2016 February Ethanol Producer Magazine

INSIDE: COMPANY HARNESSES SUN, CO2 TO PRODUCE FUELS FEBRUARY 2016

EYE ON EXPORTS US Ethanol Market Growth Continues Page 28

Industry Rebalances On Tighter Margins Page 38

2nd Corn Survey Shows Plentiful, Quality Supply Page 48

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CONTENTS

FEBRUARY 2016 VOLUME 22

DEPARTMENTS 6

8

THE WAY I SEE IT

Promises Made in Iowa

By Mike Bryan

9

EVENTS CALENDAR

10

VIEW FROM THE HILL

16

Seizing Export Opportunities

By Bob Dinneen

DRIVE

GLOBAL SCENE

World Leaders Must Recognize Biofuels Potential

By Bliss Baker

BUSINESS BRIEFS

20

COMMODITIES

22

DISTILLED

62

TALKING POINT

66

By Holly Jessen

28

Regulatory Issues For Antimicrobials Evolving

By Richard Coulter

38

48

PHOTO: USGC

4 | Ethanol Producer Magazine | FEBRUARY 2016

CORN QUALITY

Producers respond to questions about corn quality, grading practices

By Susanne Retka Schill

PROFILE

‘Industrializing Photosynthesis’ Process harnesses engineered cyanobacteria to turn CO2 to fuel

By Holly Jessen

50 CONTRIBUTION

RISK MANAGEMENT

Well-Managed Hedge Positions Improve Margins

OSHA Penalties Going Up, Up, Up

By Brent D. Soderstrum

ON THE COVER

Tighter margins didn’t dampen production levels in 2015

By Susanne Retka Schill

2015 Corn Crop Results: Good Quality, Plentiful Corn

BUSINESS MATTERS

MARKETPLACE

MARGINS

Ethanol Margins Return to Seasonal Swings

GRASSROOTS VOICE

18

64

U.S. ethanol is valuable in overseas markets as an octane source

Industry Poised to be Part of Climate Change Solution

By Tom Buis

Know Your Target Market

By Ron Lamberty

EXPORTS

Markets for ‘Liquid Corn’

Ethanol’s Outlet Opportunities

By Tom Bryan

AD INDEX

14

FEATURES

EDITOR'S NOTE

7

12

ISSUE 2

56

Effective margin management is a dynamic process, requiring monitoring of open positions as conditions change

By Chip Whalen

Ethanol Producer Magazine: (USPS No. 023-974) February 2016, Vol. 22, Issue 2. 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.

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EDITOR'S NOTE

Ethanol’s Outlet Opportunities The marked rise of U.S. ethanol exports, particularly over the past five years, continues to be one of the industry’s top stories, and also one of the brightest. The roughly 850 million gallons of ethanol our nation is expected Tom Bryan

President & Editor in Chief tbryan@bbiinternational.com

to export in 2015, while just 6 percent of total domestic production, is a big difference maker in the marketplace. In addition to having a stabilizing effect on the price of ethanol, today’s total export volume represents, for example, the amount of ethanol produced by all the ethanol plants in Ohio and Missouri combined. Without those foreign markets, who knows?

As explained in our page-28 cover story, “Markets for Liquid Corn,” U.S. ethanol exports, as a dollar figure, have risen from essentially nothing a decade ago to $2 billion today.

In fact, EPM Managing Editor Holly Jessen reports that the United States’ market share of world ethanol exports now stands at 50 percent, twice that of historical frontrunner, Brazil.

America’s ascent to ethanol exports dominance can be attributed to several factors including readiness, capacity and incidental market dynamics. First, the global demand for octane is rising while the price of U.S. ethanol—and corn—is relatively low. Corn, in fact, is expected to stay cheaper than sugar, Brazil’s main feedstock, for years to come. That bodes well for the growth of U.S. exports in the near term. Secondly, the rise of U.S. ethanol exports absolutely must be attributed to the sheer diligence and swift action of the industry itself. As Jessen reports, the U.S. ethanol industry, with lots of help from the U.S. Grains Council and federal agencies like the USDA and U.S. Commerce Department, has been originating and building worldwide markets for its product out of a real sense of necessity. The industry needed, and very much still needs, outlets for its spare capacity in order to stabilize prices and keep the lights on at every operable plant in America. Exports, particularly at today’s levels, provide exactly that channel.

Fortuitously, or maybe by design, the market growth we’re seeing is occurring with geographic diversity. While ethanol exports remain strong in proven destinations like Canada and Brazil, budding customer bases in South America, Southeast Asia and China—the No. 2 gasoline market in the world—are being cultivated in earnest. Particularly impressive, and perhaps a little confounding, is that U.S. ethanol exports are on the rise despite the fact that ethanol has been trading above the price of gasoline for about a year. That’s probably a reflection of budding global demand for octane, but also the intrepid work of America’s globetrotting ethanol ambassadors.

FOR INDUSTRY NEWS: WWW.ETHANOLPRODUCER.COM OR FOLLOW US: 6 | Ethanol Producer Magazine | FEBRUARY 2016

TWITTER.COM/ETHANOLMAGAZINE

VOLUME 22 ISSUE 2

ADVERTISER INDEX

EDITORIAL

President & Editor in Chief Tom Bryan tbryan@bbiinternational.com Vice President of Content & Executive Editor Tim Portz tportz@bbiinternational.com Managing Editor Holly Jessen hjessen@bbiinternational.com Senior Editor Susanne Retka Schill sretkaschill@bbiinternational.com News Editor Erin Voegele evoegele@bbiinternational.com Copy Editor Jan Tellmann jtellmann@bbiinternational.com

ART

Art Director Jaci Satterlund jsatterlund@bbiinternational.com Graphic Designer Raquel Boushee rboushee@bbiinternational.com

PUBLISHING

Chairman Mike Bryan mbryan@bbiinternational.com CEO Joe Bryan jbryan@bbiinternational.com

SALES

Vice President of Operations Matthew Spoor mspoor@bbiinternational.com Sales & Marketing Director John Nelson jnelson@bbiinternational.com Business Development Director Howard Brockhouse hbrockhouse@bbiinternational.com Senior Account Manager/Bioenergy Team Leader Chip Shereck cshereck@bbiinternational.com Account Manager Jeff Hogan jhogan@bbiinternational.com Circulation Manager Jessica Beaudry jbeaudry@bbiinternational.com Marketing & Advertising Manager Marla DeFoe mdefoe@bbiinternational.com

2016 Fuel Ethanol Workshop & Expo 2016 International Biomass Conference & Expo 2016 Spring Ethanol Map BetaTec Hop Products Buckman CHS Renewable Fuels Marketing CPM Roskamp Champion D3 Max Direct Automation DuPont Industrial Biosciences Ethanol Producer Magazine Webinar Series Fagen Inc. Fluid Quip Process Technologies, LLC Growth Energy Hydro-Klean LLC ICM, Inc. Indeck Power Equipment Co. Iowa Economic Development Authority J.C. Ramsdell Enviro Services, Inc. Lallemand Biofuels & Distilled Spirits Leaf-Lesaffre Advanced Fermentations Louis Dreyfus MPW Industrial Services Nalco, an Ecolab company Natwick Associates Appraisal Services Novozymes Phibro Ethanol Performance Group POET LLC Premium Plant Services, Inc. RPMG, Inc. Seneca Companies Solenis Sukup Manufacturing Co. Sulzer Pumps Solutions, Inc. Syngenta: Enogen The Greenbrier Companies, Inc. Thermal Refractory Tower Performance, Inc. United Sorghum Checkoff Program Urban Air Initiative Wabash Power Equipment Co. WestAgro Executive Brands WINBCO

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FEBRUARY 2016 | Ethanol Producer Magazine | 7

THE WAY I SEE IT

Promises Made in Iowa

By Mike Bryan

All eyes are turning to Iowa as the State Caucus looms on Feb. 1. Of course, those of us in the ethanol

industry hang on every word candidates speak when it comes to ethanol and renewable energy, in general. I wonder, however, if it really makes a great deal of difference.

In theory, it’s great to have a president who supports renewable energy, but in practice, Congress is the body that actually determines the success or failure of our industry. I’m reminded of this when I hear presidential candidates make wild claims about what they are going to do if they are elected to the Oval Office. In fact, there is little they can do (outside of veto power) without Congressional approval, as it relates to renewable energy.

I’m not a Washington insider, so what I’m saying here may not be the view of those who are insiders. But, from someone who has seen a few presidents come and go (more than I would like to admit), I do wonder how important their comments about renewable energy are, when they are vying for the top job. Aside from only a handful of candidates over the years, just about all of them, when they are in Iowa, say they support ethanol. Following through on that commitment is another story.

Not to do so would be like a vegetarian seeking the position of CEO for the National Cattlemen’s Association. If you really wanted the job, you would probably, albeit reluctantly, wolf down a T-bone over dinner with the board and comment that there is nothing like a good steak. Of course, once you have the top job, there are all sorts of reasons you can revert back to being a vegetarian but, boy, deep down I really do support the meat industry. I think you get my point.

Over the years I’ve become pretty cynical about what politicians promise when on the campaign trail. The political realities of Washington soon come to roost once the election is over. That list includes campaign donations, the compromises required in order to get things though Congress and pressures from a vast array of lobby groups, all with very convincing stories.

I don’t pay a lot of attention to what is said on the campaign trail about ethanol, because I don’t think it makes a lot of difference.

What makes a difference is what’s in their heart. Unfortunately it’s difficult to know that unless they have some voting or other public track record of either support or opposition. Looking at a number of candidates, what they say about ethanol in Iowa and what their track record is, are two different things. Some have no track record at all on ethanol and it becomes almost impossible to know if they are simply saying what Iowans and others want to hear. Maybe we should listen to them when they are campaigning in the coal country of Kentucky or in the oil producing states of Oklahoma or Texas. Renewable energy would likely not be on their list of topics.

So I’ll let the political insiders make the call on which candidate is best suited from a renewable energy perspective. For me, I’m not sure it makes a gnat’s worth of difference.

That’s the way I see it.

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

8 | Ethanol Producer Magazine | FEBRUARY 2016

EVENTS CALENDAR

National Ethanol Conference February 15-17, 2016 New Orleans, Louisiana This year’s program, “Fueling a High Octane Future,” will highlight how ethanol’s high-octane content is driving demand for the fuel both domestically and abroad.

With a 113-octane rating, ethanol is the highest-rated performance fuel in the market and keeps today’s engines running smoothly. Tomorrow's downsized, high-compression engines will require higher-octane choices at the pump. Ethanol and higher-level ethanol blends are uniquely poised to help automakers and consumers alike achieve stricter fuel economy and emissions requirements at a reduced cost.

202-315-2466 | www.nationalethanolconference.com

International Biomass Conference & Expo April 11-14, 2016 Charlotte Convention Center Charlotte, North Carolina Organized by BBI International and produced by Biomass Magazine, this event brings current and future producers of bioenergy and biobased products together with waste generators, energy crop growers, municipal leaders, utility executives, technology providers, equipment manufacturers, project developers, investors and policy makers. It’s a true one-stop shop—the world’s premier educational and networking junction for all biomass industries.

866-746-8385 | www.biomassconference.com

2016 International Fuel Ethanol Workshop & Expo June 20-23, 2016 Wisconsin Center Milwaukee, Wisconsin Now in its 32nd year, the FEW provides the ethanol industry with cutting-edge content and unparalleled networking opportunities in a dynamic business-tobusiness environment. As the largest, longest-running ethanol conference in the world, the FEW is renowned for its superb programming—powered by Ethanol Producer Magazine —that maintains a strong focus on commercial-scale ethanol production, new technology, and near-term research and development. The 2015 event drew about 2,000 people from 45 States, four Canadian Provinces and 25 countries.

