Value Added Agriculture Program
Biodiesel
Industry Overview
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Value Added Agriculture Program
Diesel Usage by Sector
Commercial Electric Utility
Farm
2%
6%
Vessel Bunkering
6%
Industrial
4%
4%
Residential
Military
11%
1%
Railroad
Off Highway
5%
4%
Oil Company
1%
On-Highway
56%
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Value Added Agriculture Program
Demand Benchmarks
• Assumptions
– RFS of 7.5 billion gallons
– Biodiesel will serve 15% of RFS demand
• RFS 7.5 billion x .15% = 1.125 BGY of
biodiesel
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Value Added Agriculture Program
Diesel Use by Sector
Energy Sector
%
distillate usage
(mill gall)
On-Highway
56
35784
715.68
3578.4
7156.8
Residential
11
7029
140.58
702.9
1405.8
Farm
6
3834
76.68
383.4
766.8
Commercial
6
3834
76.68
383.4
766.8
Railroad
5
3195
63.9
319.5
639
1278.00
6390.00
12780.00
TOTAL USAGE (mill gal)
63900
B2
B10
B20
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Value Added Agriculture Program
RFS Projections
Ethanol/Biodiesel Projections
Based on 7.5-BGY RFS
7000
6000
5000
4000
Ethanol
3000
Poly. (Biodiesel)
Poly. (Ethanol)
2000
1000
20
15
20
13
20
11
20
09
20
07
20
05
20
03
-1000
20
01
0
19
99
MGY
Biodiesel
Year
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Value Added Agriculture Program
U.S. Biodiesel Production
Biodiesel Production MGY
80
70
MGY
60
50
40
30
20
10
0
1999
2000
2001
2002
2003
2004
2005
Year
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Value Added Agriculture Program
Biodiesel Capacities
• 45 biodiesel plants with dedicated capacity of
180 MGY
• Convertible capacity is estimated at 110+ MGY
• 54 facilities under construction or under
consideration in 30 states with an additional
600+ MGY capacity (2005)
• 200 projects under consideration with over
2.5 BGY
• 18 under consideration in Iowa
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Value Added Agriculture Program
Biodiesel Capacities
cont.
• 5 newest mid-western plants add 150
MGY
• New plants range in size from 1-60 MGY
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Value Added Agriculture Program
U.S. Biodiesel Production
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Value Added Agriculture Program
Balancing Demand and Capacity
Building Capacity
900
800
700
600
500
MGY
400
300
200
100
0
Proposed
Capacity
Dedicated and
Convertible
Capacity
Production
1999 2001 2003 2005 2007
Year
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Value Added Agriculture Program
Feedstock
• Vegetable Oil
– Seed Crushing
– 29 Billion Pounds a Year
• Animal Fat
– Animal Harvesting
– 12 Billion Pounds a Year
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Value Added Agriculture Program
Feedstock Uses
•
•
•
•
•
•
Human Food
Baking or Frying
Salad or Cooking Oils
Margarine oils
Confectionary fats
Animal feed, Lubricants, Paints, Varnish, Resins,
Plastic and Soap
• 38 Billion Pounds a Year
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Value Added Agriculture Program
Feedstock Carryover
• 2.5 Billion Pounds Vegetable Oil
– 1.8 Billion Pounds Soybean Oil
– 0.7 Billion Pounds Corn, Palm, Cottonseed &
Others
• 0.4 Billion Pounds Animal Fats
– 0.36 Billion Pounds Inedible Tallow & Yellow
Grease
– 0.04 Billion Pounds Edible Tallow & Lard
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Value Added Agriculture Program
Feedstock to Biodiesel
•
•
•
•
2.9 Billion Pounds of Oils or Fats
7.65 Pounds of Oils or Fats per Gallon
379 Million Gallons of Biodiesel per Year
1.5 gallons/ bushel of soybeans
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Biodiesel Feestock Cost $
/Gallon
Value Added Agriculture Program
$3.75
$3.44
$3.25
$3.06
$2.75
$2.68
$2.30
$2.25
$1.75
$1.91
$1.53
$1.25
$0.20
$0.25
$0.30
$0.35
$0.40
$0.45
Feedstock Price $ /Pound
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Value Added Agriculture Program
Soybean Oil (crude/de-gummed) Central IL
Percentage of time in the Price Range
from March 2003 to June 2006
30.0%
20.0%
10.0%
0.0%
20-22 22-24 24-26 26-28 28-30 30-32 32-34
Price in Cents per Pound
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Value Added Agriculture Program
U. S. Average B 100 Biodiesel
Percentage of Time in the Price Range
from March 2003 to June 2006
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
32.3%
19.4%
13.5% 12.9% 15.5%
6.5%
0.0%
$3.20
$3.00
$2.80
$2.60
$2.40
$2.20
$2.00
-$3.40
-$3.20
-$3.00
-$2.80
-$2.60
-$2.40
-$2.20
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Value Added Agriculture Program
Biodiesel Pressures Feedstock
Price
• New Demand on Oil & Fats will Increase Feedstock
Price
• Which Use will be Priced Out of the Market?
