1. BIOFUELS: NATIONAL and KANSAS UPDATES Agricultural Lenders Conference 2007 Mike Woolverton Kansas State University mikewool@agecon.ksu.edu

2. Renewable Fuels Drivers 1. High gasoline and diesel fuel oil prices 2. Flow of dollars out of the United States 3. Greenhouse gas emissions 4. Instability in oil exporting regions of the world

3. The Fossil Fuel Inventory TypeAmountLocation Oil1,278 BBOE 78% E. Hemi. Heavy Oil 608 BBOE64% W. Hemi. (Tar Sands) Bitumen 345 BBOE88% W. Hemi. (Oil Shale) Nat. Gas 1,239 BBOE77% E. Hemi. Coal 4,786 BBOEWidely Distributed Distributed (60% in U.S., Russia, and China) Source: en.wikipedia.org/wiki/Fossil_fuel

4. OPEC Cartel Members 1. Saudi Arabia 2. Iran 3. Venezuela 4. Nigeria 5. Iraq 6. Algeria 7. Kuwait 8. Libya 9. Indonesia 10. United Arab Emirates 11. Qatar Source: Energy Information Administration

5. U.S. Oil Import Suppliers 1. Canada 2. Mexico 3. Saudi Arabia (OPEC) 4. Venezuela (OPEC) 5. Nigeria (OPEC) 6. Iraq 7. Angola 8. Algeria (OPEC) 9. Russia 10. Ecuador Source: Energy Information Administration

6. Renewable Energy Consumption as Percentage of Total Energy Used, U.S., 2006 Biomass (biofuels)48 Biomass (biofuels)48 Hydro42 Hydro42 Geothermal 5 Geothermal 5 Wind 4 Wind 4 Solar 1 Solar 1

7. The United States and Oil Uses 20 million barrels per day Uses 20 million barrels per day Produces 6 million barrels per day Produces 6 million barrels per day Oil usage has increased 2% per year but the economy has been growing at 3.3% per year Oil usage has increased 2% per year but the economy has been growing at 3.3% per year Cost per year to import oil - $300 to $375 billion Cost per year to import oil - $300 to $375 billion

8. What would it take to replace imports? The U.S. uses 140 billion gallons of gasoline per year and 50 billion gallons of diesel fuel made from oil of which about 60% is imported. (40% from OPEC) To replace the OPEC gasoline (33.6 bgpy) with ethanol would require 12.4 billion bushels of corn. Last years production – 10.5 billion bushels. To replace the OPEC diesel (12.0 bgpy) with soy- diesel would require 8.2 billion bushels of soybeans. Last years production – 3.2 billion bushels.

9. Renewable Energy Consumption as Percentage of Total Energy Used, U.S., 2006 Biomass (biofuels)48 Biomass (biofuels)48 Hydro42 Hydro42 Geothermal 5 Geothermal 5 Wind 4 Wind 4 Solar 1 Solar 1

10. Net Energy Balance ProductEnergy Out/Energy In Gasoline.81 Ethanol from grain 1.67 Ethanol from cellulose 2.00 Diesel.83 Bio-diesel 3.2 Source: Congressional Research Service, RL32712, May 18, 2006

11. Bio-processing To fractionate agricultural commodities into component parts and use biological or chemical processes to produce useful bio-products or intermediary compounds. Objective – make the sum of the parts more valuable than the whole. Leave no molecule behind. Leave no molecule behind.