866-746-8385 | www.fuelethanolworkshop.com

FEBRUARY 2016 | Ethanol Producer Magazine | 9

VIEW FROM THE HILL

Seizing Export Opportunities

By Bob Dinneen

If you are a regular reader of the Renewable Fuels Association’s monthly export, import summaries, then you know that ethanol exports are once again on the rise, on track to surpass 850 million gallons this year, the second-highest total ever. Given the U.S. EPA’s decision in November to inexplicitly

curtail renewable fuel use in the United States and limiting ethanol to the so-called blend wall, exports of ethanol are going to continue to be a critical market and the key to profitability in the industry.

As a result, the RFA membership has made growing export market opportunities one of our top priorities.

RFA publishes the “Ethanol Export & Import Statistical Summary,” which provides an in-depth review of international ethanol trade over the past decade. It reflects the growth in ethanol exports over that time, and lists the more than 50 countries importing U.S. ethanol today. Canada, of course, remains the largest market for U.S. ethanol, receiving 29 percent of all ethanol exports last year. Brazil, the Philippines, South Korea and India also remain top five export destinations. But this year, China emerged as a growing market for U.S. ethanol, becoming the sixth largest market for exports.

A troubling threat to the Canadian market was averted in December, when the U.S. Congress included a repeal of Country of Origin Labeling requirements in the Omnibus spending bill after the World Trade Organization found COOL violated international trade law and awarded Canada and Mexico up to a $1 billion each in potential countervailing duties that could have included fuel ethanol. RFA continues to fight the unjustified 9 percent duty imposed on U.S. ethanol by the European Union, and when it is ultimately repealed, that important market should once again provide significant opportunities.

10 | Ethanol Producer Magazine | FEBRUARY 2016

If the on again, off again distillers grains trade with China has taught us anything, it is that overdependence on one international market is fraught with peril, and the industry must work to develop new export markets in every corner of the globe. Toward that end, the RFA helped form the Ethanol Export Partnership with the U.S. Grains Council and Growth Energy to combine resources and maximize the effort’s effectiveness. Working through the USDA, the partnership has already conducted trade missions to Mexico, Japan, India, China and the Philippines. More are planned this year.

The RFA has also worked closely with the U.S. Department of Commerce to expand international trade opportunities. RFA has sponsored business-to-business trade missions to Brazil and the Philippines, and the National Ethanol Conference was selected to host an International Buyer Program in February, bringing prescreened foreign buyers from Brazil, Mexico, India, China and the Philippines to the NEC for networking with U.S. producers and marketers. International trade specialists from the commerce department will be at the International Trade Center on-site at the NEC to provide export counseling, matchmaking services, market analysis and more.

It is perhaps unfortunate that the U.S. ethanol industry is forced to build export markets because our own EPA fails to appreciate the value of maximizing, rather than artificially limiting, the amount of ethanol that can be blended domestically. But through these efforts, and the commitment to growing international markets by producers, the U.S. is poised to realize its full potential in any case.

Author: Bob Dinneen President and CEO, Renewable Fuels Association 202-289-3835

ADVERTISEMENT

DRIVE

Industry Poised to be Part of Climate Change Solution

By Tom Buis

At the United Nations Conference on Climate Change in Paris, 195 countries reached a historic agreement that will, for the first time, enable us to improve air quality and boost the transition toward resilient, low-carbon societies and economies. The

important, ambitious goals contained in the agreement can be met with the help of biofuels. Cleaner-burning, higher-performing fuels have the potential to resolve many of the pressing environmental and public health issues faced by our friends across the globe, and we are ready to be part of the solution.

The landmark agreement commits nearly every country to lowering greenhouse gas (GHG) emissions. According to Argonne National Laboratory, ethanol reduces greenhouse gas emissions by an average of 34 percent compared to gasoline. Ethanol producers are also developing new and innovative ways to produce sustainable biofuels from farm waste and woody biomass, ushering in the next generation of renewable fuels that promise even greater reductions in GHG emissions. Argonne National Laboratory estimates that cellulosic and other advanced biofuels can reduce GHG emissions by 100 percent or more compared to gasoline.

In addition to helping the world take on the challenge of climate change, ethanol and distillers grains exports also represent about 10 percent of the industryâ&#x20AC;&#x2122;s sales. In order to actively explore additional market opportunities and pursue solutions to trade barriers, Growth Energy has partnered with the U.S. Grains Council and the Renewable Fuels Association to create an Ethanol Export Steering Committee consisting of members of each organization and senior USDA Foreign Agricultural Service officials.

The steering committee focuses on providing educational information related to ethanol to our overseas representatives and customers, including USGC and FAS staff, initiating market

12 | Ethanol Producer Magazine | FEBRUARY 2016

assessment missions and engaging with current customers to expand foreign demand through a combination of overseas trade activities and bringing foreign ethanol industry teams to the U.S. Teams from the three organizations have participated in exploratory market development missions to China, South Korea, Japan, Mexico, Peru, Panama, the Philippines, Singapore and India to ascertain the potential to expand the export market for U.S. ethanol. Additional missions are in the planning stage for 2016.

These efforts have been a resounding success. In 2014, the industry had a record volume of distillers grains sales overseas and the second-highest amount of ethanol exports in history.

Through October 2015, U.S. exports of ethanol totaled 695 million gallons, up about 4 percent compared to the same period in 2014, with a value of $1.5 billion. U.S. distillers grains exports totaled 10.6 million metric tons for the first 10 months of the year with an export value of $2.5 billion. We are working hard to ensure that these numbers continue to grow by expanding the market development efforts launched in 2015 through additional market analysis and development missions.

With rapidly growing energy demands and a new climate agreement, our nation and others should invest in biofuels that are cleaner, cheaper and offer a more reliable supply than fossil fuels.

Imagine all of the good we can do for the environment and for our future by increasing the blend of ethanol in our fuel supply.

Author: Tom Buis Co-chairman, Growth Energy 202-545-4000 tbuis@growthenergy.org

GRASSROOTS VOICE

Know Your Target Market

By Ron Lamberty

Scott Parsley recently retired after 30 years at East River Electric, and 27 years on the American Coalition for Ethanol board of directors. Scott was one

of the first board members and the first ACE president who wasn’t Merle Anderson. Scott is also my Aunt Sue’s brother, and I met him more than 40 years ago, when my family spent the day with a bunch of the Parsleys at Lake Campbell one Fourth of July.

I remember being in the middle of the lake, in a boat with Scott, my Dad, a dead motor and a storm rolling in. Scott and Dad were trying to get the engine restarted, and they were checking the electrical system with Dad turning the key while Scott held wires in the engine compartment to feel whether a charge was getting to the spark plugs. That’s right, Scott verified power was delivered by getting repeatedly shocked. Kind of like testing an outlet by sticking a fork in it. Memorable.

Some people would be shocked (sorry, couldn’t resist) to learn the problem turned out to be fuel related, several years before ethanol arrived in the fuel supply. And since I went there, I won’t resist drawing a cheesy parallel to Scott being comfortable with power in his hands, or willing to be a hands-on board member, even when it’s painful. All that is true. We appreciate Scott’s service to ACE, and wish him well in his retirement.

For this column, Scott came to mind for a different reason.

One of the first times I proposed a promotional campaign, Scott said he liked the idea, asked about the target market, and then asked the question he would ask in several future ACE meetings, “Do you know if they’ll like it?” I started to answer, and realized I didn’t know. It was my opinion. I hadn’t asked anyone that wasn’t one of us.

Scott’s question came from his participation in the creation of the Touchstone Energy brand for rural electric cooperatives, a name and look his group didn’t think of, and didn’t care for when the advertising agency suggested it. The agency told them the dairy

14 | Ethanol Producer Magazine | FEBRUARY 2016

industry didn’t like their ideas at first, either, but were convinced by extensive research that said people who actually buy milk, liked this ridiculous, new, “milk moustache” campaign. The Touchstone Energy research was apparently similar and resulted in similar (albeit lesser known) success.

There’s plenty of consumer research on motorists’ fuel buying habits, and focus group research done by ACE and other ethanol supporters falls in line with historical fuel buying studies. First, most people hardly ever think of fuel. When they have to, 70 percent of people say price drives their decision, 20 percent location and 8 percent brand. Those numbers drift a percent or two each year, but they’ve been consistent for decades. When you really press people, they’ll eventually say fuel quality is important, too.

Big Oil’s retail marketing approach suggests their numbers are the same. They rarely advertise fuel, unless it’s premium. Premium barely sells, but suggests brand quality. They spend money to brand locations they don’t own, in exchange for long-term contracts that dictate more expensive branded fuel offerings, and limit availability of less expensive, higher-octane ethanol blends. And with competitors doing the same, that pesky price issue is minimized.

Until someone in a market starts to sell those less-expensive, higher octane ethanol blends.

E10 went nationwide well ahead of the renewable fuel standard, without brand campaigns or big promotions. The lower price— made even lower with a tax credit—simply had to be explained to marketers. They ran with it from there. Today, lower-priced E15 and flex fuels include renewable identification numbers (RINs), and marketers need to understand how RINs work for them. We have to teach math, know fueling equipment and lots of rules and regulations. That’s not flashy or exciting like an ad campaign or special event, but research suggests there’s a 70 percent chance it’ll work.

Author: Ron Lamberty Senior Vice President American Coalition for Ethanol 605-334-3381 rlamberty@ethanol.org

GLOBAL SCENE

World Leaders Must Recognize Biofuels Potential

By Bliss Baker

At the recently concluded Paris Climate Summit, or COP21, leaders of 195 countries reached a landmark agreement on combating climate change, which will come into effect in 2020. It aims to ensure that the global temperature

rise this century does not exceed 2 degrees Celsius above preindustrial levels by shifting to a low carbon global economy and encouraging the development of clean technologies as the basis for future development.

As part of the agreement, the signatories will be required to prepare, communicate and maintain plans outlining their efforts to reduce greenhouse gas (GHG) emissions. Countries are also required to submit updated climate plans every five years allowing them to gradually increase the ambitiousness of their goals.

Given the daunting scale of the challenge that countries face in transitioning off carbon intensive technologies, now is the time for world leaders to acknowledge the enormous potential of biofuels as the only commercially viable technology available to significantly offset emissions in the transport sector over the short and medium term by including supportive policies in their plans.

According to a report by the International Energy Agency, sustainable biofuels could provide 27 percent of the world’s total transport fuel by 2050 and avoid around 2.1 billion metric tons of CO2 emissions per year, with biofuels eventually providing 20 percent of total emission reductions in the transport sector.

“Greenhouse gas emissions, which are causing climate change, can be controlled,” Michel Jarraud, director-general of the World Meteorological Organization, recently explained. “We have the knowledge and the tools to act. We have a choice. Future generations will not.”

That biofuels represent a key tool in global efforts to combat climate change is self-evident. What is needed is the political will to enhance biofuel friendly policies in developed nations in order to lead by example in maximizing the advantages of biofuel technologies that are demonstrated to be effective, affordable and immediately available.

16 | Ethanol Producer Magazine | FEBRUARY 2016

On Dec. 6 in Paris, our organization released a report prepared by (S&T)2 Consultants Inc., which uses figures from F.O. Licht examining the impact of biofuels on global emissions. The report found that the total GHG emission reductions from global biofuels production forecast for 2014 is 169 million metric tons CO2 equivalent. These findings are consistent with recent trends, which show global ethanol production and use has, year after year, steadily reduced GHG emissions.

