April EPM 2012 by BBI International

INSIDE: ETHANOL AS A CHEMICAL FEEDSTOCK APRIL 2012

Trends, Patterns &

Relationships Data Reveals Ethanol Economics Page 34

How Big is Ethanol’s Impact? Page 42

ALSO

California’s Low Carbon Fuel Standard Put on Hold Page 48

www.ethanolproducer.com

AMERICA, START YOUR ENGINES. American Ethanol is proud to welcome Austin Dillon to the team. When Austin takes the wheel of the No. 3 American Ethanol car, he is racing for America’s energy independence. American Ethanol provides hundreds of thousands of jobs here at home, it adds a much-needed boost to our economy and keeps our nation more secure. That’s something every American can support. Find out more at AmericanEthanolRacing.com. AMERICAN GROWN. AMERICAN MADE. POWERING NASCAR. The NASCAR American Ethanol™ logo and word mark are used under license by the National Association for Stock Car Auto Racing, Inc. and Growth Energy. Austin Dillon and Austin Dillon’s autograph are trademarks of Austin Dillon. All trademarks and the likeness of the No. 3 race car are used under license from their owners. NASCAR® is a registered trademark of the National Association of Stock Car Auto Racing, Inc.

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contents

Ethanol Production Grind Margin and Return Over Variable and Total Cost

features

APRIL issue 2012 VOL. 18 ISSUE 4

DEPARTMENTS

7 Ad Index

10 The Way I See It A Hand Full of Aces By Mike Bryan

11 Events Calendar

Upcoming Conferences & Trade Shows

12 View From the Hill Why Ethanol Matters By bob dinneen

50)

Editor’s Note

Economics and Enthusiasm By Susanne Retka Schill

34 ECONOMICS

By the Numbers

42 IMPACT

Dollars and Sense

2011 data analyses highlights How big the impact may be emerging trends debated, ethanol Return Over Total Cost Return Over Variable Cost but analysts Returnagree Over Grind Margin By Holly Jessen boosts Iowa’s economy AMS Iowa Ethanol Report, EIA By KRIS BEVILL

14 Drive

Another Big Step for E15

By tom buis

16 Grassroots Voice

An Opportunity to Show

Ethanol’s Edge By Brian Jennings

18 Europe Calling

ILUC: The ‘Soap’ Continues By Rob Vierhout

20 Business Matters

FDA Has No Jurisdiction

Here—Or Does It? By Sarah Brew and Steve Toeniskoetter

22 Business Briefs 24 Commodities Report 28 Distilled 58 Marketplace

48 POLICY

54 CHEMICALS

California’s carbon intensity ratings put on hold By Kris Bevill

Examining the growth of ethanol as a feedstock for petrochemical alternatives By ERIN VOEGELE

LCFS in Limbo

Feeding the Chemical Market

Ethanol Producer Magazine: (USPS No. 023-974) April 2012, Vol. 18, Issue 4. Ethanol Producer Magazine is published monthly by BBI International. Principal Office: 308 Second Ave. N., Suite 304, Grand Forks, ND 58203. Periodicals Postage Paid at Grand Forks, North Dakota and additional mailing offices. POSTMASTER: Send address changes to Ethanol Producer Magazine/Subscriptions, 308 Second Ave. N., Suite 304, Grand Forks, North Dakota 58203.

4 | Ethanol Producer Magazine | APRIL 2012

editor’s note

Economics is the backdrop for this issue of Ethanol Producer Magazine. While there’s no debate that

Economics and Enthusiasm

the ethanol industry has had an impact on the economy, opinions differ on just how big those numbers really are. Associate Editor Kris Bevill takes a look how Iowa’s ethanol industry has impacted the state’s economy. Bevill also digs into how the court decision that put California’s Low Carbon Fuel Standard on hold is viewed by the industry. Erin Voegele, associate editor on our sister publication, Biorefining Magazine, writes about the economic opportunity in using ethanol as the feedstock for intermediary chemicals. Brazil producers are leading the way in that development. Rounding out our coverage this month, Associate Editor Holly Jessen interviews biofuels economists at the Agriculture Marketing Resource Center who shed light on the history of the industry’s economic performance by drawing on data from several government agencies. While evaluating the numbers tells much, an industry is built by people. A couple of columns in the February issue prompted a reader—industry veteran Bugs Graham—to share his story. His enthusiasm is infectious.

Susanne Retka Schill, Editor sretkaschill@bbiinternational.com

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

twitter.com/EthanolMagazine

LETTER To the Editor: After reading your editorial note and Mike Bryan’s column in the February issue, I decided to share a note I recently sent to my colleagues at Novozymes. There are not a lot of people that have been in the industry for 30-plus years, but each of us has a special story. In the early days before the Internet, one of the highlights of my month was receiving my copy of EPM. The magazine was always full of insightful articles on how to improve production and yields, at a time when educational seminars and training programs were scarce. EPM and the Fuel Ethanol Workshop have played a big part in the advancement of the ethanol industry. Thanks for all you have done.

Story from a Fuel-a-holic

In 1979, I joined the American Agriculture Movement. Our goal was to make farming a more sustainable industry by finding ways to increase farm profitability. This group led me to join with other local farmers to build an ethanol plant in 1980—a farm still. Our company was called Alcohol Cartel Inc. and our stated mission was to increase farm income. We knew we needed government subsidies to get the ball rolling, but hoped one day we could survive without government support. In 2007, as corn and milo prices skyrocketed, I spoke to a large group of farmers and proudly proclaimed that the ethanol industry’s dream of increasing grain prices is finally working. It took time, patience and the 6 | Ethanol Producer Magazine | APRIL 2012

support of the government to make this happen, but due to the increased use of corn and milo for ethanol, the grain, livestock, motor fuel and farming industries are now reaping the rewards. I am even more pleased to say that in 2012, farmers are not only benefiting, the consumer is benefiting from cheaper motor fuel. Also, less pollutants are being emitted into the atmosphere due to the positive impact of ethanol. The last thing I am thankful for is that now we can finally say that the ethanol industry can stand on its own without government subsidies. We are creating thousands of jobs, adding strength to the economy, as well as creating a new market for agriculture products for both our use and abroad as we export ethanol and distillers grains. The U.S. ethanol industry is now feeding and fueling the world! It’s been 32 years in the making with a lot of ups and downs. Boy, it has been quite a ride, but I can say I have truly enjoyed the journey. I love my job, my industry, and American ingenuity. My old daddy used to say, “Never under estimate the ability of the American farmer to provide.”

Bugs Graham Account Manager Novozymes North America Inc. Franklinton NC

AdIndex

EDITORIAL EDITOR

Susanne Retka Schill sretkaschill@bbiinternational.com

ASSOCIATE EDITORS

62 & 63

Holly Jessen hjessen@bbiinternational.com Kris Bevill kbevill@bbiinternational.com

2012 International Biomass Conference & Trade Show 2012 International Fuel Ethanol Workshop & Expo

Aggreko

Ashland Hercules Water Technologies

BBI Consulting

Lindsey Noble lnoble@bbiinternational.com

BetaTec Hop Products

PUBLISHING

BrownWinick Law Firm

Buckman

Casho, Inc.

CPM Roskamp Champion

Distiller Grains Production & Markets

Eide Bailly

Fagen Inc.

FCStone, LLC

Freez-it-Cleen

COPY EDITOR Jan Tellmann jtellmann@bbiinternational.com

ART ART DIRECTOR Jaci Satterlund jsatterlund@bbiinternational.com

GRAPHIC DESIGNER

CHAIRMAN Mike Bryan mbryan@bbiinternational.com

CEO Joe Bryan jbryan@bbiinternational.com

VICE PRESIDENT Tom Bryan tbryan@bbiinternational.com

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

EXECUTIVE ACCOUNT MANAGER Howard Brockhouse hbrockhouse@bbiinternational.com

SENIOR ACCOUNT MANAGER Jeremy Hanson jhanson@bbiinternational.com

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

8,9 & 64

CIRCULATION MANAGER Jessica Beaudry jbeaudry@bbiinternational.com

ADVERTISING COORDINATOR Marla DeFoe mdefoe@bbiinternational.com

Senior Marketing Manager John Nelson jnelson@bbiinternational.com

Growth Energy

Himark bioGas

EDITORIAL BOARD

26 & 27

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

Please recycle this magazine and remove inserts or samples before recycling

ICM, Inc. Inbicon

Lallemand Ethanol Technology

Nalco

Natwick Associates Appraisal Services

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

GENENCOR® - A Danisco Division

Novozymes

Phibro Ethanol Group

Pioneer Hi-Bred International, Inc.

Renewable Fuels Association

Sulzer Process Pumps (US) Inc.

Vogelbusch USA, Inc.

Wabash Power Equip. Co.

WCR Incorporated

WINBCO

APRIL 2012 | Ethanol Producer Magazine | 7

the way i see it

A Hand Full of Aces By Mike Bryan

The underlying story of ethanol is not its environmental benefits; the real story is the impact ethanol has on the economy. We have competed with petroleum for years based on the fact that ethanol is cleaner, more environmentally friendly. While true, it has forced the industry to spend millions of dollars proving something that most people would have automatically assumed to be the case anyway. Of course ethanol is cleaner, almost anything you could stuff in your fuel tank, other than perhaps coal, would be cleaner than oil. In retrospect, the environmental war we have waged against petroleum, is perhaps a war that we should have avoided and instead focused on the real story of ethanol…its economic impact. Arguably, the reason ethanol has gained wide Congressional support over the

10 | Ethanol Producer Magazine | APRIL 2012

years and broad public acceptance has little to do with its environmental impact, but in large measure its economic impact. Oil did not win its place in the world based on its environmental contributions. The Obama administration is pushing for a revitalization of American manufacturing. The Republicans are advocates of an industrial revolution, opening up more opportunities for the “Job

product. Food vs. fuel, land use and higher food prices are simply diversionary tactics designed to keep the industry on its heels. The issue of using corn vs. cellulose is, and frankly always has been, a moot point. The important point is that agriculture has, and always will step up to meet the demands of the market, whether it’s grain or cellulose. In the industrial economic card game,

Creators.” Well folks, ethanol producers are job creators and have proven to be a modern economic powerhouse. Governments around the world are frantically trying to improve their industrial infrastructure. You can’t improve your economic infrastructure with oil. While still a vital part of the world’s economy, oil is entering its sunset years. I have said many times, “When the oil wells of today are nothing more than rusted relics of the past, the fields of modern agriculture will still be pumping domestically produced ethanol and hundreds of billions of dollars into the world’s economy.” According to Renewable Fuels Association statistics, in 2010 the U.S. ethanol industry directly employed more than 70,000 people with indirect employment close to 400,000. Ethanol Producer Magazine, in an industry survey, showed an average annual wage of over $40,000 plus benefits. In addition, the ethanol industry added more than $53 billion to the U.S. gross domestic

the ethanol industry has a hand full of aces—no bluffing, no folding, it’s our game to win or lose. Several hundred thousand jobs and billions of dollars added to the economy each year and still growing, that’s the real story about ethanol. Oh yeah, and we also have a positive impact the environment. That’s the way I see it.

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

events calendar

Fuel Ethanol Workshop & Expo June 4-7, 2012 Minneapolis Convention Center Minneapolis, Minnesota Evolution Through Innovation Now in its 28th year, the International Fuel Ethanol Workshop & Expo provides the ethanol industry with cutting-edge content and unparalleled networking opportunities in a dynamic business-to-business environment. As the largest, longest-running ethanol conference in the world, the FEW is renowned for its superb programming—powered by Ethanol Producer Magazine.

From its inception in 1985, the FEW’s mission has remained constant: The FEW delivers timely presentations with a strong focus on commercial-scale ethanol production–from quality control and yield maximization to regulatory compliance and fiscal management. The FEW is also the ethanol industry’s premier forum for unveiling new technologies and research findings. The program extensively covers cellulosic ethanol while remaining committed to optimizing existing grain ethanol operations.