12. Bio-processing Assumptions 1. Oil will remain relatively expensive 2. A wide range of bio-products can be produced for less than petrol-based 3. Bio-mass raw materials can be replenished each year (non- depleting)

13. ETHANOL

14. Global Ethanol Production, 2006 Production (bil. gal.) Share (%) World 13.500 100.0 United States 4.855 36.0 Brazil 4.491 33.3 China 1.017 8.0 India.502 4.0 France.251 2.0 ROW 2.380 16.7

15. U.S. Industry at a Glance 2006 2007 Number of operating ethanol plants: 97 129 Number of operating ethanol plants: 97 129 Plants under construction or expanding: 35 85 Plants under construction or expanding: 35 85 Announced plants: 300 (17%) 150 (?) Announced plants: 300 (17%) 150 (?) Current production capacity: (BGPY) 4.8 6.8 Current 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 2008 12.3 BGPY end of 2008 Feedstock percentage: Feedstock percentage: Corn 97 Sorghum 2 Other 1

17. The Kansas Ethanol Industry Operating PlantsUnder Construction Campus Goodland Colwich Liberal Garden City (2) Lyons Garnett Pratt LeotiPhillipsburgRussell Capacity–261.5 mgy+240 mgy=501.5 mgy At full capacity will use 185 to 195 mil. Bu. grain (2007 KS corn/milo production 640 mil. Bu.)

18. Ethanol Plant Economics Cost to build a 100 MGPY plant - $160 million Cost 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 gallons Daily water use: 1.5 million gallons Natural gas expense - $15 to $25 million Natural gas expense - $15 to $25 million Payroll expense about $2 million Payroll expense about $2 million Distillers Dried Grains income about $25 million Distillers Dried Grains income about $25 million CO 2 income about $4 million CO 2 income about $4 million Goal 30% R.O.I. Goal 30% R.O.I.

19. Distillers Grain Each bushel of corn dry grind processed for ethanol yields about 17 pounds of distillers grain. Each bushel of corn dry grind processed for ethanol yields about 17 pounds of distillers grain. Distillers grain retains one-third of the nutrient value of corn. Distillers grain retains one-third of the nutrient value of corn. In N. America: 45% dairy In N. America: 45% dairy 37% beef 13% swine 5% poultry 5% poultry

20. Corn Use and Distillers Grain Production (billion bushels and million tons) CornDGs Production 2005 1.6 13.6 2006 2.15 18.3 2007 3.4 est. 29.0 2008 4.3 proj. 36.7

21. Ethanol Profit Margins ($ per gallon) Prices Mid-July Early Oct. Change Corn ($/bu.) 3.2725 3.735 +14% Ethanol 1.905 1.55 - 19% RBOB 1.98 2.1145 +7% Profit Margin +.26 -.23 To compete with gasoline as substitute in Early October, ethanol price would need to fall to $1.40 per gallon.

22. Economic Impact

23. Local Community Impact of an Ethanol Plant (millions of dollars) 50 mgy100 mgy Annual Expenditures 46.7 88.2 Gross Revenue 209.2 406.2 Household Income 29.2 51.2 Employment (total jobs) 836 1,573 Gross State Product 115.0 223.4 Contribution of the Ethanol Industry to the Economy of the United States, John M. Urbanchuk, February 21, 2006. prepared for the Renewable Fuels Association.

24. The Food versus Fuel Debate

26. Corn Usage Estimates (Millions of Bushels) USDA/WASDE USDA/WASDE USDA/WASDE USDA/WASDE 2006/07 2007/08 est. 2006/07 2007/08 est. Feed and Residual 5,750 5,850 1 (+2%) Food, Seed, and Industrial 1,375 1,390 2 (+1%) Ethanol for Fuel 2,125 3,300 (+55%) Exports 2,120 2,250 (+6%) Ending Stocks 1,142 1,675 (+47%) Total Usage 12,512 14,465 (+16%) 1 Assumes DDGS retain 30% of the feed value of corn and are included in the feed and residual category by the USDA. 2 Industrial, food, and seed less ethanol.