To put the scale of these reductions into perspective, the projections for 2014 now represent a total greater than the GHG emissions in 28 Annex 1 countries, which includes industrialized nations such as the U.S. and France.

Given the ambitious goal of the agreement reached at COP21, estimated to represent CO2 emission reductions of 80 percent by 2050, countries will need to embrace biofuels like ethanol in order to achieve their targets.

With the momentum coming out of COP21, now is the time for governments around to world to demonstrate leadership, introduce stronger global biofuel policies, and prioritize the commercialization of advanced biofuels to take full advantage of low carbon biofuels like ethanol in the fight against climate change.

Thirty-seven countries have already recognized the unique value of biofuels like ethanol as a low carbon alternative to fossil fuels and included biofuel friendly policies as part of the Intended Nationally Determined Contributions plans they submitted at COP21.

Given the size of the challenge being confronted, supporting biofuels is a no-brainer.

Author: Bliss Baker Global Renewable Fuels Association 647-309-0058 info@globalrfa.org

FEBRUARY 2016 | Ethanol Producer Magazine | 17

BUSINESS BRIEFS People, Partnerships & Deals

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18 | Ethanol Producer Magazine | FEBRUARY 2016

Wayne Fueling Systems has announced an agreement to acquire Simmons Sirvey, a provider of real-time fuel management services and traditional statistical inventory reconciliation in the retail fueling industry. Through the agreement, Wayne will acquire all of Simmons’ products and technology solutions including the ClearView software that provides real-time fuel monitoring and analytics for fueling station owners. Wayne Fueling Systems also recently announced an agreement with Vianet Group plc, a provider of real-time monitoring systems, data management services, and actionable data for the leisure and vending sectors, to acquire their fuel management subsidiary. U.K.-based Vianet Fuel Solutions Ltd. includes two main product lines as part of the Wayne acquisition, including fuel management solutions (FMS) and construction and forecourt services. FMS is comprised of real-time, wet-stock management, asset management and compliance monitoring services.

CFS aligns with Wayne’s current U.K. services business and provides additional services, including forecourt construction, electrical compliance services and tank lining.

Broin

Lautt

Jeff Broin, founder of Poet LLC, resumed his role as the company’s CEO in November after serving as executive chairman for the previous 3.5 years. Jeff Lautt, who served as CEO in Broin’s absence, will continue to manage the day-to-day operations of Poet as president and chief operating officer.

serve as treasurer, while Steve Bleyl of Green Plains Inc. will serve as secretary and Monte Shaw will continue as executive director. The executive committee includes Brian Cahill of Southwest Iowa Renewable Energy, Derek Winkel of Renewable Energy Group, Craig Willis of Archer Daniels Midland Co., and Bill Howell of Poet-Coon Rapids.

Syngenta has signed an agreement with Midwest Renewable Energy LLC to begin using Enogen corn technology at its Sutherland, Nebraska, ethanol plant beginning with the 2016 planting season. Syngenta is contracting Enogen with growers to support 18 ethanol plants in seven states, representing approximately 1.3 billion gallons of ethanol capacity.

The USDA has announced a conditional commitment for a $70 million loan guarantee to an affiliate Ensyn Corp. to support the construction of a 20 MMgy cellulosic biorefinery in Georgia. The facility will employ Ensyn’s Rapid Thermal Processing technology to produce a renewable fuel oil product.

The loan guarantee was awarded under the USDA’s Biorefinery Assistance Program.

Laurel Biocomposite LLC has earned the USDA Certified Biobased Product Label for its Bio-Res PLA with 97 percent biobased content; Bio-Res PE with 62 percent biobased content and Bio-Res powder with 100 percent biobased content. The company first introduced the biomaterial in 2011 as a cost-effective, green replacement with improved performance properties for traditional petroleum-based resins in a variety of plastics manufacturing processes.

The Iowa Corn Promotion Board recently announced the U.S. Patent and Trademark Office has published its patent application for a production method using corn in the industrial manufacturing of monoethylene glycol (MEG), which can be used to manufacture polyethylene terephthalate (PET) plastic.

MEG can also be used as antifreeze, coolants, aircraft deicers and industrial solvents.

The Iowa Renewable Fuels Association has announced its board of directors, officers and executive committee for 2016. Each producer member has a seat on the board and votes on officers. New officers will serve a one-year term during the 2016 calendar year.

Tom Brooks of Western Dubuque Biodiesel will serve as president, while Eamonn Byrne of Plymouth Energy has been elected vice presi- LanzaTech has signed a joint development dent. Rick Schwarck of Absolute Energy will agreement with nylon producer Invista to

BUSINESS BRIEFS¦

Deinove has produced second-generacollaborate on projects to develop one- and two-step technologies to convert industrial tion ethanol in a 300-liter fermenter. The triwaste gas carbon monoxide into butadiene. als were conducted at VTT1. Fermentation of Initial commercialization is expected this year. glucose and xylose sugars by and optimized deinol strain of Deinococcus bacteria resulted U.S. Water, an Allete Co., has an- in the production of ethanol at 7.3 percent nounced the acquisition of A and W Tech- volume/volume. This performance is consisnologies, a Georgia-based company that tent with the results obtained by the Deinove provides specialty chemicals and engineering team in its laboratories in 20-liter fermenters. service for water treatment in data centers, light industrial, institutional and food inCherry Murray was dustries. A $9 million purchase agreement confirmed by the U.S. was signed by both parties in November. Senate in December as director of the U.S. Department of Energy’s Office The Alliance for Susof Science. Murray will tainable Energy recently oversee research in the arannounced the appointMurray eas of advanced scientific ment of Martin Keller as computing, basic energy director of the National sciences, biological and environmental sciencRenewable Energy Laboes, fusion energy sciences, high-energy physics, ratory and president of Keller and nuclear physics. She will have responsibilthe alliance, which manity not only for supporting scientific research, ages the laboratory for the U.S. Department of Energy. Keller officially but also for the development, construction, joined NREL on Nov. 30. He was previously and operation of unique, open-access sciemployed by Oak Ridge National Labora- entific user facilities. The Office of Science tory, where he served as the associate labora- manages 10 of the department’s 17 national tory director for energy and environmental laboratories. Murray previously served as the sciences, which includes ORNL’s programs in Benjamin Peirce professor of technology and biosciences, environmental sciences, buildings public policy and professor of physics at Hartechnologies, transportation, climate change, vard University. manufacturing, and electrical and electronics systems. In 2006, Keller was recruited to Fluid Quip Process Technologies ORNL from an industrial enzyme discovery LLC has developed a fiber bypass system and development company to lead the Office that removes solids before ethanol fermenof Science-supported BioEnergy Science Cen- tation. The company installed the system ter, in which NREL is a partner. at two U.S. ethanol plants last year, and was scheduled to install additional systems Redfield Energy and ICM Inc. unveiled in U.S. and Brazilian plants in December. the installation of ICM’s Fiber Separation Technology at Redfield’s ethanol plant in RedThe Renewable Fuels Association has field, South Dakota, in November. FST is a unveiled a redesigned version of its fuel market value-added platform technology that helps website E85prices.com. The revamped crowdincrease ethanol yield and oil recovery for cus- sourcing site offers a highly optimized user extomers. FST also removes fiber from a stan- perience by integrating mobile device compatdard ethanol process, which allows increased ibility so that users can access E85prices.com throughput and efficiency for each gallon of no matter where they are. ethanol produced, and creates options for diversified coproducts with high-protein feeds and fiber.

SHARE YOUR INDUSTRY NEWS: To be included in the 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 email information to evoegele@bbiinternational.com. Please include your name and telephone number.

FEBRUARY 2016 | Ethanol Producer Magazine | 19

COMMODITIES

Prices & Market Analyses

Natural Gas Report

Natural gas production may fall, marginally, in 2016 Dec. 21—In a widely anticipated move, the Federal Open Market Committee agreed in December to raise the target for its key interest rate from zero to 0.25 percent to 0.25 to 0.5 percent. While this is hardly a major hike in rates, it marks the beginning of what is expected to be an ongoing process of tightening U.S. credit. The federal funds rate is the rate at which banks lend each other reserves, but essentially acts as a baseline for lending rates of all types.

Potentially rising borrowing costs couldn’t come at a worse time for low, to mid-level natural gas exploration and production companies already struggling in what has become a historically low-price environment. Internal rates of return in even the most attractive U.S. shale plays have taken a serious hit over the past 12 months. Firms have responded by drastically cutting exploration and spending. The number of rigs actively exploring for new natural gas wells hit an all-time low in December. Some estimates point toward a decline in spending of more than 20 percent in 2016 following a decline of more than 30 percent in 2015, as the industry adjusts to reduced revenue.

by Andy Huenefeld

Credit ratings of exploration and production firms have taken a hit and most have shifted out of growth mode. Larger producers are in a financial position and diversified well-enough to withstand the unfavorable environment while smaller companies do not have this luxury. A number of bankruptcies has hit the industry in recent months. Now, with interest rates on the rise, taking on additional debt to maintain operations becomes a more expensive proposition, putting the industry into potentially serious trouble in 2016.

Efficiency gains and lower production costs have worked to keep overall output volumes elevated in 2015, but year-over-year growth was reduced significantly in the fourth quarter. Production could be poised to fall at least marginally in 2016, with unsupportive winter weather contributing to the lowest natural gas prices on record when accounting for inflation. If the industry is also faced with more bankruptcies or reduced operations over the next 12 months, production volumes could fall more dramatically than expected.

Corn Report

Events in Argentina, South America impact corn market Dec. 21—Outside markets have recently had a major impact on corn prices. Currencies, energy prices, and Argentine policy changes have been in the spotlight over the past few months. The range-bound price action seen and expected in the corn market is a result of both outside market pressure and a comfortable supply and demand scenario both domestically and on the world level.

The newly elected Argentine president, Mauricio Macri, is wasting little time implementing the changes he promised during his campaign. After taking office on Dec. 10, Macri completely eliminated the export taxes imposed on corn, wheat, and meats while reducing the soybean export tax from 35 to 30 percent on Dec. 14.

Macri again made news on the Dec. 16 after he loosened controls on the peso, allowing it to float to market value. The actions taken in Argentina will result in a flood of farmer selling and increases in exports as well as an increase in production and exports in years to come.

South American weather and dryness concerns in Brazil are being closely watched but recent rains have left only about 20 perComments in this column are market commentary and are not to be construed as market advice.

20 | Ethanol Producer Magazine | FEBRUARY 2016

by Jason Sagebiel

cent of their growing region in need of moisture. The FOMC’s December meeting brought with it the first interest rate hike (25 basis points) since 2006. This came as no surprise to market analysts but Federal Reserve Chairwoman Janet Yellen’s comments on future plans to hike in 2016 should help support the U.S. dollar going forward, a cloud that continues to loom over commodity values.

Regional Ethanol Prices ($/gallon) Front Month Futures (AC) $1.399

DDGS Report

Antidumping rumors create unusual DDGS trading dynamic Dec. 21—At the end of December, the market paid as much attention to announcements out of China as it did to managing logistics going into the Christmas and New Year holidays. The Chinese minister of commerce recently announced that China is going to accept a petition from its domestic ethanol industry, accusing the U.S. of dumping DDGS. This is seen as a beginning step to filing an antidumping complaint to the World Trade Organization. This has been rumored for a while, creating an unusual dynamic, as some are buying more than normal to ensure there is a supply available in China if it does get filed, while others have been on the sidelines, fearful of a shipment being placed in limbo due to a quick change in import parameters. Falling export numbers to China reported lately would suggest that a lot are erring on the side of caution.

