
raised a major input cost to livestock and poultry producers that is
affecting industry "bottom lines." Substituting DDGs is a way to
mitigate the higher corn prices. Several issues related to DDGs result
in differing bottom line effects---DDG quality variability, differing
capacities of livestock and poultry to make use of the feed, wet versus
dry feed types, and shipping and storage.

Smaller operations in vulnerable financial positions are present in all
industries and all regions. Such operations are the most likely to feel
the effects of higher feed prices, the major input cost component for
livestock and poultry producers. In some cases, financially vulnerable
producers may be concentrated in a particular region, e.g., dairy
production in the Deep South. In other cases, unique regional
characteristics may be an advantage, as in drylot dairy production in
the West.

We do not anticipate major shifts in livestock production with the
advent of higher prices for corn and possibly other feeds driven by
increased ethanol demand. The extensive infrastructure in place to
support existing production, especially in vertically integrated
industries, is a significant factor constraining regional shifts.

*Beef Cattle.* The fed cattle industry will continue to be located
mainly in the Great Plains because of advantageous environmental
regulations, grain and forage production, climate, and feeder cattle
supplies. Major changes in the infrastructure that has grown up around
the industry, the major feedlots, packers, and grain and livestock
transport firms would be needed if a major move out of the area were
considered. Farmer feeding of cattle will likely increase somewhat in
the Midwest, even with higher feed costs (corn/grains about 75-80
percent of cattle rations), despite possible cost offsets due to use of
DDGs in rations. Cattle feeders will try to offset the higher costs by
bidding lower prices for feeder cattle that will reduce receipts to
cow-calf producers, who will also face higher feed costs, but at a
reduced proportion (less than 1 percent of total operating costs).

*Poultry.* There are three industry components---broilers, turkeys, and
layers (eggs). Broiler production is concentrated in the Southeast and
South Central sections of the country, turkey production is spread
throughout the country, and egg production is concentrated mostly in the
central portion of the country. Corn constitutes about 65-80 percent of
poultry feeds, depending on type. Nutritional requirements of poultry
limit use of DDGs in rations to offset higher corn prices. Preference
for DDGs, to the extent they can be used, also adds to costs. Poultry
production is highly integrated, and the extensive complexes are
unlikely to move in response to feed costs.

*Hogs.* Hog feeding is concentrated in the Corn Belt but is also
important in the Southeast and Great Plains. The Southeast is a
grain-deficit region, so importing feedstuffs translates into higher
feed costs in that region, whether they are co-products of ethanol or
corn itself. Nutritional requirements of hogs are similar to poultry in
that they limit use of DDGs in rations to offset higher corn prices, as
do preferences for DDGs. Hog production is also highly integrated, with
an extensive infrastructure, which would tend to keep production in
existing areas.

*Dairy.* Probably the most widely dispersed industry is dairying, but
there are concentrations of production in several areas. Milk production
growth in the West, where concentrate feed costs are a smaller share of
total feed costs, has changed the industry. Forages are the building
block of dairy cow rations---if forages are low quality or high priced,
milk production can suffer. Significant capital investments also suggest
that new dairies and processing plants are not likely to move to major
ethanol-producing areas.

*Livestock and Poultry Costs of Production (COP).* The observed regional
patterns of livestock and poultry production lead to the question of
whether production costs might also exhibit regional patterns. Regional
costs of production are examined for beef (cow-calf), hogs (hogs,
feeder-to-finish, farrow-to-finish), and dairy. Only national costs are
estimated for poultry (broilers and turkeys) and feedlots (farmer and
commercial). All data are for 2005, except turkeys (2003).

Commodity-specific surveys as part of the annual [Agricultural Resource
Management Survey (ARMS)](http://www.ers.usda.gov/Briefing/ARMS/) have
been used to collect the data for commodity cost and return estimates
since 1996.  Each farm sampled in the ARMS represents a known number of
farms with similar attributes so that weighting the data for each farm
by the number of farms it represents provides a basis for calculating
estimates for the target population of each commodity.  U.S. and
regional cost and return estimates published from the ARMS indicate
averages across the different sizes of operations, types of production
systems, and farm business arrangements used to produce individual
commodities.  The costs and returns for individual farms producing each
commodity may differ substantially from these averages.

Defining regions for COP data is generally an arbitrary activity that
depends on several factors, a major one being the data collection
itself. The regions used here for reporting this data are based on those
already existing in the REAP modeling framework. The most regions are
defined for dairy (seven) and the fewest (two) for hogs. Since we have
argued that significant movement among regions is unlikely, it is
reasonable to examine those regions where the livestock activities are
in operation.

Cost-of-production surveys generally contain relatively detailed
information, i.e., several line items. It is also important to be
cognizant of the different measures of cost, e.g., cost per cwt
(hundredweight) of milk or cost per bred cow. The costs discussed here
are aggregates that generally appear in all COP data: operating costs in
two categories, feed and non-feed, and allocated overhead costs.
Operating costs, particularly the feed category, will be one of the
first places producers look to address rising corn and soybean prices
driven by ethanol or biodiesel production demands. Appropriate totals
are also shown. The order of presentation is from "most" to "fewest"
regions.

*Dairy.* The seven regions defined are, in alphabetical order:
Appalachian, Corn Belt, Lake States, Northeast, Southeast, Southern
Plains, and West (Pacific and Mountain) (table 33). The total cost of
production ranges from about \$15.20 per cwt (Southern Plains and West)
to approximately \$24.00 per cwt (Appalachian and Corn Belt). Feed costs
range from \$5.24 in the Lake States to \$8.82 per cwt in the Corn Belt.
The Lake States result offers an interesting insight: it is sometimes
argued that higher feed prices are the reason this region's dairies face
financial issues. It appears instead that other operating costs and
overhead costs lead to the higher total cost of production in this
region.

