BIOFUELS: NATIONAL and BIOFUELS: NATIONAL and KANSAS UPDATESKANSAS UPDATES

Agricultural Lenders ConferenceAgricultural Lenders Conference20072007

Mike WoolvertonMike WoolvertonKansas State UniversityKansas State Universitymikewool@agecon.ksu.edumikewool@agecon.ksu.edu

Renewable Fuels DriversRenewable Fuels Drivers

1.1. High gasoline and diesel fuel oil pricesHigh gasoline and diesel fuel oil prices

2.2. Flow of dollars out of the United StatesFlow of dollars out of the United States

3.3. Greenhouse gas emissionsGreenhouse gas emissions

4.4. Instability in oil exporting regions of Instability in oil exporting regions of the worldthe world

The Fossil Fuel InventoryThe Fossil Fuel InventoryTypeType AmountAmount LocationLocation

OilOil 1,278 BBOE 1,278 BBOE 78% E. Hemi.78% E. Hemi.

Heavy OilHeavy Oil 608 BBOE 608 BBOE 64% W. Hemi.64% W. Hemi.(Tar Sands)(Tar Sands)

BitumenBitumen 345 BBOE 345 BBOE 88% W. Hemi.88% W. Hemi.(Oil Shale)(Oil Shale)

Nat. GasNat. Gas 1,239 BBOE 1,239 BBOE 77% E. Hemi.77% E. Hemi.

CoalCoal 4,786 BBOE 4,786 BBOE Widely Widely

DistributedDistributed(60% in U.S., Russia, and China)(60% in U.S., Russia, and China)

Source: en.wikipedia.org/wiki/Fossil_fuelSource: en.wikipedia.org/wiki/Fossil_fuel

OPEC Cartel MembersOPEC Cartel Members1.1. Saudi ArabiaSaudi Arabia2.2. IranIran3.3. VenezuelaVenezuela4.4. NigeriaNigeria5.5. IraqIraq6.6. AlgeriaAlgeria7.7. KuwaitKuwait8.8. LibyaLibya9.9. IndonesiaIndonesia10.10. United Arab EmiratesUnited Arab Emirates11.11. Qatar Qatar Source: Energy Information Source: Energy Information

AdministrationAdministration

U.S. Oil Import SuppliersU.S. Oil Import Suppliers1.1. CanadaCanada

2.2. MexicoMexico3.3. Saudi Arabia Saudi Arabia (OPEC)(OPEC)

4.4. Venezuela Venezuela (OPEC)(OPEC)

5.5. Nigeria Nigeria (OPEC)(OPEC)

6.6. IraqIraq

7.7. AngolaAngola8.8. Algeria Algeria (OPEC)(OPEC)

9.9. RussiaRussia10.10. EcuadorEcuador Source: Energy Information Source: Energy Information

AdministrationAdministration

Renewable Energy Consumption as Renewable Energy Consumption as Percentage of Total Energy Used, U.S., 2006Percentage of Total Energy Used, U.S., 2006

Biomass (biofuels)Biomass (biofuels) 4848 HydroHydro 4242 GeothermalGeothermal 5 5 WindWind 4 4 SolarSolar 1 1

The United States and OilThe United States and Oil

Uses 20 million barrels per dayUses 20 million barrels per day Produces 6 million barrels per dayProduces 6 million barrels per day Oil usage has increased 2% per year Oil usage has increased 2% per year

but the economy has been growing but the economy has been growing at 3.3% per yearat 3.3% per year

Cost per year to import oil - $300 to Cost per year to import oil - $300 to $375 billion $375 billion

What would it take to replace imports?What would it take to replace imports?The U.S. uses 140 billion gallons of gasoline per The U.S. uses 140 billion gallons of gasoline per

year and 50 billion gallons of diesel fuel made year and 50 billion gallons of diesel fuel made from oil of which about 60% is imported. (40% from oil of which about 60% is imported. (40% from OPEC)from OPEC)

To replace the OPEC gasoline (33.6 bgpy) with To replace the OPEC gasoline (33.6 bgpy) with ethanol would require 12.4 billion bushels of ethanol would require 12.4 billion bushels of corn. Last year’s production – 10.5 billion corn. Last year’s production – 10.5 billion bushels.bushels.

