· The effects on farm prices and net farm income.

· The effects on U.S. trade.

· The effects on employment in the United States.

· The effects on Department of Agriculture (USDA) farm program spending from increased demand for corn attributable to greater ethanol production.

· The logistical issues associated with supplying substantial quantities of ethanol to new markets, including an assessment of the capacity for transporting and storing ethanol to meet the demands of these markets.

Although California has decided to phase-out MTBE by 2002, most other states have not taken any actions regarding the use of MTBE. This analysis assumes all MTBE in the United States is phased-out and replaced with ethanol. In order to allow for production capacity and other infrastructure adjustments, the phase-out is assumed to begin in 2000 and end in 2004 when all oxygen demand for the RFG and carbon monoxide (CO) markets is met with ethanol. In addition, the analysis assumes Congress maintains the oxygen standards adopted by the Clean Air Act Amendments of 1990; the current gasoline oxygen requirement in California for Federal RFG is maintained; all new ethanol capacity brought on comes from large dry mills; 90 percent of U.S. ethanol is produced from corn, with the remaining 10 percent produced from sorghum, barley, wheat, and waste products. The rate at which ethanol replaces MTBE is assumed to start out gradually and accelerate over time as the ethanol industry expands capacity to meet the increase in demand.

An economic model of the U.S. agricultural sector was used to estimate the effects of replacing MTBE with ethanol on the U. S. agricultural economy over the period 2000-20 1 0. The econometric model, the Economic Research Service's Food and Agricultural Policy Simulator (FAPSIM), estimates production, use and prices of major crops and livestock products; retail food prices; and net farm income. The method of analysis compares projections of market variables under a baseline that assumes continued use of MTBE with projections of those variables under the assumed 4-year phase-out of MTBE.

The baseline for the analysis is the President's FY2000 Budget projections. The baseline assumes provisions of the Federal Agriculture Improvement and Reform Act of 1996 (1996 Farm Bill) continue through 2010. The baseline includes projections of farm prices, production, domestic use (including corn use for ethanol), exports, net farm income and food prices for the period 1999-2010.

The President's FY 2000 Budget projections are based on specific assumptions formulated at the end of last year regarding the macro economy, weather, and international developments. As a result, the baseline does not reflect the current very weak price situation for most major crops, including corn. However, over the next few years, crop prices are likely to improve as the world economy improves and as world grain and oilseed production declines in response to low prices and less favorable weather.

A 1992 input-output (1-0) multiplier model was used to estimate the effects of replacing MTBE with ethanol on U.S. employment. Data from the 1993 County Business Patterns (U.S.

Department of Commerce) were used to estimate employment effects for the Corn Belt region,

In 1998, about 1.5 billion gallons of denatured ethanol were consumed in the United States -about 384 million gallons were used in RFG and 1.1 billion gallons went to other markets such as the CO and octane markets (table 1). Before denaturing, corn-ethanol consumption equaled 1.3 billion gallons in 1998 and approaches 1.5 billion gallons in 2004 in the USDA baseline projections (table 2). In order to meet the oxygen needs met by MTBE, ethanol production under the MTBE phase-out would have to rise to 3.0 billion gallons in 2004. Some ethanol is assumed to be bid away from lower-value octane markets and move to RFG markets.

The volume of ethanol required in a gallon of RFG is less than MTBE volume because 5.7 percent ethanol replaces 11 percent MTBE, at 2 percent oxygen. The reduced volume of ethanol raises an issue of how the market will compensate for the volume reduction. This analysis concludes that refiners will replace volume and octane with increased alkylate production. Refiners with the processing capability will convert the isobutylene currently used for MTBE to alkylate. Alkylate has a high octane rating and can be used to produce premium gasoline. In addition, merchant producers looking for alternatives to MTBE production will purchase isobutylene from refineries and switch their MTBE production to alkylate. Thus, the feedstocks that were used to produce MTBE will remain in the gasoline pool in the form of alkylate. It is assumed that the current supply of isobutylene used in MTBE production is sufficient to produce enough alkylate to offset the volume shortage created by ethanol. Consequently, the analysis assumes the quantity of gasoline consumed in the United States is the same under the baseline and the MTBE phase-out scenario.

The MTBE phase-out is projected to increase the amount of ethanol produced from corn by 72 million gallons in 2000 and by 1.4 billion gallons per year in 2010 (table 2). The increase in ethanol production would increase the demand for corn above baseline by 28 million bushels in 2000 to over 500 million bushels per year beginning in 2004. The analysis assumes all of the increase in corn-ethanol production occurs in new dry mills, which produce 2.6 gallons of ethanol per bushel of corn, and 17 pounds of distillers dried grains (DDG) with 27-percent protein. DDG are assumed to substitute for soybean meal on an equivalent protein basis (table 2).

