December Ethanol Producer Magazine by BBI International

INSIDE: BENCHMARKING REVEALS INDUSTRY STABILITY DECEMBER 2012

Getting

Traction in

2013 Perspectives from Jeff Roskam, Other Industry Insiders Page 38

ALSO

Speaking with a United Voice Page 32

Back to Fermentation Basics Page 50

www.ethanolproducer.com

Novozymes is the world leader in bioinnovation. Together with customers across a broad array of industries we create tomorrow’s industrial biosolutions, improving our customers’ business and the use of our planet’s resources.

Rethink Tomorrow

contents

December issue 2012 VOL. 18 ISSUE 12

features

DEPARTMENTS

Editor’s Note

An Industry on the Offensive By TOM BRYAN

32 PROFILE

Defending Biofuels on a Global Stage

Trade associations take fight international through GRFA By Holly Jessen

38 OUTLOOK

Perspectives on 2013

Executives look ahead to the coming year By Susanne Retka Schill and Holly Jessen

48 Q&A

Defending Tomorrow’s Ethanol Today

An amplified voice for advanced biofuels By TIM PORTZ

52 PROCESS

Lessons on Bottom Line Basics

Corn, grind and fermentation pointers from the Alcohol School By Susanne Retka Schill

Ad Index

10 The Way I See It Stop the Nonsense! By MIKE BRYAN

11 Events Calendar

Upcoming Conferences & Trade Shows

12 View From the Hill

New Studies Tell Ethanol’s

Statewide Success Stories By bob dinneen

14 Drive

Looking to 2013

By TOM BUIS

16 Grassroots Voice

Conveying What's at Stake,

From the Ground Up By BRIAN JENNINGS

18 Europe Calling

Mathematical Tricks,

Backdoor Policies By Rob Vierhout

20 Business Matters

The New Sheriff:

FDA’s Increased Focus By Andrew Anderson and Steve Toeniskoetter

22 Business Briefs 24 Commodities Report

CONTRIBUTIONS 58 FINANCE

62 Tax Planning

Benchmarking report gives insights into ethanol producers’ performance By Paula Emberland

Expenditures on tangible property have new tax rules BY Jim Schmidt and Beth Feuchtenberger

Industry Improves as Indicators Stabilize, Diversification Expands

26 Distilled 66 Marketplace INSIDE: BENCHMARKING REVEALS INDUSTRY STABILITY DECEMBER 2012

Changes in IRS Tax Regulations Affect Ethanol Plants Getting

Traction in

2013 Perspectives from Jeff Roskam, Other Industry Insiders Page 38

ALSO

Speaking with a United Voice Page 32

Back to Fermentation Basics Page 50

www.ethanolproducer.com

Ethanol Producer Magazine: (USPS No. 023-974) December 2012, Vol. 18, Issue 12. Ethanol Producer Magazine is published monthly by BBI International. Principal Office: 308 Second Ave. N., Suite 304, Grand Forks, ND 58203. Periodicals Postage Paid at Grand Forks, North Dakota and additional mailing offices. POSTMASTER: Send address changes to Ethanol Producer Magazine/Subscriptions, 308 Second Ave. N., Suite 304, Grand Forks, North Dakota 58203.

4 | Ethanol Producer Magazine | DECEMBER 2012

ON THE COVER

Jeff Roskam shows off part of the Feedstox fleet of biomass harvesting equipment. PHOTO: REDROCK PHOTOGRAPHY

editor’s note

Ethanol Producer Magazine wraps each year with the views and forecasts of those who produce, sell, defend and think about ethanol fulltime. We’ve done it again in this issue, collecting the year-end contemplations

An Industry on the Offensive Tom Bryan, PRESIDENT & EDITOR IN CHIEF tbryan@bbiinternational.com

of industry leaders from Texas to Toronto. This issue of EPM is being distributed at the 9th annual Canadian Renewable Fuels Summit in Ottawa. Fittingly, we’ve included a profile of the Torontobased Global Renewable Fuels Alliance, which indirectly represents 65 percent of the world’s biofuels production. Turning their young organization into a sort of hip Interpol of global biofuels messaging, the GRFA’s Bliss Baker and Giancarlo Drennen monitor and respond to international headlines daily to help association leaders from the U.S., Canada, Europe and South America counter a seemingly endless stream of biofuels misinformation. As we discover in this month’s page-32 feature, “Defending Biofuels on a Global Stage,” Baker and Drennen are making a real difference, effectively quieting the OECD and the World Bank on ethanol over the past few years. The story reminds us that the world’s various biofuels associations, despite differences over trade policy, can and do work together. Back in the U.S., industry leaders are entering 2013 with a collective focus on overcoming the barriers of E15 implementation, drawing down the costs of cellulosic ethanol and, above all, protecting the RFS. As Jeff Roskam, CEO of the Kansas Alliance for Biorefining and Bioenergy, points out in this month’s page-39 cover story, “Perspectives on 2013,” losing or modifying the RFS would renew the petroleum industry’s monopoly on U.S. transportation fuels. That real and present danger has Brooke Coleman on the offensive, defending advanced biofuels blending targets even before they are attacked. In our page-49 Q&A, “Defending Tomorrow’s Ethanol Today,” the Advanced Ethanol Council executive director says, “If the oil industry has no problem compartmentalizing everyday business propositions and the territorial realities of protecting and expanding market share, neither should we.” In the aftermath of the election, Poet CEO Jeff Lautt and others featured in this month’s issue are sticking with the industry’s proven talking points. Lautt says it’s a priority to impress upon the new Congress what biofuels means for farm income, gas prices and the overall economy. In response to the 2012 drought, Neil McKinstray, president of The Andersons Ethanol Group and current chairman of the Renewable Fuels Association, offers an “adjust and deal with it” attitude. He tells us there is nothing the industry can do to expand the supply of corn in 2013 following the worst U.S. drought in 56 years. Acknowledging that some plants will, and have, shut down, McKinstray reminds us that other facilities are running at full throttle and gaining new efficiencies. While some of those plants may not be making much right now, “they did a few years ago and they will have a war chest,” McKinstray says, before pragmatically adding, “others may simply be trying to survive.”

For industry news: www.ethanolproducer.com or Follow Us:

6 | Ethanol Producer Magazine | DECEMBER 2012

twitter.com/EthanolMagazine

AdIndex

EDITORIAL PRESIDENT & EDITOR IN CHIEF Tom Bryan tbryan@bbiinternational.com

Vice President of Content & EXECUTIVE EDITOR

2013 International Biomass Conference & Expo

Indeck Power Equipment Co.

2013 International Fuel Ethanol Workshop & Expo

INTL FCStone Inc.

2013 National Ethanol Conference

Louis Dreyfus

American Coalition For Ethanol

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BBI Consulting Services

Tim Portz tportz@bbiinternational.com

CONTRIBUTIONS EDITOR Susanne Retka Schill sretkaschill@bbiinternational.com

FEATURES EDITOR Holly Jessen hjessen@bbiinternational.com

NEWS EDITOR Erin Voegele evoegele@bbiinternational.com

COPY EDITOR Jan Tellmann jtellmann@bbiinternational.com

ART ART DIRECTOR

Novozymes

Jaci Satterlund jsatterlund@bbiinternational.com

GRAPHIC DESIGNER Lindsey Noble lnoble@bbiinternational.com

PUBLISHING CHAIRMAN

46-47

BetaTec Hop Products

Platts

BrownWinick Law Firm

POET - DSM Advanced Biofuels

Buckman

Premium Plant Services, Inc.

Burns & McDonnell

RC Fuels Inc.

Cellencor Inc.

RPMG, Inc

CHS Renewable Fuels Marketing

SGS North America, Inc.

CPM Roskamp Champion

SGS North America, Inc. Agricultural Services

Crown Iron Works Company

Sukup Manufacturing Co.

DuPont FermaSure

Sustainable Development Technology Canada

DuPont Industrial Biosciences

Syngenta: Enogen

DuPont Pioneer

Tower Performance, Inc.

Eide Bailly, LLP

Tranter Phe

Fagen Inc.

Victory Energy Operations, LLC

Freez-it-Cleen/Polar Clean America

Vogelbusch USA, Inc.

Growth Energy

Wabash Power Equip. Co.

Himark bioGas

WCR Incorporated

Mike Bryan mbryan@bbiinternational.com

CEO Joe Bryan jbryan@bbiinternational.com

SALES VICE PRESIDENT, SALES & MARKETING Matthew Spoor mspoor@bbiinternational.com

EXECUTIVE ACCOUNT MANAGER Howard Brockhouse hbrockhouse@bbiinternational.com

ACCOUNT MANAGERS Marty Steen msteen@bbiinternational.com Bob Brown bbrown@bbiinternational.com Andrea Anderson aanderson@bbiinternational.com

CIRCULATION MANAGER Jessica Beaudry jbeaudry@bbiinternational.com

ADVERTISING COORDINATOR Marla DeFoe mdefoe@bbiinternational.com

Senior Marketing Manager John Nelson jnelson@bbiinternational.com

EDITORIAL BOARD Mike Jerke, Chippewa Valley Ethanol Co. LLLP Jeremy Wilhelm, Cilion Inc. Mick Henderson, Commonwealth Agri-Energy LLC Keith Kor, Pinal Energy LLC Walter Wendland, Golden Grain Energy LLC Neal Jakel Illinois River Energy LLC Bert Farrish Lifeline Foods LLC Eric Mosebey Lincolnland Agri-Energy LLC Steve Roe Little Sioux Corn Processors LP

30-31, 72

Customer Service Please call 1-866-746-8385 or email us at service@bbiinternational.com. Subscriptions to Ethanol Producer Magazine are free of charge to everyone with the exception of a shipping and handling charge of $49.95 for any country outside the United States, Canada and Mexico. To subscribe, visit www.EthanolProducer.com or you can send your mailing address and payment (checks made out to BBI International) to: Ethanol Producer Magazine Subscriptions, 308 Second Ave. N., Suite 304, Grand Forks, ND 58203. You can also fax a subscription form to 701-746-5367. Back Issues, Reprints and Permissions Select back issues are available for $3.95 each, plus shipping. Article reprints are also available for a fee. For more information, contact us at 866-746-8385 or service@bbiinternational.com. Advertising Ethanol Producer Magazine provides a specific topic delivered to a highly targeted audience. We are committed to editorial excellence and high-quality print production. To find out more about Ethanol Producer Magazine advertising opportunities, please contact us at 866-746-8385 or service@bbiinternational.com. Letters to the Editor We welcome letters to the editor. Send to Ethanol Producer Magazine Letters to the Editor, 308 2nd Ave. N., Suite 304, Grand Forks, ND 58203 or email to sretkashill@bbiinternational.com. Please include your name, address and phone number. Letters may be edited for clarity and/ or space.

Please recycle this magazine and remove inserts or samples before recycling

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the way i see it

Stop the Nonsense! By Mike Bryan

It’s time to get real about this talk of waiving the renewable fuels standard (RFS). So we have had one year of drought and as a result only produced the eighth largest corn crop in history and because of that we should abandon a program that has contributed to economic growth of America for the past 30 years?

Then perhaps we should stop oil subsidies, because of the Exon Valdez or the BP Gulf oil spill. Why not stop federal and state funding of education because there is a shortage of qualified teachers? One could list dozens of examples of continuing commitments made by government that transcend the high and low cycles of life. The transparency of those proposing the RFS waiver is so blatantly obvious that it allows anyone with an ounce of perception to see right through it. There are three things driving this nonsense: money, political gain and perhaps a bit of editorial notoriety, in some perverse way.

10 | Ethanol Producer Magazine | DECEMBER 2012

Those writing about this issue aren’t actually doing any research, they simply are regurgitating things that other people, who have done no research, have written or said. When you examine those in Congress who are railing against the RFS, there is either money or political capital to be gained. It’s time Washington wakes up and examines who and what is driving this ridiculous effort to abandon one of the most successful energy programs ever undertaken in American history. We should not even be having this discussion. The jobs, the economic contribution, the energy security and environmental benefits ethanol provides are deeply woven into the American economy. USDA breaks down the uses of corn for the 2010 year as follows: of the roughly 13 billion bushels of field corn produced, 36 percent was used as feed for domestic livestock (beef, pork, poultry), 31 percent was used for ethanol (also resulting in 1.5 billion bushels of distillers grains, a coproduct of ethanol production that is used as livestock feed), 14 percent was exported to other countries (Japan, Mexico, South Korea, Taiwan and Egypt are the top recipients), 9 percent was used for human food, seed and industrial use, and 11 percent was carried over as a surplus. Little has changed since that analysis was made, except for a smaller corn crop in 2012.

So stop the nonsense! Ethanol is not causing world hunger, it is not devastating the livestock industry or decimating the rain forests, and it is not having any significant impact on the price of food. What the RFS is doing is helping keep a domestic renewable energy industry strong and growing and in doing so, we set an example to the world of the power of agriculture. That’s the way I see it.