• Human Uses – Animal Feed – Industrial
• Or Biodiesel
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Value Added Agriculture Program
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Value Added Agriculture Program
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Value Added Agriculture Program
Will supplies adjust?
•
We won’t run out of vegoil/fats
– In the short run it may look like we will
– Extreme volatility with price run-up likely
– Food end users making plays already
• Price will ration
• Oil seed producers will innovate
• High prices make other feedstock sources feasible
• Palm is most likely to expand
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Value Added Agriculture Program
Soy meal Constraint?
• DDG is huge competitor 12.32 MMT in ’05/’06
• Domestic soy meal use could drop
• Meal price will become global competitive (as in very
cheap)
• Crush for oil and price meal for clearance
– Crush margins will eventually suffer
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Value Added Agriculture Program
Scenario Planning
•
•
•
•
•
•
Three studies
<$120 meal
$.35 oil
Little impact on bean price
Feed protein glut
New meal volumes must be exported
Consider $40 crude petroleum
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Value Added Agriculture Program
Is US Soy Competitive?
•
•
•
•
Palm oil yields in Malaysia about 3.9MT/ha
Canola oil yield in EU about 1.34 MT/ha
Soy oil yield in US is about 0.55 MT/ha
Sunoil yield Ukraine is about 0.42 MT/ha
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Value Added Agriculture Program
Business Model
•
•
•
•
•
Close to Market or Close to Feedstock?
Global, National or Local market?
Strategic partner financial integration?
Back integrated?
Forward integrated?
Look for “Platform Plays” to emerge
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Value Added Agriculture Program
Stand-alone Business Model
• Refineries never remain stand-alone
• Business plan built on today’s economics means
certain death
• Find ways to integrate key chain functions
• Must be very strategic on location
• Roll-up or M&A target strategy?
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Value Added Agriculture Program
Virtually Integrated
• Partnered with REG or other aggregators
• Vested strategic partners
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Value Added Agriculture Program
Full Equity Model
• Seattle waste grease plant
– No borrowed money
– Novel tech
– Local market
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Value Added Agriculture Program
Global Business Model
• Dow Halterman Houston, Texas
–
–
–
–
Deep water
Toll processor (World Energy)
Produce in EU and US
Source and sell globally
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Value Added Agriculture Program
Chain Integrated Business Model
• Dreyfus in Claypool, Indiana
–
–
–
–
–
–
Bean origination
50 mil bushel crush
80 mil gallon biodiesel
Trans/Log issues handled
Long-term off-take agreements
Import/Export capability
Dreyfus is claiming its position among the ABCD’s by adding Biodiesel into the
processing mix.
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Value Added Agriculture Program
Lender Perspective
• Loads of uncertainty
– Concentrated feedstock sellers
– Renewal of the blender’s credit
– Product demand
• Bundle working capital with term
• They want in but on their terms
– 7 to 10 year term on 20 year life facility?
– Cash sweep on operating profits to pay down half the debt in
three years.
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Value Added Agriculture Program
Lender Perspective
Working Capital
• May need ten times ethanol
– depends on biz model
– 15 to 40 cents per capacity gallon
• Some recommend one year debt reserve
– Shutdown scenarios
• Consider catastrophic cash flow scenarios
–
–
–
–
($40 crude)
$.35 cent vegoil
Supply interruption
Transportation interruption
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Value Added Agriculture Program
Large Investor Perspective
•
•
•
•
•
•
•
Very Risky. (need higher baseline IRR)
Hate novel technologies
Few companies working on demand side
Must be a low cost producer
Must have off-take truly tied in
Loss of subsidies would be fatal
Experienced management tough to find
Tons of people doing projects; very few forming businesses
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Value Added Agriculture Program
Risk Management
• Cross hedges difficult and risky
– Basis risk is tough
– ($1.20 basis shift in ethanol vs. Nymex)
• Risk premiums high in many off take agreements
– Align for supply…stay nimble on price
– Know you can get it gone
• Risk premiums high for feedstock agreements
– Align for supply…stay nimble on price
– Know you will have feedstock
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Value Added Agriculture Program
Risk
•
•
•
•
•
Few/strong players control feedstock
Massive global growth
US is not (nor will be) least cost
Market drivers are tenuous (sulfur)
Fighting the food market for feedstock (moral dilemma)
Tons of people wanting to make biodiesel; few are working on demand
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Value Added Agriculture Program
Certainty??
•
•
•
•
•
•
Feedstock issues are paramount
Vegoil price will rise
Rail tanker car crunch
New crush requires meal exported
Meal price will drop
Stand-alone refineries will be vulnerable
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Value Added Agriculture Program
Contact Us
For more information:
ISU Value Added Ag Program
1111 NSRIC
Ames, IA 50011
515-294-0588
www.iavaap.org
www.agmrc.org
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Value Added Agriculture Program
Questions About Technical Issues?
• www.biodieselbasics.com, or contact
• Rudy Pruszko
Center for Industrial Research and Service (CIRAS)
Iowa State University Extension
NICC Town Clock Center
680 Main Street
Dubuque, Iowa 52001-6818
Phone: 563-557-8271 ext 251
rpruszko@iastate.edu
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