*Beef.* Four regions are defined for cow-calf cost of production
estimates: Great Plains (Northern and Southern Plains), North Central
(Corn Belt, Lake States, and Northeast), South (Southeast, Delta, and
Appalachian) and West (table 34). The total production costs do not vary
much across regions, ranging from about \$1,251 per bred cow in the
North Central region to around \$1,061 in the West. Total feed costs are
highest in the North Central region, followed by the Great Plains, the
South, and the West. It is not feed grains or supplemental feeds that
contribute most to feed costs; it is forages (including pastures and
public grazing), which make up from 82 to 91 percent of the total feed
costs. Cow-calf operators will likely face indirect effects of higher
feed costs through reduced feeder cattle prices.

The national cost-of-production estimates for farmer feedlots show that
over 70 percent of total feed costs are for dry grains, concentrates,
and protein supplement feeds (table 35). The relative share of feed
costs in commercial feedlots for these three feeds is higher, at almost
90 percent. Feedlot operators are likely to address higher feed costs
through adjustments in feeding, including feeding distillers' grains,
and other avenues, such as bidding lower prices for feeder cattle.

*Hogs.* Two regions, North Central/Northern Plains/West and
South/Southern Plains, are identified for each of the three hog
enterprise types (tables 36-38). Total costs of production are greater
in the South/Southern Plains region for hogs by about \$4 per cwt
gained: \$63 versus about \$59 in the other region. The same comparison
for feeder-to-finish operations shows higher costs again in the
South/Southern Plains: about \$56 per cwt gained versus \$48 in the
other region. Farrow-to-finish total production costs are slightly
higher in the North Central/Northern Plains/West region, by about \$3
per cwt gained. Hog enterprises use mostly complete feed mixes; only in
the farrow-to-finish operations are grain feeds of any consequence, and
are so in both defined regions.

*Poultry.* Poultry costs of production present a particular problem. The
integrated structure of the industry suggests that producers (growers)
may have very little to say in how higher feed costs are addressed. The
data provided here are from the perspective of the
integrators/processors, so the data lack detail and do not even consider
costs that other livestock producers face, such as some of the allocated
overhead costs. Integrators reported broiler farm gate production costs
of about \$0.25 per pound live-weight in 2005 and feed costs (including
milling and delivery) of from \$0.14 to \$0.16 per pound depending on
the bird being produced. Farm gate total costs of production in 2003
were reported at about \$0.33 per pound live-weight, with feed costs
near \$0.20 or about two-thirds of the total. Corn and soybeans are
major components of poultry feed, so any price effects will be
noted---however, there is less room to adjust bird rations to replace
these two ingredients than in cattle feeding.

# **Cellulosic-Based Ethanol**

Cellulosic-based ethanol has the potential to play a significant role in
the production of renewable fuels. At the levels analyzed earlier in
this study, corn would provide 15 to 20 billion gallons of ethanol by 10
years from now, with another 1 billion gallons of biodiesel produced.
Thus, cellulosic sources would need to develop and expand to meet higher
goals for biofuel production.

A number of studies have examined the potential for cellulosic
bioenergy, both from a technical perspective and an economic
perspective. These include the "billion ton" study, the "25 by '25"
study, and some academic analyses. These studies are summarized in this
section to provide some perspectives on the possible magnitudes and
feasibility of cellulosic sources of biofuels, as well as to illustrate
the challenges and uncertainties faced.[^5]

Cellulosic's potential to expand and make a significant contribution to
bioenergy reflects, in part, the availability of biomass from crop and
forest residues or dedicated energy crops that can be produced from the
diverse resource base in the United States. For example, data published
by USDA's Economic Research Service shows that almost 1.6 billion acres
(1.7 billion acres including Alaska and Hawaii) or 84 percent of the
total land area in the 48 States is categorized as cropland, grassland
pasture and range, and forest-use land (table 39). Therefore, most of
the United States is already producing biomass either as crops, grasses,
or trees.

However, the amount of biomass that can be grown on each of the land use
categories listed in table 39 varies. For example, with current
technologies some portion of 62 million acres in cropland pasture could
be planted to energy crops, but at the present time the almost 600
million acres in rangeland and pasture are not used for crop production
because of soil conditions or lack of precipitation. However, it is
possible through research and development (R&D), scientists could
produce genetically modified energy crops that could be produced on
rangeland in the future.

*Technical Potential.* Based on existing land uses, the United States
has the potential to produce large amounts of biomass. A report prepared
by the U.S. Department of Energy (DOE) and the U.S. Department of
Agriculture (USDA), referred to as the "billion-ton" study, found the
United States has the resource potential to produce more than one
billion tons of biomass materials by the mid 21^st^ century.[^6]

The billion-ton study concluded that the land resources of the United
States are technically capable of sustainably producing almost 1.4
billion tons of biomass per year that could be used for bioenergy
production by the mid 21^st^ century (table 40). The 1.4 billion tons of
biomass materials include forest residues, crop residues, energy crops,
manure, and the organic portion of municipal solid waste. Assuming each
ton of biomass can be converted to 80 gallons of ethanol, 1.4 billion
tons of biomass is equivalent to about 110 billion gallons of ethanol.

As described in table 40, the largest potential sources of biomass
include crop residues such as corn stover and wheat straw, perennial
crops such as switchgrass, and forestry residues such as residues from
logging, land clearing, and fuel treatment to reduce fire hazards as
well as unused residues from wood processing mills. The billion-ton
study reflects an accounting of different sources of biomass that could
be used in the production of ethanol but does not include an economic
analysis to identify the economic conditions under which one billion
tons of biomass would be produced.

The billion-ton study also found that producing the amounts of biomass
described in table 40 would require a "concerted R&D effort to develop
technologies to overcome a host of technical, market, and cost
barriers". For example, providing almost 1 billion tons of biomass from
agricultural lands (crop residues and perennial crops) would require
increasing corn, wheat, and other small grain yields by 50 percent;
doubling residue-to-grain ratios for soybeans; developing much more
efficient residue harvesting equipment; managing active cropland with
no-till cultivation; growing dedicated energy perennial crops on 55
million acres of cropland, idle cropland, and cropland pasture; using
animal manure in excess of what can be applied on-farm for bioenergy;
and using a larger fraction of other secondary and tertiary residues for
bioenergy.