To replace the OPEC diesel (12.0 bgpy) with soy-To replace the OPEC diesel (12.0 bgpy) with soy-diesel would require 8.2 billion bushels of diesel would require 8.2 billion bushels of soybeans. Last year’s production – 3.2 billion soybeans. Last year’s production – 3.2 billion bushels. bushels.

Renewable Energy Consumption as Renewable Energy Consumption as Percentage of Total Energy Used, U.S., 2006Percentage of Total Energy Used, U.S., 2006

Biomass (biofuels)Biomass (biofuels) 4848 HydroHydro 4242 GeothermalGeothermal 5 5 WindWind 4 4 SolarSolar 1 1

Net Energy BalanceNet Energy Balance

ProductProduct Energy Out/Energy Energy Out/Energy InIn

GasolineGasoline .81 .81

Ethanol from grainEthanol from grain 1.67 1.67

Ethanol from celluloseEthanol from cellulose 2.00 2.00

DieselDiesel .83 .83

Bio-dieselBio-diesel 3.2 3.2

Source: Congressional Research Service, RL32712, May 18, 2006Source: Congressional Research Service, RL32712, May 18, 2006

Bio-processingBio-processing

To fractionate agricultural commodities To fractionate agricultural commodities into component parts and use into component parts and use biological or chemical processes to biological or chemical processes to produce useful bio-products or produce useful bio-products or intermediary compounds.intermediary compounds.

Objective – make the sum of the parts Objective – make the sum of the parts more valuable than the whole.more valuable than the whole.

‘ ‘Leave no molecule behind.’Leave no molecule behind.’

Bio-processing AssumptionsBio-processing Assumptions

1.1. Oil will remain relatively expensiveOil will remain relatively expensive

2.2. A wide range of bio-products can be A wide range of bio-products can be produced for less than petrol-basedproduced for less than petrol-based

3.3. Bio-mass raw materials can be Bio-mass raw materials can be replenished each year (non-replenished each year (non-depleting)depleting)

ETHANOLETHANOL

Global Ethanol Production, 2006Global Ethanol Production, 2006

Production Production (bil. gal.)(bil. gal.) Share Share (%)(%)

WorldWorld 13.500 13.500 100.0 100.0

United StatesUnited States 4.855 4.855 36.0 36.0

BrazilBrazil 4.491 33.3 4.491 33.3

ChinaChina 1.017 1.017 8.0 8.0

IndiaIndia .502 4.0 .502 4.0

FranceFrance .251 .251 2.0 2.0

ROWROW 2.380 2.380 16.7 16.7

U.S. Industry at a GlanceU.S. Industry at a Glance20062006 20072007

Number of operating ethanol plants: 97 129Number of operating ethanol plants: 97 129 Plants under construction or expanding: 35 85Plants under construction or expanding: 35 85 Announced plants: Announced plants: 300 300(17%)(17%)

150150(?)(?)

Current production capacity: (BGPY) 4.8 6.8Current production capacity: (BGPY) 4.8 6.8 Projected production capacity: 7.9 BGPY end of 2007 Projected production capacity: 7.9 BGPY end of 2007

12.3 BGPY end of 200812.3 BGPY end of 2008 Feedstock percentage:Feedstock percentage:

CornCorn 97 97SorghumSorghum 2 2Other 1Other 1

The Kansas Ethanol IndustryThe Kansas Ethanol Industry

Operating PlantsOperating Plants Under ConstructionUnder ConstructionCampus Campus Goodland GoodlandColwichColwich Liberal Liberal Garden City (2)Garden City (2) Lyons LyonsGarnettGarnett Pratt PrattLeotiLeotiPhillipsburgPhillipsburgRussellRussell

Capacity–261.5 mgy+240 mgy=501.5 mgyCapacity–261.5 mgy+240 mgy=501.5 mgyAt full capacity will use 185 to 195 mil. Bu. At full capacity will use 185 to 195 mil. Bu.

grain grain (2007 KS corn/milo production 640 mil. Bu.)(2007 KS corn/milo production 640 mil. Bu.)

