Bio-energy: Questions
Producers Should be Asking
Ray Massey
University of Missouri
Commercial Agriculture Program
Ethanol Case Study
• Who benefitted from the corn ethanol
boom?
– Ethanol industry
– Corn producers
– Input suppliers
– Land owners
– Rural economies – to the extent corn producers
benefited
– Non-rural economies – to the extent input suppliers
and land owners live in non-rural areas.
Allocation of Ethanol Profits
Source: Ag Marketing Resource Center – Who Profits from the Corn Ethanol Boom?
Ethanol Bankruptcies
• How many ethanol plants have gone
bankrupt in the last few years?
• Des Moines Register, November 18, 2008:
“An Omaha investment banker said the current roster of
16 bankrupt ethanol plants, five of them in Iowa,
will grow to as many as 40 by early next year as the
industry is squeezed by falling prices and volatile
markets.”
• Bankruptcy causes included financial and
operational problems.
Renewable Fuel Standard
40
Billions of Gallons
35
30
25
20
15
10
5
Year
Corn-based Ethanol
Biomass-based Diesel
Source: EPA, EISA of 2007
Cellulosic Biofuel
Undifferentiated Advanced Biofuel
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
0
Policy Involvement
• The 2009 renewable fuel standard (RFS)
will be 10.21% to ensure that at least 11.1
billion gallons of renewable fuels be
blended into transportation gasoline.
• Conventional vehicles can run on no more
than 10% ethanol.
• Using 11.1 billion gallons of renewable
fuels will require selling E85 because E10
can’t meet the standard.
Policy Involvement
• Sen. Charles Grassley, R-Ia., made a
similar point in a letter to the Democratic
congressional leadership last week. Any
taxpayer funding for the automakers "must
be accompanied by enforceable
commitments to FFV production and
alternative fuel use" (Des Moines Register,
Nov 19, 2008).
Policy Involvement Summary
• RFS requires more than 10% blend – or use of
E85.
• Suggested that auto bailout require commitment
to flex fuel (E85) vehicles.
• Flex fuel vehicles cost more.
• E85 cost more than E10 per BTU (or mpg).
• Policy Result: Buy cheaper foreign cars and
hasten the demise of the US auto industry.
Questions from Ethanol
Case Study
• What is the system? You need to know the
technical, economic and environmental impacts
of new fuels.
• What is the policy? You need to know how
committed the government is to biofuels and
how they will express that commitment.
• What are the economics? You need to
know basic economic principles that impact all
business dealings.
System Questions
• What limitations do I have?
• What are the potential negatives? Who
will try to hinder my involvement in this?
• What are the potential benefits? Who will
help?
• What by-products will be produced? How
used or disposed of?
System example:
Water requirements
• Ethanol plants (dry process) require at a
minimum 4 gallons of water for every
gallon of ethanol produced. Much of the
water used in the process is released as
steam so the remaining amount is highly
concentrated with salts and minerals.
Groundwater is found in abundance only in those areas that are in
the south half of the state and along the yellow shaded area
surrounding major waterways. The others areas mainly rely on
surface water for high quality and quantities of water
Water Requirement Questions
•
•
•
•
(Bob Broz questions)
What are the cost-benefit ratio for hauling a long way?
What are the water quality needs for a plant ?
What are the water quantity needs for a plant?
What other industry or growth in a community do we give
up by placing a large centralized plant in an area that will
use a large portion of the water supply?
• What is the cost of transporting feedstuffs to areas
where they can be utilized?
Water Requirement Questions
(Bob Broz questions)
• Are the areas for centralized plants livestock production
friendly?
• Many of the counties in North Central Mo. have health
ordinances keeping out CAFOs but we may need to
market for feedstuffs to make a centralized plant cost
effective.
• There are also concerns with other components of the
community infra-structure that we need to look at. Roads, sewers, emergency vehicles, etc.
• Do the benefits and taxes obtained from a plant out
weight the concerns with having the plant from an
environmental and human health aspect.
Policy Questions
• Will the EPA enforce the mandate? How?
• What will the USDA do with regard to CRP acres
and biomass production?
• What is the administration’s overall energy
policy? Cheap fuel or pollution reduction?
• When will alternative transportation (electric,
hydrogen, etc) become feasible?
Economic Questions
• What is the risk-reward tradeoff?
• What is the limiting resource that will
accrue the residual profits (or losses) from
a new industry?
– What happens when prices decrease? Lower
to the next best use.
• For corn the next best use is feed.
• What is the lower price limit of a biomass that has
no other current market?
Economic Questions
•
•
•
•
Where can I sell my feedstock?
When will a business start buying?
What will be the optimal feedstock
What organizational structure should be in
place?
• Do you look at this as a business
investment or a lifestyle (e.g. sell
investment when profitable or keep
always)?
Economic Questions
• What competitive advantage do I have?
– DDG feedstock needs to be next to existing
ethanol plant.
– Wood feedstock likely to be where wood is
currently used as a feedstock into paper.
– Money is made when someone looks outside
the expected limitations to find opportunity.