Author: Mike Bryan Chairman, BBI International mbryan@bbiinternational.com

EVENTS CALENDAR Canadian Renewable Fuels Summit December 3-5, 2012 Westin Ottawa Hotel Ottawa, Ontario

Canada is now a frontrunner in the worldwide effort to create clean, renewable sources of transportation fuel. Learn from industry experts, engage in valuable peer to peer collaboration, find solutions for your business challenges, discover new products and services. The CRFS is a great opportunity to exchange ideas and gain a global perspective on the renewable fuels industry. We offer insightful plenaries and are now offering concurrent industry breakout sessions. 613-594-5528 x223 | www.greenfuels.org

National Ethanol Conference February 5-7, 2013 Wynn Las Vegas Las Vegas, Nevada

Since 1996, the Renewable Fuel Association’s National Ethanol Conference has been recognized as the preeminent conference for delivering accurate, timely information on marketing, legislative and regulatory issues facing the ethanol industry. With numerous networking opportunities, more business meeting are conducted and contacts made at this conference than any other ethanol conference. 866-497-1232 | www..nationalethanolconference.com

International Biomass Conference & Expo April 8-10, 2013 Minneapolis Convention Center Minneapolis, Minnesota

APRIL 8-10, 2013

Minneapolis, MN www.biomassconference.com

Make Plans to Attend REGISTER NOW Interested in Speaking? Presentation ideas and poster abstracts will be accepted through December 14, 2012. Submit in one of five tracks: Track 1: Pellets & Densified Biomass Track 2: Industrial & Commercial Thermal Energy Track 3: Biomass Power Track 4: Biogas & Landfill Gas Track 5: Advanced Biofuels & Biobased Chemicals

"The quality of business relationships built here are second to none." - Stephen S. Reidell, Eagle Innovations

Building on Innovation Organized by BBI International and coproduced by Biomass Magazine, the International Biomass Conference & Expo program will include 30-plus panels and more than 100 speakers, including 90 technical presentations on topics ranging from anaerobic digestion and gasification to pyrolysis and combined heat and power. This dynamic event unites industry professionals from all sectors of the world’s interconnected biomass utilization industries— biobased power, thermal energy, fuels and chemicals. 866-746-8385 | www.biomassconference.com

International Fuel Ethanol Workshop & Expo June 10 -13, 2013 America’s Center St. Louis, Missouri

Where Producers Meet Now in its 29th year, the FEW provides the global ethanol industry with cutting-edge content and unparalleled networking opportunities in a dynamic business-to-business environment. The FEW is the largest, longest running ethanol conference in the world—and the only event powered by Ethanol Producer Magazine. Visit our website to reserve premium booth space now. 866-746-8385 | www.fuelethanolworkshop.com

866-746-8385 | service@bbiinternational.com |

#IBCE13 Follow Us: twitter.com/biomassmagazine DECEMBER 2012 | Ethanol Producer Magazine | 11

view from the hill

New Studies Tell Ethanol’s Statewide Success Stories By Bob Dinneen

In the midst of a sluggish national economy, the American ethanol industry continues to generate jobs, revive rural economies and build businesses in many sectors of the economy, from energy to construction. The industry’s

future includes more growth and new technologies, including cellulosic (nongrain) feedstocks. That success is being realized in a growing number of states and communities across the country. That’s the clear message of three recent studies of the industry’s economic benefits including Minnesota, the nation’s fifth-largest ethanol producer, as well as two states where the industry is only beginning to grow, Ohio and Georgia. In a study released in October, the Minnesota Department of Agriculture reports that the ethanol industry supported more than 12,600 jobs and generated more than $5 billion in economic activity during 2011. With 21 plants—10 of them farmer-owned —and 11,000 farmers supplying feedstocks, the ethanol industry offers an economic lifeline to Minnesota’s farmers and rural communities. By processing corn into feed

12 | Ethanol Producer Magazine | DECEMBER 2012

and fuel rather than simply selling corn as a raw commodity, the state’s ethanol industry added $912 million to the value of corn last year alone. Moreover, the report continues, “Minnesota’s ethanol industry has a ‘multiplier effect’ that benefits many economic sectors across the state, including agriculture, manufacturing, transportation, services, construction, and trade.” Assessing the biofuels industries in Ohio and Georgia, two other studies found similar current and potential economic benefits. In its study, the Ohio State University Extension Community Development concludes that ethanol production has brought economic and employment benefits to the Buckeye State. With Ohio’s ethanol industry continuing to grow, new construction and additional upgrades of Ohio’s six ethanol plants have attracted $825 million in capital investment. Just operating these plants supports 273 fulltime jobs, with an annual payroll of $9.36 million. When the total impact of plant construction—as the economists put it, “direct, indirect, and induced”—is taken into account, the industry contributes $1.1 billion in economic activity in Ohio, supporting 12,975 jobs and generating $607 million in income. Meanwhile, in Georgia, a recent study by the University of Georgia’s Selig Center for Economic Growth, takes a new look at biofuels as part of the state’s fast-growing life sciences industry, also including agriculture, pharmaceuticals, biotech and bioenergy. Jobs in this industry increased by 1.5 percent from 2007-’10 in Georgia, while statewide employment dropped by 7.9 percent during

the same period. Wages paid by companies in this sector also increased at a faster rate (4.4 percent) than wages paid by other companies within the state (4.2 percent). While ethanol production has yet to reach its full potential in the state, the report identifies eight biofuel companies active within Georgia, with six having been in business for 10 years or less and seven of the eight employing between one and 10 workers, while one employs a staff of 51 to 100. Currently, ethanol production accounts for 206 jobs within Georgia, generating $105.32 million in direct economic activity and indirectly supporting a total of 1,026 jobs. Because of the RFS, the U.S. biofuels industry continues to expand and evolve. As a result, the future is bright in rural communities, and America is stronger and more secure, from our economy to our energy sources. Author: Bob Dinneen President and CEO, Renewable Fuels Association 202-289-3835

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DRIVE

Looking to 2013

By Tom Buis

This past year was a challenging one for the ethanol industry, but due to the resilience of the family farmer and the producers and supporters of ethanol, our industry remains strong. We are poised to continue to deliver measurable results, producing renewable fuels to help meet our nation’s energy needs. Our work is far from over. This fall, Growth Energy joined the Fuels America coalition to defend the RFS and promote the benefits of renewable fuels. The facts cannot be denied—the RFS is the most successful energy policy of the past 40 years, sharply decreasing our dependence on foreign oil and creating more than 400,000 well-paying jobs that cannot be outsourced. Not to mention it is better for our environment, drives investment in next-generation biofuels and provides consumers choice and savings at the pump. With Fuels America, Growth Energy has expanded its efforts to educate policymakers to ensure biofuel benefits are understood and the misinformation that our critics use is discredited. This is not an easy task, but we have made significant progress with the number of groups participating. We need everyone—producers, farmers, stakeholders and every supporter of

14 | Ethanol Producer Magazine | DECEMBER 2012

ethanol—to join in this effort to defend and protect the RFS. One of the most important facts to point out is that only 17 percent of corn acres are used to produce ethanol. Yes, 40 percent is delivered to ethanol plants, but that is a gross number, not a net number— similar to salary versus actual take home pay. The 17 percent is the net usage, as only the starch is converted, while all the protein, fiber and oils are left to produce a high-value, less-expensive and protein-rich animal feed. We must aggressively respond to these false claims as a united industry while also proactively work to educate not only the media, but the lawmakers that represent you and your facilities. Similarly, our critics’ continue to use the same old and disproven argument of food versus fuel. Unfortunately, family farmers suffered the most severe drought in the past 50 years and ethanol critics immediately put the blame on ethanol for increased global hunger and rising food prices. The simple fact is that ethanol production did not cause a rise in commodity prices, Mother Nature did. There is no government solution to this problem. American famers and the ethanol industry have answered the call of global grain demand by increasing corn plantings. If it were not for the demand from ethanol, farmers would not have planted the record number of acres as they did. The best solution to end world hunger is increased production, and ethanol is a major driving force behind that. Educating policymakers is a top priority for Growth Energy and Fuels America, and our relentless fight to defend the RFS is

far from over. Additionally, we will continue to work to open the marketplace to higher blends of ethanol, allowing drivers to “put a little more America,” in their tanks with homegrown, renewable American Ethanol. In particular, Growth Energy will continue to advocate for increased infrastructure through incentivizing flex pumps through the alternative Fuel Vehicle Refueling Property Tax Incentive. E15 and higher blends have a promising future. Just this fall, NASCAR and American Ethanol reached a milestone, running three million miles on E15, showing only increased horsepower and extreme durability in demanding driving conditions—3 million miles and not a single engine problem. Critics of E15 have absolutely no ground to stand on. American Ethanol’s partnership has educated consumers on the importance, reliability and benefits of E15. As we enter 2013, Growth Energy looks forward to working with returning and new policymakers to ensure that our industry is accurately represented to lawmakers and continue our unwavering commitment to the RFS and bringing higher blends of ethanol to the consumer— providing choice and savings, creating jobs here in America that cannot be outsourced and reducing our dependence on foreign oil from the most unstable regions of the world, all while improving our environment. Author: Tom Buis CEO, Growth Energy 202-545-4000 tbuis@growthenergy.org

The World’s Largest and Longest Running Ethanol Conference

Reserve Your Exhibit Space Today!

June 10-13, 2013 America’s Center | St. Louis, MO www.fuelethanolworkshop.com

“IT’S A GREAT PLACE TO NETWORK WITH VENDORS AND FELLOW PLANTS.” - BILL PAIGE, BADGER STATE ETHANOL

Producers representing 87% of all U.S. installed capacity attended last year. 866-746-8385 | service@bbiinternational.com

GRASSROOTS vOICE

Conveying What's at Stake, From the Ground Up By Brian Jennings

As we prepare for 2013, the American Coalition for Ethanol will build upon the success we had this year in mobilizing grassroots support for ethanol, developing the E15 market and collaborating with automakers to pave the way for higher ethanol blends to provide the octane they need in the future. Without a doubt, the market challenges facing ethanol producers are real. The short corn crop will force rationing and pain on all end-use sectors in 2013. We need outlets to relieve the ethanol market imbalance, but the overall pool is getting smaller as fuel efficiency standards reduce U.S. gasoline use. While Ford and General Motors have okayed the use of E15 in their owner’s manuals for newer vehicles, E15 market penetration has a long way to go. Fortunately, the savings E15 offers compared to gasoline is a factor that helps motivate retailers to offer this new fuel to customers, and ACE is taking full advantage of this as we work to develop the E15 market. The demand driver, which ensures E15 a place in the market and higher ethanol

16 | Ethanol Producer Magazine | DECEMBER 2012

blends market certainty over the long run, is the renewable fuel standard (RFS). In many ways, the war over the fate of the RFS has just begun. Big Oil and other ethanol opponents are spending millions of dollars to reduce or repeal it in Congress and the courts. That’s why ACE has been vigilant about drawing attention to the success of the RFS. It’s also why we’ve joined organizations and companies committed to protecting the RFS to help launch a counteroffensive called the Fuels America campaign. By uniting our resources in the Fuels America campaign, we aim to reset the national conversation about ethanol and show the strength and diversity of the biofuels industry. ACE is proud to join this advertising and public relations campaign, which is already making a positive difference. Supporting the Fuels America campaign is just one of many steps ACE is taking to help secure the future of the RFS and mobilize grassroots support for ethanol. During the RFS waiver comment period, ACE launched a digital RFS Action Center, which coordinated more than 130 unique, grassroots comments from 15 states in opposition to the waiver. We also specifically drove livestock producers to write EPA about how they benefit from the availability of distillers grains. And prior to the election, ACE led a Twitter-based targeting of political candidates in support of the RFS. We’ve also announced a public letterwriting campaign to isolate media outlets that have published or broadcast inaccuracies about ethanol, and to tell them we won't stand

by while our industry is unjustly attacked. Our campaign slogan is provocative—Give Ethanol Critics the Finger— but before you get offended, please know that by “finger” we mean your typing finger. You can help set the record straight when you hit the “enter” key on your computer to send a letter to misinformed newspapers and other media. While the primary focus of the letter-writing campaign, which runs through the end of the year, will be the RFS, other topics will be covered, including consumer fuel choice, E15 and midlevel blends, job creation, energy security and food and fuel. Grassroots supporters are in a unique position to tell personal stories that humanize the benefits of our industry. That means real people like you can effectively help convey from the ground up what is at stake if opponents succeed in repealing the RFS. We encourage readers to take part in ACE’s effort to tell stories about how the RFS and ethanol benefits your communities and economies. The letter-writing campaign and our overall war to protect the RFS will succeed only if people get involved and take action. Author: Brian Jennings Executive Vice President, American Coalition for Ethanol 605-334-3381 bjennings@ethanol.org

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Europe Calling

Mathematical Tricks, Backdoor Policies By Robert Vierhout

After almost three years of study, debate, hours of meetings, many reports, public and nonpublic consultations, the European Commission has released its legislative proposal on how to address the indirect land use change effects of the European biofuels policy.