The 2012 FEW Program is segmented into four concurrent tracks: Track 1: Production & Operations Track 2: Leadership & Financial Management Track 3: Coproducts & Product Diversification Track 4: Cellulosic & Advanced Ethanol In addition to spot-on technical presentations handpicked by an abstract-rating committee of nearly 40 industry experts, the FEW offers superb networking forums alongside the largest, most widely attended expo in the business. (866)746-8385 | www.fuelethanolworkshop.com

International Biomass Conference & Expo April 16-19, 2012 Colorado Convention Center Denver, Colorado

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

Algae Biomass Summit September 24-27, 2012 Sheraton Denver Downtown Hotel Denver, Colorado

Advancing Technologies and Markets Derived from Algae Organized by the Algal Biomass Organization and coproduced by BBI International, this event brings current and future producers of biobased products and energy together with algae crop growers, municipal leaders, technology providers, equipment manufacturers, project developers, investors and policy makers. Register today for the world’s premier educational and networking junction for the algae industry. (866)746-8385 | www.algaebiomasssummit.org

Introducing EC5624A PLUS NexGen Ethanol Corrosion Inhibitor Nalco has created a new formula to make our Ethanol Corrosion Inhibitor better, safer, easier to use and more cost effective! As treat rates fall, it is more important than ever to manage dosage accurately. Nalco’s proprietary fluorescent tracer makes treat rate management easy, fast and accurate. Improved pHe boosting power Better cold weather handling. No more heated storage required! Excellent corrosion protection without risk of intake valve deposits. Lower treat cost. Same regular, on-site service to help you maintain ethanol quality and control inhibitor treat cost. Discover more about EC5624A PLUS at www.nalco.com/TRACE or call Phil Bureman at 913-708-4969.

International Biorefining Conference & Trade Show November 27-29, 2012 Hilton Americas - Houston Houston, Texas

Organized by BBI International and produced by Biorefining Magazine, the International Biorefining Conference & Trade Show will unite bioconversion technology providers and researchers from around the world with agriculture, forestry, and refining professionals to discuss and examine the scale-up and commercial establishment of advanced biofuels and biobased chemicals. Conference attendees will gain a broad understanding of where the industry is, what its challenges are, and where it is headed. (866)746-8385 | www.biorefiningconference.com

APRIL 2012 | Ethanol Producer Magazine | 11

view from the hill

Why Ethanol Matters By Bob Dinneen

One glance at the headlines of any newspaper in America is all that is needed to appreciate the importance of America’s evolving ethanol and renewable fuel industry. Whether it is turmoil in the Middle East, tens of millions of Americans still out of work, or skyrocketing gas prices, domestically produced renewable fuels are part of the solution. It is just common sense that if America were to produce and rely more on homegrown renewable fuels, our dependence on imported oil from tumultuous regions of the world would be lessened. This is more than just common sense, it is a fact. Since 2005, the year the first renewable fuels standard (RFS) was enacted, America has seen imported oil fall from 60 percent to 45 percent of our demand. Not coincidentally, we have seen ethanol’s share of the market grow from just around one percent to more than 10 percent today. It is also not coincidence that states with strong biofuel industries are faring much better than other states in the slow national economy following the recession of 2008 and 2009. America’s ethanol

12 | Ethanol Producer Magazine | APRIL 2012

producers are directly responsible for employing more than 90,000 Americans. An additional 311,000 workers are employed, in part due to an expanding and evolving ethanol industry. These are jobs across all sectors of the economy— manufacturing, science, engineering, business, agriculture—and are helping hundreds of thousands of American families make ends meet. Harder to see, but no less important, domestic ethanol production is keeping gas prices lower than they otherwise would be. Today, ethanol is trading at a significant discount to gasoline. Therefore, a gallon of gasoline blended with ethanol will be cheaper to produce and cheaper at the pump. For instance, if ethanol were trading at an 80 cents per gallon discount to gasoline, a gallon of E10 would be 8 cents less than a conventional gallon of gasoline and a gallon of E15 would be 12 cents less. According to a study by Iowa State University and the University of Wisconsin, ethanol has helped keep gasoline prices 25 cents cheaper per gallon on average over the past decade. In 2010 alone, the study found that increased ethanol use took 89 cents off the price of gasoline had ethanol not been in the marketplace. Perhaps the most significant contribution being made by today’s ethanol industry is its trailblazing role for all of renewable energy. America’s ethanol industry is the largest alternative, renewable fuel in the world. It is expanding markets for all types of renewable fuels

and conditioning consumers to use increasing volumes of safe, effective renewable fuels to power their lives. And, it is demonstrating that an appetite for the new ethanol technologies that are being developed today exists. Ethanol matters because America’s energy future cannot be secured by a “Swiss cheese” energy policy alone. Drilling and fracking for unconventional sources of oil will not lead to energy independence in the long run. Oil is an important, but ultimately finite, resource. America must pursue an energy policy that recognizes the contributions of renewable fuels like ethanol today and appreciates the potential and necessity of ethanol and other renewables in the future. Author: Bob Dinneen President and CEO of the Renewable Fuels Association (202) 289-3835

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DRIVE

Another Big Step for E15 By Tom Buis

Three long years after filing papers to lift the regulatory caps on how much ethanol can be blended into motor fuel in the United States, our industry saw the U.S. EPA take one of its final actions on the Growth Energy E15 petition—clearing the path forward for retailers to sell E15. This is a monumental victory for the American ethanol industry. And with gasoline prices expected to cost motorists $5 a gallon this summer, it could not have come at a more important time for our nation. E15 is the only proven antidote to the disease that is our nation’s addiction to costly, foreign oil. At Growth Energy we have never wavered in our efforts to achieve greater access to the marketplace for America’s fuel, ethanol. The ethanol industry has the capacity to provide a greater share of our nation’s fuel. Currently, we are up against the blend wall. Scaling the blend wall has

14 | Ethanol Producer Magazine | APRIL 2012

not been easy, and getting widespread use for E15 still presents challenges. We will continue to clear any remaining hurdles, however, because it is the right thing to do—for our industry, and for our nation. Effort equals results, and we will continue to put in the effort to create more market access and provide consumers with a less expensive homegrown alternative to foreign oil. The move to E15 is purely voluntary, but with ethanol selling at market prices far below that of gasoline, it shouldn’t take long for Americans to realize that higher ethanol blends can save money at the pump. Now it is up to the retailers and individual fuel companies to register for approval to sell E15. Growth Energy is committed to working with the retail industry to bring E15 to their stations. With the path clear toward a federally approved, lower-cost fuel blend, we are encouraged that retailers will move quickly. The importance of E15 in helping our industry cannot be lost. The importance of E15 in helping our nation—by creating jobs, by scrubbing our air clean of the emissions from fossil fuels, by strengthening our national security— should not be lost either. A full move to E15 creates a bigger market for American ethanol that could help create as many as 136,000 new

jobs in the United States and eliminate as much as 8 million metric tons of greenhouse gas emissions from the air in a year—the equivalent of taking 1.35 million vehicles off the road. Increasing the domestic, renewable fuel supply would also displace some of the 7 billion gallons of oil that is imported every day into the United States from countries such as Venezuela, Saudi Arabia and Nigeria. The U.S. ethanol industry today is fueling new frontiers—right here in America.

Author: Tom Buis CEO, Growth Energy (202)545-4000 tbuis@growthenergy.org

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An Opportunity to Show Ethanol’s Edge By Brian Jennings

Despite it being an election year, we cannot expect a bitterly divided Congress to agree on how to relieve the pain at the pump for consumers. And while there is no easy, silver-bullet solution to fuel price woes, the American Coalition for Ethanol has been pointing out that the Obama administration can take steps to help that do not require congressional approval by relying on American ethanol. First, with E15 market ready in many states, the U.S. EPA ought to ensure summer Reid vapor pressure (RVP) limitations do not stand in the way of consumers having access to the most affordable fuel available for most cars. As of this writing, wholesale ethanol prices are nearly 80 cents per gallon less than gasoline prices. E15 could save drivers approximately 12 to 15 cents per gallon versus straight gasoline in many markets. With the “summer driving season” on the horizon, EPA should ensure E15, a homegrown source of clean octane at a remarkably affordable price, remains unleashed to help consumer pocketbooks. The alternative—blocking consumers from access to E15 just when fuel demand and prices routinely begin to climb, based

16 | Ethanol Producer Magazine | APRIL 2012

on obscure RVP red tape—would be economically and politically unwise. Second, EPA and the National Highway Traffic Safety Administration have a historic opportunity to capitalize on proposed rules to provide additional fuel price relief to Americans while reducing pollution. Earlier this year, ACE wrote to these federal agencies with recommendations on how ethanol’s clean octane could help achieve their proposed corporate average fuel economy (CAFE) and greenhouse gas (GHG) standards. The purpose of the CAFE-GHG rule is to require vehicles to reduce fuel use and

that will put a premium on octane. There are two principle ways to boost octane in internal-combustion engines. One, add more ethanol. Two, increase the use of petroleum-based aromatics. While aromatics are considered hazardous air pollutants and are the most expensive ingredients in gasoline, ethanol is the most affordable and cleanest source of octane. For the past three years, toluene prices (benzene, toluene, and xylene are the primary aromatics) have exceeded ethanol prices by between 70 cents and $1 per gallon. Since aromatics come from crude oil, as oil prices rise, so does the cost of

tailpipe emissions between 2017 and 2025, so it will have an enormous impact on the future of fuel use, including ethanol. ACE’s recommendations essentially encourage the agencies to continue providing automakers with incentives to make flex-fuel vehicles (FFVs) and to recognize that ethanol’s clean octane benefits can help reduce petroleum use, harmful tailpipe emissions and pump prices. As it stands today, EPA and NHTSA’s proposed rule discourages FFV production. While it provides generous incentives for electric and fuel cell vehicles, it would phase out FFV credits. The agencies are expected to issue a final rule this summer and we are working with others to encourage EPA and NHTSA to provide a level playing field for each vehicle technology. Meeting the ambitious fuel economy goals proposed in the rule will require automakers to modify engines in a way

aromatics. Ethanol has done more to reduce petroleum prices, use and greenhouse gas emissions than any alternative fuel in the past quarter century. ACE believes there is an even greater opportunity today, based on ethanol’s price and octane supremacy over petroleum-based aromatics. In other words, today Americans are spending more at the pump to increase air pollution. It doesn’t have to be that way. We can spend less and clean the air with more ethanol.

Author: Brian Jennings Executive Vice President, American Coalition for Ethanol (605) 334-3381 bjennings@ethanol.org

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Europe Calling

ILUC: The ‘Soap’ Continues By Robert Vierhout

Every once in a while I dedicate my column to the topic that is loved by those who hate biofuels: ILUC. Contrary to the USA where the U.S. EPA managed to get some indirect land use change (ILUC) values out of a black box relatively quickly, the EU is progressing slowly in ‘solving’ ILUC. For already more than two years, the European Commission services have been deliberating what to do. In my opinion, the delay in putting a bill on the table is caused by the fact that the ILUC ‘science’ is simply not conclusive. A study by the International Food Policy Research Institute assessing ILUC caused by biofuel policy does not seem to convince everyone within the commission that indirect land use change is more than just an imaginary problem. The mere fact that the IFPRI researchers themselves expressed reservations and caution about the results of their work creates uncertainty on what measures to propose. The latest compromise under discussion by the commission services would allocate an ILUC value differentiated by crop (vegetable oil, sugar and starch) to biofuels to be used to

18 | Ethanol Producer Magazine | APRIL 2012

achieve the target set in the law on fuel quality. This target aims to reduce greenhouse gas (GHG) emissions by 6 percent by 2020. In the Renewable Energy Directive, on the other hand, three different measures would be introduced: raising the threshold for direct emissions from 35 to 45 percent reductions and for new (date unknown) installations to 60 percent and, finally, there would be a subtarget of 1.5 percent point set for double counting biofuels (those biofuels produced from waste, residue or cellulose material). To me this seems rather messy legislation: trying to address by different means in different laws a still-to-be proven problem. I guess this is the type of legislation one would expect from a problem that is more political than factual in nature. But, let’s assume, for the sake of the argument, that the effect would occur some time in the future under a businessas-usual scenario. Would these measures prevent ILUC, one example being tropical deforestation? Unlikely. If countries in Southeast Asia can no longer, due to this ILUC value, export their palm oil to the EU, they will find other markets, most likely closer to home. A leakage effect would occur. If, as a result, the EU produces less biofuel, would we then not even need to import more biofuels to compensate for the lower GHG saving? More imports, more risk of unwanted land use change? Finally,

we would not be addressing the problem where it is occurring: outside Europe. A more effective way to prevent unwanted land use changes leading to higher carbon release is by concluding agreements with the countries that are exporting biofuels to Europe. These agreements should restrict or forbid imports of certain biofuels unless proper land management is guaranteed. This could cause a legal battle at the World Trade Organization level, but such a measure seems legitimate if it would avoid adverse environmental effects. Punishing all biofuels instead, simply to avoid going to the WTO over a matter of principle, is not justified. Brazil shows that it is possible to manage land in a responsible way. Its tropical protection program, Amazon Region Protected Area, resulted in a 75 percent reduction in tropical forest clearing since 2004, even as ethanol production doubled. Rewarding mitigation, responsible land management and recognizing the value of animal feed production is a more constructive way forward than applying the conservative politics of punishment. Policy will yield better results, if it based on positive instead of negative incentives. Author: Robert Vierhout Secretary-general, ePURE Vierhout@epure.org

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business matters

FDA Has No Jurisdiction Here—Or Does It?