The increase in ethanol demand resulting from MTBE's phase-out is projected to increase the average price of corn by about $0.16 per bushel in 2010 and about $0.14 per bushel annually over the study period, 2000-2010 (table 3). Higher corn prices cause feed use of other crops to increase, leading to price increases of other grains, including sorghum, barley, oats, and wheat. Soybean prices are projected to decline by less than 1 percent. Higher corn prices reduce soybean production, but the decline in production is about offset by lower demand for soybean meal resulting from the increase in DDG production. Soybean oil prices increase in response to lower soybean production, but soybean meal prices fall in the face of increased competition in the protein feed market.

For cattle, hog and dairy producers, feed costs increase as higher corn prices more than offset the drop in soybean meal prices (table 3). In contrast, poultry, turkey, and egg producers feed a higher portion of protein in their rations, and for these producers, feed costs decline. Generally, the effects on feed costs are very modest and there is little change in livestock production and prices. Milk, steer and hog prices are 1 to 2 percent higher, whereas poultry prices are 1 to 2 percent lower on average over the 2000-2010 period.

Total farm cash receipts are projected to average $ 1. 0 billion higher during 2000-201 0 compared with the baseline (table 4). Corn cash receipts rise due to higher prices and more production (table 5). Over the period 2000-2010, cash receipts for corn average $1.2 billion higher and increase by over $1.6 billion, or about 9 percent during 2010 (table 5). Cash receipts for other feed grains and wheat also increase. In contrast, slightly lower production (less than 2 percent) and lower prices reduce soybean cash receipts by an average of $315 million per year. Total livestock cash receipts increase by less than 0.1 percent (table 6). Annual net farm income is projected to average over $1.0 billion higher during 2000-2010. Cumulatively over-the 2000-2010 period, net farm income increases by about $12 billion (table 4).

The MTBE phase-out is projected to increase prices for corn and other agricultural commodities causing the average U.S. agricultural net export value to increase by about $200 million per year (table 7). The export value for grains and feeds increase by about $225 million per year, while the export value of oilseeds and oilseed products decline slightly. The export value of livestock and animal products remains nearly unchanged.

The MTBE phase-out is expected to eliminate MTBE imports, since one third of the MTBE currently consumed in the United States is imported. Based on Energy Information Administration (EIk) gasoline consumption projections, MTBE consumption is expected to increase about 2 percent per year without an MTBE phase-out. Assuming that the current price of MTBE (about $0.72 per gallon) will increase by almost 1 percent annually, the import value of MME would average about $1.1 billion per year. Thus replacing MTBE with ethanol would reduce import value by $ 1.1 billion per year and almost $12 billion from 2000-2010 (table 7). The net increase in agricultural exports combined with the decrease in MTBE imports is projected to result in an average annual positive increase in the U.S. balance of trade of $1.3 billion per year.

Input-output analysis indicates that employment from increasing ethanol production to 3.4 billion gallons(denatured) in 2010 would create 13,000 additional jobs across the entire economy. Over a third of the new jobs, or 4,300, would be in the ethanol sector itself. Another 6,400 jobs would be in the trade and transportation and service sectors. Farm sector jobs increase by 575. Jobs in other industry, food processing, and energy sectors also increase by another 1,600 in 2010.

The Corn Belt region produces almost 80 percent of U.S. ethanol production. Thus, 80 percent of the new jobs in ethanol production, or about 3,600 jobs, are expected to occur in this region. In addition, the MTBE phase-out would create about 700 jobs in trade and transportation, 500 jobs in other services, and 400 jobs in energy, food processing and other industries in this region. The potential loss of U.S. jobs from reducing MTBE imports were not estimated.

The increase in ethanol production with a MTBE phase-out would be eligible for the Federal excise tax exemption on gasoline, or equivalent tax credit which would reduce federal tax revenues. The exemption is currently $0.54 per gallon and it is scheduled to drop to $0.53 on January 1, 2001, $0.52 on January 1, 2003 and $0.51 on January 1, 2005. Under the current law, the tax exemption expires on December 31, 2006.

Under the FY 2000 President's Budget baseline, farm crop prices are expected to strengthen from current levels, which results in increased ethanol use having little to no impact on the cost of farm price and income support programs during the projection period. While loan deficiency payments and marketing loan gains are currently forecast to reach $5.5 billion for the 1999 crops, these payments are projected to drop rapidly under the baseline after the current year under the projected price increases. And, since 1996 Farm Bill production flexibility contract payments are not tied to the level of market prices, these farm program costs do not fall as market prices for corn and other grains increase, compared with the baseline. However, farm prices are extremely volatile and farm prices and incomes could fall enough in the future to trigger loan deficiency payments and marketing loan gains and, possibly, emergency aid to offset declines in farm income. Higher corn and other grain prices under the MTBE phase-out would lessen the need for emergency relief and reduce loan deficiency payments and marketing loan gains should prices soften considerably from baseline levels. Where loan deficiency payments are being made, each $0.10 increase in corn prices could lower farm program outlays by about $1 billion per year.