Everyone was expecting the introduction of an indirect land-use (ILUC) factor into the law, but strangely enough this didn’t happen: the ILUC factor has been put in the fridge. The Commission, out of the blue, said more study is needed and will submit yet another report, this time by the end of 2017. That doesn’t mean that what has been put on the table is good. The use of biofuel from food/feed crops is limited to 5 percent—the current level. After 2020, it’s game over. Instead of instant death, it is now death by stages. This season’s lower crop yields must have come as a godsend for the European Commission. No more worries whether the ILUC science is right or wrong. Blame biofuels for the increase in commodity prices and limit its production. Less biofuel means more land for growing crops for food. ILUC problem solved. Capping the use of first-generation biofuels is not only simplistic, it is also naïve and irresponsible policymaking. Does the Commission really believe that such an approach will reduce the hunger problem in

18 | Ethanol Producer Magazine | DECEMBER 2012

the world? In the EU, we use 9 million tons of grains for fuel ethanol production from about 1.5 million hectares of land. With today’s global grain production of 2.2 billion tons, this is next to nothing (0.004 percent). But Europe, by abandoning its biofuel policy is going to make the difference in feeding the world! That in the future we will need to find 3 million more tons of animal feed outside EU is just a minor detail, as is using more fossil fuel. The oversimplification doesn’t stop there. The 10 percent target for 2020 has not changed, and to fill the gap created by limiting first generation to 5 percent, the following accounting trick is being proposed: On top of double counting some biofuels from preferred feedstocks, we should quadruple count biofuels from 14 raw materials such as algae, crude glycerine, straw, manure, husks, cobs, etc. So, imagine. You have a cow you feed cereals and make biofuels from the manure—modern technology brought back to its essentials. Every liter of manure biofuel will count four times. Three virtual liters of biofuel means the equivalent amount of additional fossil fuel. So, there is no additional greenhouse gas emission savings, no increase in energy security, no diversification of energy sources. The oil companies love this approach to promote advanced biofuels—or this clever way of promoting more fossil fuels through the back door. Investments going down the drain is not a mathematical trick, it is reality. For ethanol alone, the investments already reach 9 billion euros, supporting 100,000 jobs. The proposal is shockingly bad for the

European biofuels industry. It is a slap in the face of those committed entrepreneurs and investors who have spent time and money creating a new promising industrial sector and who drove it to the highest environmental sustainability standard you can imagine. What should have become a precursor of the much praised and heralded bio-economy will fade away, as will the bioeconomy. Instead of incentivizing better biofuels and recognizing the benefits of highprotein coproducts, the Commission has surrendered to the imaginary concerns and unproven scenarios of NGOs. Instead of boosting the economy, recognizing the contribution of biofuel to increased agricultural yields and more sustainable agriculture, the Commission is sending another sector to the grave. The economic crisis seems to have paralyzed the forces that counterbalance excessive environmentalism. Surely, with this kind of erroneous industrial policy, we will not save Europe’s industrial competitiveness. We will not yield that easily. The EU bioethanol industry will do everything in its power in the next year to obtain support from the more sensible and responsible decision makers to safeguard investments, jobs and an industry with enormous potential for moving towards a bio-economy. Consistency in policy is vital to maintain a stable investment climate. By changing the rules of the game even before half-time, the Commission is giving the wrong signal to investors: be aware, we can change the rules any time. Don’t put any trust in us.

Author: Robert Vierhout Secretary-general, ePURE Vierhout@epure.org

business matters

The New Sheriff: FDA’s Increased Focus By Andrew Anderson and Steve Toeniskoetter

The U.S. Food and Drug Administration has historically left regulation of animal feed facilities, including ethanol facilities producing feed as coproducts, to the states. But with the passage of the Food Safety Modernization Act and other changes within FDA, the agency is beginning to assert its authority. The FDA is showing a newfound interest in ethanol facilities, including registration requirements, antimicrobial usage and aflatoxin testing. There are several key points for the industry to remember. First, all facilities producing or storing biofuels coproducts used for animal feed must register with FDA. Although this has been a requirement since the end of 2003, FDA had no way of enforcing the requirement until the passage of the FSMA in January 2011 gave teeth to the registration requirement by allowing FDA to suspend a facility’s registration. FSMA also prohibits the shipment of any goods from the facility if its registration is suspended or if it is not registered. Under FSMA, facilities are supposed to renew their registration every two years. That renewal period was set to begin in October, but FDA’s website was not yet ready

20 | Ethanol Producer Magazine | DECEMBER 2012

for the renewals. Biofuel facilities that have already registered with FDA should sign up for FDA’s FSMA alert emails and be prepared to register once the website is active again. Facilities that are not yet registered should register immediately at https://www.access. fda.gov/oaa/. Registration is relatively simple, with just a few questions regarding the facility, its products and the responsible party for the facility. FDA has also significantly increased its focus on the use of antimicrobials in the ethanol production process over the past few years. FDA has been sampling and testing DDGS and other coproducts. In 2010, it conducted a significant study that showed antimicrobial residues in four of 46 samples tested. Earlier this year a consumer interest group, focused on what it calls sustainable food, farm and trade systems, released a report entitled “Bugs in the System: How the FDA Fails to Regulate Antibiotics in Ethanol Production.” That report spurred some members of Congress to write a letter to FDA seeking FDA action on antimicrobials. With FDA’s increased focus on antibiotic resistance and the subtherapeutic use of antibiotics in food animals, we expect FDA to begin more testing for antimicrobial residues in ethanol coproducts and potentially start issuing warning letters or other enforcement actions when residues are found. With the severe drought that affected the Midwest and Great Plains this year, aflatoxin levels in corn and wheat feedstock have become a significant concern. FDA’s Compliance Policy Guide 638.100, first issued in 1979, provides action levels— levels at

which FDA will consider taking enforcement action—with respect to aflatoxin in animal feed. This CPG applies to ethanol coproducts fed to animals. It generally prohibits companies from mixing grain with high aflatoxin levels with clean grain in order to dilute the amount of aflatoxin in the finished product below the action level. With the significant grain shortages and high aflatoxin levels this year, FDA approved several states’ requests to allow blending. However, that blending must be done under very strict conditions. The blend must be sold for use with appropriate species, must be analyzed for aflatoxin content and be accompanied by certification by the seller, the seller must obtain a certification from the buyer regarding the buyer’s use of the product, and the product must be clearly labeled as for animal feed use only. The new reality in the feed and biofuels world is that FDA is here to stay. We believe the actions outlined here are just the beginning of greater FDA involvement in the industry. Ethanol companies are well-advised to get ahead of the curve by understanding FDA’s involvement in the industry and putting in place the necessary FDA compliance systems and other policies to ensure compliance. Authors: Andrew Anderson Partner, Faegre Baker Daniels andrew.anderson@faegrebd.com 515-447-4703 Steve Toeniskoetter Associate, Faegre Baker Daniels steve.toeniskoetter@faegrebd.com 612-766-7353

business briefs People, Partnerships & Deals

Syngenta in North America has signed a commercial agreement with Merrill, Iowabased Plymouth Energy LLC to use grain featuring Enogen trait technology next year. Enogen trait technology eliminates the need to utilize liquid alpha amylase enzyme in dry grind ethanol production, allowing for reduced energy, gas and water usage. Syngenta is currently working with the plant to contract with local growers to produce Enogen corn for the 2013 crop. Growers under contract will begin delivering the specialty grain following next year’s harvest. Syngenta has also recently formed trial agreements with Siouxland Ethanol LLC and Golden Grain Energy LLC. The McGraw-Hill Companies have announced that Platts, a McGraw-Hill division and global provider of energy, petrochemical and metals information, has signed a definitive agreement to acquire Switzerland-based Kingsman SA, a privately-held provider of price information and analytics for the global sugar and biofuel markets. Kingsman employs analysts, researchers and report writers in key markets, including London, Montreal, New Delhi and Sao Paulo,

Brazil. It serves a global clientele of producers, traders, refiners, financial institutions and end-users, offering a variety of subscription publications covering sugar, ethanol and biodiesel. The company’s prime focus is on market analysis, supply and demand fundamentals and trade flows. Jeff Lautt, Poet LLC CEO, and Kelly Manning, Growth Energy vice president of development, presented Sen. Tim Johnson, D-S.D., with the Fueling Growth award for his exceptional support Sen. Tim Johnson is a long-time advocate of of the ethanol industry. renewable fuel. The award is given annually to the ethanol industry’s outstanding champions with an exceptional voting record in support of the biofuels industry, and recognizes Johnson’s contributions to helping the biofuel industry create jobs and economic development to South Dakota communities. Johnson visited Poet headquarters in Sioux Falls, S.D., to discuss the importance of renewable fuels.

22 | Ethanol Producer Magazine | DECEMBER 2012

He also received a tour of the facility, where much of Poet’s research and development activities take place. The Andersons Inc. has signed a definitive agreement to purchase substantially all of the assets of Mt. Pulaski Products LLC. The transaction is subject to certain conditions, and is anticipated to close by the end of the year. Mt. Pulaski Products is a corn cob processor that operates two facilities in central Illinois. The company produces several products, including absorbents and abrasives. The acquisition aligns with The Andersons growth strategies for its cob products businesses. If acquired, the assets of Mt. Pulaski Products will operate within The Andersons Turf and Specialty Group, Cob Division. General Motors and Ford Motor Co. have announced that new model vehicles are ready to run on E15. The owner's manuals for GM’s 2012 and 2013 model year vehicles state that those vehicles can run on fuels containing up to 15 percent ethanol. Ford has approved E15 for use in all model year 2013 vehicles, including hybrids and Ecoboost.

BUSINESS BRIEFS Sponsored by

Neill McKinstray has been named chairman of the Renewable Fuels Association board of directors. He is president of the ethanol group at The Andersons Inc. McKinstray previously Neill McKinstray served as vice chairman begame president of the Ethanol Group at The for two years, and will Anderson’s in 2011, and be succeeding Chuck served as vice president of the grain and ethanol Woodside, general groups since 2005. manager of Minden, Neb.-based KAPPA Ethanol LLC. Woodside served as chairman for two one-year terms. Randall Doyal, CEO of Al-Corn Clean Fuel, is serving as the new vice chairman. Walter Wendland, CEO of Golden Grain Energy LLC, was named treasurer. Mick Henderson, general manager of Commonwealth Agri-Energy LLC, will serve as sec- Randall Doyal is a 30year veteran of the fuel retary. ethanol industry.

Clariant Corp. has joined the Advanced Ethanol Council. Süd-Chemie, now a part of Clariant, has been developing its proprietary sunliquid process since 2009. The technology has been operating at the pilot scale since 2009. Clariant began operation of a cellulosic ethanol demonstration facility in Straubing, Germany, in July. The demonstration plant will produce up to 330,000 gallons of ethanol per year from wheat straw, corn stover and sugarcane bagasse feedstocks. The sunliquid process can produce cellulsoic ethanol from a wide variety of agricutlural residues and dedicated energy crops. Clariant has started plans to commercialize the sunliquid process in the U.S., and has opened an office in Des Moines, Iowa. Verenium Corp., a company focused on the development and commercialization of high-performance enzymes, has entered into an agreement with Comerica Bank for a two-year, $10 million revolving credit facility. The credit allows Verenium to borrow up to $8.4 million against eligible foreign and domestic receivables and will cover an existing $1.6 million letter of credit commitment to Verenium’s landlord. The credit facility also

immediately frees up $1.6 million in restricted cash, which had previously secured the letter of credit. Advanced Bioenergy LLC has announced plans to sell its Fairmont, Neb., ethanol plant to Wichita, Kan.-based Flint Hills Resources LP, a wholly owned subsidiary of Koch Industries Inc. The transaction is expected to close later this year, subject to regulatory approval. The Fairmont ethanol plant began production in 2007, and has an annual production capacity of more than 115 million gallons. The facility also produces more than 320,000 tons of dried distillers grains each year, along with more than 18 million pounds of nonfood grade corn oil. Advanced Bioenergy will continue to operate its ethanol plants in Huron, S.D., and Aberdeen, S.D. Share your industry briefs To be included in Business Briefs, send information (including photos and logos if available) to: Business Briefs, Ethanol Producer Magazine, 308 Second Ave. N., Suite 304, Grand Forks ND 58203. You may also fax information to 701-7468385, or email it to evoegele@bbiinternational.com. Please include your name and telephone number in all correspondence.

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DECEMBER 2012 | Ethanol Producer Magazine | 23

commodities Natural Gas Report

Deferred pricing patterns change in the past 3 years Oct. 22—Most U.S. Energy clients are hedgers, not traders, putting their focus on the relative value of deferred prices. An example: If natural gas prices for summer 2013 are undervalued, hedging partial supply for that time period may make sense. If prices seem overvalued, it may make sense to hold off purchasing fixed-price, deferred supplies. Market carry, the relationship between prompt prices and deferred prices, is often used as a comparative metric to evaluate deferred value. The accompanying chart shows the market carry for each day from January 2009 through October 2012—the prompt (current) price, the futures price 12 months ahead and the futures price 24 months ahead. We started the analysis in January 2009 since it excludes the commodity price

bubble that occurred in 2008 and better reflects current market conditions. Interestingly, the market carry has generally been declining over the past three years. We believe the primary reason is that, in 2009, the market didn’t believe shale gas would grow as it has, and instead believed prices would have to go up to incent drilling and production, based on historic pricing requirements. As the market realized shale production is lower-cost and abundant, deferred prices dropped materially. The market carry has dropped even as prompt prices

By Casey Whelan

dropped. We now have an attractive market situation where prompt prices are relatively low for those who prefer to not hedge and, at the same time, a relatively low market carry for those who prefer to hedge.

Corn Report

Cash market, spreads to remain firm for 2013 Oct. 22—The corn market observed a mild sell-off in mid-October, though the short crop slowed producer sales as harvest concluded, firming up the cash corn market domestically despite slow exports. The USDA released the October supply/demand table with great expectations, raising harvested acres by 300,000 to 87.7 million acres. Yield was lowered by 0.8 bushels to 122, the lowest national yield reported since 1995 when it was 113.5. Demand was reduced by 114 million to 619 million bushels, a 5.6 percent carryout-to-use ratio. The function of the market today is to ration corn to ultimately increase the carryout. The USDA expects the ethanol and feed sectors to consume 4.5 billion and 4.15 billion bushels, respectively. Corn exports were reduced by 100 million bushels in the latest report, to an expected 1.15 billion bushels compared to 1.543 and 1.834 billion bushels the past two years, re-

BY JASON SAGEBIEL

spectively. The USDA is expecting the U.S. mestic winter wheat. World corn carryout to import 75 million bushels of corn this was reduced from 123.95 mmt to 117.27 year as compared to 28 million bushels the mmt; however, this is still above the 2006 and past two years. Many analysts believe the U.S. 2003 years of 108.74 mmt and 103.16 mmt, could import 100 million bushels or more. respectively. The cash markets are expected US Corn Yield (bushel/acre) to remain firm all Source: USDA 170 year. This will keep 160 spreads at very 150 firm levels without chances for carries 140 in the marketplace 130 and keeping corn 120 fundamentally sup110 portive through 100 2013. More scru90 tiny will be put on the South American 80 corn and soybean 70 crop as well as do83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

24 | Ethanol Producer Magazine | DECEMBER 2012

report

Regional Ethanol Prices Front Month Futures (AC) $2.427

($/gallon)

REGION

SPOT

RACK

West Coast

$2.575

$2.750

Midwest

$2.435

$2.700

East Coast

$2.500

$2.891 SOURCE: DTN

Regional Gasoline Prices

DDGS Report

Well-supplied spot markets depress DDGS prices BY SEAN BRODERICK Oct. 22—DDGS prices stagnated in October, remaining like September’s. Plant runtimes have not been as erratic as they were in September when we saw a lot of downtime, but throughput is still all over the board, from completely not running, to more than 100 percent, impacted by local corn supply. One wonders how things will look once harvest is completed. Domestic DDGS demand improves, as animal feeding margins return. We are seeing better demand from Southeast poultry feeders, partly due to rate cuts by some eastern railroads. Nationally, volumes are way down, and the railroads are looking for ways to ship more tons. Also, a couple of non-Midwest ethanol plants have shut down until the return of better

margins, and Eastern Corn Belt plants are meeting that demand. Container exports have been steady. Chicago volumes are falling, however, as the rail freight discounts incent volume into container ports like Savannah, Ga. At the Gulf, bulk DDGS is about $25 per metric ton more expensive than corn, and U.S. corn is not the cheapest in the world market, although our logistics are better. There are number of loading issues in South America, as the loading lineup is quite long. With a lot of plants not sold ahead, the spot markets are well supplied, depressing prices. Better feed demand, we hope, will keep DDGS in the mid- to upper- 90s as a percentage of corn prices.