By Sarah Brew and Steve Toeniskoetter Pop quiz time—which federal agencies regulate your plant? Did

your answer include the Food and Drug Administration? If your plant produces distillers grains, corn oil or similar products for human or animal consumption, your answer should have. Ethanol plants that produce coproducts for food or feed are considered food facilities subject to FDA jurisdiction. But you are already regulated by the U.S. EPA and your state’s department of agriculture, so why should you care? For years, ethanol producers have mostly flown under FDA’s radar, but times are changing. FDA’s recent focus on antibiotic residues and mycotoxins in DDGSs was just a taste of things to come. A little over a year ago, President Obama signed into law the Food Safety Modernization Act, the first significant update and expansion of FDA’s food and feed safety regulatory powers in almost 70 years. While plants producing feed (including ethanol plants) have had to register with FDA since 2002, FSMA gives that requirement some teeth by allowing FDA to revoke a facility’s registration due to food or feed safety reasons. FSMA also prohibits shipping food or feed into interstate commerce without a current registration, effectively turning your registration into a license to operate. In other words, FDA could effectively shut down your sales, or even order a mandatory recall, if it finds significant food safety violations. The backbone of FSMA is the requirement that all registered facilities develop and implement a hazard analysis and preventive controls plan. Such a 20 | Ethanol Producer Magazine | APRIL 2012

system is likely to be quite similar to the Hazard Analysis and Critical Control Point plan system discussed in the November Business Matters column. We expect FDA to release its proposed rule on preventive control plans for animal feed facilities sometime between March and June. At a minimum, the rule will require feed manufacturers to evaluate known or reasonably foreseeable feed safety hazards, identify and implement preventive controls, monitor those controls, take corrective actions when they are not working, and periodically verify the effectiveness of the overall system. All of this must be in writing and will no doubt be a primary focus of FDA or state department of agriculture inspectors. While we do not yet know what preventive controls will be required, they will likely include testing both incoming grain and finished product for mycotoxins, testing finished product for antibiotic residues and possible microbial contaminants such as Salmonella or E. coli, pest control programs and implementation of required current good manufacturing practices. A recall plan may also be required, along with controls to ensure unapproved food or feed additives do not make it into the final product. Based upon comments by FDA officials, we believe FDA will likely mandate certain controls but still allow a producer flexibility to implement a different control that achieves the same or better result. FSMA also requires FDA to perform more frequent inspections of regulated facilities, which for some ethanol plants will be the first. The law requires all facilities be inspected by 2018, and at least once

every five years thereafter. Certain highrisk facilities will get inspected more often, though it is highly unlikely FDA will find most ethanol facilities to be high risk. A key part of any inspection will be a review of a facility’s records. In addition to access to hazard analysis and preventive control plan records (including monitoring and verification records, such as test results), FDA also gets increased records access in Class I-recall situations. Managing records and training employees on how to handle inspections will be essential to avoid receiving FDA warning letters. A Form 483 or Warning Letter will generally note FDA’s concerns with a facility and require they be fixed. Under FSMA, if FDA reinspections are needed, fees starting at $224 an hour per inspector will be paid. This is just a sampling of FDA’s new powers and possible requirements for ethanol facilities. FDA has its hands full implementing FSMA and, therefore, many of these provisions will not be in effect for months, or even years. Nonetheless, we encourage you to visit with your legal advisor to begin preparing for compliance with this important new law. Sooner or later, FDA will be knocking at your door—will you be ready? Authors: Sarah Brew Partner, Food and Agriculture Industry Group Faegre Baker Daniels (612) 766-7470 Sarah.Brew@FaegreBD.com Steve Toeniskoetter Associate, Food and Agriculture Industry Group (612) 766-7353 Steve.Toeniskoetter@FaegreBD.com

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business briefs People, Partnerships & Deals

Pam Keck joins the National Corn Growers Association as director of biofuels programs and business developments. “Pam is an incredibly valuable addition to our team, and we are excited to be Scientist and able to utilize her broad Educator Pam Keck brings knowledge base to furmore than 20 years ther enhance our biofuof experience in the agricultural and biofuels els program,” said Paul industry, academia and Bertels, NCGA vice not-for-profit research to her new position at president of production NCGA. and utilization. Keck most recently contracted with Monsanto, coordinating an outreach program that brought together schools and scientists. She previously taught chemistry at Southern Illinois University, Edwardsville, and at Lewis and Clark Community College. She served as assistant director of workforce development and scientific projects at the National Corn-to-Ethanol Research Center. Carl Rush, senior vice president of organic growth for Waste Management Inc., is now serving on the board of directors for Enerkem Inc. At Waste Management, Rush is responsible for finding growth opportunities that are synergistic with the company’s objective of maximizing value from waste, including converting them into biofuels, renewable chemicals and energy. Enerkem has established a strategic relationship with Waste Management since the company’s initial investment in Enerkem in 2010. Tracey Olson has resigned from his position as CEO of Granite Falls Energy LLC to accept the top management position at Karian Peterson Powerline Contracting in Montevideo, Minn. An interim CEO will be appointed as the board begins the management search, according to board chairman, Paul Enstad. “Granite Falls Energy is a great company with great employees and we will continue that tradition by carefully identifying Tracey’s successor in the coming months. 22 | Ethanol Producer Magazine | APRIL 2012

We appreciate Tracey’s years of service and wish him the best.” John Stork has joined Epic Systems Inc. as project manager/design engineer. Most recently employed at Jacobs Engineering, working exclusively as project manager on ConAgra projects, Stork Project Engineer is now responsible for John Stork has more engineering and manthan 16 years of experience in various agement activities at the engineering, project St. Louis-based multiand operations discipline engineering management roles for companies including and fabrication firm. Raskas Foods, Epic Systems provides Schreiber Foods and Newell/Rubbermaid. automation solutions for modular process plants and systems as well as custom machine manufacturing, machine vision system integration and packaging, and assembly line integration. Mansfield Renewable Energy is now marketing ethanol and distllers grains for the 25 MMgy Red River Energy LLC plant in Rosholt, S.D. Jon Bjornstad, president of Mansfield Renewable Energy, stated, “We’re excited to offer a new line of products and services through our work with Red River Energy. Many of our plant partners have asked us to provide feed marketing options. With Bernie Punt joining our team, we feel like we have found the right leadership to enable us to offer the service.” The coproducts division will allow the company to provide a more complete services portfolio, which also includes natural gas supply, denaturant supply, ethanol marketing, corn oil marketing, and risk management services, Bjornson said. The former North Country Ethanol in Rosholt was purchased in September and renamed Red River Energy, coming back online late last year. Mick Miller is general manager of the plant and continues as president of Energetix LLC.

Arisdyne System Inc. announced two new licensing agreements. Pinal Energy LLC, Maricopa, Ariz., and United Ethanol LLC, Milton, Wis., have agreed to license and acquire the company’s patented cavitation system. United Ethanol was involved in extensive testing of the technology along with the National Corn-to-Ethanol Research Center, the Ohio State Agriculture Research and Development Center, and Critical Path Management. Pinal Energy’s decision followed a four-month test showing yield improvements in a mixed feedstock environment. Arisdyne’s patented devices and processes have applied high-shear cavitation technology to open the corn cell structure efficiently, expose the starches to water and enzymatic activity, and reduce particle size; all contributing to more effective frontend processing. Dedert Corp. has moved into its new head offices and state-of-the-art research and development facility in Homewood, Ill., 30 miles from downtown Chicago. The fully equipped 10,000-square-foot onsite research facility will facilitate pilot-scale testing of products and processes. The company has been providing evaporators and dryers to the starch/ethanol industries for 40 years. LionBlog is the newest tool through which Lion Technology Inc. will share its knowledge and expertise in the fields of environmental law, hazmat transportation, hazardous waste management and workplace safety. The blog is designed to serve as a reference for regulated industries by preparing them for rule changes, providing updates on the status of proposed legislation, answering user-submitted questions and requests for clarification, and promoting discussion and sharing among peers. CPM Roskamp Champion trained 15 operators from Hungary’s nearly completed Pannonia Ethanol. The new facility will use the CPM Roskamp Champion hammermill to produce corn ethanol and distillers grains. The training was held at Highwater Ethanol LLC in Lamberton, Minn.

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The Roundtable on Sustainable Biofuels announced its first completed commercial certification of the Manildra Group of Australia. The Manildra Group, though its subsidiary Shoalhaven Starches Pty Ltd., is producing ethanol from starchy wastewater generated by its wheat-processing facility. The certification was conducted by NCS International. BinMaster, a division of Garner Industries, released its MultiBob inventory management system, which provides an average bin level from measurements taken by two and up to 32 SmartBob sensors. MultiBob can be used to monitor inventory in any storage bin or flat storage warehouse. Each SmartBob sensor detects level changes as bins and warehouses are emptied or filled using trucks, loaders or conveyors.

Cincinnati, Ohio-based Almo Process Technology recently announced improvements to several features of its sizer, including redesigned output ports for material flow optimization, the vibration absorption system, the screen tensioning system and redesigned dust covers. In a roundup of news headlines of the past month: BioProcess Algae LLC and Green Plains Renewable Energy Inc. began construction on a five-acre algae production facility at the site of Green Plain’s 65 MMgy ethanol plant near Shenadoah, Iowa. • Aventine Renewable Energy Holdings Inc. resumed work to restart the 38 MMgy ethanol plant it purchased in 2010 in Canton, Ill. • NEDAK Ethanol LLC, a 44 MMgy plant in Atkinson, Neb., recently completed a capital restructuring deal, raised $10 million

in equity and entered into an asset management agreement. • ZeaChem Boardman Biorefinery LLC received a $232.5 million conditional commitment for a USDA loan guarantee to build its 25 MMgy integrated biorefinery in Boardman, Ore., contingent on the successful operation of its demonstration-scale facility. • Gevo Inc. received a patent on its isobutanol technology, “Recovery of Higher Alcohols From Dilute Aqueous Solutions.” The patent addresses the separation technology used to produce propanols, butanols, pentanols and hexanols and how ethanol plants can be retrofitted to produce higher alcohols. Share your industry briefs To be included in Business

Briefs, send information (including photos and logos if available) to: Business Briefs, Ethanol Producer Magazine, 308 Second Ave. N., Suite 304, Grand Forks ND 58203. You may also fax information to (701) 7468385, or email it to sretkaschill@bbiinternational.com. Please include your name and telephone number in all correspondence.

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1/21/11 1:38 |PM APRIL 2012 | Ethanol Producer Magazine 23

commodities Natural Gas Report

Prices unsustainable for natural gas Feb. 17—The spot price for natural gas is currently trading in the neighborhood of $2.50 per MMBtu in many areas. As the chart shows, summer 2012 prices are barely above $3 per MMBtu. Natural gas consumers are clearly benefiting from these low prices through reduced energy-related operating costs. Our clients certainly would like that trend to continue. Will it and can it? Unfortunately, we don’t believe year-over-year price drops can be sustained. While consumers are reaping significant savings, natural gas producers are selling below replacement cost. For example, the full production cost on the northeastern part of the Marcellus Shale is approximately $4 per MMBtu, while the cost for a traditional vertical well approaches $7 per MMBtu. A profit-driven producer will not aggressively add production capability with these numbers. The production ration-

By Casey Whelan

alization process has already started. Seneca Resources is reducing its 2012 production budget by 8 percent and shifting resources to liquids and oil-prone fields and away from dry gas fields. Talisman Energy plans to reduce its 2012 production budget by $500 million, much of that decrease coming from dry gas formations. Interestingly, it is increasing the budget in the Eagle Ford, which has high liquid content. Chesapeake Energy plans to decrease this year’s dry gas drilling budget by 70 percent compared to 2011, from $3.1 billion to $900 million. While anecdotal, these ex-

amples point to a larger trend. The outcome of reduced investment over time is a likely decrease in production. When that will happen is uncertain. It is time for caution and diligence when planning risk management.