Region

Spot

Rack

West Coast

1.540

1.650

Midwest

1.430

1.661

East Coast

1.500

1.729 SOURCE: DTN

by Sean Broderick

At the numbers DDGS are trading currently, below the value of corn, there has been a pickup in North American demand. There is generally an increase in domestic U.S. demand once the weather begins to cool but traders have also seen good demand from Mexico and Canada.

Hopefully, Congress will take steps to ensure the U.S. is not afoul of the WTO determination that Country of Origin Labeling is illegal by repealing it. Losing demand from our border neighbors would impact prices adversely.

With an eye on China, ethanol producers are hopeful of a similar price action of DDGS to last year around this time, when there was an $80 per ton surge in prices. With the downward price of ethanol lately, any price increase in DDGS will be warmly welcomed.

Regional Gasoline Prices ($/gallon)

Front Month Futures Price (RBOB) $1.261 Region

Spot

Rack

West Coast

1.797

2.148

Midwest

1.320

1.538

East Coast

1.295

1.476 SOURCE: DTN

DDGS Prices ($/ton) LOCATION

Feb 2016

Jan 2015

Feb 2015

Minnesota

110

110

160

Chicago

140

140

195

Buffalo, N.Y.

130

130

200

Central Calif.

178

178

242

Central Fla.

153

153

225 SOURCE: CHS INC.

Corn Futures Prices

(March Futures, $/bushel) Date

close, bu.

close, ton

Dec 18, 2015

3.745

133.75

Nov 18, 2015

3.6825

131.52

Dec 18, 2014

4.11

146.79 SOURCE: FCSTONE

Ethanol Report

Cash Sorghum ($/bushel)

by Rick Kment

Ethanol prices search for support in early 2016 Dec. 21—The ethanol market's— and energy complex on the whole—inability to end 2015 on a high note will continue to create some additional challenges for the industry in the upcoming year. Ethanol futures continue to trade around $1.40 per gallon, which is near the bottom of short-term support.

Seasonal demand for gasoline and ethanol suggests that additional pressure is likely to develop in both ethanol and RBOB gasoline markets through the first quarter of 2016, potentially testing

2015 support levels of $1.36 per gallon.

A breakthrough these levels could create additional bearish weakness for the market in the short term, although it may not limit long-term production based on relatively stable corn prices.

Crude oil prices are at multi-year lows with aggressive supplies being built.

A break through 2008’s support level is extremely possible over the upcoming weeks. This could bring about additional liquidation in many commodity markets in 2016.

Location

Dec 17, 2015

Nov 20, 2015

Nov 19, 2014

Superior, Neb.

3.19

3.13

4.61

Beatrice, Neb.

3.20

3.13

4.21

Sublette, Kan.

3.22

3.16

4.22

Salina, Kan.

3.34

3.36

4.60

Triangle, Texas

3.27

3.18

4.13

Gulf, Texas

4.32

433.00

5.88

SOURCE: SORGHUM SYNERGIES

Natural Gas Prices ($/MMBtu) LOCATION

Dec 27, 2015

Oct 30, 2015

Dec 28, 2014

NYMEX

1.77

2.32

3.144

NNG Ventura

1.79

2.29

3.47

Calif. Citygate

2.36

2.20

3.62

SOURCE: U.S. ENERGY SERVICES INC.

U.S. Ethanol Production (1,000 barrels) Per Day

Month

End Stocks

Oct 2015

972

30,139

18,889

Sept 2015

951

28,543

18,904

924

28,644

17,341

Oct 2014

SOURCE: U.S. ENERGY INFORMATION ADMINISTRATION

FEBRUARY 2016 | Ethanol Producer Magazine | 21

DISTILLED

Ethanol News & Trends

Green Biologics begins construction on Minnesota project

US sets new ethanol production record The U.S. ethanol industry set a new weekly ethanol production record the week ending Nov. 20, with production averaging 1.008 million barrels (42.34 million gallons) per day. The week marks the first time average daily production has surpassed the 1 million barrel-per-day mark.

The new record replaces the one set the week of June 19, 2015 when production averaged 994,000 barrels per day.

U.S. ethanol producers have repeatedly broken the record for ethanol production in recent years. The week of June 13, 2014, the U.S. pro-

duced 972,000 barrels per day of ethanol, breaking a production record set several years earlier in late 2011. The week of Nov. 21, 2014, the record was again broken with 982,000 barrels per day of ethanol production. In December 2014, new records were set three consecutive weeks with average daily production of 988,000 barrels per day the week of Dec. 5, 2014; 990,000 barrels per day the week of Dec. 12, 2014; and 992,000 barrels per day the week of Dec. 19, 2014. The week of June 5, 2015, the industry tied the 992,000 barrel-per-day record.

U.K.-based renewable chemical producer Green Biologics Ltd. is moving forward with the retrofit of a former corn ethanol plant in Little Falls, Minnesota. The company is converting the former 21 MMgy Central MN Ethanol Cooperative corn ethanol plant to produce biobased n-butanol and acetone.

The facility was acquired by Green Biologics in December 2014 and renamed Central MN Renewables. Permitting was completed in late August 2015 and the construction began Sept.

1, 2015. According to the company, production of biobased chemicals is scheduled to commence in 2016. â&#x20AC;&#x153;The commencement of this construction project marks a significant milestone in our commitment to becoming a world class renewable specialty chemicals company,â&#x20AC;? said Sean Sutcliffe, chief executive of Green Biologics.

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DISTILLED Marquis Energy produces 1 billionth gallon of ethanol In December, Hennepin, Illinois-based Marquis Energy celebrated reaching its 1 billion gallon of ethanol production. The north unit of the facility began production on April 20, 2008. With continuous operational enhancements to improve production efficiency made by the team at Marquis, the facility was able to hit this milestone in seven and a half years.

The total facility capacity is expected to be more than 300 million gallons per year following startup of the plant’s south unit, which was expected near the end of 2015.

With the help of the additional production capacity, Marquis expects to reach the 2 billion gallon milestone by 2020.

“We are proud of the team here at Marquis Energy to have produced over a billion gallons of renewable fuels throughout the past seven and a half years,” said Jason Marquis, vice president of Marquis Energy. “This accomplishment highlights the hard work and dedication of our team, which contributes to our local farm economy, and also the world's energy markets.

The production of fuels from renewable sources strengthens our national security, is a cost-effective oxygenate for fuel, and has lower greenhouse gas emissions than gasoline.”

Final RFS standards 2014 Percent standard

2015 Million gallons

Percent standard

2016

Million gallons

Percent standard

Million gallons

0.019%

33

0.069%

123

0.128%

230

Biomass-based diesel

1.41%

1.63

1.49%

1.73

1.59%

1.90

Advanced biofuel

1.51%

2.67

1.62%

2.88

2.01%

3.61

Renewable fuel

9.19%

16.28

9.52%

16.93

10.10%

18.11

Cellulosic biofuel

SOURCE: U.S. EPA

EPA finalizes 2014-’16 RFS RVOs, 2017 RVO for biomass-based diesel On Nov. 30, the U.S. EPA released its longanticipated final rule setting the 2014, 2015 and 2016 renewable volume requirements (RVOs) under the renewable fuel standard (RFS), along with the 2017 RVO for biomass-based diesel.

While the rulemaking increases volume requirements above levels proposed in May and takes a small step in overcoming the E10 blend wall in 2016, the RVOs fall below statutory levels.

The EPA has set 2014 and 2015 RVOs at levels reflecting actual biofuel use during those years.

For 2016, the EPA has set the RVO for renewable fuel at 18.11 billion gallons, including 230 million gallons of cellulosic biofuel, 1.9 billion gallons of biomass-based diesel, and 3.61 billion gallons of advanced biofuel. On a percentage basis, the rule calls for total biofuels to account for 10.10 percent of the transportation fuel pool, up from the proposed 9.63 percent announced in May 2015. The percentage for cellulosic biofuel is 0.128 percent, up from

a proposed 0.114 percent. The percentage for biomass-based diesel has also increased, from a proposed 1.49 percent to a level of 1.59 percent. In addition, the percentage requirement for advanced biofuel has increased from a proposed 1.88 percent to 2.01 percent. Statutory levels for 2016 would have been set at 22.25 billion gallons of total renewable fuel, including 4.25 billion gallons of cellulosic biofuels and 7.25 billion gallons of advanced biofuel. Overall, the final 2016 RVO falls approximately 4.14 billion gallons short of the level called for by statute.

The rule also sets the 2017 requirement for biomass-based diesel at 2 billion gallons, up from the 1.9 billion gallons proposed in May. Renewable fuel associations expressed mixed reactions to the rule. While the rule makes progress in piercing the blend wall, many expressed concern with the EPA’s methodology, which continues to cite distribution issues as reason to reduce RVOs from statutory levels.

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FEBRUARY 2016 | Ethanol Producer Magazine | 23

DISTILLED

Emission reduction levels Facility

Percent reduction

Kansas Ethanol LLC

34.4%

Corn LP

21.7%

EPA approves 2 efficient producer pathways In November, the U.S. EPA approved efficient producer pathways for two additional corn ethanol plants, including Kansas Ethanol LLC, a 55 MMgy plant located in Lyons, Kansas, and Corn LP, a 65 MMgy plant located in Goldfield, Iowa. With the two new additions, the EPA has now approved efficient producer pathways for 52 ethanol plants.

Facilities with approved efficient producer pathways have demonstrated the ethanol they produce meets a 20 percent minimum greenhouse gas (GHG) reduction threshold when compared to a gasoline benchmark. Under the renewable fuel standard (RFS), existing ethanol plants were grandfathered in to the program at their registered capacities.

Any new ethanol plants and any expansions at existing plants must show GHG reductions of at least 20 percent in order to generate renewable identification numbers (RINs) for that volume.

In their petitions, both plants supplied EPA with data on the bushels of corn processed, gallons of ethanol produced and the energy used in the process as natural gas and electricity. The EPA uses those figures to calculate the upstream emissions from feedstock production and transportation, the process, and downstream emissions from the fuel production and distribution and lifecycle emissions, which include indirect land use modeling.

In the EPA approval letters posted online, Corn LP’s 65 MMgy plant was found to achieve a 21.7 percent GHG reduction compared to the baseline gasoline. Kansas Ethanol’s 55 MMgy plant achieves a 34.4 percent GHG reduction.

In both cases, the indirect land use modeling comprises just under half of the calculated emissions.

STRONG.

European antitrust investigation targets 3 ethanol producers In December, the European Commission announced the opening a formal antitrust investigation to determine whether three ethanol producers have manipulated ethanol benchmarks published by a price reporting agency, which would be a breach of European Union antitrust rules. The three companies being investigated are Spain-based Agengoa S.A., Belgiumbased Alcogroup SA, and Sweden-based Lantmännen ek för, along with their relevant subsidiaries.

The commission’s investigation began with unannounced inspections carried out in May 2013. Additional inspections were carried out in October 2014 and March 2015.

According to the commission, it has concerns that these companies may have colluded to manipulate ethanol benchmarks published by price reporting agency Platts, for example by agreeing between them to submit or support bids in order to influence benchmarks upwards, driving up ethanol prices.