Front Month Futures Price (RBOB) $2.696

($/gallon)

REGION

SPOT

RACK

West Coast

$2.795

$3.259

Midwest

$2.595

$3.044

East Coast

$2.723

$3.216 SOURCE: DTN

DDGS Prices ($/ton) location

DEC 2012

NOV 2012

Minnesota

260

255

DEC 2011 208

Chicago

278

288

227

Buffalo, N.Y.

285

310

236

Central Calif.

324

327

232

Central Fla.

308

310

246 SOURCE: CHS Inc.

Corn Futures Prices Date

(Mar. Futures, $/bushel)

High

Low

OCT 22, 2012

7.65

7.56 1/2

7.59 1/4

SEP 22, 2012

7.57 1/2

7.48

7.51

OCT 21, 2011

6.75

6.58 1/2

6.60 SOURCE: FCStone

Cash Sorghum Prices ($/bushel) LOCATION

Ethanol Report

Ethanol prices supportive on tight corn supplies BY RICK KMENT Oct. 22—Ethanol prices posted moderate to strong gains in October following renewed concern about droughtreduced corn supplies through the end of 2012 and into the first half of 2013. While ethanol prices have posted a 20 cent rally from September lows, traders are expected to be focused on the availability of corn over the next year. Light relief may be available from South America, if weather conditions are ideal. Ethanol prices are likely to remain elevated over the near and extended future due to the stable current demand in the market, though margins for ethanol producers are expected to remain weak. Production levels slipped fast through the initial weeks of the fourth quarter, but inventory lev-

els remained above last year’s. Traders are looking for ethanol prices to continue following corn market price movement extremely closely. The RBOB/ethanol price spread narrowed significantly in October, moving from nearly $1 per gallon in September to 26 cents, as gasoline demand moved to a more normal seasonal level. Additionally, price levels fell nearly 50 cents per gallon in the futures market in less than one month. Following the recent sell-off, it is expected that renewed buyer activity will occur in the RBOB gasoline market through the next month. This will help to create additional stability in gasoline prices ahead of the year-end holiday season.

OCT 19, 2012

SEP 20, 2012

OCT 28, 2011

Superior, Neb.

7.27

6.96

6.33

Beatrice, Neb.

7.21

6.91

6.21

Sublette, Kan.

7.31

7.05

6.26

Salina, Kan.

7.39

7.11

6.60

Triangle, Texas

7.19

7.00

6.19

Gulf, Texas

7.24

7.00

6.93

SOURCE: Sorghum Synergies

Natural Gas Prices

($/MMBtu)

LOCATION

OCT 18, 2012

OCT 1, 2012

NOV 1, 2011

NYMEX

3.58

3.02

3.52

NNG Ventura

3.35

3.21

3.64

CA Citygate

3.76

3.70

3.82

SOURCE: U.S. Energy Services Inc.

U.S. Ethanol Production

(1,000 barrels)

Per day

Month

End stocks

AUG 2012

845

26,194

19,369

JUL 2012

817

25,329

20,373

AUG 2011

902

27,979

18,123

SOURCE: U.S. Energy Information Administration

DECEMBER 2012 | Ethanol Producer Magazine | 25

distilled

Ethanol News & Trends

European Commission acts to alter biofuel policy

states. In addition, it would maintain the goal of havFeedstock group ing 10 percent of transCereals and other starch rich crops 12 portation fuel be renewable Sugars 13 content by 2020, but would Oil crops 55 place a 5 percent cap on the *Data sourced from EU biofuel proposal use of crop-based biofuels. Furthermore, the proposal would establish incentives The European Commission released a proposal in October that aims to alter the for biofuels that result in little or no ILUC EUâ&#x20AC;&#x2122;s biofuel policy with the goals of limiting emissions. Representatives of the European biofuel global land conversion for biofuel production and increasing the greenhouse gas (GHG) re- industry have spoken out against the proposal, stressing that it would decimate the regionâ&#x20AC;&#x2122;s duction levels of the resulting fuels. The proposal seeks to amend the Renew- biofuel industry and would cut off European able Energy Directive in several specific ways. farmers from a key market. The European It would set a 60 percent minimum GHG biofuels industry has also criticized the ILUC saving threshold for new biofuel production. component of the proposal, questioning the It would also include indirect land use change legitimacy of the data and science that was (ILUC) in the reporting of GHG savings of used. biofuels by fuel suppliers and EU member Estimated indirect land use change emissions from biofuel

Estimated indirect land use change emissions (gCO2eq/MJ)

Scaling back costs. How a U.S. ethanol plant cut acid usage and evaporator cleaning frequency by switching to BulabÂŽ 8301 scale control from Buckman. The challenge. A Midwestern ethanol plant relied heavily on sulfuric acid to lower pH. Unfortunately, acid availability was tight, driving costs up significantly.

The solution. Buckman applied FDA-allowed BulabÂŽ 8301 just ahead of the first evaporator resulting in outstanding scale control and process pH control.

The savings. s 3AVED ON PLANT SULFURIC ACID USAGE RESULTING IN NET SAVINGS OF TO YEAR s 4EN #)0 S PER YEAR WERE ELIMINATED SAVING LABOR DOWNTIME AND CHEMICAL COSTS FOR ACID WASH s (YDROBLASTING FREQUENCY AND TIME WAS REDUCED s /VERALL HEAT TRANSFER PERFORMANCE HAS BEEN IMPROVED WHICH PROVIDES ADDITIONAL mEXIBILITY TO optimize water balance and backset usage. s ! REDUCTION IN $$' SULFUR CONTENT WAS OBSERVED

Find out more. 4O LEARN MORE ABOUT OUR "ULABÂŽ SCALE CONTROL PROGRAM FOR EVAPORATORS OR HEAT EXCHANGERS contact your local Buckman representative. Let us give you a story worth telling.

ÂŠ2012 Buckman Laboratories International, Inc.

NSF grant supports ethanol fuel cell research The National Science Foundation has awarded Xiaowei Teng, assistant professor of chemical engineering at the University of New Hampshire, two grants totaling nearly $1 million to improve the efficiency of ethanol oxidation fuel cell reactions. According to UNH, ethanol is at least four times more efficient when used in fuel cells than it is when used to fuel internal combustion engines. While hydrogen is the most commonly studied fuel in fuel cell reactions, ethanol presents several advantages. For example, it is less toxic. Ethanol, however, is hampered by a slow, inefficient and expensive oxidation process in the fuel cell reactions. Teng and his team are working to improve that process. â&#x20AC;&#x153;With these grants, weâ&#x20AC;&#x2122;re trying to promote ethanol as a future renewable fuel in the power generation industry,â&#x20AC;? says Teng. â&#x20AC;&#x153;Our research tries to target the most efficient way to burn it.â&#x20AC;?

distilled

UCS: 680 million tons of biomass available in US by 2030

Dyadic enzyme verified at Sweden demo plant

The Union of Concerned Scientists Forest biomass has published a report that shows biomass feedstock has the potential to dramatically 101 increase the U.S. renewable energy supply. Waste materials The report, titled “The Promise of Biomass,” found that 680 tons of biomass Estimated could be made available by 2030. That is biomass 155 availability 400 enough to produce 54 billion gallons of Agricultural Energy in 2030 cellulosic biofuel. residues Crops The report provides detailed maps for different biomass sources. The maps describe where the UCS expects certain types of feedstocks to be abundant, including energy crops, agricultural residues, Quantity, in million dry tons waste materials and forest biomass. According to the study, the largest long-term opportunity to expand bioenergy production in the U.S. is from dedicated energy crops, such as switchgrass and miscanthus, as well as fast-growing trees like hybrid poplar and willow. However, there is also great potential to source biomass from agricultural residues and waste materials, including household garbage, vegetative waste, construction and demolition debris, manure and other livestockrelated waste.

A four-year research project at a demonstration plant in Sweden has concluded, verifying that Dyadic International Inc.’s AlternaFuel CMAX enzyme can successfully be used to produce biofuels and biobased chemicals. Dyadic and SEKAB-E Technology cooperated on verifying the effectiveness of Dyadic’s enzyme to degrade cellulose into fermentable sugars at SEKAB’s ethanol demonstration plant in Ornskoldsvik, Sweden. The research, funded by the EU, was part of DISCO, a consortium of industrial partners, research institutions and universities from Russia to Europe, with the goal of identifying and developing more productive and cost-effective cellulosic enzymes. “The goal for SEKAB E-Technology is to translate the knowledge and experience gained at the plant over the years into commercial ventures,” said Thore Lindgren, executive vice president of SEKAB. “The ethanol demonstration plant is a unique facility and the expertise gathered here allows us to test all the aspects of cellulose degradation in a way that few others can.”

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Ethanol industry creates jobs, economic development

Tampa Port adds ethanol capabilities

A separate study, published by Ohio # of jobs Output Impact ($ million) Employment Impact (# of Jobs) State University Ex14,000 tension Community 12,000 Development, found that new construc10,000 tion and additional 8,000 upgrades of Ohioâ&#x20AC;&#x2122;s six ethanol plants 6,000 represented $825 4,000 million in capital investment. Ongoing 2,000 operations at those plants have resulted 0 in 273 direct fulltime jobs and an annual payroll of $9.36 million per year. Georgia Bio also released an industry analysis that addressed biofuel production. Ethanol production within the state was found to support 206 direct jobs. The total impact of ethanol production on the stateâ&#x20AC;&#x2122;s gross domestic product is estimated to be $105.32 million.

Minnesota ethanol production and economic impact 12 ,6 86

$ Million $6,000

*Data sourced from Minnesota Department of Agriculture study

Several studies were released in October that highlight the benefits the ethanol industry generates on the state and local levels. A study produced by the Minnesota Department of Agriculture found that the estimated return on investment for the stateâ&#x20AC;&#x2122;s ethanol industry was 813 percent from 1990-2011. That means every dollar invested in building an ethanol plant resulted in more than $8 generated for the state economy.

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The Tampa Gateway Rail terminal at the Port of Tampa is now home to the nationâ&#x20AC;&#x2122;s first ethanol unit train-torefined products pipeline. It also houses Floridaâ&#x20AC;&#x2122;s first on-dock unit train intermodal container capability. The new facility was inaugurated in late September, and was scheduled to begin operations in November. The rail terminal can handle ethanol unit trains, up to 96 cars in length and was made possible through a public/private partnership. The Florida Department of Transportation paid $7.5 million, the Port of Tampa paid $5 million and CSX Corp. contributed $2.5 million. Additional improvements were paid for with $15 million from Kinder Morgan and $1.5 million from CSX. The pipeline system will be used to supply Kinder Morganâ&#x20AC;&#x2122;s energy terminal. Ethanol will be unloaded directly from tank cars to the pipeline, which will transport the fuel to holding tanks for blending. Ethanol can also be transported to ships at the new dockside rail terminal.

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tÄ&#x17E; ĹľÄ&#x201A;ĹŹÄ&#x17E; Ä?Ĺ?Ĺ˝Ć&#x161;Ä&#x17E;Ä?Ĺ&#x161;ĹśĹ˝ĹŻĹ˝Ĺ?Ç&#x2021; Ç Ĺ˝Ć&#x152;ĹŹ &Ĺ˝Ć&#x152; Ć&#x152;Ä&#x17E;Ä&#x201A;ĹŻ Ć?Ĺ˝ĹŻĆľĆ&#x161;Ĺ?Ĺ˝ĹśĆ?Í&#x2022; Ĺ?Ĺ˝ Ć&#x161;Ĺ˝ Ä&#x201A; Ć&#x2030;Ć&#x152;Ĺ˝Ç&#x20AC;Ä&#x17E;Ĺś Ć?ĆľĆ&#x2030;Ć&#x2030;ĹŻĹ?Ä&#x17E;Ć&#x152; Ĺ˝Ä¨ Ä&#x17E;Ć&#x161;Ĺ&#x161;Ä&#x201A;ĹśĹ˝ĹŻ Ć&#x161;Ä&#x17E;Ä?Ĺ&#x161;ĹśĹ˝ĹŻĹ˝Ĺ?Ç&#x2021; sĹ˝Ĺ?Ä&#x17E;ĹŻÄ?ĆľĆ?Ä?Ĺ&#x161; h^ Í&#x2022; /ĹśÄ?Í&#x2DC; Íť Ç Ç Ç Í&#x2DC;Ç&#x20AC;Ä?ĆľĆ?Ä&#x201A;Í&#x2DC;Ä?Ĺ˝Ĺľ Íť ÍžĎłĎĎŻÍż Ď°Ď˛ĎÍ˛ĎłĎŻĎłĎ° 28 | Ethanol Producer Magazine | DECEMBER 2012

distilled

Feedstock research kicks off in the Northeast The USDA announced a five-year, $10 million grant to research the growth of shrub willow, switchgrass and miscanthus on marginal and abandoned lands in the Northeast. The funding is the sixth such grant awarded through USDAâ&#x20AC;&#x2122;s Agriculture and Food Research Initiative, which is developing regional renewable energy markets to create jobs and reduce dependence on foreign oil. Each of the other five grants supported similar regional projects in other areas of the U.S. In the Northeast, Pennsylvania State Universityâ&#x20AC;&#x2122;s Tom Richard, a professor of agriculture and biological engineering and director of the Penn State Institutes of Energy and the Environment, will lead a team of researchers from 20 universities, organizations and companies. The research team, named the Northeast Woody/ Warm-season Biomass Consortium (NewBio), will develop perennial feedstock production systems and supply chains for the three feedstocks. The Northeast has more than 3 million acres of marginal, degraded and abandoned land that could become sources for biomass.