Looking only at the almost 1 billion tons of biomass from agriculture,
table 41 provides an idea of the necessary technological changes
identified in the billion-ton study necessary to meet the goal. The
billion-ton study estimated that the agricultural sector could produce
194 million dry tons of biomass per year in a sustainable manner. This
includes the amount grain used for biofuels when the study was completed
plus recovering 40 percent of corn stover and other crop residues.
However, by increasing corn yields by 25 percent and recovering 60
percent of corn stover and other crop residues, the agricultural sector
could increase the amount of biomass available by 238 million dry tons
per year.

As a point of comparison, USDA's current long-term projections project
that corn yields will increase from 151 bushels per acre in 2006/07 to
170 bushels per acre by 2016/17.[^7] That change represents a 12.6
percent increase over 10 years, or almost 1.3 percent per year.
Therefore, increasing corn yields by 25 percent over the next 20 years
is realistic if yields only maintain their historic growth rates.

Higher corn yields and recovering greater amounts of crop residues
further increases the amount of biomass available for ethanol
production. Increasing corn yields by 50 percent and recovering 75
percent of corn stover and other crop residues would raise the amount of
biomass available by an additional 165 million dry tons per year.

Lastly, growing perennial energy crops on 55 million acres of land would
increase the amount of biomass available by about 400 million dry tons
per year. Of the 800 million tons of additional biomass production over
current levels, half of the increase can be met by increases in crop
yields and greater residue recovery on existing cropland with the
remainder met by growing perennial grasses for energy crops. In the
billion-ton study, the 55 million acres devoted to perennial energy
crops came from mainly from reductions in pasture (25 million acres),
land enrolled in the Conservation Reserve Program (CRP) (10 million
acres), soybean acres (8 million acres), hay (5 million acres), and
wheat (5 million acres).

*Economic Potential.* The U.S. Department of Energy (DOE) expects that
research, science, and technological developments can reduce the cost of
cellulosic ethanol to be competitive with corn ethanol by 2012. However,
it will take time to deploy cellulosic technology through new plant
construction and expected retrofitting of existing grain ethanol plants.

A number of factors will be important in determining which feedstocks
will be used in producing cellulosic-based ethanol including the costs
associated with producing, harvesting, transporting, handling, storing,
and processing these various biomass materials as well as the ability to
compete with existing agricultural commodities. Because cellulosic-based
ethanol is not produced commercially, it is difficult to assess the
actual cost of producing biomass feedstocks. Recent studies regarding
the economics associated with producing biomass feedstock suggest that
increases in the use of no till, improvements in traditional crop
yields, and improvements in energy crop yields are necessary to produce
biomass at a cost which allows cellulosic-based ethanol to play a
significant role in meeting our energy demands.

Researchers at the Iowa State University estimated production costs for
switchgrass for seven alternative scenarios and four yield levels per
acre (1.5, 3, 4, and 6 tons per acre).[^8] In each scenario, the cost to
produce each ton of biomass declines as yield per acre increases. In
their lowest cost scenario, total yearly production costs excluding land
costs range from \$121 per acre (\$80 per ton) for 1.5 tons per acre
yield to \$241.16 per acre (\$40 per ton) for 6 tons per acre. The
average cost over all yield levels was \$177.66 per acre (\$49 per ton),
with an average yield of 3.6 tons per acre.

The University of Nebraska in cooperation with the USDA's Agricultural
Research Service also estimated the variable costs of production of
switchgrass based on data collected on 10 farms in Nebraska, South
Dakota, and North Dakota. The data was collected over five years
(2000-05) including one year to establish the switchgrass and four years
for full production. A total of 173 acres were planted and the average
yield over the four production years was 3.4 tons per acre per year with
average production costs excluding land costs of \$33 per ton.

The ability to compete with existing commodities is also an important
component of the economics of biomass production especially if land is
used specifically for dedicated energy crops. For example, under the
USDA baseline, net returns per acre (returns over variable costs) are
expected to range from \$94 per acre for wheat to \$334 per acre for
corn in 2007. Strong prices for commodities are expected to keep net
returns relatively high over the entire forecast period (2007-16).
Therefore, assuming biomass yields of 4 tons per acre, farmers would
need to be paid an average of \$23.40 per ton to compete with wheat and
\$83.50 per ton compete with corn just to cover the opportunity costs
associated with using cropland for dedicated energy crops. These net
returns can be considered the minimum returns required to plant energy
crops, such as switchgrass, instead of traditional crops.

Adding an additional \$23.40 to \$83.50 per ton in addition to biomass
production costs of \$30 to \$40 per ton would mean that farmers would
need to be paid about \$60 per ton to compete with wheat and \$120 per
ton to compete with corn. The \$60 to \$120 per ton that is needed to
compete with wheat and corn is on land that wheat and corn are currently
grown on. These costs could come down on more marginal land assuming
biomass yields could be maintained. These estimates are consistent with
those Babcock, Gassman, Jha, and Kling of the Center for Agricultural
and Rural Development who found that farmers would consider switching
from corn to switchgrass if switchgrass prices reached \$110 per ton
(assuming yields of 4 tons per acre) and \$82 per ton (assuming yields
reach 6 tons per acre).[^9]

As an alternative to dedicated energy crops, researchers at the Oak
Ridge National Laboratory estimate there are currently about 60 million
tons of corn stover available at a cost of \$30 per dry ton.[^10] The
estimate of available corn stover takes into consideration the need to
leave some residue in the field to meet erosion, moisture, and equipment
constraints and represents about 30 percent of the total amount of corn
stover produced in the United States. If the entire U.S. corn crop is
planted to the no tillage system, then about 100 million dry tons of
corn stover could be available annually. The \$30 per dry ton cost
includes the cost of harvesting the stover and the cost of replacing
nutrients lost through the removal of the stover but does not include
any premium that may need to pay farmers or the cost of transporting the
stover to the ethanol plant. It is important to note there are limits to
how much crop residue as corn stover can be removed from the land. Crop
residues play an important role in reducing soil erosion and runoff and
returning organic matter to the soil.