Abengoa is Europe’s top ethanol producer, with 1.281 billion liters (338.40 million gallons) of total capacity. The company has three ethanol plants in Spain, one in Netherlands, and one in France. Alcogroup operates a 170,000 cubic meter (28.27 million gallon) ethanol plant at the port of Ghent, Belgium. Lantmännen operates two ethanol plants in Sweden, with a combined capacity of 210,000 cubic meters of ethanol.

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24 | Ethanol Producer Magazine | FEBRUARY 2016

DISTILLED International Energy Agency predicts global rise in biofuel use The International Energy Agency recently released its World Energy Outlook 2015, saying there are clear signs that an energy transition is underway. The report examines all energy sectors, looking at global energy trends to 2014, the oil market, natural gas, unconventional gas, coal, power, renewables and energy efficiency. Each sector is analyzed under three scenarios, with current and new policies, as well as a more aggressive 450 Scenario that would result in greater greenhouse gas (GHG) reductions. It also examines the impact of low oil prices.

The report notes the global biofuels share of total transportation fuel was 3 percent in 2014. Under the different scenarios, current policies are projected to lead to biofuels rising to a 4 percent in 2025 and 5 percent in 2040. Under its scenario that features new policies, the 2025 projection is maintained at 4 percent, but the 2040 projection rises to 6 percent. Under the more aggressive 450 Scenario, the 2025 projection is 7 percent and the 2040 projection is 18 percent.

Fuel production

36

19.2

0.069%

123

0.128%

230

Feedstock and fuel transport

4.9

*

1.49%

1.73

1.59%

1.90

Fuel use

0.9

79

1.62%

2.88

2.01%

3.61

Life-cycle emissions

49.1

98.2

9.52%

16.93

10.10%

18.11

Percent reduction

50%

9.52%

16.93

10.10%

18.11

* EMISSIONS INCLUDED IN FUEL PRODUCTION STAGE SOURCE: U.S. EPA

EPA approves fuel pathway for proposed Montana-based barley ethanol plant The U.S. EPA recently approved a fuel pathway for Montana Advanced Biofuels LLC, a proposed 70 MMgy barley-toethanol plant in Great Falls, Montana. The facility will be able to produce both D6 renewable fuel and D5 advanced biofuel as long as it meets specified energy efficiency and yield levels.

Gary Hebener, president of the company, said with the pathway now approved, the last step for the project is to secure financing. “While working with the EPA and waiting for them to make their decision, we’ve been working with a major international lender,” he said. “We think we are making good progress towards bank-led

project financing. We’re optimistic that in the first half of next year, we will close.”

The eight local investors and project developers have been working closely with the Great Falls Development Authority, and much of preliminary work is done. An option for the land for the plant site is secured, and the site has been both annexed to the city and zoned. Water and sewage utilities are in place and new roads have been built to service the site located along a rail spur. Permits are in place. “Everything’s ready to go,” Hebener said.

In addition to ethanol, the proposed facility is expected to produce 83 million pounds per year of vital wheat gluten.

FEBRUARY 2016 | Ethanol Producer Magazine | 25

Ironically, the latest breakthrough in the field of energy, is a field.

While most innovation begins with the seed of an idea, the greatest advance in the making of ethanol starts with a seed. The first corn seed technology specifically developed to increase the efficiency of ethanol production, Enogen corn can reduce costs by up to 10% and helps generate more ethanol per bushel than any corn feedstock ever grown. Recently named AgriMarketing’s Product of the Year, Enogen is definitely making waves in the field of energy.

© 2015 Syngenta. Enogen®, the Alliance Frame, the Purpose Icon, and the Syngenta logo are trademarks of a Syngenta Group Company.

Syngenta Customer Center: 1-866-SYNGENT(A) (796-4368). www.FarmAssist.com MW 11115010-P1 02/15

EXPORTS

NETWORKING: A trade team of Mexican ethanol buyers pose outside Kansas Ethanol LLC, during an October trip to Missouri, Kansas and Texas to learn about U.S. ethanol production and strategies for purchasing the fuel.

PHOTO: USGC

28 | Ethanol Producer Magazine | FEBRUARY 2016

EXPORTS

Markets for

‘LIQUID CORN’

Global trade for U.S. ethanol has been trending up in the past decade, becoming an important part of the industry’s growth strategy.

By Holly Jessen

Looking at the numbers, it doesn’t take long to conclude that the U.S. is developing into an ethanol export powerhouse. “As recently as 2006, the U.S. barely registered as an exporter at all, and between 2006 and 2014, our exports have risen by $2 billion,” says Michael Dwyer, chief economist for the U.S. Grains Council. “There has been a dramatic change in the competitiveness of American ethanol.”

By volume, U.S. market share of world exports was only a few percentage points in 2006. In 2015, the U.S. share of world exports is expected to remain at nearly 50 percent, about the same level as in 2014, and twice the amount exported by Brazil.

The fact is, the U.S. is picking up market share from Brazilian ethanol producers, Dwyer says. In 2014, the U.S. exported $2.1 billion in ethanol, overtaking Brazil as the world’s largest ethanol exporter. Brazil’s ethanol industry faces multiple factors that make it difficult to complete, including a recession and high interest rates. In comparison, the U.S. ethanol industry is doing very well. “The U.S. ethanol industry, while we have had better times, by and large, has never been healthier than it is today,” he says. One factor in growing demand is the difference in price of U.S. and Brazilian ethanol, from

FEBRUARY 2016 | Ethanol Producer Magazine | 29

EXPORTS

the export position. “We’ve got them beat by about 30 cents a gallon,” he says.

And, USGC is optimistic that U.S. ethanol exports will continue to grow long term.

That’s based on projections through 2024 from the USDA on U.S. corn prices and Organization for Economic Co-operation and Development on world sugar prices.

The price of corn is expected to hold fairly steady below $4 a bushel while sugar prices are forecast to stay just above corn prices.

“We think the advantage we have today is going to carry through pretty much the next decade,” Dwyer says.

There has been a significant shift, confirms Geoff Cooper, senior vice president of the Renewable Fuels Association. Five years ago the ethanol industry assumed the U.S. EPA would enforce the renewable fuel standard (RFS), set by Congress in 2007.

But, unfortunately, that didn’t happen. “The ethanol export market emerged very rapidly, at a very crucial time for the industry and

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30 | Ethanol Producer Magazine | FEBRUARY 2016

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.

EXPORTS

really provided a crucial outlet for some of the spare capacity and production that we have in the United States,” he says. “It has helped support robust demand, healthy pricing and healthy economics for the ethanol sector.”

By the time all the data is in for 2015, U.S. ethanol exports are expected to hit about 850 million gallons, second only to the record 1.193 billion gallons exported in 2011. It’s also an increase from the 835.6 million gallons exported in 2014, Cooper says. That’s particularly impressive, considering the changes in oil and ethanol prices.

“Having this conversation this time last year, there was a lot of concern within our industry about what lower oil prices might mean for ethanol export demand,” Cooper says. “The thought was that if ethanol was trading above gasoline blendstock we were going to see some erosion in ethanol market share. And here we are, a year later, expecting to see an increase in exports even

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EXPORTS

ETHANOL EDUCATION: A team of ethanol buyers listens to Tom Buis, co-chairman of Growth Energy, during a visit from the Philippines in August.

PHOTO: USGC

though ethanol has been priced above gasoline for the last year.”

Ethanol doesn’t only have value when it’s an inexpensive source of energy. “It’s all about octane,” Cooper says. “What I have learned in the past year is that export markets are increasingly valuing U.S. ethanol for its octane content, just as domestic refiners here in the U.S. have for several years. I think what we have seen this year is a clear indication that ethanol’s octane value is being recognized globally as well.”

Hot Markets

Substantial opportunities for ethanol exports exist globally. In fact, according to figures from the RFA, if the top 15 gasoline markets outside the U.S. all used just 5 percent ethanol blends, that would add up to more than 6.5 billion gallons of ethanol a year.

In an effort to tap into global ethanol export markets, two years ago USGC joined with RFA, Growth Energy and the USDA Foreign Agriculture Service to promote ethanol exports in other countries. Recent examples include visits to the U.S. by ethanol buyers from Mexico, the Philippines and Peru in October, August and June. USGC has long promoted distillers grains exports, and continues to do so, but the addition of ethanol exports acknowledges both products come from the same source. “When we are exporting ethanol think of it as liquid corn, in terms of what it means for corn farmers,” Dwyer says.

Specifically, the trade team from Peru visited the International Fuel Ethanol Workshop & Expo, followed by a tour of ethanol plants and trading companies in Iowa, Illinois and Texas. In December, USGC reported a U.S. exporter had confirmed the sale of 10 million gallons of ethanol, valued at more than $15 million, on its way to Peru.

In 2010, Peru began requiring a 7.8 percent ethanol blend in gasoline and the country’s own ethanol industry is still relatively new.

The promotion program is at work in multiple countries, with a focus on Asian countries, such as the Philippines, Japan, Korea, India and China, as the best market

32 | Ethanol Producer Magazine | FEBRUARY 2016

EXPORTS

prospects, Dwyer says. Ethanol usage in those counties is low but fuel consumption growth is the fastest in the world. In addition, air quality problems are widespread and worsening, especially in areas of Asia that are developing.

The ethanol export promotion efforts have been successful, Cooper says, in terms of getting conversations going about U.S. ethanol. “It takes time to build these markets and forge relationships,” he says. “It’s not an easy thing to do but I think we have seen some success in breaking into these new markets.”

Besides RFA’s involvement in promotion efforts with USGC, Growth Energy and USDA-FAS, the association also joined forces with the U.S. Commerce Department to set up business-to-business sales opportunities, such as trade trips to Brazil and the Philippines, which have been very successful. Cooper also mentioned Asian countries, specifically Thailand, Vietnam and Singapore, plus South American Countries such as Columbia and Peru, as hot, new markets.

These are places where the U.S. is currently sending small amounts of ethanol but that have lot of potential for growth.

For example, China emerged in 2015 as a player in the ethanol export story. The country was the top customer for U.S. ethanol in October, according to the latest available data in late December. In that month alone, 32.6 million gallons of ethanol were exported to China, which is almost double the total amount of ethanol shipped to the country in the past two years. “That’s a new development in 2015 that I think is a tremendous opportunity,” Cooper says. “China is the No. 2 gasoline market in the world, behind the United States, so there’s lots of demand potential there.” Between 2014 and 2011, China’s ethanol industry produced between 555 million gallons and 696 million gallons of ethanol.

Another opportunity for export growth is to Mexico and other markets still using MTBE despite known risks to air and water quality. “We think there’s a real opportunity to get in some of those markets,” he says.

While more education is needed on the en-

MOVING BILLBOARD: Kelly Davis, director of regulatory affairs for the Renewable Fuels Association, sits in a vehicle advertising ethanol as “clean energy for your engine” during a May trip to explore market possibilities in Mexico. Also on the trip were representatives from USGC, Growth Energy and USDA Foreign Agriculture Service.

PHOTO: USGC

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FEBRUARY 2016 | Ethanol Producer Magazine | 33

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34 | Ethanol Producer Magazine | FEBRUARY 2016

EXPORTS

vironmental and health benefits of ethanol, good progress has been made in securing ethanol’s future as Mexico’s oxygenate of choice.

Cooper also stressed the importance of Canada. “It’s our oldest and most consistent market,” Cooper says. Through October, about one-third of ethanol exports ended up in Canada. In 2014, a total of 335.9 million gallons of U.S. ethanol was exported to the nation’s neighbor to the north, which is 4 percent more than the previous year. The country produced 510 million gallons of the fuel that year.