Ethanol Plant EconomicsEthanol Plant Economics

Cost to build a 100 MGPY plant - $160 millionCost to build a 100 MGPY plant - $160 million Purchase about 37-39 million bushels of corn Purchase about 37-39 million bushels of corn

(240,000 acres)(240,000 acres)

Daily water use: 1.5 million gallonsDaily water use: 1.5 million gallons Natural gas expense - $15 to $25 millionNatural gas expense - $15 to $25 million Payroll expense about $2 millionPayroll expense about $2 million Distiller’s Dried Grains income about $25 Distiller’s Dried Grains income about $25

millionmillion COCO22 income about $4 million income about $4 million Goal 30% R.O.I. Goal 30% R.O.I.

Distiller’s Grain Distiller’s Grain Each bushel of corn dry grind processed Each bushel of corn dry grind processed

for ethanol yields about 17 pounds of for ethanol yields about 17 pounds of distiller’s grain.distiller’s grain.

Distiller’s grain retains one-third of the Distiller’s grain retains one-third of the nutrient value of corn.nutrient value of corn.

In N. America: In N. America: 45% dairy45% dairy

37% beef37% beef

13% swine13% swine

5% poultry5% poultry

Corn Use and Distiller’s Grain Corn Use and Distiller’s Grain Production Production (billion bushels and million tons)(billion bushels and million tons)

CornCorn DGs ProductionDGs Production

20052005 1.6 1.6 13.613.6

20062006 2.15 18.3 2.15 18.3

20072007 3.4 3.4 est.est. 29.029.0

20082008 4.3 4.3 proj.proj. 36.7 36.7

Ethanol Profit Margins Ethanol Profit Margins ($ per ($ per gallon)gallon)

PricesPrices Mid-JulyMid-July Early Oct.Early Oct. ChangeChangeCorn ($/bu.) 3.2725Corn ($/bu.) 3.2725 3.735 3.735 +14% +14%EthanolEthanol 1.905 1.905 1.55 1.55 - 19% - 19%RBOBRBOB 1.98 1.98 2.1145 +7% 2.1145 +7%

Profit Margin Profit Margin +.26+.26 -.23-.23

To compete with gasoline as substitute in Early October,To compete with gasoline as substitute in Early October,ethanol price would need to fall to $1.40 per gallon.ethanol price would need to fall to $1.40 per gallon.

Economic ImpactEconomic Impact

Local Community Impact of an Local Community Impact of an Ethanol Plant Ethanol Plant (millions of dollars)(millions of dollars)

50 mgy50 mgy 100 mgy100 mgy

Annual Expenditures 46.7Annual Expenditures 46.7 88.2 88.2

Gross RevenueGross Revenue 209.2 209.2 406.2 406.2

Household IncomeHousehold Income 29.2 29.2 51.2 51.2

Employment (total jobs) 836Employment (total jobs) 836 1,573 1,573

Gross State ProductGross State Product 115.0 223.4 115.0 223.4 Contribution of the Ethanol Industry to the Economy of the United Contribution of the Ethanol Industry to the Economy of the United

States, John M. Urbanchuk, February 21, 2006. prepared for the States, John M. Urbanchuk, February 21, 2006. prepared for the Renewable Fuels Association.Renewable Fuels Association.

The Food versus Fuel DebateThe Food versus Fuel Debate

Food, Alcohol, & Industrial Corn Usage

0.0

1.0

2.0

3.0

4.0

5.0

6.0

73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07Harvest Year

Billi

on B

ushe

ls

Source: USDAWASDE Report: 8.10.07

2007 Estimate

KSU Dept. of Ag Econwww.agmanager.info

Corn Usage Estimates Corn Usage Estimates (Millions of Bushels)(Millions of Bushels)

USDA/WASDE USDA/WASDEUSDA/WASDE USDA/WASDE 2006/072006/07 2007/08 est. 2007/08 est.