The cost to transport biomass from the farm gate to the ethanol plant
will depend on distance hauled and handling charges. Some experts
estimate that transportation and handling would add another \$20 per ton
to the delivered cost of biomass to the plant. A study by the National
Renewable Energy Laboratory (NREL) estimated the delivered cost of corn
stover to the plant at \$56 per ton.[^11]

Corn stover (crop residue) and forest and mill residues appear to be the
most likely biomass feedstocks to be used initially. The abundance of
corn acres provides ample supplies of corn stover, and the forestry
industry has an infrastructure in place for harvest and collection of
woody materials and mills are well established.

Dedicated energy crops are likely to take longer to play a significant
role as a feedstock for cellulosic-based ethanol because of initially
higher production costs and because it takes time to establish the crop.
Dedicated energy crops could play a more important role as a feedstock
for cellulosic ethanol over time as farmers become more familiar with
growing energy crops causing yields to increase, transportation
infrastructure issues are overcome, and limits are approached on the
availability of lower cost feedstocks such as corn stover and forest and
mill residues.

Herbaceous energy crops such as switchgrass will likely be the dominant
dedicated energy crops because farmers' existing complement of equipment
and machinery, such as mowers and balers used in production and
harvesting of alfalfa hay, other hay, and forage could be used in
switchgrass production. After one or two years to establish the crop,
herbaceous crops are harvested every year and provide the farmer greater
flexibility in planting decisions by being able to devote land to an
energy crop like switchgrass one year and to switch back to other crops
the following year. In contrast, with dedicated woody crops, land is
devoted to a specific activity for a longer period of time. For example,
hybrid willows are harvested every three years and hybrid poplars every
seven to 10 years. In addition, farmers would likely need to invest in a
new complement of equipment and machinery to plant, harvest, drag, and
chip trees and to remove stumps after the harvest. Capital invested in
woody energy crops production could be tied up between three to 10
years.

These results are similar to findings by presented as part of the
"25x'25" study.[^12] As part of the 25x'25 study, researchers looked at
feasibility of two alternative renewable energy scenarios. The 25x'25
study did not estimate how much renewable energy would be produced over
time. The study assessed the impacts of alternative levels of renewable
energy production on the economy and the agricultural sector. Under the
"All Energy" or AE scenario, 25 percent of the nation's total energy use
in 2025 is required to be produced from renewable sources. Under the AE
scenario, ethanol production in the United States increases to 30
billion gallons per year by 2015, 58 billion gallons per year by 2020,
and 87 billion gallons per year by 2025. Biodiesel production increases
to 450 million gallons per year by 2015, 720 million gallons per year by
2020, and 1.1 billion gallons per year by 2025. The second scenario,
referred to as the EPT scenario required that 25 percent of the nation's
total electric power and motor vehicle fuels are required to be produced
from renewable sources. Under the EPT scenario, ethanol production is
slightly higher compared to the AE scenario, increasing to almost 32
billion gallons per year by 2015, 60 billion gallons per year by 2020,
and 88 billion gallons per year by 2025. Biodiesel production under the
EPT scenario is the same as under the AE scenario.

Figure 14 presents the amounts of biomass used to produce bioenergy
under both 25x'25 scenarios. While biofuel production is similar under
both 25x'25 scenarios, the AE scenario requires larger amounts of
electricity production from biomass compare to the EPT scenario because
meeting 25 percent of the nations total energy use (AE scenario)
requires more renewable energy than meeting 25 percent of the nation's
total electric power and motor vehicle fuels (EPT scenario). Therefore,
by 2025, almost 1.3 billion tons of biomass will be required to meet
total required bioenergy production under the AE scenario compared to
about 1 billion tons of biomass under the EPT scenario.

Initially, wood residues and corn stover are the most likely feedstock
to be used to produce cellulosic-based ethanol. However, as the demand
for ethanol increases over time, dedicated energy crops play an
increasingly important role. By 2025, for example, dedicated energy
crops contribute over 50 percent of the total bioenergy feedstock
supplies.

The results of the 25x'25 study are also influenced by assumptions
regarding the amount of biomass available from crop residues, yield
increases in traditional crops, and yields increases for energy crops.
The 25x'25 study assumes conventional tillage falls from 60 percent
currently to 25 percent by 2021 and the use of no till increases from 20
percent currently to 55 percent by 2021. As in the billion-ton study,
the increase in the use of no till increases the amount of biomass
available for cellulosic ethanol.

With respect to traditional crops, the 25x'25 study assumes corn yields
increase by 1.69 percent per year over time, slightly higher than the
1.3 percent per year increase assumed in the USDA baseline. The effect
of the higher yield assumption is that corn yields approach 168 bushels
per acre by 2015 and 194 bushels per acre by 2025.

In addition, the 25x'25 study assumes research and technology can
increase switchgrass yields over time. Yield increases vary by region of
the country, with the greatest annual increases (5 percent per year)
assumed for Appalachia, the Southeast, and the Southern Plains and the
smallest annual increases (1.5 percent per year) assumed for the North
East, Lake States, and Northern Plains. For example, switchgrass yields
in the Southern Plains are assumed to increase from 4.3 dry tons per
acre to 6.5 dry tons per acre in 10 years and to 8.6 dry tons per acre
in 20 years. Harvesting costs also increase by 5 percent for each ton
yield increase.

Even with technological advances that increase yields for both
conventional and energy crops, biomass prices increase under both 25x'25
scenarios. By 2015, the price of switchgrass ranges from about \$36 per
dry ton under the EPT scenario to almost \$47 per dry ton under the AE
scenario. By 2025, however, pressure to increase bioenergy production
causes the price of switchgrass to increase to \$55 per dry ton under
the EPT scenario to almost \$82 per dry ton under the AE scenario.

The 25x'25 study also estimates the effects of added bioenergy
production on the agricultural economy as well as the economy in
general. Under the AE scenario, net farm income is about \$15 billion
greater than the baseline by 2020 and \$37 billion greater than the
baseline by 2025. Under the EPT scenario, net farm income is about \$8
billion greater than the baseline by 2020 and \$18 billion greater than
the baseline by 2025.

The impacts on net farm income in the 25x'25 study are modest in
relation to the level of added biofuels production. In our corn-based
ethanol scenarios presented earlier, increasing biofuel production by
3.3 billion gallons per year (Scenario 1: 3 billion gallons of ethanol
and 300 million gallons of biodiesel) in 2016 caused net farm income to
increase by \$4 billion over the baseline while increasing biofuels
production by 8.3 billion gallons per year (Scenario 2) increased net
farm income by \$14.3 billion over the baseline.