Report highlights role of coproducts in profitability Benchmarking study results 2010 Total number of ethanol plants 63 Plant coproduct production breakdown Primary DDGS production % 52.4% Primary WMDGS production % 30.2% Primary WDGS production % 17.4% Corn oil production % 44.4% 19% CO2 production % * Data sourced from Christianson & Associates PLLP

Christianson & Associates PLLP has released its third annual benchmarking report, which found that coproducts are becoming an increasingly important factor in ethanol plant profitability. The analysis found that coproduct revenue has remained relatively constant, averaging 15 to 16 percent of total revenue, from 2008-'10. It gained ground in 2011, when coproducts accounted for 18 percent of total plant revenue. The role of coproducts in plant revenue continued to grow during the first half of 2012, where it accounted for 23 percent of plant revenue.

2011 62

Jan.-July 2012 56

61.07% 23.21% 16.07% 53.6% 21.1%

56.36% 16.36% 27.27% 52.73% 25.45%

According to the report, ethanol plants that produce multiple coproducts have had an edge, and corn oil extraction stood out among the coproducts produced. Christianson & Associates also found that corn oil yields are rising, from an average yield of about 0.39 pounds of oil per bushel of corn in early 2011, to 0.55 pounds per bushel in the second quarter of 2012.

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DECEMBER 2012 | Ethanol Producer Magazine | 29

Profile

32 | Ethanol Producer Magazine | DECEMBER 2012

Profile

Defending

Biofuels on a

Global Stage An international federation of biofuels associations has been fighting biofuel’s opponents for the past three years. By Holly Jessen

When the Global Renewable Fuels Alliance was formed, biofuel’s public and political fortunes had started to shift. Sud-

Behind the Curtain Bliss Baker, left, and analyst Giancarlo Drennen operate GRFA out of Toronto, Canada. It represents biofuels associations from 44 countries.

denly, the renewable fuels industry was getting bombarded with biased and negative reports. “We got a lot of bad press and the vast majority was ill-informed,” says Bliss Baker, spokesperson for GRFA. “That was very new for us because we had always been the darling issue for politicians.” That was the genesis for the creation of a global association. The existing associations were doing a good job of representing their members and responding to misinformation in their backyards, so to speak, but a united front was needed on

PHOTO: MATTHEW PLEXMAN PHOTOGRAPHY

DECEMBER 2012 | Ethanol Producer Magazine | 33

Profile

140

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190

100

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Food Price Index

Clear Correlation A chart displaying global crude oil prices (per barrel) overlaid with data from the United Nations monthly food price index illustrates the true cause of food price inflation. GRFA utilizes this information heavily, Baker says. SOURCE: GRFA

the international stage. Baker gives Bob Dinneen, president and CEO of the Renewable Fuels Association, a large part of the credit for moving the idea forward. By February 2009, the GRFA and its mission were formally announced at the National Ethanol Conference. Its members are biofuel associations, such as some of the founding members, RFA, the Canadian Renewable Fuels Association, and eBIO, today known as ePURE, the European Producers Union of Renewable Ethanol. “The fact of the matter is, all of us advocating for renewable fuels are facing many of the same issues, many of the same arguments— there’s nothing really that’s unique,” Dinneen tells Ethanol Producer Magazine. “It helps to be able to share experiences with those in other countries.” When it was first formed, GRFA represented more than 60 percent of the world’s renewable fuels production from 30 different countries. Today, that has grown to 65 percent representation in 44 countries, Baker says. Some of the newer member associations represent Australia, Argentina and southern African countries. Since day one, Baker has been at the helm of GRFA, as the face of the organization. Baker operates consulting business Maple Leaf Strategies, formerly Bentham & Associates, out of Toronto. Although the company

34 | Ethanol Producer Magazine | DECEMBER 2012

does have other clients, the majority of his work is for GRFA. He’s a past CRFA board chairman and president and also worked as vice president of Greenfield Ethanol for a number of years. His well-rounded background made him a good fit for the position, Dinneen says, describing Baker as a trustworthy and effective advocate for the global biofuels industry. “He’s someone that I think is knowledgeable, articulate and passionate on these issues,” he says. Daily, Baker and analyst Giancarlo Drennen monitor the biofuels-related activities of more than two dozen international organizations. That means keeping an eye on what is said publically about biofuels in media interviews as well as studies or reports on the subject. In fact, GRFA sometimes gets involved with commenting on or peer reviewing biofuels research. “We monitor what they are saying and, ideally, impact and influence what they do,” he says. And, Baker believes they have had some success in developing relationships and even changing attitudes about biofuels. For example, in the early days of the GRFA quite a bit of time was spent monitoring and responding to statements made by the World Bank. “We shot back pretty hard and challenged everything that they were saying, because 80 percent of it was based on information that was

Profile

either wrong or it was completely biased,” he says, adding that today, the World Bank isn’t really saying a lot on the subject of biofuels. It’s a similar situation with the Organization for Economic Cooperation and Development, a group with which GRFA now has a good working relationship. “They are taking a different tone now on biofuels and looking at this much more scientifically than they used to, and the GRFA had a lot to do with that,” he says. Still, that doesn’t mean every person in the organization is on board. In mid-September, a representative of OECD went on record suggesting that biofuel mandates have a role in food price inflation. GRFA quickly responded with a press release, saying the real factors for rising food prices include volatile oil prices, financial speculation in commodities markets and more. In addition, it pointed to a recently released OECD agency report that stated biofuels could make up 27 percent of the world’s transportation fuel supply by 2050 without jeopardizing food security and that current global biofuels production takes up only 2 percent of arable land, not significant enough to have any impact on food prices. “Our job is to keep them honest and when they say things that are wrong or ill-informed, we challenge them instantly,” Baker says. He’s not the only one who thinks the or-

'While we do not

always agree on issues—particularly trade issues—the GRFA platform allows us to have continued communications, share ideas and share messaging.' ―W. Scott Thurlow, president of CRFA, a founding member of GRFA

ganization has had an impact this way. “The GRFA has, in a very short time frame, become a strong voice for the industry within the international community,” W. Scott Thurlow, president of CRFA says. Next on the agenda is a targeted public relations or advocacy campaign. The group is actively seeking funding from corporate sponsors. “We’re at a very critical point right now in our future, and if we were to cede any kind of ground to the antibiofuels folks it could be very damaging to our industry,” he says.

Rate of Return

So, what do the association members of GRFA get out of membership? For one, from a communications standpoint, the GRFA is able to echo some of the same key messages put forth by its members, Baker says. For example, when the RFA challenges the flawed science of indirect land use change in the U.S., GRFA echoes those arguments in the international community. The old food versus fuel argument is another battle the organization pushes back against repeatedly. CRFA’s membership in GRFA allows the association to focus on what’s going on domestically, knowing that the global group is monitoring and dealing with international issues, Thurlow says. Considering the increasingly important role international organizations are playing in developing biofuels policies, that’s key. “We need to be heard within these organizations and we need a seat at the table when policy and research is being developed,” he says. “The GRFA gives us that opportunity.” Dinneen echoed that by saying when he and other association members can’t attend an overseas biofuels event, GRFA can. “What we really wanted to make sure that we had with the GRFA is the opportunity to interact with the international forums more consistently,” he says. ePURE considers the GRFA a very important vehicle in keeping the organization aware of and able to respond to emerging global developments that affect the biofuels industry, a spokesperson told EPM via email. After all, many issues affecting the EU biofuels industry are also global issues, such as DECEMBER 2012 | Ethanol Producer Magazine | 35

Profile

'Our

job is to keep them honest and when they say things that are wrong or ill-informed, we challenge them instantly.' ―Bliss Baker, spokesperson for GRFA

agriculture systems as well as the need to reduce emissions and fossil fuel consumptions. “[Being a part of GRFA] allows the global biofuels industry to speak with a unified voice to international institutions,” the spokesperson says. GRFA also puts about a lot of biofuelrelated data. The organization works with research or consulting companies to release several annual global biofuels reports. In September GRFA put out its annual greenhouse gas reduction report, which forecast global ethanol production would reduce greenhouse gas emissions by 10 million metric tons in 2012. The organization also reported in June that predicted global ethanol production would reach 82.2 billion liters in 2012, a 1 percent growth from the previous year. A third report, which was new this year, outlined the substantial impact biofuels has on the global economy—including supporting nearly 1.4 million jobs in 2010. Interacting with other associations is a perk of membership that might not be as obvious to outsiders, Baker says. GRFA hosts monthly calls that association leaders from Europe, Canada, the U.S. and Argentina participate in on a regular basis. Any of the other association members are welcome to call in, and sometimes they do, he says, but due to time zone constraints some communicate primarily via email instead. In addition, two or three times a year, GRFA members have a chance to get together in person, typically at the National Ethanol Conference and sometimes at the Canadian Renewable Fuels Summit or the World Ethanol & Biofuels event. Whether a meeting is on the phone or face-to-face, it provides a valuable platform for dialogue on policy ideas and trade issues, he says. Staying connected with CRFA’s industry partners and keeping the lines of communications open is very important, Thurlow says. “While we do not always agree on issues—particularly trade issues—the GRFA platform allows us to have continued communications, share ideas and share messaging.” Author: Holly Jessen Features Editor, Ethanol Producer Magazine 701-738-4946 hjessen@bbiinternational.com

36 | Ethanol Producer Magazine | DECEMBER 2012

OUTLOOK

38 | Ethanol Producer Magazine | DECEMBER 2012

OUTlook

Perspectives on

2013

Ethanol Industry executives approach 2013 with optimism and concern. By Holly Jessen and Susanne Retka Schill

Looking into the future, Jeff Roskam, CEO of the Kansas Alliance for Biorefining and Bioenergy, fears any modification of the renewable fuel standard (RFS). “Period,” he says.

In The Field Roskam stands next to a Feedstox vehicle and a Case IH 275 Magnum tractor used to pull a square baler, part of the nonprofit’s fleet of biomass harvesting equipment.

“Not only would this be detrimental to the existing industry, it would take us back to a petroleum monopoly on liquid fuels. Monopolies generally are not market justified.” Roskam is one of four industry insiders Ethanol Producer Magazine spoke to for the December issue. The executives, two presidents and two CEOs, shared their hopes and fears about the coming year, while looking back on how 2012 will shape ethanol’s future. Each has a slightly different angle on the industry, from the helm of corn-ethanol companies, one of which is aiming for cellulosic ethanol, from the biomass business and from a brokerage firm embedded in the financial and physical marketplace. As one year turns into another, here’s what they had to say. Overall, Roskam believes there needs to be a much greater recognition for the value of biomass. To that end, he believes higher corn prices will drive innovation, as ethanol producers realize the raw input costs for biomass are actu-

PHOTO: REDROCK PHOTOGRAPHY Source: ICM

DECEMBER 2012 | Ethanol Producer Magazine | 39

OUTLOOK

ally lower than recent high corn prices. “That hasn’t really existed too much in history of bioenergy,” he says. Of course, more needs to be done to scale up biomass harvesting capacity and draw down the cost of harvesting and transporting biomass from field to plant gate. And that’s exactly what KABB is working on, through its subsidiary Feedstox. After assembling its fleet of advanced biomass harvesting equipment this spring, the equipment was put into use for the first time. The fleet, which is mostly for producing or moving square bales, has a combined capacity of 80,000 tons of harvested biomass. “We call it baling, road-siding and hauling [equipment,]” he says, adding that the nonprofit harvests biomass through partnerships or leasing agreements. “Our equipment is pretty darn close to fully utilized during this corn harvest.”