Feed and ResidualFeed and Residual 5,7505,750 5,850 5,8501 1 (+2%)(+2%) Food, Seed, and Industrial Food, Seed, and Industrial 1,3751,375 1,390 1,3902 2 (+1%)(+1%)

Ethanol for FuelEthanol for Fuel 2,1252,125 3,300 3,300 (+55%)(+55%) ExportsExports 2,1202,120 2,250 2,250 (+6%)(+6%)

Ending StocksEnding Stocks 1,1421,142 1,675 1,675 (+47%)(+47%)

Total UsageTotal Usage 12,512 12,512 14,465 14,465 (+16%)(+16%)

1 1 Assumes DDGS retain 30% of the feed value of corn and are included in the feed and residual Assumes DDGS retain 30% of the feed value of corn and are included in the feed and residual category by the USDA. category by the USDA.

2 2 Industrial, food, and seed less ethanol. Industrial, food, and seed less ethanol.

BIO-DIESELBIO-DIESEL

The Bio-diesel FormulaThe Bio-diesel Formula

100 gallons of veg. oil or animal fats100 gallons of veg. oil or animal fats

+10 gallons of methanol+10 gallons of methanol

==

100 gallons of bio-diesel100 gallons of bio-diesel

+10 gallons of glycerol+10 gallons of glycerol

Advantages of Bio-dieselAdvantages of Bio-diesel

No sulfur and less carbon emissionsNo sulfur and less carbon emissions Higher cetane rating – better mileageHigher cetane rating – better mileage Superior lubricitySuperior lubricity

One disadvantage:One disadvantage:

Bio-diesel requires an additive to Bio-diesel requires an additive to prevent jelling at low temperaturesprevent jelling at low temperatures

Biodiesel Capacity and Production, U.S. and Europe, Biodiesel Capacity and Production, U.S. and Europe, 2000-2006 (million gallons)2000-2006 (million gallons)

U.S.U.S. EuropeEuropeYearYear Cap.Cap. Pdn.Pdn. Cap.Cap. Pdn.Pdn.20002000 5050 2 2 - 198 - 19820012001 5050 5 - 227 5 - 22720022002 54 15 - 31054 15 - 31020032003 85 20 597 41885 20 597 41820042004 157 25 654 563157 25 654 56320052005 290 75 1,232 928290 75 1,232 92820062006 580 250580 250(43%)(43%) 1,768 1,420 1,768 1,420(80%)(80%) Sources: NBB, EBBSources: NBB, EBB

U.S. Biodiesel ProductionU.S. Biodiesel Production

148 plants in operation - Capacity 1.39 bgpy148 plants in operation - Capacity 1.39 bgpy(Krystal Clean Biofuels KC expanding to 3 mgpy.(Krystal Clean Biofuels KC expanding to 3 mgpy.

Sedgwick Plant online June 07 1 mgpy.)Sedgwick Plant online June 07 1 mgpy.) 96 plants under construction - 1.89 bgpy96 plants under construction - 1.89 bgpy(Emporia plant under construction)(Emporia plant under construction)

TOTAL 3.28 TOTAL 3.28 bgpybgpy

Many of the new plants - 30 mil. gal. per yearMany of the new plants - 30 mil. gal. per year

(Requires the oil from 400,000 A. soybeans.)(Requires the oil from 400,000 A. soybeans.) Continuous processing using multiple Continuous processing using multiple

feedstocks of veg. oilfeedstocks of veg. oil

World Production of Oils, World Production of Oils, 2004/05, MMT2004/05, MMT

VegetableVegetable TropicalTropicalSoySoy 32.4 32.4PalmPalm 33.233.2Rape/CanolaRape/Canola 15.8 15.8 Palm Kernel Palm Kernel 4.0 4.0SunSun 9.2 9.2CoconutCoconut 3.3 3.3PeanutPeanut 4.9 4.9CottonCotton 4.8 4.8OliveOlive 2.7 2.7