Brazil was the No. 2 market for U.S. ethanol in 2014 and is on track to be so this year as well. In 2014, Brazil produced 6.19 billion gallons of ethanol and imported 112.2 million gallons of U.S. ethanol, a 147 percent increase from the previous year. In the same year, the U.S. produced 14.3 billion gallons of ethanol domestically and imported 60.8 million gallons of Brazilian ethanol. It’s also noteworthy that that’s 83 percent reduction from Brazilian ethanol imports the previous year. “We’ve been trading ethanol with Brazil for much of the past five years but it’s certainly more up and down and hit or miss in the Brazil market,” he says.

Then there’s Europe. U.S. ethanol exports to Europe are the reason the industry crossed the 1 billion gallon mark in 2011. But a tariff on U.S. ethanol caused exports to Europe to erode dramatically, although small amounts are still making it there. “Europe is a still a major frustration for us,” Cooper says. “They have a need for more ethanol they can produce. … We are just asking for the chance to get in there to compete with the Brazilian ethanol, for access to that marketplace.”

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

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38 | Ethanol Producer Magazine | FEBRUARY 2016

MARGINS

Ethanol Margins

Return to Seasonal Swings Off to a slow start, 2015 margins improved, thanks to exports and strong driving demand. What will 2016 bring?

By Susanne Retka Schill

Ethanol margins returned to earth in 2015, after soaring sky-high for much of 2013 and 2014.

The seasonality pattern that emerged after 2010 was put on pause during that prosperous period, but returned in 2015, resulting in slim to negative margins in the first few months before recovering as the summer driving season increased demand. The tighter margins didnâ&#x20AC;&#x2122;t dampen ethanol production, however, with the industry setting new production records throughout the year, even topping out over 1 million barrels per day in the weekly production averages twice before the year ended. The production performance of 2015 is a testament to the industryâ&#x20AC;&#x2122;s increasing efficiency, as miniscule new capacity was added during the year, but it also raises the worrisome questionâ&#x20AC;&#x201D;with the industry running hard, is supply going to outpace demand? Ethanol Producer Magazine spoke to a banker and a broker for a perspective on the trends shown in the accompanying charts.

FEBRUARY 2016 | Ethanol Producer Magazine | 39

MARGINS

“Supply and demand has remained well balanced through the fall,” says Dan Kowalski, director of industry research at CoBank, part of the national cooperative bank system servicing agribusiness. CoBank released a report in September that called 2015 a year of rebalancing in the ethanol industry. Kowalski updated the data through the end of the year for the charts shown here.

Exports and low gasoline prices contributing to increased driving demand are the biggest factors behind that balance, he says. “We continue to push higher on production but at the same time exports have remained very strong and ethanol is still priced above gasoline and has been since September.” Speaking in late December, he adds, “Clearly the market is signaling there is not the excess or burdensome amount of ethanol that one might expect at that production level.”

Ethanol production numbers and stocks reports are closely watched, says Will

THE RANGE AND THE AVERAGE: The Andersons presented a nine-year margin analysis in its third-quarter investor call showing the historic range for each month of the year. Margins in 2014 set the high end in most months while in 2015 they were on the low side of the nine-year average in most months.

SOURCE: THE ANDERSONS, NYMEX CHICAGO ETHANOL (PLATTS) FUTURES ELECTRONIC (FRONT MONTH); CBOT CORN FUTURES ELECTRONIC (FRONT MONTH) EST. INDUSTRY 2.8 GAL/BUSHEL

Babler, a broker and principal with Atten Babler Risk Management LLC. “As far as the stocks go and how heavy they can get, I wouldn’t give an absolute number,” he says.

“If storage continues to build and the run rates stay up near the record pace, then the stocks situation will largely depend on exports.”

MARGINS

SHAPING PLANT MARGINS: Ethanol producers benefited from dramatic declines in corn prices throughout 2014, along with relative strength in ethanol and distillers grains prices. In 2015, DDG prices declined relative to corn and ethanol prices were dragged lower by crude oil, rebalancing margins at lower levels. Ample corn supplies should keep those prices relatively stable in 2016. Plant profitability will be heavily influence by ethanol and distillers grains revenue.

SOURCE: COBANK, USDA, CME

The start of the year usually sees tight margins, Babler says. “We would expect it’s going to be a tough margin environ-

ment until we move into the point where spring driving demand kicks in. You can have surprises where the export market will

bail you out and keep the price up, which is a lot of what is happening now. There could be some wrinkles around RIN compliance and the amount of blending needed to meet these more aggressive EPA targets, and that’s not entirely clear yet. But, it’s hard to see a huge runaway market to the upside in the near term. Looking at the downside, if you’re staring at $35 crude oil, or the possibility of something even lower, one shouldn’t be surprised if, all of a sudden, the exports just stop.” In many cases, imports are policy driven, and policies can change, he adds. “That propensity of the export market to change its mind is probably increased when you’re at 10-year low in oil price.”

On the other side of the margin equation, neither observer expects much movement in corn. Kowalski points out that USDA bumped up its projection for corn consumption by 25 million bushels in the report following the U.S. EPA’s announcement of the 2016 renewable volume obligations (RVO) under the renewable fuel stan-

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BEST MARGIN GAUGE: Though not perfect, the ethanol/corn price ratio is the best predictor of ethanol profitability because it measures roughly three-fourths of plant cost and revenue in one ratio. Since 2008, breakeven margins correlated with an ethanol/corn price ratio of 0.38. In 2015, the ratio and plant margins hovered above the breakeven level.

SOURCE: COBANK, BLOOMBERG, CME

ALL COMMODITY VIEW: A major characteristic of combined global commodity prices is 30- to 40-year supercycles that typically have short upswings and longer downswings, lasting between 15 and 25 years peak-totrough. The graph shows the peak years of the four super-cycles beginning in 1894, 1932, 1971 and 1999. From peak-to-trough in the three cycles shown, the price declines ranged between 40 and 50 percent. Real prices declined in each new super-cycle.

SOURCE: ERTEN, BILGE, AND JOSE ANTONIO OCAMPO (2012). “SUPER-CYCLES OF COMMODITY PRICES SINCE THE MID-NINETEENTH CENTURY.” UN/DESA WORKING PAPER NO. 110.

42 | Ethanol Producer Magazine | FEBRUARY 2016

MARGINS

dard (RFS). “It’s not a big move. The broad consensus within the industry is that there’s going to be a minimal impact, maybe in the area of a nickel or a dime on prices.”

Babler agrees that corn is not likely to be a constriction, although the basis has been strong as farmers have been tight fisted. “But the corn is there and there’s a good probability that there’s going to be even more corn globally and in the U.S. as we move into the next crop cycles.”

Policy Influence

The bigger question, Babler suggests, is how the market will balance out in a lower energy price environment. “There’s a lot of open questions the further out you go. It’s hard to find stability in this market and the root of that is that there’s so much policy influence.” Policy changes in individual countries could impact exports, he says, and the domestic policy front isn't settled yet.

Even though the EPA released its final rule on the RVO for 2016, there is still the possibility of a lawsuit or another attempt for Congressional action to alter the RFS, Babler points out. “For corn ethanol it was a mandate that landed in the middle.” Neither the ethanol nor the oil industries were exactly pleased, he says, nor is the policy impact entirely clear, with alternative viewpoints on RIN balances, the renewable identification numbers used for compliance, and speculation on the potential for biodiesel to be used to comply with the renewable mandate dominated by corn ethanol.

Kowalski points out that D6 ethanol RIN value rose dramatically after the EPA’s announcement, settling down around 70 cents at year end. For those in the industry who have worked to pass the RIN value on to the consumer, that could help drive E85 and E15 sales by reducing the cost of ethanol for blending. For others, the economics may work against ethanol blending. “At this point, the incentive for the blender is to use RINs they may have accumulated, because ethanol is more expensive than gasoline,” he says. “It doesn’t make sense to blend in extra ethanol into the gasoline pool. It makes more economic sense for them to use the RINs for any obligation that they’re not covering with their 10 percent blend.” The issue of the blend wall has not been solved, he adds. RINs prices could become stronger as obligated parties bid them up for compliance, additional higher blends could be used or noncompliance might become the strategy. “And we’re back at the same place next year fighting this battle, figuring out how this works,” he says.

While policy uncertainty was the 2015 story for biofuels, for commodities as a whole, it was the price collapse in oil. Indeed, across the board globally, all commodities have dropped, turning the focus of commodity analysts on super-cycles. Ethanol’s growth curve coincides with the run-up in the current super-cycle which began in the early 2000s. There were fast growth rates in emerging markets and a debt-fueled boom time in developed countries, Babler points out. “You had a huge run-up from 2000 all the way in to the financial crisis and then you started to see

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FEBRUARY 2016 | Ethanol Producer Magazine | 43

MARGINS

a lot of things shake out,â&#x20AC;? Babler says. â&#x20AC;&#x153;Some ag commodities hung on a little longer, due to drought and extreme weather, but now weâ&#x20AC;&#x2122;re seeing all that slip.â&#x20AC;? Investments made to increase capacity during the boom came online just as the economy slowed, thus the record inventories in many, many commodities, Babler says. The front side of the cycle, the boom, is much shorter than the downside, he adds, â&#x20AC;&#x153;And you get a longer-than-expected negative cycle on the back side of it. When you consider everything going on, it seems like weâ&#x20AC;&#x2122;re moving into that environment now.â&#x20AC;?

Kowalski says that at first glance, the commodity price woes are caused by the strong dollar, but not all commodity sectors have performed the same. The energy price index dropped the most dramatically, while ag crops, livestock and industrial metals saw a less dramatic decline. â&#x20AC;&#x153;Macro forces are affecting commodities,â&#x20AC;? he says, â&#x20AC;&#x153;but they are having differing effects.â&#x20AC;? Looking ahead to 2016, Kowalski says the dollar is likely to

STOCKS TO BLEND: Ethanol stocks relative to 20-day supply for blenders are watched closely, charted here by the RFA. Ethanol inventories typically rise until the spring and decline as the driving season picks up.

SOURCE: RFA

remain strong and alongside higher interest rates wonâ&#x20AC;&#x2122;t help commodities.

2016 Prospects

As a broker, Babler views 2016 prospects in risk management terms. â&#x20AC;&#x153;The most

risk is in first half of the year,â&#x20AC;? he says. â&#x20AC;&#x153;The status quo would be margins stay very tight with some people struggling and some doing okay. Thatâ&#x20AC;&#x2122;s the status quo until we get into driving season. But thereâ&#x20AC;&#x2122;s a mine field before we get there. Do exports hang

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MARGINS

low energy prices and we get into peak driving season, and we have an export market hanging in there, things could get better.”

Kowalski views 2016 with the eyes of a banker. “The reality is that liquidity is fantastic in the industry. Ethanol producers have come through very strongly. They have managed their margins up to this point very well and the industry has really learned how to manage itself. So there might be some turbulent times ahead, but the liquidity really will enable most of the producers to handle those struggles, if they do come.”

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

PATTERNS IN DEMAND: Usually updated weekly by the Renewable Fuels Association, this chart shows the quarterly numbers since 2008, with the rapid growth in supply followed by the emergence of the seasonal pattern in 2011 as supply caught up to demand. CoBank estimates ethanol production will rise 1 percent in 2016.

SOURCE: RFA

in there? Does the low crude oil price finally catch up with the ethanol industry? Could margins run away to the positive side in the near term? I think there are a lot of headwinds to make that happen. It feels like it’s

going to be tough, scratching it out for the start of the year and more downside risk than upside opportunity. If you get further out, more things can change. We’ve seen good gasoline demand all year. If we’ve got

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FEBRUARY 2016 | Ethanol Producer Magazine | 45

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48 | Ethanol Producer Magazine | FEBRUARY 2016

CORN QUALITY

2015 CROP RESULTS

Good Quality,

Plentiful Corn Survey provides snapshot of new crop quality for ethanol production.

