Biofuels Economist & University Professor Ag Marketing Resource Center Current Status of Ethanol: Causes of the Crisis & Emerging Challenges By Dr. Robert Wisner Biofuels Economist & University Professor Ag Marketing Resource Center Iowa State University Ames, Iowa U.S.A.

Current Environment Several major bankruptcies: VeraSun, Pacific Ethanol & others About 15% of the 170 U.S. ethanol plants are idle The remainder operating at avg. 80-85% of capacity Plants under construction (17), completed, or nearly completed could add about 20% to capacity Approximately $1.25/bu. drop in corn prices since June 11 helps returns

Factors Behind Bankruptcies Excess industry capacity due to rapid growth & failure to fully assess impact of growth on corn market Excessive debt Plant design defects Poor risk-management strategies Protecting price of feedstock rather than protecting margin Use of pricing tool unsuited for extreme market volatility

Assumes all consumers are willing to use ethanol

Will big ethanol returns re-occur? Probably not. Slower market growth with ethanol as gasoline substitute Ethanol may soon be largest user of U.S. corn Large % increase in ethanol a few years ago had small corn market impact That’s no longer true Will it be true in the future? Depends on corn yield trend Cellulose ethanol: higher cost + competing in E-85 market

Ethanol Contribution to Energy Self-sufficiency 2008: ethanol equivalent to 4.2% of U.S. crude oil use & 6.3% of crude oil imports -- on a volumetric basis Energy-equivalent basis: 2.8% of crude oil use & 4.2% of U.S. crude oil imports Use of petroleum in ethanol production is not deducted from these numbers, so actual contribution is less Conclusion: view ethanol as one element in a portfolio of potential contributions to U.S. energy self-sufficiency

Conclusions Ethanol industry will struggle with over-capacity until blending wall is eliminated, & possibly longer Future growth depends on GHG & blending policies, corn yield trend, cellulose technology break-through Industry to become more integrated with petroleum, have fewer firms Future of cellulose ethanol questionable Mandates next 3 yrs. 100, 250 & 500 mil. Gal.