Corn Report

Trade anticipates corn crop to be biggest since 1944 Feb. 17—At the time of this writing, the March planting intentions report is still a month away. That all-important USDA report will have been released, however, when this article is circulated. The market anticipates 94 million to 95 million acres planted and corresponding yield and demand numbers—projections that will impact the market through the balance of the spring along with weather. Poor ethanol margins and large global wheat inventories have limited gains that might have been expected from reports of declining South American crop prospects. A U.S. carryout estimate of 801 million bushels leaves no room for error and makes planting intentions all-important. In February, the USDA projected exports to be 1.70 billion bushels, up from January’s 1.65 billion. Corn demand for feed and ethanol were un24 | Ethanol Producer Magazine | APRIL 2012

changed at 4.60 and 5.0 billion bushels respectively. Global corn ending stocks were reduced due to lower U.S. carryout. Argentine and Brazil crops were projected at 22 million metric tons (mmt) and 61 mmt respectively, numbers that could still be reduced by approximately 5 mmt, trimming global stocks further. Global wheat stocks continue to increase, which will limit corn’s upside. The chart illustrates historical U.S. planted corn acres, with the far right showing a new crop estimate that will likely change. Expec-

BY JASON SAGEBIEL

tations are for the biggest planting year since 1944. The market will react to any surprises in the March 30 planting intentions report.

report

Regional Ethanol Prices Front Month Futures (AC) $2.215 REGION

SPOT

RACK

West Coast

$2.295

$2.460

Midwest

$2.175

$2.450

East Coast

$2.255

$2.521 SOURCE: DTN

Regional Gasoline Prices

DDGS Report

DDGS prices likely to be volatile this spring BY SEAN BRODERICK Feb. 17—By late February, ethanol plant run times and margins were getting the most attention, causing DDGS supply to be a concern. The market is not feeling the full effects yet, but the barge and container markets that feed into exports have been moving higher in anticipation. Chinese demand has picked up significantly since they returned from their New Year’s celebration, and container sales to Southeast Asia were higher than last year. Korea also appears to be increasing shipments closer to 2010’s pace. In the U.S., DDGS is seeing a lot of competition from corn gluten feed in the feedyards in the southern plains, and canola meal in California. Feedyard and dairy demand has cooled with the unsea-

sonably warm winter weather in Texas, Oklahoma and New Mexico. Eastern feeders brought in feed wheat from the U.K., and Midwest-sourced container shipments have increased out of the eastern seaboard ports. Given export demand, and the probability of decreased supply, we do expect DDGS prices to rally as a percentage of corn. There’s potential for DDGS price volatility this spring, both from corn and beans fighting for acres and from uncertain ethanol plant margins affecting production, creating gaps in supply. And while there will be no decision on the dumping case until June, our expectation is that China will continue to pick up its containers shipment pace, and quite possibly, bulk.

Front Month Futures Price (RBOB) $3.0156 REGION

SPOT

RACK

West Coast

$3.310

$3.298

Midwest

$2.507

$2.914

East Coast

$3.019

$3.047 SOURCE: DTN

DDGS Prices ($/ton) location

APR 2012

MAR 2012

Minnesota

195

183

APR 2011 205

Chicago

215

204

210

Buffalo, N.Y.

230

205

210

Central Calif.

260

245

Central Fla.

228

216

219 SOURCE: CHS Inc.

Corn Futures Prices Date

(May Futures, $/bushel)

High

Low

Feb. 17, 2012

6.50

6.38 3/4

6.45 1/4

Jan. 17, 2012

6.18 1/4

6.08 1/4

6.10 3/4

Feb. 17, 2011

7.23 1/4

7.02 1/2

7.23 SOURCE: FCStone

Cash Sorghum Prices ($/bushel) LOCATION

Ethanol Report

Tight ethanol supplies are hard to imagine BY RICK KMENT Feb. 17—Ethanol supplies are the main focus this quarter. The mid-February Energy Information Administration report put ethanol stocks at record highs after nine consecutive weeks of gains. This created stability in ethanol prices in the month even when gasoline prices jumped as much as 30 cents per gallon. Although overall demand for gasoline and ethanol continues to grow, and is above levels from a year ago, the first quarter tends to be sluggish because driving activity is lower than either the end-of-year holiday or the spring and summer travel seasons. This is true in 2012. Due to the buildup of supplies by many blenders to take advantage of the

blenders credit, overall buying demand for ethanol remains down. Ethanol production is slowing, however, although the trend lower is expected to be wellmanaged, with plants taking a longer, more sustainable approach toward margins than was seen four to five years ago when markets turned sour. This could allow for markets to bounce back rather quickly, especially if production costs at many of these plants stabilize. Ethanol and gasoline prices are expected to trend higher over the next several weeks, and as ethanol supplies tighten back to a normal range, it is likely that more aggressive price support will be seen through much of the spring and early summer.

FEB 17, 2012

JAN 20, 2012

FEB 24, 2011

Superior, Neb.

6.07

5.70

6.06

Beatrice, Neb.

6.12

5.77

6.19

Sublette, Kan.

6.15

5.84

6.04

Salina, Kan.

6.14

5.81

6.31

Triangle, Texas

6.34

6.01

6.37

Gulf, Texas

6.75

6.51

6.68

SOURCE: Sorghum Synergies

Natural Gas Prices

($/MMBtu)

LOCATION

FEB 17, 2012

FEB 1, 2012

FEB 1, 2011

NYMEX

2.70

2.34

3.75

NNG Ventura

2.51

2.56

4.08

CA Citygate

2.82

2.79

3.97

SOURCE: U.S. Energy Services Inc.

U.S. Ethanol Production

(1,000 barrels)

Per day

Month

End stocks

Dec. 2011

960

29,772

18,261

Nov. 2011

945

28,335

18,343

Dec. 2010

918

28,457

17,941

SOURCE: U.S. Energy Information Administration

APRIL 2012 | Ethanol Producer Magazine | 25

Cellulosic is your seed corn. Plant now.

(KK [OYLL JLSS\SVZPJ LULYN` Z[YLHTZ ^P[O HU 0UIPJVU )PVTHZZ CO2 9LÄULY` ;OL M\[\YL VM JVYU L[OHUVS PZ ;OL 5L^ ,[OHUVS ·Z[V]LY Corn L[OHUVS THKL MYVT [OL SLM[V]LYZ VM [OL OHY]LZ[ ;OL < : THYRL[ 111.3 MT/hr Traditional Grain Steam Ethanol Plant HSVUL ILNPUZ H[ IPSSPVU NHSSVUZ H `LHY I` JV\Y[LZ` 9-: 36.8 Mbt/yr 88,4 MT/hr 40% Supply 16,000 BTU/gal ;OL M\[\YL PZ HSZV JSLHU SPNUPU HUK * TVSHZZLZ·[OL [^V V[OLY 36.4 MT/hr Supply Natural Gas Electricity 85% YLUL^HISL LULYN` Z[YLHTZ WYVK\JLK H[ JVTTLYJPHS ZJHSL I` H Biomass 10.1 MW CO2 154.8 MBTU/hr 11.9 MWH/hr 13,000 BTU/gal 4; KH` 0UIPJVU )PVTHZZ 9LÄULY` 0[»Z KLZPNULK [V PU[LNYH[L 50.0 MT/hr 1.00 KWH/gal 463k tpy Inbicon Biomass Z`TIPV[PJHSS` ^P[O H UL^ VY L_PZ[PUN NHSSVU JVYU VY ^OLH[ WSHU[ Refinery Steam Electricity <ZPUN UV MVZZPS M\LSZ P[ JHU [\YU [OL SPNUPU PU[V HSS [OL Z[LHT HUK 88.4 MT/hr 10.9 MWH/hr 78.900 BTU/gal 4.36 KWH/gal Lignin BioFuel Powder LSLJ[YPJP[` `V\ ULLK [V WYVJLZZ [OL IPVTHZZ (UK L]LU WYVK\JL 100% Supply 19.2 MT/hr (90% dm) 100% Supply LUV\NO L_[YH LULYN` [V VMMZL[ `V\Y NYHPU WSHU[»Z \[PSP[` JVZ[Z 0.38 ton/ton as-is Biofuel CHP Plant ;OL * JHU WYVK\JL TVYL LULYN` VY ++. Z\WWSLTLU[ VY OPNOLY ]HS\L IPV JOLTPJHSZ

Ethanol 33.6 MT/hr 100MMgpy DDGS 33.4 MT/hr 16.8 Ibs/bu Ethanol 7.2 MT/hr 20MMgpy C5 Molasses 19.7 MT/hr (65% dm) 0.39 ton/ton as-is

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Ethanol News & Trends

Accelerating Innovation

The American public takes for granted the role that U.S. agriculture plays in providing low-cost and abundant food, not to mention the role corn ethanol plays in keeping fuel costs down, Secretary of Agriculture Tom Vilsack said in his keynote address on day two of the National Ethanol Conference, held Feb. 23-24 in Orlando, Fla. He stressed the industry needs to play a role in educating the public on the importance of these contributions. “It is important for us to market this,” he said. “Ninety-eight percent of America does not farm and are generations removed from the farm.” Vilsack outlined the programs USDA is administering to support the growth of renewable energy, highlighting one creative approach to furthering advanced biofuels. The joint effort on drop-in aviation fuels involving the USDA, the U.S. DOE and the Navy addresses financing hurdles by including a Navy precontract for fuel supplies from a biorefinery. Maintaining funding for future energy programs may be a challenge in the Farm Bill negotiations ahead. Vilsack explained that it took time to get the rules in place and begin implementation of the new energy programs. Only those programs that were funded throughout the life of the current farm bill, however, are part of the baseline. Thus, none of the energy programs are in the baseline budget, and continued funding will require reducing funds for programs covering crop insurance, conservation, nutrition and others. With budget cuts to the baseline expected, Vilsack said USDA will seek more flexibility to use existing programs to fund further work in renewable energy. Renewable Fuels Association President and CEO Bob Dinneen outlined the accomplishments of the industry in producing 13.9 billion gallons of ethanol and 39 million metric tons of high-protein feed last year while employing 90,000 people. “Despite a worldwide recession, deeper and more severe than any since the Great Depression, the U.S. ethanol industry has been the fastest growing in28 | Ethanol Producer Magazine | APRIL 2012

PHOTO: Susanne Retka Schill, BBI International

Ethanol industry lauded, challenged in Orlando

Leadership Award Dave Vander Griend, president and CEO of ICM Inc., center, received the Renewable Fuels Association’s 2012 Leadership Award given to individuals who have shown exceptional leadership in helping America’s ethanol industry grow and evolve into the innovative, cutting edge industry it is today. He is pictured with RFA President and CEO Bob Dinneen, left, and RFA Chairman Chuck Woodside, CEO of KAAPA Ethanol LLC, at the 17th Annual National Ethanol Conference.

dustry in the nation, with the value of our output growing by an average annual rate of 7.9 percent since 1998,” Dinneen told the 1,200 attendees in his opening State of the Industry address. The U.S. economy grew just 2.2 percent per year on the average in that period, while the ethanol industry’s rate of growth beat the Internet publishing and broadcasting industry, as well as the petroleum refining and oil and gas extraction industries. In addition to reducing oil imports and improving air quality, Dinneen stressed the success of the ethanol industry in revitalizing rural America. “Ethanol has become the single most important value-added market for farmers, stimulating investment and allowing farmers to get their income from the marketplace, not the taxpayer,” he said. He pointed to gains in corn production with the past five corn crops averaging 12.6 billion bushels compared to a 10.5-billion-bushel average in the previous five years and 9.6-billion-bushel average in the five years before that, when corn prices were around $2 a bushel. “That increased productivity has allowed the ethanol industry to grow without diverting corn supplies away from

other important markets,” he said, adding there was more corn available for nonethanol uses in the most recent five-year period than ever before. While the corn ethanol industry did not fight the loss of the tax incentive, Dinneen said it is critical that in the year ahead the industry remind policymakers that cellulosic ethanol needs policies to help it develop. Other priorities for the association will be to complete the work begun to aid the rollout of E15, encourage the growth of E85 and work with automakers to fully realize the octane benefit of ethanol. In a discussion on E15, Kristy Moore, vice president of technical services for the RFA, said there are 10 E15 registrations sitting on the desk at the U.S. EPA waiting for approval. The necessary federal approvals, however, are only half the battle, she added. RFA is focusing its initial efforts for state-level regulatory approvals in 12 Midwestern states where E15 will launch, plus preparing materials to meet misfueling mitigation guidelines and for future point-of-sale retailer forums. —Susanne Retka Schill

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Join the Club Butamax signs up first early adopter to produce butanol