*Cellulosic Summary*. The United States has the potential to produce a
large amount of biomass that could be used to produce biofuels. However,
both the billion-ton study and the 25x'25 study note the need for
significant technological breakthroughs to convert this technical
potential into an economic reality. For example, the billion-ton study
found that using a significant amount of this biomass requires a
"concerted R&D effort to develop technologies to overcome a host of
technical, market, and cost barriers". Similarly, the 25x'25 study noted
"To obtain the amount of renewable energy in the goal, two conditions
need to be met. First is commercial introduction of the technology for
cellulosic-to-ethanol conversion. Second is the development of an energy
dedicated crop economy with 105.8 million planted acres." In addition,
"To achieve the renewable energy goal at reasonable crop and feedstock
prices, investment in research to improve yields of energy feedstock,
along with yields of traditional crops, is crucial."

**Figure 1: Projected Corn Used for Ethanol Production\
and Share of Total Domestic Corn Production**

![](media/image2.wmf)

**Figure 2: Projected Soybean Oil Used for Biodiesel Production\
and Share of Total Domestic Soybean Oil Production**

![](media/image3.wmf)

![](media/image4.wmf){width="5.999305555555556in"
height="4.095138888888889in"}

![](media/image5.wmf){width="5.999305555555556in"
height="4.095138888888889in"}

**Figure 5: Corn: Season-Average Farm Price**

![](media/image6.wmf)

**Figure 6: Soybeans: Season-Average Farm Price**

![](media/image7.wmf)

**Figure 7: Percent change in corn acreage**

15-billion gallon scenario

20-billion gallon scenario

**Figure 8: Percent change in soybean acres planted**

15-billion gallon scenario

20-billion gallon scenario

**Figure 9: Distribution of crop rotations, Corn Belt,\
with percentage change from baseline for each rotation**

![](media/image8.wmf){width="5.990277777777778in"
height="4.104861111111111in"}

**Figure 10: Distribution of crop rotations, Northern Plains,\
with percentage change from baseline for each rotation**

![](media/image9.wmf){width="5.990277777777778in"
height="4.104861111111111in"}**\
**

**Figure 11: Distribution of crop rotations, Lake States,\
with percentage change from baseline for each rotation**

![](media/image10.wmf){width="5.990277777777778in"
height="4.104861111111111in"}

**Figure 12: Distribution of tillage practice, Corn Belt,\
with percentage change from baseline for each tillage practice**

![](media/image11.wmf){width="5.990277777777778in"
height="4.104861111111111in"}

**Figure 13: Distribution of tillage practice, Northern Plains,\
with percentage change from baseline for each tillage practice**

![](media/image12.wmf){width="5.990277777777778in"
height="4.104861111111111in"}

**Figure 14. Biomass Feedstocks Over Time**

![](media/image13.png){width="6.00748031496063in"
height="5.986614173228347in"}

Source: English, B., D De La Torre Ugarte, K. Jensen, C. Hellwinckel, J.
Menard, B. Wilson, R. Roberts, and M. Walsh. "25% Renewable Energy for
the United States by 2025: Agricultural and Economic Impacts." November
2006.

![](media/image14.wmf){width="7.25in" height="2.7395833333333335in"}

![](media/image16.wmf){width="5.1715277777777775in" height="8.9in"}

![](media/image17.wmf){width="5.092361111111111in" height="8.8in"}

![](media/image18.wmf){width="6.240277777777778in"
height="8.218055555555555in"}

![](media/image19.wmf){width="6.240277777777778in"
height="8.218055555555555in"}

![](media/image20.wmf){width="5.999305555555556in"
height="4.229166666666667in"}

![](media/image21.wmf){width="5.999305555555556in"
height="5.916666666666667in"}

![](media/image22.wmf){width="5.998611111111111in"
height="4.364583333333333in"}

![](media/image23.wmf){width="5.998611111111111in"
height="5.909722222222222in"}

![](media/image24.wmf){width="5.993055555555555in"
height="4.229166666666667in"}

![](media/image25.wmf){width="5.993055555555555in"
height="5.073611111111111in"}

![](media/image26.wmf){width="5.995833333333334in"
height="4.720138888888889in"}

![](media/image27.wmf){width="5.995833333333334in"
height="5.6618055555555555in"}

![](media/image28.wmf){width="5.999305555555556in"
height="7.604166666666667in"}

![](media/image29.wmf){width="5.998611111111111in"
height="7.576388888888889in"}

![](media/image30.wmf){width="5.998611111111111in"
height="7.586111111111111in"}

![](media/image31.wmf){width="5.992361111111111in"
height="7.622916666666667in"}

![](media/image32.wmf){width="5.999305555555556in"
height="3.770138888888889in"}

![](media/image33.wmf){width="5.997916666666667in"
height="3.765277777777778in"}

![](media/image34.wmf){width="5.993055555555555in"
height="4.713888888888889in"}

![](media/image35.wmf){width="5.995833333333334in"
height="4.726388888888889in"}

![](media/image36.wmf){width="5.997916666666667in"
height="4.145833333333333in"}

![](media/image37.wmf){width="5.995138888888889in"
height="4.165277777777778in"}

![](media/image38.wmf){width="5.995138888888889in"
height="6.242361111111111in"}

![](media/image39.wmf){width="5.998611111111111in" height="6.3in"}

![](media/image40.wmf){width="5.996527777777778in"
height="1.9159722222222222in"}

![](media/image41.wmf){width="5.9944444444444445in"
height="1.9201388888888888in"}

**Table 25: Composition of Farm Production Regions**

![](media/image42.wmf){width="4.279166666666667in"
height="2.807638888888889in"}

**Table 26: Nitrogen fertilizer used, by region (million tons)**

![](media/image43.wmf){width="5.302083333333333in"
height="2.4145833333333333in"}

**Table 27: Phosphorus fertilizer used, by region (million tons)**

![](media/image44.wmf){width="5.280555555555556in"
height="2.4145833333333333in"}