In the next year, KABB plans to add to its fleet and increase the amount of biomass harvested. The goal is to set up contracts with the cellulosic ethanol facilities that are currently under construction, following the harvest season from the Southern High Plains to the Northern High Plains for maximum utilization of equipment. “We’re still working on next year’s contracts with those facilities, to see what kind of equipment they might need,” he says. Infrastructure to harvest and bale biomass is already in place, yet even the largest operators don’t have sufficient capacity to supply biorefineries. Roughly speaking, one 20 MMgy plant would need nearly 300,000 dry tons of feedstock yearly and the largest biomass aggregator has the equipment capacity to harvest only about one-third of that amount. In addition, existing markets, including for animal feed and bedding, may

compete for supply. “That’s why scaling is such a big issue for the proposed refiners,” he says. As a general rule, it costs about $50 a ton to get biomass to the plant gate, not counting the price paid to the farmer. In order to cut the cost of harvesting and delivering biomass, two factors are key: increasing crop density and cutting back on the number of passes or touches during harvest, he says. Dedicated energy crops naturally have higher crop density than agricultural residues such as wheat straw and corn stover. KABB estimates that corn stover yields 2.5 tons of biomass per acre compared to 7 tons per acre for grasses and 10-plus tons per acre for miscanthus. The greater the crop density, the more biomass can be harvested in less time, as well as offer substantial fuel savings and greenhouse gas emission reductions. Successfully cutting back on the number of passes and increasing crop density could decrease the cost by $15 a ton. “The annual savings to that plant, from us being able to reduce our cost from $50 to $35, would be $4.285 million, or 21 cents a gallon,” he says. “[That’s] a big incentive.” Still, Roskam believes agricultural residues will be the first cellulosic feedstocks, partially because farmers assume less risk for greater utilization of crops they’re already planting. Feedstox’s combination combine balers, which harvest corn or wheat and bale stover or straw at the same time, have worked particularly well, he says. Depending on the agreement, Feedstox may harvest the grain and take the bales in barter or split the revenue with the producer. “They generally find that very attractive,” he says. After spending 15 years working in the corn-ethanol industry and the past two years in biomass, Roskam feels strongly that there are opportunities to take the sucrose molecule to fuel ethanol, yes, but other chemical directions as well. “I think the opportunity is not exclusive for cellulosic ethanol,” he says. “I think it’s for organic chemicals from renewable sources, and that’s where I guess I get more optimism.” Author: Holly Jessen Features Editor, Ethanol Producer Magazine 701-738-4946 hjessen@bbiinternational.com

40 | Ethanol Producer Magazine | DECEMBER 2012

PHOTO: POET

OUTlook

Day-to-day Operations The message that ethanol helps keep fuel prices lower can have a real impact on public opinion, Lautt says.

Aiming for Multiple Feedstocks, Products

fuels means for farm income, gas prices and the overall economy.” As efforts to educate the public about the benefits of ethanol are stepped up, Lautt addresses the strategies that appear to work best. “I’ve found that the most effective points are those related to jobs and the economy,” he says. “We’re making a real impact by providing an additional market to farmers, new jobs in rural areas and new revenue circulating in local communities. Also, we have an important story to tell about distillers grains. Finally, we need to keep stressing that biofuels are keeping overall fuel prices lower for consumers." He adds that the ethanol industry must not get complacent when criticism dies down. “We have active opponents working every day to derail our efforts to expand domestic renewable fuel production. We have to work every day to get our message out as well.”

In looking ahead, Lautt sees the growing adoption of the biorefinery concept as the biggest shift coming for the ethanol industry. “I think that change is being felt across the industry,” he says. “We’re seeing the value of having a diverse range of products, and in the future we’ll be producing even more products from each kernel of corn.” For Poet, the product list will soon include cellulosic ethanol, as construction continues on its first facility at Emmetsburg, Iowa, in partnership with DSM. “Cellulosic ethanol provides opportunities for more feedstock and product diversity,” he says. “I see biorefineries in the future with multiple feedstocks coming in and multiple products—fuel, renewable power, food, feed, biochemicals and more— coming out.”

Author: Susanne Retka Schill Contributions Editor, Ethanol Producer Magazine 701-738-4922 sretkaschill@bbiinternational.com

Jeff Lautt, CEO of Poet LLC

Poet’s new CEO strikes a note of optimism for the industry, even in the face of a tough year ahead. “The biorefining industry is much more resilient than in previous years,” says Jeff Lautt. “Producers have worked to be more efficient and many have integrated new technologies to increase revenue and income. Despite the challenging business climate, we are not seeing the kind of shakeup we saw when things got tough in previous years.” Lautt took on the job at Poet in April, succeeding Jeff Broin who has stepped aside from the day-to-day operations, though he still leads the company’s board as executive chairman. The blend wall will continue to be an issue for the industry, Lautt says. “It will be important for the entire industry to work hard to implement E15 into more stations across the country.” He also stresses the industry “must remain vigilant in addressing any misguided criticism or attempts to weaken the U.S. plans for energy independence, including changes to the renewable fuel standard. That’s important for our industry’s sake, but also for consumers’ sakes and for farmers’ sakes. With a new Congress coming in, it is crucial that we impress upon them what bio-

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OUTLOOK

Dealing with a Tough Reality

Neill McKinstray, president of The Andersons Ethanol Group It’s impossible to look ahead to 2013 without considering the dry and crispy corn fields that withered in the drought and heat of 2012. “We’ve just experienced the most significant drought in 56 years, and there’s absolutely nothing we can do to expand the supply of corn in the next 12 months,” says Neill McKinstray, the current chairman of the Renewable Fuels Association. “That is a fact, and the market is going to have to adjust and deal with it.” He points to the coming together of several factors that will create a dynamic and challenging situation. “The outlook will be for very tight margins in the industry and forced restrictions on some production in expectation that we’re going to have to fight for what corn is available. It will be high-priced corn.” he says. “On top of that, with the continued slow pace of gasoline consumption, the need for ethanol is not as great as it once was. And the development of E15 and E85 fuel distribution has not moved at the pace we might have anticipated at one point.” In early October, “somewhere north of 15 percent of capacity is shut down,” McKinstray says, with some producers temporarily idled

while others operate at less than 100 percent of capacity. With the uncertainty created by the attacks on the RFS and energy policy in general, “the industry will gravitate toward action and opportunities that are less uncertain,” he says. Such things as operating efficiency and systems improvements, better cost controls and well-tested new technology will be tried, he says, “as opposed to looking at some grand scheme involving huge acquisitions, new plants or untried technology.” While some plants may not be making much money right now, he notes, “they did a few years ago and they will have a war chest. Others may simply be trying to survive.” Product diversification has become a key strategy for ethanol producers to mitigate tight margins, but The Andersons have taken it to another level. Ethanol production is only the latest of several diversifications. In 1947, when Harold and Margaret Anderson decided to capitalize on the truck traffic delivering grain to a single grain elevator in Maumee, Ohio, by adding a retail store. Now a publicly traded company, The Andersons conducts business across North

'We’ve just experienced the most significant drought in 56 years, and there’s absolutely nothing we can do to expand the supply of corn in the next 12 months.' ―Neill McKinstray, president of The Andersons Ethanol Group

America in the grain and plant nutrient sectors, railcar leasing, turf and cob products, consumer retailing and ethanol. McKinstray doesn’t think it is very productive to spend much time confronting or correcting corn ethanol critics. “You’re either

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OUTlook LDCommodities.com

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one side or the other and typically you don’t see a lot of switching. Everyone’s got their view of the facts.” Instead, he likes to remind people what the industry’s early objectives were, including a new market for agricultural production, remediating air pollution, rural economic development and employment. “All those objectives have been addressed and clearly impacted in a positive way by the ethanol industry. Ag income has never been higher.” He points to the contrast between a recent trip to The Anderson’s ethanol plant in Iowa and his hometown in Illinois. “There’s nothing going on,” he says of his hometown. “Main Street is boarded up, and by the way, there’s no ethanol plant there. “I drive through small towns in Iowa that have really not much else going for them except there’s an ethanol plant nearby and there’s crop production. They’re thriving, and the unemployment rate in Iowa is half of what it is in the rest of the nation.” The industry should celebrate those successes, McKinstray says.

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DECEMBER 2012 | Ethanol Producer Magazine | 43

OUTLOOK

Utilizing Marketplace Tools to the Best Advantage

Bob Shults has a hopeful outlook on 2013. The Texas-based commodity brokerage firm matches buyers and sellers at the best price, in the physical and financial markets for ethanol but also in agricultural products, feed ingredients, grains, crude oil and more. He’s excited about the future following the resolution of current regulatory and policy uncertainty surrounding the RFS and, in the financial world, the Dodd–Frank Wall Street Reform and Consumer Protection Act. “We’re going to have a much clearer picture of the political and regulatory environment, more certainty,” he says. Looking into the future, Atlas believes 2013 will bring better alignment of the ethanol supply and demand equation and improved producer margins. Shults is encouraged by the fact that General Motors and Ford Motor Co. officially announced their newer vehicles can run on E15 and hopes to see continued acceptance of higher blends. He’d like to see other opportunities for increased ethanol demand, such as new engine technologies to take advantage of the fuels higher octane content. “If nothing else, we’ve got to see a closer alignment of the supply and demand,” he says. Overall, the company is seeing improved liquidity in the financial ethanol markets as well as new participants, allowing for better commodity risk management. This could play a significant role in the ethanol and corn markets as it comes out of a rough year. The distillers grains market continues to become more efficient with time. “The financial tool in the DDG markets may become a more important piece of the picture, allowing better risk management on that side

PHOTO: COLOSSUS COMMUNICATIONS

Bob Shults, president and founding partner of Atlas Commodity Markets

When the Going Gets Tough Shults considers the ethanol industry extremely resilient.

of things as well,” he says, adding that the feed ingredient brokerage team at Atlas continues to see strong demand for the product. Calling the ethanol industry “extremely resilient in the face of a lot of obstacles,” Shults points out that it has continued to evolve in the ways it manages risk. That’s impressive, considering the industry's relative newcomer status in a multicommodity business world. The company is seeing an increase in industry participation in the financial markets, using tools such as swaps, options and block futures to manage commodity exposures. “They continually try to find new ways to increase their profitably through finding any kind of edge they can,” he says.

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44 | Ethanol Producer Magazine | DECEMBER 2012

Author: Holly Jessen Features Editor, Ethanol Producer Magazine 701-738-4946 hjessen@bbiinternational.com

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Q&A

Defending Tomorrow's Ethanol Today Advanced Ethanol Council Executive Director Brooke Coleman talks controlling the industry’s narrative and the delicate challenge of battling ethanol’s only customer for market share. INTERVIEW BY TIM PORTZ Photo by LIZA VOLL

Recognizing that the arguments for advanced ethanol as well as the challenges facing producers are unique from those of firstgeneration producers, Brooke Coleman and the Advanced Ethanol Council have been charged with educating policy makers on the importance of maintaining the commitment to commercialize next-generation biofuels. AEC member companies face an uphill battle to develop economically viable production strategies amidst a constrained capital market. Add to that a contentious policy battleground featuring open calls to waive the vital production waypoints established in the renewable fuel standard (RFS). Your biography points to time spent predominantly on the coasts, yet you’ve been working in renewable fuels for nearly 15 years. How did you get involved in an industry that was classified as regional and championed largely by advocates and policy makers from the Midwest?

Four letters. MTBE (methyl tertiary butyl ether). One second, I was leading an effort in California to ban MTBE to protect drinking water resources; the next second, I found myself in the middle of a national debate about ethanol versus MTBE. I did not realize at the outset that I was wading into a 100-year battle between ethanol, methanol and petroleum. But I realized very quickly, both from an environmental and economic perspective, that we are better off making biofuels from plentiful domestic resources than buying petroleum from dwindling foreign ones. But I get the insinuation, and it is largely true, people on the coasts generally have no clue when it comes to agriculture and land use (even while they seem to have

all the answers when it comes to saving these valuable resources). The drought certainly brought out the opposition to the industry and the RFS in full force this summer. What is the industry’s strongest counter to claims that ethanol production should be curtailed in times of tight supply?

It really comes down to a simple tradeoff. If we use less ethanol, we probably get a very small reduction in grain prices, but we take highoctane fuel out of a highly constrained liquid fuel marketplace, which will raise gas prices and send a terrible signal to investors in advanced biofuels. At some point, though, we need to stop refuting and start going on the offensive. The livestock industry is not getting its $2 corn back with oil prices at the new equilibrium. What a waste it would be to backslide on biofuels in pursuit of the fantasy that $2 corn might come back. Parties obligated to buy gallons of advanced ethanol like cellulosic ethanol are quick to point out that the industry hasn’t yet delivered the volumes they are required to purchase. With a handful of cellulosic facilities under construction, how soon will this change, and why are these volume requirements so important to continue defending?

First of all, let’s frame the emergence of this industry properly. RFS2 was signed just five years ago. Going from the laboratory to commercial deployment is difficult enough in five years without a historic global recession to completely paralyze lending markets. But, to be sure, the first wave of plants is expected to come online this year. So 2013 should be the year that we

48 | Ethanol Producer Magazine | DECEMBER 2012

produce commercial gallons. And that’s a heck of an accomplishment given the circumstances. As for the second question, the issue is off-take. Preserving the targets sends a signal to the industry that they should plan on using the fuel, which ultimately translates into off-take agreements with cellulosic biofuel producers and private sector investment to produce those gallons. In the ideal world, we do not need blending targets to bring our fuel to market. But in that world, fuel markets are competitive, pricedriven and reward innovation. It’s a wonderful ideal, but it’s not reality. If we are going to fix the OPEC/foreign oil dependence problem, it’s going to take market-forcing mechanisms like the RFS. Being passive is not going to change anything. Is there a historic precedent for the rise of a replacement for such a well-entrenched energy incumbent like petroleum-based fuels? If so, what are the lessons to be learned from it?

Ethanol is arguably the most disruptive alternative fuel in the world. But what ethanol has accomplished to date is totally different from what we aim to accomplish. Ethanol use exploded because there was a massive void in the marketplace (MTBE) in combination with federal policy (the Clean Air Act, and later, RFS1) that basically ensured ethanol would replace MTBE. In addition, the regulatory and market barriers for 10 percent ethanol blends were small in comparison to those we face today. It was a good choice, but it is also true that incumbents ultimately decided to cede the MTBE markets to ethanol, because MTBE was deemed by U.S. courts to be a defective product and blenders needed the octane. So lesson No. 1 is when the

Q&A

political, market and regulatory stars align, energy portfolios can be overhauled in a very short period of time. Now, ramping up to 20 to 30 percent ethanol market share is a different animal. In the immediate term, we need to protect the RFS and take the bias for incumbents out of the U.S. tax code. Without that, we are not going to get where we want to go. But more broadly, we need to accept as an industry that we are battling with our customers for market share, and act accordingly. Act accordingly? Can you expand on that?