When Highwater Ethanol LLC signed a letter of intent last December with Butamax Advanced Biofuels LLC to retrofit the 50 MMgy corn ethanol plant for biobutanol production, it also became the founding member of Butamaxâ&#x20AC;&#x2122;s Early Adopters Group. According to Butamax, the EAG is expected to develop into a large group of ethanol producers who have elected to become the â&#x20AC;&#x153;first waveâ&#x20AC;? of producers to use its technology to convert facilities for butanol production. To date, Highwater is the only member of the EAG, but Butamax CEO Paul Beckwith expects that will soon change. â&#x20AC;&#x153;During the course of this year weâ&#x20AC;&#x2122;re looking to add two to three more members to the group,â&#x20AC;? he says. â&#x20AC;&#x153;We are talking to a number of producers about this opportunity.â&#x20AC;? Butamax has said it is targeting the industryâ&#x20AC;&#x2122;s leading ethanol producers to join its group. But considering those producers are already operating at the top of an established industry, why would they consider converting to produce a fuel that doesnâ&#x20AC;&#x2122;t yet have a market? According to Beckwith, the answer is quite simple: economic opportunity. â&#x20AC;&#x153;What butanol really offers is the opportunity to continue the operation very much as is, but to manufacture a higher value product and gain the benefits associated with thatâ&#x20AC;&#x201D;basically, higher income,â&#x20AC;? he says. The biggest drawbacks to butanol production to date have been the arduous regulatory approval process and that legacy ACE butanol technology isnâ&#x20AC;&#x2122;t competitive with ethanol. Beckwith is confident that Butamaxâ&#x20AC;&#x2122;s technology will be competitive with ethanol on an energy basis within the next year, adding that because butanol has favorable blending properties, refiners and blenders will be willing to pay more for the product relative to ethanol. Butamax plans to begin retrofitting the Highwater plant in 2013, with operations anticipated to begin in 2014. By that time, Beckwith says he expects regulatory approval will have been finalized for the fuel, allowing it to enter into the marketplace with relatively

few issues. â&#x20AC;&#x153;One of the strengths of Butamax is that we have a great deal of expertise in the fuels market related to introducing new products,â&#x20AC;? he says. â&#x20AC;&#x153;Weâ&#x20AC;&#x2122;ve done extensive testing to ensure that when we introduce butanol into the fuels market, weâ&#x20AC;&#x2122;re able to advise our customers of exactly how to do that and how to formulate the blends in order to ensure a safe introduction to the market.â&#x20AC;? Butamax intends to focus its efforts primarily on the fuels market, rather than chemicals. â&#x20AC;&#x153;We will still be able to sell butanol into the chemicals market, but long-term, we see the biggest opportunity for butanol to be the fuels market, and we donâ&#x20AC;&#x2122;t want to go to market with technology that is only competitive in the chemicals market,â&#x20AC;? Beckwith says. â&#x20AC;&#x153;That could potentially leave some producers stranded if they donâ&#x20AC;&#x2122;t have technology that is consistent with being competitive in the fuels market.â&#x20AC;? Butamaxâ&#x20AC;&#x2122;s technology and game plan is similar to another butanol developer, Colora-

Partner Courtship Butamax CEO Paul Beckwith expects to add new members to its early adopters group this year.

do-based Gevo Inc., and the two companies are currently involved in a legal battle over intellectual property associated with the production technology. The lawsuits are ongoing but Beckwith wants to assure ethanol producers that they wonâ&#x20AC;&#x2122;t affect Butamaxâ&#x20AC;&#x2122;s plans. â&#x20AC;&#x153;The litigation is not going to delay our implementation of biobutanol,â&#x20AC;? he says. â&#x20AC;&#x153;It is very much our intent to commercialize this technology and offer it to the industry.â&#x20AC;? â&#x20AC;&#x201D;Kris Bevill

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APRIL 2012 | Ethanol Producer Magazine | 29

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Small-scale Step Forward

Allard inks distributorship deal with Synenergy Allard Energy Inc., a Farmersville, Texasbased company that has developed small-scale modular ethanol refineries, is now working with Synenergy Limited LLC. At of the end of January, the two companies announced that Synenergy now holds the exclusive license to distribute Allard technologies as well as provide ethanol production services in Michigan, Illinois, Indiana, and Ohio. Synenergy will work with Allard Energy to provide services in the areas of venture feasibility, business models, plant layout, feedstock analysis, installation of system modules as well as assistance with training and start-up, the company says. Worldwide, the Michigan company can also sell Allard refineries nonexclusively. Tom Burgess, general manager of Synenergy, called Allard’s ethanol production technologies cutting edge. “Keeping feedstock, ethanol production and ethanol distribution local is the future of a sustainable fuel production model,” he says. “Allard Energy’s advanced technologies and product line provides

an opportunity for the small- to medium-sized entrepreneur to transform waste managementrelated issues into a profit center.” Allard’s refineries range in size and output from the 2 gallon-per-hour/21,000 gallonper-year model to the 200 gallon-per-hour/1.6 MMgy model. Although there’s no limit on the number of modules that can be networked, Allard has said the optimal plant size for one location is about 200 to 500 gallons per hour of ethanol output. Allard’s emphasis is on producing ethanol from organic and industrial waste rather than food or commodity-based products. The company works to turn ideas into workable products cost effectively in a short period of time. “One of our goals is to promote an ‘open source’ approach to our products, which means that we intend on making an open system approach available to everyone,” according to information on the company’s website. “We don’t believe in building an inventory of intellectual property and then leveraging pat-

Ethanol Production on Wheels An Allard Research lab unit produces 2 gallons per hour of ethanol. The company also markets a 20 gallon-per-hour modular cellulose ethanol refinery module. SOURCE: ALLARD ENERGY

ent protection against others, nor do we want to evolve into a company that spends more on legal fees protecting its ‘proprietary’ works ahead of actually investing to producing products that reach the market and solve problems today.” —Holly Jessen

DOWN Evaporator Costs Scale can quickly build up on equipment S surfaces s and dramatically interfere with the heat h transfer efficiency of an evaporator, lowering l capacity and productivity while raising r maintenance costs. Buckman’s B antiscalant programs prevent or o reduce fouling, extending the operating time between off-line maintenance cleanings and softening remaining deposits so they are easier to clean. Use of these programs improves the heat transfer capacity of the evaporator and results in increased production. Let Buckman help you maximize evaporator performance and cut your plant’s total operating costs.

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What’s in a Tax?

UNICA, RFA spar over Brazilian goods and services tax As of March 1, a 25 percent Brazilian goods and services tax, referred to as the ICMS, again applies to imported ethanol in the state of Sao Paulo, which includes the Port of Santos, Brazil’s main port. The Renewable Fuels Association sent a letter to Ambassador Ron Kirk, U.S. Trade Representative, expressing concern over the development. “Because ethanol produced in Sao Paulo is tax exempt, ethanol imported into Sao Paulo from the United States and other areas is at a substantial economic disadvantage,” Bob Dinneen, president and CEO of RFA, said in the Jan. 31 letter. “We believe this action is discriminatory and may—severely and immediately—restrict the exportation of U.S. ethanol to Brazil.” Although RFA acknowledged that a waiver of Brazil’s 20 percent tariff on imported ethanol has been extended to 2015, the organization asserted that Sao Paulo is “essentially imposing a tariff on almost all the product entering the country from the U.S.” by reinstating the ICMS tax on ethanol. Further, it amounts to a 5 percent increase from the 20 percent tariff to the 25 percent ICMS, Dinneen said. UNICA, on the other hand, takes exception with the RFA’s view. The Brazilian Sugarcane Industry Association points out that the ICMS was a pre-existing value-added tax that has been in place for several years as a countrywide federal tax, says Marcos Jank, president and CEO of UNICA. Due to significantly higher demand for imported anhydrous

ethanol in 2011, the state of Sao Paulo deferred collection of ICMS at customs from Oct. 1, 2011, to May 31. The deferment period was cut short when the state government decided to move up the ending date to March 1, rather than waiting until May 31. “As of that date, importers of anhydrous ethanol will resume payment of the ICMS when the product clears customs, as was the case before Oct. 1, 2011,” Jank says. “A credit in the same amount will be generated for the importer, who is free to recover the tax at any time, a practice that has been in place for several years.” The ICMS tax is collected at the port of entry, when the product clears customs, and again when the ethanol is blended. However, when the ICMS is collected at customs, a credit of the same amount is granted to the importer, which the importer can recover at any time. “In other words, the net tax burden on imported ethanol was and continues to be zero, and imported ethanol continues to receive the same national treatment as domestically produced ethanol,” Jank says. “The ICMS applied on blended ethanol by the state of Sao Paulo, regardless of origin, is 25 percent.” —Holly Jessen

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A microorganism found in hot springs displays cellulosic ethanol potential Yellowstone National Park is home to more than 10,000 geysers, hot springs and other hydrothermal features, equal to about half of the world’s hydrothermal wonders. Recently, researchers from the U.S. DOE’s BioEnergy Science Center at Oak Ridge National Laboratory discovered a microorganism living within one of Yellowstone’s famous hot springs that could help unlock the secret of economical cellulosic ethanol production. The bacterium, known as Caldicellulosiruptor obsidiansis, thrives in extremely hot temperatures and breaks down organic materials such as leaves and other debris in its natural environment. Scientists believe that if these characteristics can be transferred to biofuel production tanks, the microorganism could be very useful in consolidated bioprocessing, a production process that uses microorganisms to break down biomass and also produce ethanol. To test this potential, researchers conducted a series of experiments, evaluating proteins from C. obsidiansis grown on four materials ranging from simple sugar to pretreated switchgrass. In a paper published in the Journal of Proteome Research, the researchers explained that testing simple substrates first provides an important basis of knowledge for researchers before they move on to more complex specimens such as switchgrass. “This progression helps us look at how proteins change given different carbon substrates,” ORNL researcher and study co-author Richard Giannone said. “One of the

PHOTO: JENNIFER MORRELL-FALVEY, ORNL

Hot Discovery

goals is to identify new proteins that we haven’t seen before. If an unknown protein doesn’t show up on the simple sugars or cellulose, but it shows up on the switchgrass, then we can say something about that gene or protein—that it responds to something the switchgrass is providing.” Tiny wonder Researchers the U.S. DOE’s Oak Ridge The researchers noted that switchgrass was at National Laboratory believe the selected for testing because they believe it bacterium named C. obsidiansis is one of the most promising bioenergy (shown here growing on crystalline cellulose) could play crops in the U.S. due to its robustness and a role in the development of a cheaper biofuel production low ecological impact. process. Through their testing, scientists found that the hot springs microorganism expressed a set of proteins that specifically breaks down the hemicellulose on switchgrass. They also found that, once inside the cell, it essentially turns on another function to process the C5 sugars further. The team plans to combine its measurements of the C. obsidiansis proteins with other technologies in order to obtain a holistic view of the organism, with the end goal of providing researchers with more complete information regarding the microorganism’s use in ethanol production. —Kris Bevill

ECONOMICS

By the Numbers Trends and patterns in the ethanol industry By Holly Jessen

The numbers are in for 2011, adding another year to the data compiled by the Agricultural Marketing Resource Center at Iowa State University on prices, profitability, and supply and demand in the ethanol sector. Economists Bob Wisner and Don Hofstrand maintain a set of spreadsheets and continually look for new ways of analyzing the facts and figures. So what did Wisner and Hofstrand discover about 2011 and the future of the ethanol industry by examining the data gathered in the past year? For one thing, they point to high corn and ethanol prices, the expiration of the Volumetric Ethanol Excise Tax Credit and exports as major stories. Hofstrand was especially struck by the high ethanol and corn prices that dominated 2011. “When you look at the patterns in the past, we last saw this for a brief time in 2008,” he says. “But the [recent] period of high prices has been longer, even though it is trailing off somewhat now. That’s one of the things that marks 2011 in my mind and whether that’s a harbinger for the future, I don’t know.” With higher corn prices, comes rationing. When everything shook out, it wasn’t the ethanol industry that cut back on corn use, however. “It rationed the demand for corn use for feed and the exports somewhat more than it did for ethanol,” Hofstrand says. “In fact the ethanol industry continued to expand while use of those other categories declined.” Higher corn prices have meant increased profits for corn producers and, a less obvious benefit, it also means more profit for the entire corn production system, including increased cash rents. “The ethanol profits are not only going to the ethanol producer and the corn farmer, they are also trailing back into the resources that the corn farmer uses,” Hofstrand says. Wisner points out that how profits are distributed between ethanol producers, landowners and farmers has varied over time and varied significantly in 2011. Export demand was strong, resulting in an impressive 1 billion gallons of ethanol exported in 2011. With the U.S. at the blend wall, that demand proved very important for the ethanol industry, he says. For the coming year, demand for U.S. ethanol in Brazil is expected to continue, 34 | Ethanol Producer Magazine | APRIL 2012

and increased demand due to mandates for ethanol in other countries is expected to continue, Hofstrand says. On the other side of the coin, Wisner adds, the fact that California’s Low Carbon Fuel Standard has been declared unconstitutional could slow imports from Brazil in the short term. However, the California Air Resources Board is appealing and the final outcome of that court battle is still unknown. The year 2011 was a year of substantial fluctuations in profitability, ranging from times of negative returns to very strong profitability in the last quarter of the year. Based on spot prices, profitability in the final quarter of 2011 was exceptionally good, although it dropped sharply in December, Wisner says. The catalyst for that profitability was the eminent sunset of VEETC at the end of the year, as ethanol plants pumped out as much product as possible and the petroleum industry blended as much with gasoline as it could. Looking ahead, Wisner expects the loss of Harbinger of the the blenders credit will result in slowed ethanol future? production in 2012. His projections for January Don Hofstrand, a retired value-added to August are that the average weekly decline agriculture extension compared to last year will be 1.7 million bushspecialist and a current AgMRC biofuels els. Viewing the numbers a different way, comeconomist, points out paring January to August to the weekly average that corn prices stayed from September 2011 through December 2011, higher longer in 2011 than in 2008. he projects a 3.3 million bushel decline in corn processing by the ethanol industry. The expected decline is even more noticeable when stacked up against the last quarter of 2011. That comparison adds up to a decrease of 5.4 million bushels per week, or 5.4 percent. The arrival of the blend wall and expected increase in E85 prices due to the lapse of VEETC are two factors that have complicated the future outlook of ethanol use, Wisner says. Analyzing the removal of VEETC shows that the net price for E10 is likely to increase by 4.5 cents a gallon and won’t have much of an effect on E10 demand, particularly

