ETHANOL + BIODIESEL
INDUSTRIES
Tom Houser
November 2, 2006
0
CoBANK, ACB

Part of the $140 billion Farm Credit System

$37 billion, customer-owned, cooperative bank headquartered
in Denver, Colorado

Nation-wide bank, with 11 regional banking centers across the
country, and two overseas offices to facilitate the export of U.S.
agricultural products.
1
CoBank Portfolio (September 30, 2006)
Lender to the industry since 1992

Bio-fuels commitments presently total over $700 million,
including $650+ million for ethanol and $50+ million for biodiesel

“Gross” commitments (i.e., before sell-downs) total over $1.2
billion

Gross includes approximately $100 million purchased
“passive” participations in 10 plants
2
CoBank Portfolio (cont’d)
- Have approved a total of 42 ethanol plants (39 companies).

25 plants with capacity of 1.2+ billion gallons are now
producing; is approximately 25% of industry total capacity
based on 105 plants currently in operation.

17 plants (2 tentative) with over 1 billion gallons capacity in
construction/scheduled.

Total of 2.2+ billion gallons; approx. 25% of currently
proposed industry capacity through 2008 per the Renewable
Fuels Association (RFA).
3
CoBank Portfolio (cont’d)

Approved plants are located as follows:
 Iowa
 Minnesota
 South Dakota
 Nebraska
 Illinois
 Indiana
 Kentucky
 Michigan
 Other States

TOTAL
4
11
8
5
4
2
3
2
2
5
42
U.S. Ethanol Industry Today

Annual production record in 2005 of approx. 4.2 billion
gallons.

Per RFA, 105 plants currently in operation in 19 States; total
capacity near 5 billion gallons/year (bgy).

41 additional plants under construction, along with several
expansions, will add another 2.9 billion gallons capacity.

Dozens (hundreds?) of additional plants in various stages of
development.
5
Historic U.S. Fuel Ethanol Production
6
Future Ethanol Production
Estimated
Year
RFS
Capacity
2006
4.0
5.1
2007
4.7
6.6
2008
5.4
7.9
2009
6.1
8.6
2010
6.8
9.3
2011
2012
7
7.4
9.9
7.5
10.3
U.S. Ethanol Refineries
Source: RFA, January, 2006
8
ETHANOL
Is the Glass
Half Empty
or
Half Full?
9
Risk Assessment / Issues:

Primary Risk – Crude Oil Price Scenario !!!

Crude stays $60+/barrel, “the glass is half full”

Crude settles back to $40 +/- a barrel, economics dramatically
different

RFS, does, though, provide “floor”
10
U.S. Motor Gasoline vs. Ethanol,
Wholesale Price
Cents per gallon
300
PRX_EIAshortterm, PRXrev. 25-May-06
RFN US Spot
Ethanol
Wholesale
Price
275
250
DOE Forecast
of Wholesale
gasoline Price
May-06
225
200
DOE
Wholesale
Gasoline plus
51 cents
(Refiner
blending credit
for ethanol)
DOE Actual
Wholesale
Gasoline Price
175
150
In May-06 outlook, ethanol price is
ABOVE wholesale gasoline plus the
blender tax credit, due to continued tight
supply of octane enhancers.
125
Source: US Department of Energy, www.eia.doe.gov/emeu/steo.
100
Jan-05
11
Jan-06
Jan-07
Jan-08
Risk Assessment / Issues: (cont’d)

Corn Production/Cost

Absent a widespread “weather event”, cost likely to increase, though
modestly*
 PRX – “what’s to stop the farm price of corn as a raw material from
approaching the world price of petroleum, on a gallon per gallon basis.”
 “… it is the coming job of corn price to reduce the ROI of the ethanol
dry mill industry to zero or below, halting the expansion before all the
corn is gone.”

Acreage, yield curve, new hybrids, etc.