While the oil industry continues to be our primary customer base and frequent business partner, their trade associations and affiliated third parties are trying to bury us alive. If the oil industry has no problem compartmentalizing everyday business propositions and the territorial realities of protecting and expanding market share, neither should we.

how to reform a $2 billion biofuels program, you better have someone at the table who cares about your stuff and is not weakened by a conflict of interest. That’s the gist of it. When you are speaking with policymakers who aren’t supportive of the industry, what reasons do they use to support their positions?

Not surprisingly, it’s the issues our adversaries work so hard to put at the center of the political discussion about biofuels. Grain and food prices, livestock interests, and in some cases, ecological concerns like land use. The problem is, it’s not good enough to have good answers for each of these questions because in politics, perception is reality. The livestock industry may be barking up the wrong tree when it comes to the cause of higher feed prices, but if they are convinced and vocal, we have a political problem.

Why was it important for advanced ethanol producers to have an industry voice that was unique from the associations already advocating for ethanol producers?

You once noted that the first lesson you learned in law school is never allow your opponent to control the narrative of any argument. What is the narrative you most often see industry opponents trying to establish about biofuels?

The formation of AEC had more to do with concerns about the discussion about second-generation biofuels than first-generation biofuels. Not all advanced biofuels are created equal, and different types need different things to excel in the marketplace. I think the AEC founding companies felt like our story was not getting properly amplified and, in some cases, was getting distorted to serve the interests of other advanced biofuels. Advocating for the entire advanced biofuels industry, for example, is easy when policy makers are asking only general questions. But when someone asks

It’s a long list. Oil prices are the primary cause of higher food and grain prices, yet they set the parameters of the debate with food versus fuel. Unconventional sources of fossil fuels are the primary threat to the future health of this planet, yet it is biofuels (via indirect land use change) that need to be avoided. You have to give them credit. Incumbents protect their market share well and use third parties to do it. But the biofuels industry needs to learn from it, stick together and start playing some offense, because we are on the right side of every issue involved, from food prices to land to subsidies. DECEMBER 2012 | Ethanol Producer Magazine | 49

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PROCESS

52 | Ethanol Producer Magazine | DECEMBER 2012

PROCESS

Lessons on

Bottom

LineBasics The Alcohol School reviews key focus areas for ethanol producers. By SuSanne Retka Schill

Corn quality, mashing, fermentation, distillation, coproducts—each year The Alcohol School provides a comprehensive course on making ethanol efficiently. In September, 90 participants flew into Montreal for the 32nd annual school, which digs into the science behind the process as well as new developments under way for both the fuel ethanol and beverage alcohol industries. The cross fertilization is deliberate, not only between the beverage and fuel alcohol producers, but also for related companies that send employees to get a broader understanding of the industries served. Ethanol Producer Magazine attended this year and gives a taste of what was learned, with a focus on areas with a big impact on the bottom line in the initial steps of the process.

A Closer Look at Corn

“If you want to save money, improve your bottom line in the biggest cost— feedstock,” said Robert Piggot, technical consultant with Lallemand Ethanol Technology, a co-sponsor of the event with the Ethanol Technology Institute. When buying corn, ethanol producers are most interested in the starch. Nonetheless, a survey of ethanol producers once asked if they would pay more for corn if they could get 3 percent more starch. “Most ethanol plants said no,” he said. For a 100 MMgy plant, that 3 percent would add up to $13 million more revenue, if ethanol were selling at $2.50 per gallon, he pointed out. There can actually be a conflict in the goals between the purchasing departDECEMBER 2012 | Ethanol Producer Magazine | 53

PROCESS

ment, which is looking for low cost, large quantities and flexible payment terms, and operations, which needs easy-to-process, high yielding corn to be delivered on a timely basis. Operations is looking for high starch content, low moisture, high ratios of amylopectin-toamylose and floury-endosperm-to-horny-endosperm, and no molds or mycotoxins, which means the standard grade of No. 2 yellow dent corn isn’t all that helpful. “We are stuck with the specifications that were meant for the baking and feed industries, and they actually don’t mean anything to us,” Piggot said. Broken kernels, for instance, could be considered beneficial for the ethanol industry, while foreign material wouldn’t. Thus the maximum 3 percent BKFM is not specific enough. No. 2 specs also call for a 5 percent maximum in damaged kernels, with no more than 0.2 percent heat damaged. “If the grain is heat damaged, you lose sugars,” he explained. “Other types of damage are not a problem.” The moisture spec of 14.5 percent is well-understood, but the test weight spec of 54 or 56 pounds per bushel is mean-

ingless, he said. “You often get better yields out of low test weight corn.” Piggot recommends plants make their expectations clear when explaining their quality needs and setting discounts. “You’re better off to discount the grain,” he added. “Try not to get into the loop of getting a rejected load returned to you, just blended up.” Discounts need to consider hidden and indirect costs. High moisture corn, just 1 percent over the 14.5 percent spec, would translate into a direct cost of 50 gallons of ethanol lost from the load, which at $2.50 per gallon ethanol, would call for a discount of 16 cents per bushel. He recommends that number be doubled to account for other increased costs. For example, the electrical power needed to grind wet corn will be significantly higher than for properly dried corn. Attention to details in grinding corn is the next area that can have a direct impact on yield. The ideal grind size is very much plant-dependent, Piggot said. While there are advantages to smaller grind sizes that increase the surface area

exposed to enzyme action, problems can arise. Factors to consider include how well the slurry mixes and temperature parameters. Coarser grinds need slightly higher temperatures while finer grinds are needed if jet cooking is not used. Finer grinds will keep suspended longer in the fermentor, but will contribute to quicker fouling in the stripper and heat exchangers, plus impact centrifuge separation. The goal is to get the best compromise of particle size for maximum yield and good separation—too large and yields are lost, too small can increase solids in the stillage and backset. Most ethanol plants use hammermills to grind, and many never take a close look at the configuration, Piggot added. A number of things can be adjusted to improve performance, including the speed and number of hammers as well as spacing, plus the open area on the screen, feed rate, air flow and hammerto-screen distance.  on the web For additional information, see the online version of this story at www.ethanolproducer.com.

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PROCESS

The next step in the process, mashing, is also a key area for maximizing yields, said Garth Whiddon, technical service manager for Lallemand Ethanol Technology. In mashing, water is combined with the crushed or ground grain, adjusted for pH and temperature to match the chosen enzymes used to break the starches down into dextrins. “Having the optimal conditions for enzymatic efficiency leads to lower usage rates and higher yields,” he said. Fine tuning this step is important. If 4.5 percent residual starch is left after fermentation, it adds up, amounting to $2.6 million lost for a 50 MMgy plant. The industry has gone through some major process changes, Whiddon added. At one time, nearly every plant used a separate saccharification tank, where the mash was cooled before adding glucoamylase. While it may have been optimal for the ideal enzyme dose, it also created a perfect environment for bacteria. Most plants have now moved to simultaneous saccharification and fermentation. A more recent process change has been a move towards dropping the jet cooking step. In addition to decreasing enzyme use by nearly 25 percent, eliminating jet cooking prevents a possible 3 to 5 percent yield loss from a Maillard reaction—a chemical reaction that makes some sugars unfermentable and also reduces the free amino acids needed for yeast health. If jet cooking is eliminated, however, the grind requirements are more stringent, he adds, to ensure proper starch conversion.

sential for consistent fermentations. “Growing yeast cells produce alcohol 33 times faster than nongrowing cells,” he explained, adding that the rate of budding parallels ethanol production. An expert on yeast physiology, he described the micro-organism’s needs in detail, including factors such as oxygen, pH, temperature, moisture, nutrients, physical factors such as agitation and pressure as well as stress factors that include inhibitors and contaminants. While glycerol plays a role in yeast metabolism,

overproduction reduces ethanol yield and is a key indicator of stress. “The theoretical maximum yield of ethanol from 100 parts of glucose is 51.1 percent,” he adds. “You’d never get 100 percent—a living organism needs to use sugar to grow—but industrial alcohol producers should aim for greater than 90 percent of this theoretical yield.” Very high gravity fermentations lead to higher concentrations of alcohol than what was previously considered possible, Ingledew

Understanding the Workhorse

More than one Alcohol School instructor spoke about the importance of yeast and pointed out that proper management would enhance yield and therefore profit. The longtime scientific director of the Ethanol Technology Institute, Mike Ingledew, and the new director, Graeme Walker, both dug into the details of keeping yeast working at peak efficiency. Ingledew is professor emeritus at the University of Saskatchewan and Walker is a professor and director of the Abertay University Yeast Research Group in Scotland. “Saccharomyces cerevisiae is the number one industrial organism, making more money than any other microbe,” Walker said. Keeping yeast cells viable and actively growing is esDECEMBER 2012 | Ethanol Producer Magazine | 55

BIOFUELS

PROCESS

PHOTO: SUSANNE RETKA SCHILL, BBI INTERNATIONAL

THE BIOFUELS MARKETS ARE ALWAYS MOVING... International Leaders Yeast expert Graeme Walker, left, of Scotland, has taken over the reins of scientific director of Ethanol Technology Institute from long-time director Mike Ingledew of Canada.

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explained. Some plants are getting 15 to 16 percent ethanol volume to volume (v/v), and many are achieving up to 20 percent, compared to the traditional expectation of 7 to 12 percent. Paying close attention to yeast nutrition is a major part of achieving these high alcohol levels—beginning with water. Attention must be paid to water quality when recycling various process flows and even with well water, he cautioned. “They can contain significant amounts of ions, solvents and organic acids that are harmful to yeast viability.” Proper aeration is important and the timing of oxygen supply can be more critical than the amount. “Many plants overaerate,” he added, “and many poorly aerate.” “Useable nitrogen is the most critical limiting nutrient,” he said. “It makes the most difference of all nutrients added to fermentors with regard to yeast growth.” Nitrogen in yeast cells is normally found at concentrations of 6 to 8 percent weight to weight (w/w) and phosphorus is around 1.4 to 2 percent. The amounts of useable nutrients needed, therefore, relate to the overall biomass weight that will be made in the fermentor, which can amount to over 5 tons of yeast biomass in a 250,000 gallon fermentor. “If your mash is purified, deficient, or you don’t know what’s in the mash, add nutrients,” he said. If using urea, he recommended using 0.48 grams per liter (g/L) for normal gravity mashes and doubling that for very high gravity mashes. Ammonia’s higher nitrogen content calls for 0.134 g/L for normal mashes and double that for very high gravity mashes, which will require a pH adjustment. Phytases may be useful to liberate useable phosphorus in grain mashes, he added, and most of the other minerals and vitamins are generally supplied by the mash, although yeast foods provide insurance and lead to consistency. “Nutrients will vary from crop to crop, from farm to farm and day by day,” he explained. Author: Susanne Retka Schill Contributions Editor, Ethanol Producer Magazine 701-738-4922 sretkaschill@bbiinternational.com

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Finance

CONTRIBUTION

PHOTO: BBI INTERNATIONAL, SUSANNE RETKA SCHILL

Industry Improves as Indicators Stabilize, Diversification Expands Multiple revenue streams lessen impact of ethanol prices By Paula Emberland

Despite challenges and tight margins, recent months demonstrate that ethanol plants have diversified and stabilized since the earlier days of the industry,

according to the Biofuels Benchmarking Industry Report produced by Christianson & Associates PLLP. The Midwest accounting and consulting firm has been collecting data from

The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reflect the views of Ethanol Producer Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s). 58 | Ethanol Producer Magazine | DECEMBER 2012

its ethanol benchmarking program participants since 2003. The industry report profiled here focuses on the 18-month period from January 2011 to June 2012, and includes data from about a quarter of all ethanol plants in the U.S. and Canada. Looking at the numbers, three key factors at work in recent years provide indicators of a future of increased stability and higher levels of synergy with local economies. First,

FINANCE

gallon, on average, to a low of $2.04 in Q2 of 2012, coproduct netbacks rose steadily. Measured in revenue-dollarsper-gallon-of-ethanol sold, coproducts brought in an average of 62 cents per gallon in Q2 of 2012, which is a steady increase of 59 percent since the last quarter of 2010, Comparing Performance The chart shows the average return from the leaders (the when coproduct revtop 25 percent) and the laggards (the lowest 25 percent) compared to the overall enue was just 39 cents average of the plants participating in the benchmarking project at Christianson & per sales gallon of Associates. ethanol. Not only does and perhaps most importantly, more plants the increase in coproduct profitability indiare producing different types of coproducts, cate better ability to withstand low ethanol and they’re making more money from those prices, it also reflects close integration with coproducts, both in real numbers and as a other local industries to get the best return percentage of total revenue. Over 25 percent on coproduct technology investments. This of plants now recapture and sell CO2, for instance, and over half have begun extracting corn oil. Distillers grains prices have also risen in correlation with corn prices, which hasn’t always been the case with ethanol prices. The result of this diversification is that coproduct revenue accounted for 23 percent of average grind revenue in the first half of 2012, up from just 16 percent in 2008. Multiple revenue streams mean less dependence on the price of ethanol to determine profitability, and coproduct prices overall have been less volatile. Although ethanol netbacks fluctuated from a high in the third quarter SOURCE: Christianson & Associates of 2011 of $2.66 per

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Finance

Ethanol Yield Impact (Based on Q2 yield/revenue) Q2 2012 Average Yield

Yield Difference Gallons/Bushel Potential Production Change*

Potential Revenue Difference**

US Average

2.74

US Leaders

2.8

+.06

+367,200 gal

$745,416

US Laggards

2.66

-.08

-489,600 gal

-$993,888

*Undenatured production gallons plus 2 percent denaturant, for a plant processing an average 6 million bushels of grain per quarter (an average production capacity of about 67 MMgy). **Average ethanol sales of $2.03 (derived from Q2 2012 average revenue per gallon minus denaturant).

type of geographical targeting, to maximize profit and minimize transportation costs, is a

key component of successful coproduct strategy. Obviously, plants have always used their

regional market to make decisions about how much to dry their distillers grains, but plants now have increasingly diverse markets to consider for other types of coproducts. For example, plants may find it profitable to sell CO2 when they’re near another business that makes use of it, such as a bottling plant. They may also determine that it’s more profitable for them to refine CO2 themselves, or to simply sell the raw product, illustrating an area where it’s important for plant leadership to carefully review markets and evaluate payback on technology investments. A look at netbacks from CO2 sales makes this clear when one compares the group of leaders, which is the average of the top 25 percent, and a laggard group, the average of the lowest 25 percent. Leaders in CO2 sales can expect netbacks about 10 times higher than laggards in this category, so clearly a careful evaluation of local markets is critical. Similarly, plants may determine that corn oil is profitable for them if they’re near a big consumer of the oil such as a biodiesel refinery. Although the benchmarking program does not collect specific information about the industries to which corn oil is marketed, higher profits are earned by the plants in the eastern third of the country, as shown in a regional comparison of corn oil net sales. This is indicative of a correlation between higher corn oil profits and proximity to biodiesel producers, which are concentrated east of the Mississippi River.