ECONOMICS

Relative Shares of Major Use of U.S. Corn in 2004-'05

Relative Shares of Major Use of U.S. Corn in 2010-'11

Exports 18%

Other & Seed 14%

Feed & Residual 37%

Feed & Residual 56%

Exports 14%

Ethanol & DGS 12%

Head for Numbers

In the discussion about the AgMRC biofuels data, Hofstrand and Wisner just can’t help themselves. Even while discussing recent trends, they were busily thinking up new ways to analyze the numbers. “We’re always looking for things to add,” Hofstrand says, telling EPM that they’re also open to suggestions for additional data comparisons, depending on what would be most useful. Targeted toward value-added agriculture, AgMRC is a virtual library that provides facts and figures on commodities, markets, business development and more. AgMRC, which is partially funded by USDA, is based out of Iowa State University. It started out as a collaboration of ISU, the University of California and Kansas State University but as it has evolved, other universities have provided data as well, Hofstrand says. The information compiled in abundant articles, spreadsheets, Tracking DDGS replacement charts and graphs comes from various sources Robert Wisner, an including the USDA, U.S. Energy Information AgMRC biofuels economist and Agency and the U.S. Census Bureau. professor emeritus, One part of that is data collected on the resays distillers grains, a coproduct of ethanol newable energy industry, specifically ethanol and production, replaces a biodiesel. That includes the monthly Renewable “substantial amount” of Energy and Climate Change newsletter, which is corn for animal feed.

Other & Seed 11%

posted online and emailed to more than 1,300 subscribers. Past newsletter articles on diverse subjects range from exports, risk management, profitability of the ethanol supply chain and more. The first monthly newsletter was published in June 2008. The information has value for people in a variety of areas, such as the management of biofuels plants, investors and those in the feed industry, Wisner says. In addition, domestic and foreign policy makers have been known to use the information in making policy decisions. Both Wisner and Hofstrand have received many calls and emails from people around the world, they tell EPM. Source for all charts: AgMarketing Resource Center

 on the web On the Web: www.agmrc.org/renewable_energy/

Weekly U.S. Ethanol Production, 2010-11 and Needed 2011-12 for USDA 5.0 bil. Bu. Projection 280 260 Mil. Gal. per Week

because many states don’t label E10 pumps. E85, on the other hand, is projected to go from a net price of $2.515 a gallon with VEETC to $2.897 a gallon without VEETC, a more than 38 cent a gallon increase. With E85 fuel mileage about 25 percent lower than gasoline, E85 prices need to be about 25 percent lower than gasoline. “Without competitive retail prices, the E85 market is unlikely to expand to the hoped-for size and to provide a way out of the blend wall,” he says. “If a break-through in cellulosic ethanol production technology occurs that encourages rapid increases in production, pricing of E85 will become increasingly important to the entire ethanol industry.”

Ethanol & DGS 38%

240 220 200 180

2010-11 Proj. 2011-12

160 140 120 100

3- 1- 29- 26- 24- 21- 18- 18- 15- 13- 10- 8- 5Sep Oct Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

APRIL 2012 | Ethanol Producer Magazine | 35

ECONOMICS

Supply/Demand Balance One set of analyses that Hofstrand says deserves more attention are the supply/demand balance sheets compiled by Wisner. “They are used quite a bit but I am not sure everybody knows about them,” Hofstrand says. The data is somewhat unique among publically available sources of information and even data compiled in the private sector, Wisner says. The predictions examine questions such as, is the current situation a short-term development or will it continue on and for how long? “The reason we do that, is the markets are always forward looking, looking beyond just the current situation,” he says.

On the corn side, Wisner takes a long-term look at the trend for corn yields, going back to 1866 when the USDA first started recording the information. He examines, for example, how frequently corn yields are as much as 7 or 8 percent below or above trend. This helps determine the most likely long-term trend and possible implications. In the corn/ethanol and corn/distillers grains balance sheets, the data shows how many bushels of corn are being used for ethanol production, what amount of distillers grains is produced, how much of that is exported and even what percentage of distillers grains are utilized by various types of

Total Corn Supply (beginning carryover and production)

livestock. “There’s a lot of detail behind that,” Wisner says, “with the ultimate purpose being to determine how many bushels of corn are being replaced by the distillers grains.” The data shows it’s a substantial amount, he adds. In the future, he plans to add additional data on corn oil extraction. Recent reports have shown that more ethanol plants than initially anticipated have added that technology to their plants, Wisner says. While extracting corn oil can produce a premium product for some livestock, such as dairy cattle, the changing composition of distillers grains has caused some concerns in the pork and poultry industries.

Corn Production, Usage and Ending Carryover 16,000 14,000

16,000 14,000

12,000

12,000 Bushels (mil.)

Bushels (mil.)

10,000 10,000 8,000 6,000 4,000

8,000 6,000 4,000

2,000 2,000

0 Historic

Prelim.

Proj.

Beginning Carryover

36 | Ethanol Producer Magazine | APRIL 2012

Projected 2012-2013 Production

2007-08

2008-09

2009-10 Production

Total Usage

2010-11

Projected 2011- Projected 20122012 2013

Ending Carryover

ECONOMICS Ending Corn Carryover and the U.S. Weighted Average Farm Price 10.0

160.0

9.0

140.0

8.0

120.0

7.0

100.0 80.0 60.0

$7.00 $6.00 $5.00

6.0

$4.00

5.0 $3.00

4.0 3.0

40.0

$2.00

2.0

20.0 0.0

Corn Price

180.0

Weeks of Use

Bu./acre

Yield, Bushels per Acre Used for Ethanol and Returned as Dried Distillers Grains

$1.00

1.0 2007-08

2008-09

2009-10

Historic Yield

2010-11

2011-12

Prelim.

Proj.

Bu/ac. for fuel ethano & DGS

Low

Med.4

0.0

High

Projected 2012-2013

2007-08

2008-09

2009-10

Historic

DDGS production (bu. per acre equiv.)

2010-11

2011-12

Prelim.

Proj.

Ending Corn Carryover

Low

Med.4

$0.00

High

Projected 2012-2013

U.S. weighted avg. farm price

Ethanol Usage Projections and Corn Balance Sheet (mil. bu.) Historic Year: (production/marketing) 1/ Yield (bu. per acre)

Prelim.

Proj.

2007-08

2008-09

2009-10

2010-11

2011-12

Projected 2012-2013

150.7

153.9

164.7

152.8

147.2

Long-term Historical Yield Probability:

Low

Med.

High

148.0

164.2

168.0

18%

65%

17%

Total Supply (incl. imports)

14,362

13,729

14,774

14,182

13,501

13,656

15,128

15,477

Total Usage (mil. bu.)

12,737

12,056

13,066

13,054

12,785

12,885

13,115

13,245

3,049

3,709

4,568

5,021

5,000

5,050

5,150

5,175

682

842

1,051

1,162

1,163

1,183

1,208

1,214

23.4%

30.7%

34.9%

40.3%

40.35%

39.1%

35.8%

35.1%

5.2%

7.0%

8.0%

9.3%

9.4%

9.2%

8.4%

8.2%

932

660

859

452

-21

150

175

Ethanol Usage: 2/ Ethanol & DGS usage (bu. corn) DDGS production (mil. bu. corn equiv.) 3/ Ethanol & DGS usage (bu. per acre) DDGS production (bu. per acre equiv.) Ethanol & DGS usage (% corn production) DDGS production (corn equiv.% of crop) Mil. bu. increase in ethanol-DGS vs. prev. year

1,624

1,673

1,708

1,128

716

771

2,013

2,232

11.3%

12.2%

11.6%

8.0%

5.3%

5.6%

13.3%

14.4%

6.6

7.2

6.8

4.5

2.9

3.1

8.0

8.8

U.S. weighted avg. farm price

$4.20

$4.06

$3.55

$5.18

$6.05

$6.45

$5.00

$4.85

Iowa weighted avg. farm price

$4.15

$4.01

$3.50

$5.13

$6.00

$6.40

$4.95

$4.80

Harvest price (central Iowa)

$3.30

$3.50

$3.60

$4.75

$5.85

$6.15

$4.65

$4.50

Dec. futures price (harvest avg.)

$3.80

$3.85

$3.95

$5.35

$6.20

$6.60

$5.15

$5.00

-21.4%

172

115

148

-9

315

-731

-42

-348

-142

100

150

5.6%

-12.4%

-0.8%

-6.8%

-3.0%

0.0%

2.2%

3.2%

487

-616

106

-278

-151

129

184

Ending Carryover: (mil. bu.) Carryover as percent of supply Carryover, weeks of total use Prices:

Other: Feed use % chg. low-yield years vs. 2007-08 Mil. bu. domestic corn feeding replaced by increased DDGS 3/ Mil. bu. corn exports replaced by increased DDGS Mil. bu. change in corn feeding vs. prev. year % change in corn feeding vs. prev. year Net change in domestic corn feeding (mil. bu.) vs. prev. yr., incl. DDGS By Dr. Robert Wisner, biofuels economist, rwwisner@iastate.edu Marketing year - starts at Sept. 1 of the production year and ends August 31 of the following year. For example, the 2007 crop is marketed from Sept. 1, 2007 to August 31, 2008. 2/ DDGS bu. equivalent production & substitution for corn feeding is based on 17 lbs. of DDGS per bushel of corn. Assumed DDGS consumption by species varies by year. Current estimates: of the 76% of production consumed domestically after deducting exports 1/

is as follows: 36% fed to dairy, 52% fed to beef, 6% fed to hogs, and 6% fed to poultry. Exports are assumed to account for 24% of current production, and to gradually increase the future. Assumed percentage of one pound of corn replaced by each pound of DDGS in rations = 45% for dairy, 100% for beef, 55% for poultry and 85% for hogs. 3/ Includes corn equivalent of DDGS exports. 4/ Long-term probabilities reflect historical frequencies. Yield since 1990 has been above 1990-2007 trend 8 years, equal to it

one year and below it 13 out of 22 years. Since 1995, yield has been above this trend 5 out of 17 years. Excluding 2004, the average difference of actual yield since 1995 vs. 1990-2001 trend has been -1.7 bushels/a. The 1995-2007 trend reflects two low years and one very high year that tilt the trend line upward (See alternative yield trend chart). Actual yield has been below the 1995-07 trend yield 6 of last 7 years (2009 was the exception), by an average of -6.6 bu./a. Yield was below 2005-09 trend 5 of last 7 years.

APRIL 2012 | Ethanol Producer Magazine | 37

ECONOMICS

Ethanol Profitability

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

Ethanol Production Grind Margin and Return Over Variable and Total Cost $3.00 $2.50

$ per gallon

$2.00 $1.50 $1.00 $0.50 $$(0.50) Return Over Total Cost

Return Over Variable Cost

Allocation of Ethanol Profits between Ethanol Producer and Corn Farmer $10.00 $8.00 $6.00 $4.00 $2.00 $-

Ethanol Cost (not including corn)

Cropland Cash Rent

Corn Production Input Costs

Ethanol Revenue

Corn Price

Cash Renter Farmer Breakeven Corn Selling Price

Ethanol Breakeven Corn Purchase Price Source: USDA AMS Iowa Ethanol Report, ISU Ethanol Profitability, ISU Estimated Costs of Crop Production

38 | Ethanol Producer Magazine | APRIL 2012

Return Over Grind Margin

Source: USDA AMS Iowa Ethanol Report, EIA

$ per bushel

The data series that garners the most attention is the ethanol profitability spreadsheet, Hofstrand says. Starting with a hypothetical 100 MMgy ethanol plant in Iowa, the model tracks profitability by looking at four factors, the costs of natural gas and corn inputs and revenues from ethanol and distillers grains prices. The spreadsheet uses daily ethanol and distillers grains prices converted to monthly averages, as reported by USDA Ag Market News, and monthly natural gas prices as reported by EIA, to calculate profitability. “It serves in a general way as a barometer of what’s happening in the industry, even though it’s not an industry aggregate,” says Wisner. “We recognize that there are variations in costs and pricing strategies from one plant to another but it gives a general indication of what’s happening out there.” Hofstrand points out one feature ethanol producers can take advantage of is plugging in their own numbers to adjust the profitability model. For example, a plant can enter in its own capacity, financing details, efficiency factors and more. The prices for ethanol, distillers grains and cost of natural gas and corn cannot be directly changed in the spreadsheet, but producers can enter in a price adjustment, plus or minus the average price recorded. For example, an ethanol plant that paid a few cents more or less than the average price for corn used by the model can enter that in under price adjustment.