By Susanne Retka Schill

It may not have been a record-breaking corn harvest, but it was close. The USDA estimates 13.654 billion

bushels were produced in 2015, down from last year’s record-breaking 14.216 billion bushels, and third largest ever. Of that, 5.2 billion bushels will be delivered to the nation’s ethanol plants to become ethanol and distillers grains.

The U.S. Grains Council survey of the 2015 corn crop found quality to be better than the four-year average on most attributes, mostly due to the favorable growing season. The lower protein concentration in 2015 compared to recent years was attributable to high yields, the USGC report suggests, and offset by higher starch concentration.

Starch levels were above 2014 and earlier years. Oil content in the USGC survey was the same as last year, but higher than the four-year average.

For a second time, Ethanol Producer Magazine, surveyed a sampling of ethanol producers. Charles Hurburgh, University of Iowa grain quality specialist, helped craft the survey, suggesting additional questions to gain insight on grading practices. All respondents report testing every inbound load for test weight and moisture, and most (85 percent) grade every load for total damage and broken kernels and foreign material. Roughly a quarter of those reporting test every load for protein and oil content and one-third test starch concentration.

Composite samples are widely used for other attributes. About half the plants test for protein and oil on the composite samples and 75 percent test for starch concentration.

With mycotoxins being the most critical safety concern, as they get concentrated in the distillers grains, nearly 70 percent of the plants report testing for aflatoxin and 57 percent test for vomitoxin on composite samples. About 28 percent test for aflatoxin on every load, while 17 percent test for vomitoxin on every load. Mycotoxins aren’t a concern this year among ethanol producers—no one responding to the survey reported more than scattered positives and most tests indicated undetectable toxins.

Author: Susanne Retka Schill Senior Editor, Ethanol Producer Magazine sretkaschill@bbiinternational.com 701-738-4922 FEBRUARY 2016 | Ethanol Producer Magazine | 49

ENDLESS POSSIBILITIES: Jouleâ&#x20AC;&#x2122;s CO2-to-fuel conversion, shown here at lab scale, requires only sunlight, non-potable water and cyanobacteria to produce ethanol and other fuels.

PHOTO: JOULE

50 | Ethanol Producer Magazine | FEBRUARY 2016

PROFILE

‘Industrializing Photosynthesis’ For eight years, Joule has been working under the radar to develop and commercialize its CO2-to-fuel technology.

By Holly Jessen

When it comes to ethanol production volumes per acre of land, Joule's Helioculture technology leaves all other processes in the dust.

“We can do several factors higher productivity than any other biofuel system,” says Tom Jensen, executive vice president and head of corporate development, speaking from the company’s demo plant in Hobbs, New Mexico, where the company has reached yields of 5,000 gallons of ethanol per acre, per year. At lab scale, the number is 16,000 gallons, and Joule is still reaching for higher numbers. “We do believe we know how close the gap to what we label theoretical maximum, which is about 25,000 gallons per acre, per year.”

The company’s technology utilizes engineered cyanobacteria to continuously convert waste CO2 to fuel, including ethanol and alkanes that are highly blendable for diesel and jet fuel products. Joule has developed a library of cyanobacteria, each one optimized for production of a desired end product. Joule’s process can also produce biochemicals, although that hasn’t been the company’s focus.

“We believe the world needs a scalable low carbon solution for fuel,” Jensen says.

While some refer to cyanobacteria as simply algae, Joule uses the more technically correct term for the microorganisms. Cyanobacteria, a photosynthetic organism, is one of the oldest lifeforms on the planet and can be found growing in many different conditions, Jensen says. For example, although it’s not in a recoverable form, there

FEBRUARY 2016 | Ethanol Producer Magazine | 51

SUNCATCHER: The company's demo-scale operation is located in Hobbs, New Mexico.

PHOTO: JOULE

are two species of cyanobacteria found in the earthâ&#x20AC;&#x2122;s oceans that naturally produce the equivalent of 15 million barrels of hydrocarbon equivalent daily. â&#x20AC;&#x153;What we are doing is replicating nature,â&#x20AC;? he says. â&#x20AC;&#x153;We are industrializing photosynthesis, if you like.â&#x20AC;?

The Joule system circulates engineered microorganisms, brackish or sea water, nutrients and CO2 in large see-through plastic tubes. As the organisms are exposed to sunlight, the photosynthetic process occurs and ethanol secretes out the cells of the organism, which is then recovered. â&#x20AC;&#x153;The

efficiency of this process is quite extraordinary,â&#x20AC;? Jensen says. â&#x20AC;&#x153;It is really a close to 100 percent direct conversion of CO2 and sunlight to fuel.â&#x20AC;?

The technology is best suited for areas with strong sunlight, located in a wide band around the equator, and close to sources of CO2 and water. The company has identified more than 1,000 locations worldwide, which could support a commercial production unit of 1,000 acres or more, he says.

There is more work that needs to be done, however, before it becomes a reality.

For one thing, the alkane diesel production process, which is a more complicated biological pathway than ethanol production, requires further development. â&#x20AC;&#x153;We have produced it,â&#x20AC;? Jensen says. â&#x20AC;&#x153;We know we can do it. But we are probably 12 to 18 months behind our ethanol program.â&#x20AC;?

The company expects the first commercial-scale Helioculture production unit to be up and running before the end of the decade. Eventually, Jensen says, the technology could replace a significant portion of current transportation fuels while reducing

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PROFILE the environmental footprint by 80 to 90 percent and, eventually, nearly 100 percent.

“This is a way to decarbonize the transportation sector,” he says.

Cooperative Progress

The company hit several major milestones in 2015, including the U.S. EPA registering it's trademarked Sunflow-E ethanol and closing on $40 million in private equity and venture debt financing, bringing the total raised to $200 million. At the end of the year Joule announced a partnership and a merger, both of which aim to move Joule along the pathway to commercial success.

The most recent announcement was made in early December, after Joule and HeidelbergCement, a German company with locations around the world, including the U.S., agreed to explore how Joule’s technology could be applied to mitigate carbon emissions in cement manufacturing. Almost exactly one month prior to that, Joule and Red

Rock Biofuels, a developer of renewable jet and diesel fuel biorefineries, announced they intended to merge.

The HeidelbergCement partnership could someday result in collocation of Joule’s technology at one or more of the German company’s cement manufacturing sites. Initially, however, Joule will set up a demo-scale system, to prove out the company’s ability to produce fuel with CO2emissions produced by HeidelbergCement’s manufacturing process, Jensen says. At the same time, Joule is continuing to evaluate other CO2 sources.

The merger of Red Rock and Joule, on the other hand, offers the company a more near-term path to commercialization.

Red Rock’s process will use a commercially proven Fischer-Tropsch technology to produce 15 MMgy of renewable diesel and jet fuels from biomass residues sourced from forests and sawmills. Work to build the first biorefinery in Lakeview, Oregon, will begin

this year and, is expected to wrap up within 18 months, Jensen says.

Although the Oregon facility will not be located in an optimal location for collocation of Joule’s Helioculture technology, the company will test the viability of integrating the two technologies. Red Rock’s Fischer-Tropsch production process produces a pure source of CO2, which could be utilized in Joule’s production process as a feedstock, recycling an already recycled CO2 stream to produce more biofuels, Jensen says. The merger is a diversification strategy and adds a pathway for producing additional low carbon to carbon neutral fuels.

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

FEBRUARY 2016 | Ethanol Producer Magazine | 53

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RISK MANAGEMENT

SOURCE: CIH

Well-Managed Hedge Positions Improve Margins Case study examines strategies that leave openings for upside opportunities while mitigating risk.

By Chip Whalen

Forward ethanol margins can be projected using the futures market as a price discovery mechanism. The risk transfer function

plant to lock-in or protect forward margins.

One aspect of the margin management process involves identifying a forward margin opportunity and then analyzing that opportunity from an objective context to deterof these exchange-traded contracts, includ- mine whether it is worth protecting. Assuming futures and options, allow an ethanol ing it is, positions might be initiated as part

of a margin management strategy to protect the plantâ&#x20AC;&#x2122;s profitability. From there, prices will fluctuate over time, which brings us to the next step, managing positions. Effective margin management is a dynamic process that requires monitoring open positions over time as market conditions change, and

CONTRIBUTION: 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).

56 | Ethanol Producer Magazine | FEBRUARY 2016

RISK MANAGEMENT

takes advantage of making periodic adjustments to these positions with the hope of improving upon the margin opportunity.

As a case study of this dynamic at work, letâ&#x20AC;&#x2122;s explore a recent market period with a model ethanol plant actively managing positions around a margin opportunity for August, 2015. In early June, the plant is modeling its forward profitability around its projected costs and revenues and calculates an expected profit margin of 19 cents per gallon for August. Given that margins have recovered from around breakeven earlier in the spring, the plant finds this value attractive and wishes to take positions to protect its corn costs and ethanol revenue.

They decide to initiate coverage by purchasing September corn futures contracts at the current price of $3.675 on June 5 while taking a flexible ethanol strategy using options.

With August Platts trading at $1.51 per gallon, the ethanol plant decides to purchase a $1.50 put option for a premium of 6 cents and simultaneously sell a $1.70 call option for a premium of 2 cents. For a net cost of 4 cents, the resulting position provides the plant with a minimum ethanol price of $1.46 per gallon and a maximum ethanol price of $1.66 per gallon. Given the historically low prices for both corn and ethanol on June 5, the plant determines there would be more opportunity to participate in potential margin improvement through higher ethanol prices, thus the flexible strategy there.

Holding all other costs and revenues fixed, with a projected margin on the open market of 19 cents per gallon, the combined positions would provide the ethanol plant with a minimum margin opportunity of 14 cents per gallon and a maximum potential margin of 34 cents per gallon, should August Platts be above $1.70 per gallon at expiration. Ten days later, on June 15, prices have subsequently declined and August Platts ethanol is now trading at $1.44 per

FIGURE 1: The price history for the September corn futures contract through July 2.

SOURCE: CIH

FIGURE 2: Three more weeks in the September Corn futures contract, showing adjustments in hedging strategy and along with that, an accounting of the final corn price.

SOURCE: CIH

Final Corn Price: 3.750

Price of Long Futures

-.625

Gain From Original Future Sales

+.220

Cost of Long 4.30 Calls

-.015

Premium From Sale of 4.30 Calls

3.330

Final Net Corn Price

FEBRUARY 2016 | Ethanol Producer Magazine | 57

RISK MANAGEMENT

gallon. As a result, the put option that the ethanol plant has purchased has gained in value while the call option that was sold has depreciated. The $1.70 call option is now worth a half cent, which means that it has lost 75 percent of its value in two weeks’ time, and the ethanol plant decides to buy it back in order to remove the maximum price sales obligation above the market. Following this adjustment, the plant effectively now has just a minimum ethanol price or floor of $1.455 with no cap or ceiling so that they can have unlimited participation to higher prices.

Advancing a few weeks to July 2, the corn market has rallied sharply in response to adverse weather with excessive rainfall in the eastern Midwest causing concerns over yield ahead of pollination. September Corn

futures are now trading at $4.30 per bushel, up over 60 cents from where the long position was initiated back on June 5. Much of the run-up has been in response to shortcovering by commodity funds, and the price increase has been very sharp in a relatively short period of time. While wishing to maintain protection against further price increases, the ethanol plant also desires to secure the gain that has built up in its long futures position. Replacing the futures position with an option strategy may make sense in order to allow for the opportunity of participating in lower prices should the market retreat while still protecting the risk of higher prices. This may be particularly true as prices approach the previous high from the beginning of the year, as shown in Figure 1.