Corn vs. Soybeans
12
Cornbelt-12 Yield History and Trend
Bushels per acre
225
CORNBELT12_Actual
200
177
175
CORNBELT-12
Trend, 1960
to 2004
CORNBELT-12
Forecast
165
150
150.7
Trend, 1990
to 2004
125
100
75
50
For CORNBELT-12, PRX is
forecasting the Trend, 1990 to
2004, which is above the longterm 30-year trend.
25
0
50-51 55-56 60-61 65-66 70-71 75-76 80-81 85-86 90-91 95-96 00-01 05-06 10-11 15-16
PRX_B_IA_BA_BS, GTB06-03, Mar-15-06
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CBOT Corn Prices the Last 5 Years
What will the
next 5 years look
like?
A 10 cent move
in corn has a 3.5
cent affect on an
ethanol plants
margin. A $1.00
per mmbtu of
Nat Gas has a
3.5 cent affect on
an ethanol plants
margin. Ethanol
price has a 1 for
1 affect on the
margin.
How will corn
and nat gas price
be determined?
14
Cornbelt Model Ethanol ROIs, Cts/Gal
PRX_BS_Regions, GTB-06-10, Oct-12-06
Ethanol Price
Corn
Price
$1.25
$1.50
$1.75
$2.00
$2.25
$2.00
$0.19
$0.44
$0.69
$0.94
$1.19
$2.50
$0.07
$0.32
$0.57
$0.82
$1.07
$3.00
($0.05)
$0.20
$0.45
$0.70
$0.95
$3.50
($0.17)
$0.08
$0.33
$0.58
$0.83
$4.00
($0.30)
($0.05)
$0.20
$0.45
$0.70
$4.50
($0.42)
($0.17)
$0.08
$0.33
$0.58
$5.00
($0.54)
($0.29)
($0.04)
$0.21
$0.46
DDG price moved in relation to corn price. Gas set at $7.00 per cu ft.
The future of corn supply-demand depends as much on the future of ethanol price as
.
any other factor, and ethanol price has now declined from its above $3.00 levels.
The job of corn price is easier, of course, the lower one's opinion of ethanol price!
15
Risk Assessment / Issues: (cont’d)

Distillers Dried Grains (DDG’s)

Ration inclusion rates increase for dairy and beef cattle, and
also with swine and poultry (“glass half full”).

Market becomes saturated and value relative to corn declines.

DDG’s vs. soybean meal (what if bio-diesel takes off ?)
16
Distillers Dried Grains
Growth in U.S. DDGS Production
 DDGS production rapidly increased to near 9 million tons in 2005

and will continue to grow as dry mill production capacity is added.
Many industry observers believe the market for DDGS can and will
expand but worry about the impact on pricing from the build-out.
US DDGS Production (million tons / year)
Historic US Production of Distiller Grains
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1975
1978
1981
1984
1987
1990
1993
1996
Sources: USDA data, conversations with industry experts, SJH estimates.
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1999
2002
2005
Risk Assessment / Issues: (cont’d)

Political / Legislative Support

Partial excise tax exemption has been extended through 2010;
5.1 cents/blended gallon.

RFS mandates usage increasing to minimum 7.5 bgy.

Positioning has begun to legislate higher requirement.
 “Mom, Apple Pie, and Ethanol” (Hillary Clinton!)
18
Risk Assessment / Issues: (cont’d)

Technology

Basic production process continues to evolve, especially
regarding energy use.

Fractionization also gaining interest.

Cellulosic technology improving, but not yet commercial.
“Logistics” also an open issue(s) regarding transportation,
quantity, timing, and consistency.
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“Wall Street” $$$$

Raw Material (Corn) / Finished Product (ethanol) relationship (lack thereof)
used to “scare off” Wall Street.

Tremendous interest has now developed, both for debt and equity
investments (concerned about being “left out”).

Project finance (leveraged) structures.

Ready market to sell deal into.

Significant fees; not much “skin”.
[ Risk profile of Bio-Diesel NOT the same as ethanol !!!! ]
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Ethanol Industry – Impacts
In-process “profound” change in infrastructure accelerated by
ethanol build-out

Need for “Speed and Space”

Need to “Build and Close”

Aggressive replacement of inefficient, depreciated assets

Size matters
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