ECONOMICS Total Revenue of Ethanol Production $4.00 $3.50 $3.00

$ per gallon

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$0.50 $-

Ethanol Revenue

DDGS Revenue

Source: USDA AMS Iowa Ethanol Report

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Cost of Ethanol Production $3.50 $3.00

$ per gallon

$2.50

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$2.00 $1.50 $1.00

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Corn

Natural Gas

Other Variable

Fixed Costs

Source: USDA AMS Iowa Ethanol Report, EIA

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IMPACT

Visible Impact Sukup Manufacturing Co., an Iowa-based manufacturer of grain bins and other grain storage and handling equipment, is an example of ethanolâ&#x20AC;&#x2122;s direct economic impact on agricultural communities. The companyâ&#x20AC;&#x2122;s business has grown substantially over the past decade as it works to meet the grain storage demand of both ethanol and corn producers. Photo: SUKUP MANUFACTURING CO.

42 | Ethanol Producer Magazine | APRIL 2012

IMPACT

Dollars and

Sense Analyses vary, but ethanol’s economic benefits are clear By Kris Bevill

Multiple economic analyses have been conducted throughout the past several years on the economic impact of the U.S. ethanol industry. Recently, two analyses were released focused

on the impact of ethanol on Iowa’s economy in 2011. One of them, prepared for the Iowa Renewable Fuels Association by John Urbanchuk, technical director of environmental economics at Cardno ENTRIX, found that the ethanol industry contributed more than $5 billion to the state’s gross domestic product (GDP) last year. The other, conducted by Dave Swenson, an associate scientist at Iowa State University’s department of economics, found that ethanol contributed about $1 billion to the GDP. Both totals represent a definitive positive impact, but which is more accurate? It all depends on how you calculate it.

No Corn?

When Swenson conducted his analysis, he used a farmgate-forward formula, discounting any contribution of corn production from the state’s agricultural producers. He believes that for policymakers to understand the contribution that value-added production such as ethanol offers to a state’s GDP, it is important to segregate any contributors that may have been part of the economic landscape without it. For him, this includes corn. “We discount the corn inputs from the modeling structure because the corn was already here, and because what we are interested in documenting are the net additions to Iowa productivity associated with ethanol production,” Swenson says in his analysis. Further, he argues that the land used for corn production would be as productive as it could be, even without ethanol. “While plants may up the bid locally for corn, in and of themselves they do not create more crop production in Iowa,” he says in the paper. Therefore, Swenson doesn’t attribute the creation of additional farm-based jobs to ethanol production either. He does, however, note the ethanol industry’s requirements for skilled maintenance and facilities management, chemicals, fuels, utilities and transportation and concludes that Iowa’s ethanol industry was responsible for about 6,000 jobs in 2011, accounting for slightly more than $280 million in labor income. APRIL 2012 | Ethanol Producer Magazine | 43

IMPACT

2011 Contribution of the Renewable Fuels Industry to Iowa GPD (Millions)

Employment (Jobs)

Income (Millions)

Ethanol Manufacturing Direct

$181.3

1,900

$181.30

Indirect

$1,007.0

8,600

$473.86

Induced

$309.4

4,900

$172.05

Subtotal

$1,497.7

15,400

$827.2

Biodiesel Manufacturing Direct

$25.2

350

$20.7

Indirect

$440.1

4,900

$257.1

Induced

$131.4

2,100

$72.8

Subtotal

$596.7

7,350

$350.6

Direct

$1,228.4

28,500

$1,086.4

Indirect

$1,524.8

15,800

$912.0

Induced

$946.3

15,100

$523.5

Subtotal

$3,699.5

59,400

$2,521.9

Direct

$1,434.9

30,750

$1,288.4

Indirect

$2,971.9

29,300

$1,642.9

Induced

$1,387.0

22,100

$768.4

Total

$5,793.8

82,150

$3,699.7

Agriculture

Total Impact

SOURCE: CARDNO ENTRIX

Holistic View

In his report, Urbanchuk notes that the ethanol industry spends more money on corn than for any other raw material used in its production process. Iowa producers purchase about 1.3 billion bushels of corn annually, resulting in $7.2 billion of revenue for Iowa corn farmers last year, according to his analysis. Therefore, he did give some credit to ethanol’s impact on agriculture because, he says, without it the agricultural landscape would be different. “Without the demand for corn provided by the ethanol industry, Iowa farmers would likely plant fewer acres to corn, purchase fewer inputs and produce a smaller crop, thereby reducing the economic contribution provided by the corn industry,” Urbanchuk says in his report. The impact of renewable fuels production, specifically ethanol and biodiesel production, on Iowa’s agricultural economy is significant, Urbanchuk says. While the production processes themselves are not particularly labor intensive (the ethanol industry directly provides about 1,900 full-time Iowa jobs), be44 | Ethanol Producer Magazine | APRIL 2012

cause the industries use feedstocks produced by Iowa farmers, Urbanchuk also attributes up to 28,500 direct farm and farm-related jobs to renewable fuels. “Most of the agriculture jobs supported by the ethanol industry are farm workers and laborers associated with grain production,” he says in the report. “However, a wide range of jobs in support activities related to crop production, ranging from farm managers and bookkeepers to farm equipment operators, are supported by ethanol production. As the impact of the direct spending by the ethanol and biodiesel industry expands throughout the economy, the employment impact expands significantly and is spread over a large number of sectors.” Expanding the view to include indirect and induced agriculture-related jobs attributed to renewable fuels production amounts to an additional 30,900 jobs throughout Iowa, he says.

Visible Changes

Analyses may be useful for policymakers attempting to quantify an industry’s overall impact, but for others, the evidence of ethanol’s impact on Iowa’s economy doesn’t have to be proven on a spreadsheet. They can see it with their own eyes when they look across Iowa’s changing landscape. For example, corn grown by Iowa farmers has historically been delivered to grain elevators after harvest for shipment elsewhere. But as the ethanol industry’s appetite for locally grown corn has increased, farmers have happily grasped the opportunity to keep their product on the farm, constructing grain bins to store their corn and sell to area ethanol plants throughout the year rather than offload in bulk immediately after harvest time. This fact is evident in the increasing number of grain bins being erected throughout Iowa’s farming communities and proven again when examining the soaring sales of an Iowa-based grain storage equipment manufacturer. Sheffield, Iowa-based Sukup Manufacturing Co. was established in 1963 by Eugene Sukup after he invented a system for in-thebin grain drying. The company successfully produced various grain-related storage tools for years, evolving its products to meet the sector’s changing needs. About 12 years ago,

the company began developing expanded product lines including grain bins and tower dryers to provide products to meet the growing needs of the biofuels and agricultural sectors. As a result, business at Sukup has tripled in the past 12 years, according to Steve Sukup, company vice president and chief financial officer, who attributes the company’s stellar performance to booming demand from renewable fuels producers and their direct impact on agriculture. “We enjoy working with the ethanol companies at their locations,” he says. “What also really helped us is that each of the farmers or ranchers around the ethanol plant became a customer because they now control their marketing. Before the ethanol industry, it was just ‘get the grain to the river,’ and your marketing opportunities seemed fairly limited. Now, each farmer is able to market. They need grain storage because ethanol plants need grain 365 days a year and it takes on-farm storage to be able to meet those needs.” Sukup Manufacturing has offices in several states and provides products to customers throughout the entire U.S., servicing growers of soybeans, wheat and rice, as well as corn, along with various agricultural-related manufacturers. But Sukup doesn’t hesitate to declare that the company’s growth over the past decade—doubling in size to total about 400 employees currently—is directly related to agriculture and ethanol and he has no doubt that ethanol production is directly responsible for revitalizing rural economies. “It’s given them [farmers] more markets,” he says. “The dollars stay in the community. When you sell your grain, you’re either selling it to the local co-op that’s selling it to the ethanol plant or you’re selling it directly to the ethanol company. And those dollars are staying in the same radius as the ethanol plant.”

Future Changes

Analysts may disagree on the exact indirect effects of ethanol production, but they agree that the industry has had a positive direct effect on jobs and GDP over the past year. Whether that same conclusion will be reached next year, however, is another source of debate. Growth in the corn ethanol sector is expected to remain stagnant throughout

IMPACT

2012 as existing producers continue to meet or beat demand for their product, so this year’s GDP could end up being similar to the 2011 total. Swenson says that as any industry matures, and he considers the ethanol industry to be mature, job multipliers go down as more efficient technologies are introduced. “Any mature industry over time uses fewer jobs per unit of output and requires fewer jobs per unit of input over the long haul,” he says. “Everyone is chasing the same efficiencies, the same reductions in cost, the same technologies, to make sure they’re as close to their neighbor as possible.” One segment that could change all that is cellulosic ethanol production. Both Urbanchuk and Swenson predict little significant growth in the ethanol industry until cellulosic facilities begin to come online. Urbanchuk believes any future growth in ethanol will be through the use of non-corn feedstocks. Swenson is keeping a close eye on the small number of cellulosic facilities that are expected to begin operating in Iowa in the next few years, and says their commercialization will spur substantial activity in the feedstock chain, which can be factored into future analyses. He’s willing to acknowledge cellulosic ethanol’s impact on farming economics, because whereas corn has other uses and would probably still be grown and sold

by farmers, cellulosic ethanol producers are creating a market for cellulosic feedstocks, he says. Corn stover, for example, will become a new commodity with its own inputs and requirements, he says, allowing him to factor in things like increased farm productivity as a result of ethanol’s demand for the product. Of course it will be a couple of years before anyone expects the cellulosic ethanol industry to be a factor in any state’s GDP. And while corn ethanol’s contribution is not expected to grow significantly this year, there is a chance that it could decline. By mid-February, several producers were beginning to respond to dismal crush margins by reducing ethanol output. Predicting a year’s worth of crush margins is not unlike attempting to predict a year’s worth of weather conditions, but Monte Shaw, executive director of the Iowa Renewable Fuels Association, offered a word of caution for the industry’s 2012 outlook. “If the current crush margins were to continue for the next several months, you could see plants come offline and actually have production go down for the first time since the mid-′90s,” he says. “I don’t think that will happen. I hope the market brings things back into correlation.” The effects of a declining ethanol industry would likely be immediately felt in those same rural communities that are just begin-

ning to prosper. A recent example came by way of a corporate decision made by Archer Daniels Midland Co. to close a small ethanol plant in northeast North Dakota. ADM has operated the 30 MMgy ethanol plant in Walhalla, N.D., since the early ’90s, providing about 60 jobs in a town with a population of less 1,000. When the company announced in February that it will close the plant in April, N.D. Gov. Jack Dalrymple immediately reacted, urging the company to consider alternatives and keep employees working. “I spoke with and encouraged ADM management to make sure they pursue all other options before closing the plant,” the governor said in a news release. “I stressed the importance of taking care of the employees and I offered the state’s assistance in finding another company to operate the plant and to evaluate the plant’s other potential uses.” ADM said corn used at the facility was shipped in from other areas of the country, so the plant’s closure may not directly impact the region’s agriculture sector, but in a community of 1,000 people, an ethanol plant is usually a major employer. Without ethanol, where do they work? Author: Kris Bevill Associate Editor, Ethanol Producer Magazine (701) 540-6846 kbevill@bbiinternational.com

APRIL 2012 | Ethanol Producer Magazine | 45

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POLICY

48 | Ethanol Producer Magazine | APRIL 2012

POLICY

LCFS in Limbo California’s Low Carbon Fuel Standard has been brought to a halt, at least temporarily. How will it affect ethanol producers? By Kris Bevill

The battle over the legality of California’s Low Carbon Fuel Standard has been ongoing for more than two years and it probably won’t be fully resolved any time soon. In late December, how-

ever, a California district judge handed down the first ruling in the case, delivering a preliminary victory to the plaintiffs, which include the Renewable Fuels Association, Growth Energy and various corn growers and ethanol/feed marketers. The judge found that the LCFS violates the dormant Commerce Clause of the U.S. Constitution, and halted the California Air Resources Board from continuing to enforce the regulation. CARB has since appealed the ruling and many believe it will appeal its case all the way to the U.S. Supreme Court, if necessary. Both sides express confidence that they will ultimately win but, for now at least, carbon intensity (CI) ratings are a nonfactor for producers selling into the largest ethanol market in the U.S.