Financial Progress

The second factor pointing to increased stability is a financial one and can be observed by looking at historical earnings and working capital numbers over the past five years. Consistently favorable revenue and profitability throughout 2010 and most of 2011 allowed plants to position themselves more securely than ever before, by reducing debt 60 | Ethanol Producer Magazine | DECEMBER 2012

FINANCE

and increasing working capital (the difference between current assets and current liabilities). Working capital has decreased slightly over the most recent two quarters, and currently averages about 17 cents per production gallon. Overall liquidity remains well above the low levels seen during the industry recovery period of 2009 to early 2010. Average working capital bottomed out at an average of just 5 cents per production gallon in Q2 of 2009. This improvement should, in turn, help maintain some degree of overall industry stability during the remainder of 2012 and into 2013, as plants cope with continued tight grind margins and the effects of this year’s Midwest drought season.

due to better extraction technologies—they’re up an average of 40 percent since the first quarter of 2011. Leader plants in this category can expect even higher yields, averaging 0.72 pounds per bushel in the most recent quarter. Based on the trends emerging from the data in the report, the outlook is good that plants will continue to find ways to become increasingly stable and self-sustaining, largely

by making savvy technology investments that help them diversify into new coproduct markets, which in turn result in ever-better integration with the surrounding agricultural and economic environments. Author: Paula Emberland Benchmarking Business Analyst Christianson & Associates PLLP pemberland@christiansoncpa.com 320-441-5544

Optimizing Success

Ethanol production spurs better science, encouraging creation of the engineering and technology jobs that accompany applying theoretical science into production. Indicators of ongoing efforts to optimize production technology are the third contributing factor in the industry data that point to ethanol’s lasting significance in the domestic economy as we head into 2013. One such indicator of technological advancement is, of course, improved yield. Although overall average ethanol yields have remained fairly constant, leaders have shown average yields of about 2.80 gallons per bushel, while the overall industry average hovers at around 2.73 gallons per bushel. The laggards group isn’t far behind, averaging about 2.65 gallons per bushel. However, extracting just a bit more ethanol per bushel, as leader plants do, can make a difference of millions of dollars to a plant’s bottom line. Moving from the laggard average ethanol yield of 2.66 gallons per bushel to the yields achieved by the average leader yield of 2.8 gallons may not seem like a big difference. But multiply those numbers by the average plant feedstock use of 6 million bushels per quarter, and that change can mean an increase in revenue per quarter of over $1.7 million, the difference between a profitable year and an unprofitable one, particularly in today’s tightmargin environment. Corn oil yields have jumped even more

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DECEMBER 2012 | Ethanol Producer Magazine | 61

TAX PLANNING

CONTRIBUTION

Changes in IRS Tax Regulations Affect Ethanol Plants New property definitions will change tax treatment of certain repairs By Jim Schmidt and Beth Feuchtenberger

There has been significant ditures on tangible property be- Revenue Service. Taxpayers tend to see controversy concerning expen- tween taxpayers and the Internal business expenditures as deductions for reThe claims and statements made in this article belong exclusively to the author(s) and do not necessarily reflect the views of Ethanol Producer Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s). 62 | Ethanol Producer Magazine | DECEMBER 2012

pairs and maintenance, while the IRS argues for capitalization and recovery over a period of years. This conflict has produced a number

TAX Planning

THINK

of court cases with decisions made in both directions. On Dec. 23, 2011, the IRS issued temporary regulations that provide guidance for the deduction or capitalization of amounts paid to acquire, produce or improve tangible property. In developing these regulations, the IRS amalgamated case law and prior IRS guidance. The goal is to reduce controversies while both sides continue to address the issue. Even though temporary, taxpayers are expected to comply with the regulations, which are effective for taxable years ending on or after Jan. 1, 2012. As a result, businesses need to know how these regulations apply to insure compliance. Failure to comply with the regulations could cause the IRS to assess a deficiency during examinations. To comply with these regulations and minimize examination risk, ethanol plant operators need to determine if they have the appropriate policies and procedures in place, as well as applicable tax elections. All of which may require changes to accounting methods.

Deducting Materials, Supplies

The regulations define materials and supplies as tangible property used or consumed in the taxpayerâ&#x20AC;&#x2122;s business operations (not inventory), and specifically defined as: â&#x20AC;˘ A component acquired to maintain, repair or improve a unit of tangible property owned, leased or serviced by the taxpayer and that is not acquired as part of any single unit of tangible property. â&#x20AC;˘ Fuel, lubricants, water or similar items that are reasonably expected to be consumed in 12 months or less, beginning when used in taxpayers operations. â&#x20AC;˘ A unit of property with an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayerâ&#x20AC;&#x2122;s operation. â&#x20AC;˘ A unit of property with an acquisition cost or production cost of $100 or less, or an item identified in published IRS guidance as materials and supplies. The regulations allow a taxpayer to deduct nonincidental materials and supplies

when used or consumed. If a taxpayer has no record of use, or an inventory is not maintained for the nonincidental materials and supplies, a taxpayer may deduct these expenditures when purchased, if taxable income is not distorted. These rules are consistent with prior law. A taxpayer, with certain exceptions, has the right, however, to elect to capitalize the cost and depreciate any material and supply item. In general terms, capitalization of these items will provide an increase in taxable income for the year capitalized, and a deduction in future years based on the applicable taxable life. While the regulations modify the â&#x20AC;&#x2DC;de minimisâ&#x20AC;&#x2122; (minimal expense) rule from the prior proposed regulations, ethanol plants generally have material and supply costs that exceed the de minimus rule threshold.

Spare Parts Treatment

There is a new optional method of handling rotating and temporary spare parts, which allows quicker deductions on these parts, rather than the general rule to deduct as the part is disposed. Although the optional method requires more record keeping, the cash flow improvement may be worth the effort. Factors that help in the determination of electing capitalization would include a comparison of the number of turns in spare parts inventory versus the depreciation period of the capitalized cost.

Building Changes

One of the more important changes in the regulations is the definition of a unit of property, which now has two main categories: buildings and everything else. The smaller the unit of property, the more likely costs incurred in relation to that unit of property will be capitalized. For repair purposes, the building category is divided into a building structure and nine designated building systems: HVAC, plumbing, electrical, all escalators, all elevators, fire and alarm, security, gas distribution and others, as designated by the IRS. Separating designated building systems into these new components is a significant change to prior rules. It will require ethanol facilities to analyze the

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TAX PLANNING

One of the more important changes in the regulations is the definition of a unit of property.

remaining undepreciated cost of a building component that is replaced, where the related repair was required to be capitalized. This creates a current tax benefit, as well as an opportunity of reviewing past depreciation schedules to determine if deductions should have been claimed for building components that had been previously replaced. The determination of costs in the â&#x20AC;&#x153;everything elseâ&#x20AC;? category is broken down as the following:

impact of the repair and determine the breakdown into the designated building systems. Facilities may also need to file a request for a change of accounting method to come into compliance, or to elect the flexibility provided under the General Asset Account rules. To understand the potential effect of the designated building system concept, consider the following: If an improvement cost to an electrical system is measured against a total building under prior proposed regulations, the improvement cost may not rise to the level required for capitalization. But, when the same improvement cost to an electrical system is measured against the electrical system as the unit of property under the new regulations, required capitalization is more likely. The regulations now allow, however, a current deduction for the

â&#x20AC;˘ Networkâ&#x20AC;&#x201D;based on facts and circumstances and through specific industry programs. â&#x20AC;˘ Plantâ&#x20AC;&#x201D;based on discrete major functions. â&#x20AC;˘ Generalâ&#x20AC;&#x201D;based on a â&#x20AC;&#x153;functionally interdependentâ&#x20AC;? test. Most ethanol plants will find the most benefit by applying the safe harbor for routine maintenance. Under the safe harbor, capitalization is not required if maintenance does not improve the property, but rather keeps the property in its ordinary efficient operating condition and the maintenance is expected to be performed more than once during the class life of the property. Unfortunately, there is no â&#x20AC;&#x153;bright-lineâ&#x20AC;? test for the determination of a repair versus improvement, and each situation is dependent on the facts and circumstances of the expenditure. The regulations include many examples that help determine whether the expenditure has to be capitalized, including whether it results in a betterment to the unit of property, is a restoration to the unit of property or adapts the unit of property to a new use.

Next Steps

Talk to your accountant to learn more about how these regulations may apply to your production facility. Together, you can take steps to: â&#x20AC;˘ Discuss questions and the implementation of the regulations.

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â&#x20AC;˘ Develop written accounting procedures as required or suggested to provide support for safe harbor or other positions. â&#x20AC;˘ Determine if a change of accounting will be required to comply with the regulations and when it should be filed, or if an alternative treatment is more advantageous. Authors: Jim Schmidt, CPA Director of Renewable Energy, Eide Bailly 612-253-6599 jschmidt@eidebailly.com Beth Feuchtenberger, CPA Partner, Eide Bailly 605-977-2728 bfeuchtenberger@eidebailly.com

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66 | Ethanol Producer Magazine | DECEMBER 2012

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Elevation Coating, LLC 763-742-2067 www.elevationcoating.com

Size Reduction-Shredders

Parts & Services ICM, Inc. 877-456-8588

Fractionation-Corn

Vecoplan, LLC 336-861-6070

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Productivity Enhancements ICM, Inc. 877-456-8588

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Safety ERI Solutions, Inc. 316-927-4294

Heat Exchangers Pick Heaters, Inc. 800-233-9030

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Loading Equipment-Liquid

Dryers-Other Cellencor, Inc. 515-259-1122

Silo Cleaning

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Hoppers Airoflex Equipment 563-264-8066 www.airoflexequipment.com

www.VecoplanLLC.com

Storage-DDGS Hoffmann, Inc. 563-263-4733

Structural Fabrication Agra Industries, Inc. 715-536-9584

erisolutions.com

www.hoffmanninc.com

www.agraind.com

Tanks Agra Industries, Inc. 715-536-9584

www.agraind.com

EPM MARKETPLACE With all contact information placed in one convenient location, Ethanol

Laboratory-Supplies

Producer Magazine not only contains top editorial content but also a

Midland Scientific Inc. 800-642-5263 www.midlandsci.com

useful directory in each publication. Whether a first-time advertiser wanting to raise awareness of your business or a frequent display advertiser looking for added exposure, EPM Marketplace is the perfect solution.

68 | Ethanol Producer Magazine | DECEMBER 2012

EPM MARKETPLACE Legal Services

Thermal Oxidizers Koch Knight LLC 330-488-1651

www.kochknight.com

Attorneys BrownWinick Law Firm 515-242-2414 johnson@brownwinick.com Greenwich Blackhawk Prof. Corp. 310-393-2200 www.greenwichblackhawk.com

Media Publications Platts 1-800-PLATTS-8

www.platts.com/biofuels

Truck Receiving/Dumpers Airoflex Equipment 563-264-8066 www.airoflexequipment.com

BOTTOM-LINE RESULTS

Valves Best Supply Company 316-262-8336 www.bestsupplycompany.net Cashco, Inc. 785-472-4461

www.cashco.com

Wastewater Treatment Services ICM, Inc. 877-456-8588

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Saving �me and money is key.

Yield Enhancement Himark bioGAS 780-700-5110

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Ethanol Production Existing Producers Louis Dreyfus Commodities 402-844-2680 www.LDCommodities.com

Finance Grant Writing Sustainable Energy Strategies, Inc. 703-543-6838 www.sesi-online.com

Because we’ve completed more than 335 bioenergy projects around the world, the team here at BBI Consul�ng Services is able to streamline any bioenergy and engineering project. In return, you’ll save �me and money, elimina�ng underfunded and undermanned projects. We’ll help you keep your project on the best track for success.

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Lender Representatives BBI Consulting Services 866-746-8385 www.bbiinternational.com

Consulting Services

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DECEMBER 2012 | Ethanol Producer Magazine | 69

MAKE PLANS TO ATTEND THE:

2013 fly-in Biofuels Beltway March March 13-14, 2013* For more information, visit www.ethanol.org or contact Shannon Gustafson at 605-334-3381 or sgustafson@ethanol.org *Dates subject to confirmation based on the 2013 Congressional calendar.

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