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58 | Ethanol Producer Magazine | FEBRUARY 2016

They ultimately decide to reposition their hedge into an option strategy, buying a $4.30 call for a premium of 22 cents.

Effectively, the ethanol plant now has a maximum September corn futures price of $3.895 which represents their right to purchase futures at $4.30 minus their net gain on the previous hedge (62.5 cents realized gain on closed futures position—22 cents cost of call option). Another way of thinking about this is that the plant spent 22 cents to protect 62 cents of gains, and under a worst case scenario will add that cost to their eventual corn purchase. The tradeoff, however, is they will benefit, should corn prices eventually decline by more than the 22 cent cost of the calls purchased, thus potentially lowering their corn price below the $3.675 level they started from.

By the end of the month on July 28, the corn market has moved sharply lower as fund selling and reduced weather concerns have pressured prices. September corn futures are now trading at $3.75 per bushel, 55 cents lower from where the decision was made to adjust the long futures position into a call option. While the call option has now lost most of its value, the gain in the futures position was preserved by offsetting those contracts at the higher price level. As a result, the plant is significantly better off having effectively participated in a majority of the price decline. The decision is made to convert the hedge back into a long futures position to lock in the lower value the market is now trading at. Accounting for both the gain on the initial long futures position and the subsequent loss on the long call option, the ethanol plant has an effective net price on the new September corn futures contract of $3.33 per bushel. (see figures 2 and 3).

Putting everything together, the ethanol plant comes into the August marketing period with a net realized margin of 26 cents per gallon. This is not only better

RISK MANAGEMENT

than the open market margin at that point of 16 cents per gallon, assuming the plant had done nothing, but also better than the 19 cents per gallon margin they initially projected receiving back in early June, as detailed in Figure 3. While there were other adjustments that also could have been made during this particular period to improve the margin further, the main point is to highlight how active management of positions can significantly improve upon projected margin opportunities as market conditions change. Profit margin management is not simply a â&#x20AC;&#x153;set it and forget itâ&#x20AC;? process but rather a dynamic one of capitalizing on opportunities as market conditions change.

The examples reviewed in this case study explored two particular types of adjustments, buying back decayed options previously sold and protecting equity that has built up in a hedge position. The corn adjustment was an example of the latter in converting the initial futures purchase into a call option, while the ethanol adjustment involved the former buying back decayed options. While many might leave a short option in place with the expectation of it expiring worthless, there have been examples where the market can blow up (or down) to cause what were previously decayed options to suddenly become very valuable. The first quarter of 2014 is a case in point when logistical bottlenecks caused ethanol prices to soar heading into expiration. Short call options that impose a maximum price and limit participation in higher ethanol value would have been an unwelcome part of a hedge position during this period, particularly when they could have been bought back for little to no value (see figure 4).

There is always a cost/benefit tradeoff between protecting the risk exposure of deteriorating margins on the one hand and retaining opportunity on the other to participate in stronger margins over time.

Final Realized

Open Market

Projected On 6/5

3.33

3.6375

3.675

Ethanol Price:

1.455

1.4642

1.51

Profit Margin:

0.26

0.16

0.19

Corn Price:

FIGURE 3: The final accounting of the margin strategy resulting in a realized margin that is significantly better than that projected on June 5, when, in this case study, the plant initiated hedges.

SOURCE: CIH

FIGURE 4: Price history for the March 2014 ethanol contract illustrates the opportunity for an ethanol adjustment.

SOURCE: CIH

In the case of the corn adjustment, spending 22 cents on the call option was the cost while the benefit would be participating in lower corn prices if the market were to drop by more than 22 cents. While some might not choose to adjust a long futures position under those circumstances, others might feel that after such a strong rally in a short period of time, there was a reasonable expectation that prices might retreat by that much to make the adjustment worthwhile.

The ethanol adjustment is arguably an easier decision. By only spending a half cent per gallon to remove a limitation on participating in higher prices, the plant is not really affecting their bottom line that much

from a cost standpoint while significantly improving their ability to benefit from margin improvement. Weighing the costs and benefits carefully is an important part of making any adjustment to a hedge position, but should always be considered as part of a dynamic margin management process in order to optimize profitability.

Author: Chip Whalen Vice President, Education and Research Commodity & Ingredient Hedging LLC 312-596-7755 ethanol@cihedging.com

FEBRUARY 2016 | Ethanol Producer Magazine | 59

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TALKING POINT

Regulatory Issues For Antimicrobials Evolving

By Richard Coulter

With the implementation of the Food Safety Modernization Act, many customers have questions about the proper regulatory position of all products used in their ethanol plants. The uncertainty is well-founded because of the far-reaching impact and complexity of this new regulation.

It is important to note that the U.S. Food and Drug Administration spent several years prior to the implementation of FSMA to define procedures necessary for regulatory compliance for use of any processing additive or antimicrobial in ethanol production. These procedures remain consistent with and will be integrated into the new FSMA program.

These guidelines, which remain consistent with FSMA, state that any additive, including antimicrobials, used in an ethanol plant must meet one of three criteria to be acceptable for use. These criteria are: 1. An AAFCO definition: The product has a definition in the feed ingredient manual approved by the American Association of Feed Control Officials.

2. Approved food additive: The product has an approved food additive petition that is listed in the Federal Registry.

3. Generally recognized as safe (GRAS): The product has been determined to be generally recognized as safe by panel of experts qualified by scientific training and experience to evaluate the safety of substances directly or indirectly added to food.

If the product in use meets one or more of the above criteria, it is acceptable for use under FDA guidelines and it is compliant with FSMA simultaneously.

Recently there has been further confusion in the industry as to the impact and potential overlap of the recently revised Veterinary Feed Directive guidance on the use of antimicrobials in the fermentation process. U.S. ethanol producers have the responsibility as animal feed suppliers to ensure that their suppliers and fermentation aids and ingredients fully comply with today’s regulations under FSMA. In spite of the fact there are many regulations governing how antimicrobials and processing aids can be used, it is important to remember that each regulation is set in place for specific areas of governance defined by the intended use. Regulations are very clear on this point. The use of antimicrobials/antibiotics in ethanol processing does not require a Veterinary Feed Directive. Accordingly, recent news regarding the FDA changes to the VFD regulations (21 CFR 558.6) does not apply to the ethanol industry, nor do the VFD regulations apply to the feeding of 62 | Ethanol Producer Magazine | FEBRUARY 2016

distillers coproducts to livestock. VFDs are only applicable to the use of certain approved animal drugs.

The FDA’s consideration of the use of antimicrobials by the ethanol industry dates back more than two decades. In June of 1993, Alice O’Connell of SmithKlineBeacham Animal Health (SKB), the company now known as Phibro Animal Health, made a submission for the use of virginiamycin in the fermentation of alcohol. Dr. George Graber of the FDA Center for Veterinary Medicine’s Division of Animal Feeds replied Nov. 22, 1993, with their letter of no objection to the use of virginiamycin to SKB, thus paving the way for use of this important antibiotic to control infections. In more recent years, the FDA has further clarified the methods for any additive, including antimicrobials, to become acceptable for use in ethanol production.

The FDA’s guidance has been very clear that the intended use of the component or drug is the basis of the regulatory categorization.

Antimicrobials used in the fermentation process to produce ethanol are not regulated as animal drugs but are food additives (as defined in FFDCA 201(s)) or components that are considered to be GRAS. Most processing aids, antimicrobials, yeasts and other fermentation components currently being sold to the U.S. ethanol industry are predominantly GRAS, but some are also approved food additives (or AAFCO defined ingredients). Antimicrobials used for ethanol fermentation are not intended to impact distillers grains in any way. They are simply the most effective, safe, and proven infection-management tools available to the industry to control bacteria in fermentation for over 30 years.

In summary, Veterinary Feed Directives are for tracking the use of antibiotic treated feed (medicated feed) intended for the treatment of disease conditions, in accordance with the new animal drug regulations and have no bearing on products used in ethanol production. Ethanol coproducts are not medicated feeds and, therefore, not subject to the VFD requirements for use. All processing aids, including antimicrobials, used in ethanol fermentation must be either food additives or GRAS components intended for use in ethanol production, and are fully compliant with FSMA. Author: Richard Coulter, BVSc Senior vice president, scientific and regulatory affairs Phibro Animal Health Info requests: Steve.Rust@pahc.com 201-329-7300 Contributing author: Kristi Smedley, PhD, principal, Center for Regulatory Services Inc.

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BUSINESS MATTERS

OSHA Penalties Going Up, Up, Up

By Brent D. Soderstrum

On Nov. 2, President Obama signed a bipartisan budget bill that permits OSHA to institute a catchup adjustment. The increase is effective Aug. 1 and subsequent annual adjustments for which the bill provides are to be based upon the Consumer Price Index.

The big question is, what will be the exact amount of the catch-up adjustments? Apparently, the CPI is approximately 80 percent higher than it was back in 1990, which is when OSHA penalties were last increased. However, this first increase in OSHA penalties could be much higher than 80 percent because the act sets the maximum adjustment at 150 percent of the current penalty structure. Thus, the potential penalty structure for maximum fines could be as follows: • Other than serious: $12,600 to $17,500.

The maximum is currently set at $7,000.

• Serious: $12,600 to $17,500.

The maximum is currently set at $7,000.

• Repeat: $126,000 to $175,000.

The maximum is currently set at $70,000.

Willful: $126,000 to $175,000. The maximum is currently set at $70,000.

This first increase is not the end of it. The budget bill also requires OSHA to annually increase the monetary penalties based upon the percentage increase in the CPI from the previous year.

As a result, every Jan. 15, OSHA will set new penalty amounts.

Thus, employers need to pay attention.

OSHA’s increased penalties are intended to increase employers’ attention to the safety regulations by putting some teeth back into the monetary penalties. Regardless of the penalty increases, employers need to be prepared for OSHA to show up at their

64 | Ethanol Producer Magazine | FEBRUARY 2016

door for an inspection. It has been easy for employers to accept OSHA citations when the dollar amounts are reduced. However, with the increase in the penalty structure, a repeat violation can be quite devastating to a company. An employer may be cited for a repeat violation if that employer has been cited previously for a substantially similar condition and the citation has become a final order. The new citation has to be issued within 3 years of the final order of the previous citation or 3 years from the final abatement date of the citation, whichever is later.

Look over your safety manuals, make sure your employees are trained and be prepared for a work accident, an employee complaint to OSHA or even a programmed OSHA inspection.

Know beforehand how you will handle an OSHA inspection.

Also, don’t be too quick to settle an OSHA case even now, before the new penalty structure goes into place, since a possible repeat violation will have much more punch to it after Aug. 1. If you aren’t careful, an OSHA violation that you thought was a “good deal” can rear its ugly head again in the next three years and result in a single OSHA citation of up to $175,000.

Author: Brenton D. Soderstrum Attorney, BrownWinick Law Firm 515-242-2474 soderstrum@brownwinick.com

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% w/v in hours Why compromise on yield?

TPS

TOTAL PERFORMANCE SYSTEM Your plant is unique, your enzyme solution should be also.

Find out how you can maximize the performance of your plant with the Total Performance System by contacting your DuPont representative or calling 1-800-847-5311.

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