**Table 28: Potash fertilizer used, by region (million tons)**

![](media/image45.wmf){width="5.3125in" height="2.4145833333333333in"}

**Table 29: Pesticide applied (million lbs)**

![](media/image46.wmf){width="5.302083333333333in"
height="2.4145833333333333in"}

**Table 30: Nitrogen leached into groundwater (million tons)**

![](media/image47.wmf){width="5.290277777777778in"
height="2.4145833333333333in"}

**Table 31: Soil erosion (million tons)**

![](media/image48.wmf){width="5.302083333333333in"
height="2.4145833333333333in"}

**Table 32: Additional industry information on the impact of ethanol\
on poultry and aquaculture feed costs**

+--------+-------------------------------------------------------------+
| [Bro   | U.S. broiler liveweight production in 2006 was 48.3 billion |
| ilers] | pounds. Production is concentrated in the Southeast and     |
| {.unde | South Central sections of the country with Maryland,        |
| rline} | Virginia, North Carolina, Georgia, Alabama, Mississippi,    |
|        | Arkansas, and Texas accounting for over 70 percent of total |
|        | broiler production in 2005.The feed conversion ratio for    |
|        | broiler production is approximately 2 pounds of feed per 1  |
|        | pound of liveweight or approximately 96.6 billion pounds of |
|        | feed use in 2006.                                           |
|        |                                                             |
|        | Approximately 68 percent of broiler feed is corn or 66      |
|        | billion pounds in 2006.                                     |
|        |                                                             |
|        | Due to nutritional restrictions, broilers feeds can only    |
|        | contain approximately 10 percent DDG's.                     |
|        |                                                             |
|        | Most broiler production is not in the same locations as the |
|        | majority of ethanol production.                             |
+--------+-------------------------------------------------------------+
| T      | U.S. turkey liveweight production in 2006 was 7.2 billion   |
| urkeys | pounds. Turkey production is spread throughout the country  |
|        | with 5 largest producing States being North Carolina,       |
|        | Minnesota, Missouri, Arkansas, and Virginia. These States   |
|        | accounted for 55 percent of total turkey production in      |
|        | 2005.                                                       |
|        |                                                             |
|        | The feed conversion ratio for turkey production is          |
|        | approximately 2.9 pounds of feed per 1 pound of liveweight  |
|        | or approximately 21 billion pounds of feed use in 2006.     |
|        |                                                             |
|        | Approximately 70 percent of turkey feed is corn or 15       |
|        | billion pounds in 2006.                                     |
|        |                                                             |
|        | Due to nutritional restrictions, turkey feeds can only      |
|        | contain approximately 10 percent DDG's.                     |
+--------+-------------------------------------------------------------+
| Eggs   | U.S. egg production in 2006 was 7.6 billion dozens (table   |
|        | and hatching production). Egg production is concentrated    |
|        | mostly in the central portion of the country with the 5     |
|        | largest producing States being Iowa, Ohio, Pennsylvania,    |
|        | Indiana, and California. These States accounted for 43      |
|        | percent of total egg production in 2005.                    |
|        |                                                             |
|        | The feed conversion ratio for egg production is             |
|        | approximately 4 pounds of feed per 1 dozen eggs or          |
|        | approximately 30 billion pounds of feed use in 2006.        |
|        |                                                             |
|        | Approximately 80 percent of egg-type feed is corn or 24     |
|        | billion pounds in 2006.                                     |
|        |                                                             |
|        | Egg birds (producing shell eggs or hatching eggs) have the  |
|        | same basic nutritional restrictions as broilers and can     |
|        | only use approximately 10 percent DDG's in their rations.   |
+--------+-------------------------------------------------------------+
| C      | U.S. catfish production in 2006 was 570 million pounds.     |
| atfish | Catfish production is concentrated in four States (Alabama, |
|        | Mississippi, Louisiana, and Arkansas) with Mississippi      |
|        | being the largest producer.                                 |
|        |                                                             |
|        | The feed conversion ratio for catfish production is         |
|        | approximately 2 pounds of feed per 1 pound of liveweight of |
|        | fish at harvested. The National Agricultural Statistics     |
|        | Service estimated that 1.5 billion pounds of catfish feeds  |
|        | were delivered to producers in 2006.                        |
|        |                                                             |
|        | Catfish feeds are roughly similar in composition to broiler |
|        | feeds.                                                      |
|        |                                                             |
|        | Catfish also have similar nutritional restrictions as       |
|        | broilers and can only incorporate a relatively small        |
|        | percentage of DDG's in their rations.                       |
+--------+-------------------------------------------------------------+

  ------------------------- --------- ----------- ------- -------- ----------- --------- ----------
  **Table 33: Dairy                                                                      
  production costs, 2005**                                                               

  ** **                     ** **     ** **       ** **   ** **    ** **       ** **     ** **

  Item                      West      Southeast   Corn    Lake     Northeast   Appala-   Southern

                                                  Belt    States               chian     Plains

                                                                                         

                            dollars                                                      
                            per cwt                                                      

  Operating costs:                                                                       

  Feed:                                                                                  

  Feed grains               1.11      0.47        1.21    1.10     0.75        0.78      1.20

  Hay and straw             2.32      0.81        3.32    1.24     1.46        1.37      1.63

  Complete feed mixes       2.33      3.39        1.43    0.71     1.73        3.36      2.92

  Liquid whey and milk      0.06      0.04        0.08    0.24     0.08        0.07      0.01
  replacer                                                                               

  Silage                    0.85      1.12        0.95    0.67     1.20        1.34      0.38

  Grazed pasture and        0.13      0.11        0.16    0.07     0.07        0.25      0.08
  cropland                                                                               

  Other feed items          0.74      1.58        1.67    1.22     2.36        1.04      1.25

  Total feed operating      7.54      7.52        8.82    5.24     7.64        8.21      7.47
  costs                                                                                  

  Total non-feed operating  2.37      3.93        3.41    2.91     3.84        3.79      2.99
  costs                                                                                  

                                                                                         

  Total operating costs     9.90      11.45       12.23   8.15     11.48       12.00     10.46

  Total allocated overhead  5.27      8.66        11.72   12.26    12.15       12.08     4.69