27. BIO-DIESEL

28. The Bio-diesel Formula 100 gallons of veg. oil or animal fats +10 gallons of methanol = 100 gallons of bio-diesel +10 gallons of glycerol +10 gallons of glycerol

29. Advantages of Bio-diesel No sulfur and less carbon emissions No sulfur and less carbon emissions Higher cetane rating – better mileage Higher cetane rating – better mileage Superior lubricity Superior lubricity One disadvantage: One disadvantage: Bio-diesel requires an additive to prevent jelling at low temperatures Bio-diesel requires an additive to prevent jelling at low temperatures

30. Biodiesel Capacity and Production, U.S. and Europe, 2000-2006 (million gallons) U.S.Europe U.S.Europe YearCap. Pdn. Cap. Pdn. 2000 50 2 - 198 2001 50 5 - 227 2002 54 15 - 310 2003 85 20 597 418 2004 157 25 654 563 2005 290 75 1,232 928 2006 580 250 (43%) 1,768 1,420 (80%) Sources: NBB, EBB

31. U.S. Biodiesel Production 148 plants in operation - Capacity 1.39 bgpy 148 plants in operation - Capacity 1.39 bgpy (Krystal Clean Biofuels KC expanding to 3 mgpy. Sedgwick Plant online June 07 1 mgpy.) 96 plants under construction - 1.89 bgpy 96 plants under construction - 1.89 bgpy (Emporia plant under construction) TOTAL 3.28 bgpy Many of the new plants - 30 mil. gal. per year Many 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 feedstocks of veg. oil Continuous processing using multiple feedstocks of veg. oil

32. World Production of Oils, 2004/05, MMT Vegetable Tropical Soy 32.4Palm33.2 Rape/Canola 15.8Palm Kernel 4.0 Sun 9.2Coconut 3.3 Peanut 4.9 Cotton 4.8 Olive 2.7

33. Soybean Oil Futures Price

34. BD Profit Margin Calculation Soybeans to Bio-diesel Conversion: Soybeans to Bio-diesel Conversion: Soybeans per bushel -$9.79 Soybeans per bushel -$9.79 Biodiesel 1.5 gallons/bu. +$3.43 Biodiesel 1.5 gallons/bu. +$3.43 Byproduct: soymeal +$6.72 Byproduct: soymeal +$6.72 Cost of methanol = Glycerin credit Cost of methanol = Glycerin credit Value of biodiesel Value of biodiesel & byproducts +$10.15 & byproducts +$10.15 Net Value-added per bushel +$.36 Net Value-added per bushel +$.36 The industry believes it can compete directly with petrol-diesel when oil price is $40 or above unless the prices of soybeans and soyoil are too high.

35. Bio-diesel Conclusions The industry is expanding, but under utilizing capacity. The industry is expanding, but under utilizing capacity. The high prices of vegetable oil will constrain production of biodiesel. The high prices of vegetable oil will constrain production of biodiesel. Soybean meal is becoming the by- product and increased supply will cause price to fall. Soybean meal is becoming the by- product and increased supply will cause price to fall. Corn and soybeans will be fierce competitors for available acres of land. Corn and soybeans will be fierce competitors for available acres of land.

36. Impact on Land Use

37. Land in Crops (Millions of acres) 5 yr. Ave. 07/08USDA Proj. 08/09 5 yr. Ave. 07/08USDA Proj. 08/09 Corn 79.6 92.9 88.2 (-5%) Soybeans 74.2 64.1 68.9 (+7%) Hay 62.4 61.8 61.8 (--) Wheat 59.5 60.5 62.6 (+2%) Cotton 14.1 11.1 10.0 (-11%) Grain Sorghum 8.1 7.8 7.4 (-5%) Principle Crops 322.0 320.1 321.1 CRP 35.9 34.9 (-3%) Total crop land in the United States – 441.6 million acres

38. Crop Acres Coming Out of CRP, 2007–2017, Millions of Acres Source: USDA, FSA

39. Land in CRP, Leading States, 2007 Millions of Acres Source: USDA, FSA

40. Dangers Ahead 1. Over expansion of ethanol capacity – On-line capacity at the end of 2007 is expected to be 7.9 billon gallons 2. Declining ethanol production profit margin 3. Lack of feedstock for biodiesel 4. Drop in the price of oil

41. Future Bio-fuel Technology Cellulosic Ethanol Cellulosic Ethanol Bio-butenol Bio-butenol Algae oil Algae oil