Soybean Oil Futures PriceSoybean Oil Futures Price

BD Profit Margin CalculationBD Profit Margin Calculation Soybeans toSoybeans to B Bio-diesel Conversionio-diesel Conversion:: Soybeans per bushel Soybeans per bushel -$9.79 -$9.79 Biodiesel 1.5 gallons/bu. Biodiesel 1.5 gallons/bu. +$3.43+$3.43 Byproduct: soymeal Byproduct: soymeal +$6.72+$6.72 Cost of methanol = Glycerin creditCost of methanol = Glycerin credit Value of biodiesel Value of biodiesel & byproducts +$10.15& byproducts +$10.15 Net Value-added per bushel +$ .36Net Value-added per bushel +$ .36

The industry believes it can compete directly with The industry believes it can compete directly with petrol-diesel when oil price is $40 or above unless the petrol-diesel when oil price is $40 or above unless the prices of soybeans and soyoil are too high.prices of soybeans and soyoil are too high.

Bio-diesel ConclusionsBio-diesel Conclusions

The industry is expanding, but under The industry is expanding, but under utilizing capacity.utilizing capacity.

The high prices of vegetable oil will The high prices of vegetable oil will constrain production of biodiesel.constrain production of biodiesel.

Soybean meal is becoming the by-Soybean meal is becoming the by-product and increased supply will cause product and increased supply will cause price to fall.price to fall.

Corn and soybeans will be fierce Corn and soybeans will be fierce competitors for available acres of land.competitors for available acres of land.

Impact on Land UseImpact on Land Use

Land in CropsLand in Crops (Millions of acres)(Millions of acres) 55 yr. Ave.yr. Ave. 07/08USDA07/08USDA Proj. 08/09Proj. 08/09

CornCorn 79.6 92.9 79.6 92.9 88.2 88.2 (-5%)(-5%) SoybeansSoybeans 74.2 64.1 74.2 64.1 68.9 68.9 (+7%)(+7%)

HayHay 62.4 61.8 62.4 61.8 61.8 61.8 (--)(--)

WheatWheat 59.5 60.5 62.6 59.5 60.5 62.6 (+2%)(+2%)

CottonCotton 14.1 11.1 10.0 14.1 11.1 10.0 (-11%)(-11%)

Grain Sorghum 8.1 7.8 7.4 Grain Sorghum 8.1 7.8 7.4 (-5%)(-5%)

Principle Crops 322.0 320.1 321.1Principle Crops 322.0 320.1 321.1CRPCRP 35.9 34.9 35.9 34.9 (-3%)(-3%)

Total crop land in the United States – 441.6 million acresTotal crop land in the United States – 441.6 million acres

Crop Acres Coming Out of CRP, Crop Acres Coming Out of CRP, 2007–2017, Millions of Acres2007–2017, Millions of Acres

Source: USDA, FSASource: USDA, FSA

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Out of CRPMil. A.

Land in CRP, Leading States, 2007Land in CRP, Leading States, 2007Millions of AcresMillions of Acres

Source: USDA, FSASource: USDA, FSA

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

TX MT ND KS CO IA MN MO SD WA NE IL

Land In CRP

Dangers Ahead Dangers Ahead

1.1. Over expansion of ethanol capacity – Over expansion of ethanol capacity – On-line capacity at the end of 2007 is On-line capacity at the end of 2007 is expected to be 7.9 billon gallonsexpected to be 7.9 billon gallons

2.2. Declining ethanol production profit Declining ethanol production profit margin margin

3.3. Lack of feedstock for biodieselLack of feedstock for biodiesel

4.4. Drop in the price of oilDrop in the price of oil

Future Bio-fuel TechnologyFuture Bio-fuel Technology

Cellulosic EthanolCellulosic Ethanol Bio-butenolBio-butenol Algae oilAlgae oil