                                                                                         

  Total economic costs      15.17     20.11       23.95   20.41    23.64       24.07     15.15
  ------------------------- --------- ----------- ------- -------- ----------- --------- ----------

  ------------------------------------- ---------- ---------- ---------- ----------
  **Table 34: Cow-calf production                                        
  costs, 2005**                                                          

                                                                          

                                        North      Great      South      West

  Item                                  Central    Plains                

                                                                          

                                                                         

                                                                         

                                        \$ per                           
                                        bred cow                         

  Operating costs:                                                       

  Feed:                                                                  

  Concentrates and other feed           28.36      26.92      25.46      19.42

  Supplemental feed                     32.35      27.19      12.62      3.13

  Harvested forages                     183.93     111.56     181.94     116.65

  Cropland pasture                      15.12      15.52      3.64       4.58

  Private pasture                       86.52      118.69     67.31      110.91

  Public land                           0.37       5.94       0.25       1.83

  Total feed operating costs            346.65     305.82     291.22     256.53

  Total non-feed operating costs        174.00     140.55     128.37     152.86

                                                                         

  Total operating costs (Includes                                        
  purchased                                                              

  cattle for backgrounding)             552.67     523.83     474.30     507.31

  Total allocated overhead              698.25     538.31     703.82     553.20

                                                                         

  Total economic costs                  1,250.92   1,062.14   1,178.12   1,060.51
  ------------------------------------- ---------- ---------- ---------- ----------

  ------------------------------------------- ----------- ----------------
  **Table 35: Feedlot costs of production,                
  2005**                                                  

                                                           

  Cost category                               Farmer      Commercial
                                              feedlot     feedlot

                                                          

                                                           

                                              \$ per cwt  
                                              final       
                                              product     

  Operating costs:                                        

  Feed\--                                                 

  Halage                                      0.37        0.00

  Silage                                      4.51        0.38

  Dry grain & concentrates                    9.94        9.83

  Protein supplement                          4.27        3.95

  Legume hay                                  1.20        1.59

  Pasture                                     0.01        0.00

  Crop residue                                0.00        0.00

  Total feed operating costs                  20.30       15.75

  Total non-feed operating costs              88.62       89.29

                                                          

  Total operating costs (including feeder     108.91      105.04
  cattle)                                                 

  Total allocated overhead                    14.61       0.85

                                                          

  Total economic costs                        123.52      105.89
  ------------------------------------------- ----------- ----------------

  ------------------------------------------ --------------- ------- -----------
  **Table 36: Regional farrow-to-finish                              
  production costs, 2005**                                           

  ** **                                      ** **                   ** **

                                             North Central,          South and

  Cost category                              Northern                Southern
                                             Plains, and             Plains
                                             West                    

                                                                      

                                                                     

                                             \$ per cwt gain         

  Operating costs:                                                   

  Feed \--                                                           

  Grain                                      9.51            5.51    

  Protein sources                            7.64            4.72    

  Complete mixes                             7.66            12.59   

  Other feed items                           0.30            0.23    

  Total feed operating cost                  25.10           23.05   

  Total other non-feed operating costs       5.24            4.96    

                                                                     

  Total operating costs                      30.34           28.01   

  Total allocated overhead                   24.32           23.94   

                                                                     

  Total economic costs                       54.66           51.95   
  ------------------------------------------ --------------- ------- -----------

  -------------------------------------- ---------------- ------- --------------
  **Table 37: Regional feeder                                     
  pig-to-finish**                                                 

  **production costs, 2005**                                      

                                                                  

                                         North Central,           South and

  Cost category                          Northern Plains,         Southern
                                         and West                 Plains

                                                                  

                                                                  

                                         \$ per cwt gain          

  Operating costs:                                                

  Feed \--                                                        

  Grain                                  1.87             0.02    

  Protein sources                        1.58             0.01    

  Complete mixes                         15.74            22.68   

  Other feed items                       0.09             0.00    

  Total feed operating cost              19.28            22.71   

  Total non-feed operating costs         20.51            25.53   

                                                                  

  Total, operating costs                 39.79            48.24   

  Total, allocated overhead              8.09             7.33    

                                                                  

  Total economic costs                   47.88            55.57   
  -------------------------------------- ---------------- ------- --------------

  --------------------------------------- ---------- ---- ------- -------------
  **Table 38: Hog production costs,                               
  2005**                                                          

                                                                  

                                          North                   South and
                                          Central,                

                                          Northern                Southern
                                          Plains,                 Plains
                                          and West                

  Cost category                                                   

                                                                  

                                                                  

                                          \$ per cwt              
                                          gain                    

  Operating costs:                                                

  Feed \--                                                        

  Grain                                   3.75            0.47    

  Protein sources                         3.01            0.40    

  Complete mixes                          15.90           21.75   

  Other feed items                        0.20            0.02    

  Total feed operating cost               22.86           22.64   

  Total non-feed operating costs          20.44           27.86   

                                                                  

  Total, operating costs                  43.29           50.50   

  Total allocated overhead                15.42           12.53   

                                                                  

  Total economic costs                    58.72           63.03   
  --------------------------------------- ---------- ---- ------- -------------

Table 39. Major Land Uses in the United States, 2002

  ------------------------- --------- ------------ --------- ------------
  Land use                  48 States United       48 States United
                                      States                 States

                            Million                Percent   
                            acres                  of total  

  Cropland used for crops   340       340          18.0      15.0

  Idle cropland             40        40           2.1       1.8

  Cropland used for pasture 62        62           3.3       2.7

  Grassland pasture and     584       587          30.8      25.9
  range                                                      

  Forest-use land grazed    134       134          7.1       5.9

  Forest-use land not       425       517          22.4      22.8
  grazed                                                     

  Special uses              153       297          8.1       13.1

  Urban                     59        60           3.1       2.6

  Miscellaneous other land  97        228          5.1       10.1

  Total land area           1,894     2,264        100.0     100.0
  ------------------------- --------- ------------ --------- ------------

Source: Lubowski, R., M. Vesterby, S. Bucholtz, A. Baez, and M. Roberts.
Major Uses of Land in the United States, 2002. U.S. Department of
Agriculture. Economic Research Service. EIB-14. May 2006. The report is
available on the internet at:
http://www.ers.usda.gov/publications/EIB14/.

Table 40. Estimated Annual Biomass Potential in the United States

+-------------------------+------------------------+-------------------+
|                         | Biomass                | Ethanol           |
|                         |                        | Equivalent        |
|                         | (million tons)         |                   |
|                         |                        | (billion gallons) |
+-------------------------+------------------------+-------------------+
| Grain-to-ethanol \*     | 87                     | 7                 |
+-------------------------+------------------------+-------------------+
| Process residues        | 87                     | 7                 |
+-------------------------+------------------------+-------------------+
| Crop residues           | 446                    | 36                |
+-------------------------+------------------------+-------------------+
| Perennial crops         | 377                    | 30                |
+-------------------------+------------------------+-------------------+
| Forestry residues       | 368                    | 29                |
+-------------------------+------------------------+-------------------+
| Total                   | 1,365                  | 109               |
+-------------------------+------------------------+-------------------+

\* The billion-ton study was completed prior to the recent increase in
corn-based ethanol production. Therefore, the potential to produce 7
billion gallon per year from grain-to-ethanol is under-estimated. The
latest USDA baseline projects corn-based ethanol production of 12
billion gallons per year by marketing year 2016/17.

Assumes 80 gallons of ethanol per dry ton of biomass.

Source: Biomass estimate is from "Biomass as a Feedstock for Bioenergy
and Bioproducts Industry: The Technical Feasibility of a Billion-Ton
Supply"

Table 41. Sources of Agricultural Biomass Over Time

+--------------------+------------------------+------------------------+
| Scenario           | Agricultural           | Change in              |
|                    |                        |                        |
|                    | Biomass                | Biomass                |
|                    |                        |                        |
|                    | (million dry tons per  | (million dry tons per  |
|                    | year)                  | year)                  |
+--------------------+------------------------+------------------------+
| Currently          | 194                    |                        |
| Availability       |                        |                        |
+--------------------+------------------------+------------------------+
| Moderate crop      | 432                    | +238                   |
| yield increases    |                        |                        |
| without land use   |                        |                        |
| change             |                        |                        |
+--------------------+------------------------+------------------------+
| High crop yield    | 597                    | +165                   |
| increases without  |                        |                        |
| land use change    |                        |                        |
+--------------------+------------------------+------------------------+
| High crop yield    | 998                    | +401                   |
| increases with     |                        |                        |
| land use change    |                        |                        |
|                    |                        |                        |
|                    |                        |                        |
+--------------------+------------------------+------------------------+

Source: "Biomass as a Feedstock for Bioenergy and Bioproducts Industry:
The Technical Feasibility of a Billion-Ton Supply"

[^1]: USDA released two versions of its long-term projections in 2007,
    each based on a different set of assumptions. Under current law,
    blenders of biofuels receive tax credits. These credits are
    scheduled to expire in 2010 for ethanol and in 2008 for biodiesel.
    In addition, legislation also authorizes import tariffs for ethanol.
    Authorization for this program expires in 2008. One baseline
    released by USDA assumes that these programs terminate on their
    scheduled expiration dates. The alternative baseline used for this
    analysis assumes that these programs will be reauthorized and
    extended indefinitely (*USDA Agricultural Projections to 2016*, U.S.
    Department of Agriculture, Office of the Chief Economist, World
    Agricultural Outlook Board, OCE-2007-1, February 2007).

[^2]: The markets for the co-products of ethanol production have changed
    significantly in recent years due to the rapid influx of additional
    quantities of these products available for commercial use. To
    account for these industry changes, the assumptions used in this
    analysis differ in many respects from those that have been used in
    the past to conduct similar studies.

[^3]: USDA publishes a number of different price series for crops. The
    crop farm prices discussed in this analysis are the season-average
    prices reported by the National Agricultural Statistics Service.

[^4]: Under Scenario 1, the stock-to-use ratio never falls below 3
    percent. Under Scenario 2, however, the stocks-to-use ratio is as
    low as 1 percent in the final years of the analysis. It is uncertain
    how low this ratio should be allowed to fall. If the analysis
    constrained the stocks-to-use ratio to be some value higher than 1
    percent, then the price impacts associated with Scenario 2 would be
    somewhat higher than those described in the text.

[^5]: Since many of these studies pre-date the recent expansion of
    corn-based ethanol production, the grain-to-ethanol estimates are
    expected to be surpassed.

[^6]: The study "Biomass as a Feedstock for Bioenergy and Bioproducts
    Industry: The Technical Feasibility of a Billion-Ton Supply" can be
    accessed through the internet at the following web site:

    feedstockreview.ornl.gov/pdf/billion_ton_vision.pdf.

[^7]: U.S. Department of Agriculture. Office of the Chief Economist.
    World Agricultural Outlook Board. "USDA Agricultural Projections to
    2016." Long-term Projections Report OCE-2007-1. February 2007. The
    report is available through the internet at:
    <http://www.ers.usda.gov/briefing/projections/>

[^8]: Duffy, M. and V. Nanhou. "Costs of Producing Switch Grass for
    Biomass in Southern Iowa." Iowa State University Extension
    Publication PM 1866. April 2001.

[^9]: Babcock, B.A., P.W. Gassman, J. Jha., and C.L. Kling. "Adoption
    Subsidies and Environmental Impacts of Alternative Energy Crops."
    Center for Agricultural and Rural Development Briefing Paper 07-BP
    50. March 2007.

[^10]: Graham, R.L., R. Nelson, J. Sheehan, R.D. Perlack, and L.L.
    Wright. "Current and Potential U.S. Corn Stover Supplies." Agronomy
    Journal. Vol. 99, January-February 2007.

[^11]: A. Aden, M Ruth, K. Ibsen, J. Jechura, K. Neeves, J. Sheehan, and
    B. Wallace, Lignocellulosic Biomass to Ethanol Process Design and
    Economics Utilizing Co-current Dilute Acid Prehydrolysis and
    Enzymatic Hydrolysis for Corn Stover, National Renewable Energy Lab.
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