The Issue

The LCFS is a regulatory measure designed by CARB with the intent of reducing greenhouse gas (GHG) emissions from the state’s transportation sector by 16 million metric tons by 2020. To determine the amount of emissions associated with specific fuels, CARB identified a number of production pathways to be evaluated for their carbon intensity. The formulas determine—after a full, life-cycle analysis of the fuel, including such factors as the energy sources used to produce the feedstock and fuel, emissions from transportation involved in producing and delivering the fuel to its endpoint, and storage and use of the fuel—the amount of CO2 equivalent per megajoule of fuel energy. The policy also allows for parties to submit applications for new or modified pathways if the process used to produce a fuel is not already addressed in the CI Lookup Table. The ethanol industry takes issue with CARB’s methodology for determining carbon intensity because it includes indirect land use change calculations, a concept that continues to be debated and re-evaluated by scientists. The lawsuit, however, focused on a separate legal matter. The plaintiffs argued that CARB’s CI rat-

ings placed Midwest ethanol at a disadvantage to California ethanol, and therefore violated the Commerce Clause, which exists to prevent states from attempting to regulate activities beyond their borders. In his ruling, Judge Lawrence O’Neill said that while it may be true that there are differences in the carbon intensities of Midwest and California ethanol when using CARB’s methodology, the policy negatively affects the price and desirability of Midwest ethanol in the California market and “the price differential is based on transportation and out-of-state electricity—both factors that discriminate based on location.” Therefore, the judge ruled that the policy does attempt to regulate activities beyond California’s border and violates the Commerce Clause.

Midwestern Views

For ethanol producers located outside of California, the court’s decision was a definite win. California’s ethanol market represents a little more than 1 billion gallons per year, making it the single largest ethanol market in the nation. Midwest ethanol producers need California. And while CARB has said previously that many of the Midwestern gallons would qualify for the program initially, producers felt otherwise. Todd Sneller, administrator of the Nebraska Ethanol Board, says a number of plants evaluated the standard and tried to determine which pathways would allow at least a portion of their ethanol to qualify, but discovered it would mean they would essentially have to segregate gallons that were produced under certain parameters—using only locally grown corn and no natural gas, for instance—which is a nearly impossible task. Additionally, some of the older Midwestern ethanol plants that use coal-fired boilers would be shut out of the market entirely. “The LCFS makes it virtually impossible for those plants to supply a portion of their ethanol to that market,” he says. Without the LCFS in force, those producers regain the opportunity to market their product into California.

Bring in Brazil?

Another issue for U.S. ethanol producers is CARB’s preferential treatment of Brazilian sugarcane ethanol. Under the LCFS, APRIL 2012 | Ethanol Producer Magazine | 49

POLICY

sugarcane ethanol enjoys a low CI rating, which prompts obligated parties to demand imports from Brazil in order to comply with the program’s carbon reduction requirements. The results of this requirement played a role in the well-noted events on the international market last year, whereby U.S. producers exported record amounts of ethanol to Brazil to supply its shortfall in production while Brazilian ethanol was still being shipped to the U.S. “We are exporting ethanol from the center of Nebraska by rail to Brazil so the Brazilian sugarcane ethanol can be exported to California,” Sneller says. “That’s just an extraordinary example of how well-intended public policy can really go all wrong and promote enormous inefficiency.” Because Brazil was short on ethanol last year, the LCFS probably did not impact Midwestern producers as strongly as it would have if Brazil had produced ample supplies and

50 | Ethanol Producer Magazine | APRIL 2012

not required U.S. imports. Regardless, Marty Lyons, president of ethanol marketing firm M-Pact BioFuels LLC, agrees with Sneller that the policy poses negative impacts on Midwest ethanol producers. “The California court ruling that stops CARB from implementing the LCFS puts all U.S. domestic ethanol plants on a level, competitive field and eliminates a clear discrimination against ethanol producers outside California,” he says. “Additionally, it seems beyond rational that California would want to have Brazilian ethanol gallons shipped to California at the expense of domestic ethanol supply. U.S. ethanol production is the best low-carbon path for California because our industry has a keen safety and environmental focus.”

Local Angle

California ethanol producers, of which there are only a handful, all agree that no

policy should discriminate against U.S. ethanol based solely on its geographic origin, according to Lyle Schlyer, president of Pixley, Calif.based Calgren Renewable Fuels LLC. His overall view of the LCFS is positive, however, and he says it is an effective method of inspiring technological improvements to reduce the carbon footprint of ethanol facilities. “Why not have policies that reward those of us that successfully achieve the policy objectives that are being sought?” he says. “We [Calgren] saw the LCFS as precisely that.” Calgren has taken several steps to reduce its carbon footprint in order to supply lower carbon fuel for the LCFS. Calgren does not dry any of its distillers grains, for example, and neither do any of the other California producers, according to Schlyer, partially because it lowers the plant’s CI rating. If there is no incentive for lowering the CI rating, he says the company may consider purchasing a dryer. Other projects at Calgren, such as erecting a co-generation facility and anaerobic digester, require substantial investments, but were considered to be worth it in order to achieve a lower CI rating and boost demand for the facility’s ethanol. Without that driver, the investment may not be worth it, he says. “Natural gas is so cheap right now that it’s hard to justify these kinds of projects, except that it will lower the carbon intensity of the ethanol we produce and consequently can act as a reasonable incentive when no other incentive exists,” Schlyer says. “Even though we want to do our part environmentally, [without the LCFS] we’d feel compelled to assess every project straight up and down in terms of its commercial impact.” Several Midwest ethanol producers, including Poet LLC and Archer Daniels Midland Co., took steps last year to improve their processes in the eyes of CARB, filing pathway amendments to reflect their technology improvements and lower the CI rating of ethanol produced at their facilities. Schlyer believes that if the renewable fuel standard [RFS] were the only driver, companies like Calgren and the more innovative Midwestern producers wouldn’t be as interested in making technological improvements because the RFS doesn’t effectively reward their good behavior. For example, unless the RFS is modified to al-

POLICY

low corn ethanol to qualify as an advanced biofuel, corn ethanol will never be allowed to generate the more valuable renewable identification numbers [RINs] associated with that category of fuel, no matter how efficiently that corn ethanol is produced, he says. But Sneller says the entire ethanol industry is constantly being motivated to improve its efficiency in order to comply with federal regulatory requirements and also to improve the profitability of production, so the LCFS isn’t that critical in spurring innovation. “There’s a whole list of compliance issues that ethanol plants are facing every day,” he says. “They’re constantly in pursuit of technologies that address those issues on the one hand and at the same time promote efficiencies, because if they can make investments in their plant that allow improved efficiency, that typically means better economics.”

What Now?

Representatives from both sides of the lawsuit were unable to comment on the

Carbon Intensities Assigned to Midwest and California Corn Ethanol Fuel

Fuel Pathway

Assigned Total Carbon Intensity (gCO2e/MJ)

Difference Between Carbon Intensities for Midwest and California Corn Ethanol (gCO2e/MJ)

Corn

1. Midwest; Dry Mill; Dry distillers grains; Natural gas

98.40

9.50

1a. California; Dry Mill; Dry distillers grains; Natural gas

88.90

2. Midwest; Dry Mill; Wet distillers grains; Natural gas

90.10

9.40

2a. California; Dry Mill; Wet distillers grains; Natural gas

80.70

3. Midwest; Dry Mill; Wet distillers grains; 80% Natural gas; 20% Biomass

86.80

9.36

3a. California; Dry Mill; Wet distillers grains; 80% Natural gas; 20% Biomass

77.44

Carbon Computations In evidence presented during a California district court hearing, plaintiffs in the case against the California Air Resources Board highlighted four pathways on the Low Carbon Fuel Standard’s carbon intensity Lookup Table that assign higher scores for ethanol produced in the Midwest than in California to support the argument that the LCFS discriminates against out-of-state ethanol. DATA: CALIFORNIA AIR RESOURCES BOARD

pending legal matter. Both sides, however, have repeatedly expressed their optimism for victory. In early January, CARB asked for a stay on the injunction, which would allow it to enforce the LCFS through 2012. The agency’s request was denied. Following the

decision, Bob Dinneen and Tom Buis, heads of the RFA and Growth Energy, respectively, released a joint statement saying that the court’s decision demonstrated the strengths of their claims against the LCFS. “American ethanol advocates will continue to oppose

APRIL 2012 | Ethanol Producer Magazine | 51

POLICY

LCFS Reduction Requirements Californiaâ&#x20AC;&#x2122;s Low Carbon Fuel Standard came into effect in 2010, but producers and importers were not required to demonstrate a reduction in carbon intensity (CI) until 2011. The initial reduction was minimal, just 0.25 percent of their CI rating, but reduction requirements would have doubled this year to 0.5 percent and increased by half a percent each year after, maxing out at 10 percent in 2020. CARBâ&#x20AC;&#x2122;s effort to reinstate this punitive policy that illegally seeks to dictate the production and transportation of ethanol and other fuels outside its border,â&#x20AC;? they said. Meanwhile, a CARB spokesman simply stated, â&#x20AC;&#x153;ARB believes weâ&#x20AC;&#x2122;ll prevail in this matter.â&#x20AC;? As for ethanol producers located in California and throughout the Midwest, the effects of a policy in limbo are already being felt. â&#x20AC;&#x153;The immediate impact on Midwestern producers is that as long as there is a stay on

enforcement of that provision, ethanol that is produced in a very efficient manner and shipped in an efficient manner can continue to go to the traditional markets in the western U.S., including California,â&#x20AC;? Sneller says. The impact is especially positive for producers on the western edge of the Corn Belt who have been servicing that market for many years, including veteran plants like Hastings, Neb.based Chief Ethanol Fuels Inc., which has marketed its ethanol to California for more than 25 years, according to Sneller. He points out that transportation companies contracted to ship ethanol from the Midwest to California will also benefit from the situation. For California producers like Calgren, however, the impacts of a halted LCFS are less than positive. Schlyer says refiners who had previously signed agreements to purchase Calgrenâ&#x20AC;&#x2122;s lower-carbon ethanol at a premium rate have already been in touch to try to renegotiate their contracts. â&#x20AC;&#x153;The blenders have to decide whether they should be trying to acquire our low-carbon-intensity ethanol or buy the cheapest ethanol,â&#x20AC;? he says, adding that he believes those who had previously agreed to pay more for lower carbon ethanol are now being punished for it. â&#x20AC;&#x153;Frankly, they did the right thing and the court slapped their hand for it,â&#x20AC;? he adds.

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CARB will likely rework its policy to eliminate portions found to be in violation of the Commerce Clause, but itâ&#x20AC;&#x2122;s unknown if and when the policy will be allowed to come back into play. It is clear that the policy, and its hiatus, impacts producers differently depending on location, but in general, ethanol producers would appear to widely support an amended program that eliminates geographic distinctions and provides support for environmental improvements. Schlyer believes the industry and CARB should work together to correct any geographic discrimination in the LCFS. Ultimately, heâ&#x20AC;&#x2122;d prefer a self-certification program that rewards participants who meet the policy goals and heavily penalizes noncompliers. Sneller says many Midwestern producers would support the LCFS if itâ&#x20AC;&#x2122;s properly structured. â&#x20AC;&#x153;In a properly constructed program, you can accomplish several different objectives, some of them practical in terms of efficiencies that would allow consumers access to lower-cost transportation fuels, but in the other, rewards the producer for their environmental performance according to that particular compliance matrix,â&#x20AC;? Sneller says. â&#x20AC;&#x153;If done properly, thatâ&#x20AC;&#x2122;s a good outcome.â&#x20AC;? Author: Kris Bevill Associate Editor, Ethanol Producer Magazine (701) 540-6846 kbevill@bbiinernational.com

CHEMICALS

Commerical Production Braskemâ&#x20AC;&#x2122;s green polyethylene plant can produce up to 200,000 tons of the biobased material per year. PHOTO: Braskem S.A.

54 | Ethanol Producer Magazine | APRIL 2012

CHEMICALS

Feeding the

Chemical Market Ethanol serves as not only a liquid transportation fuel but also as a feedstock for biobased chemical production By ERIN VOEGELE

Although ethanol is generally associated with the transportation fuel market, it is in no way limited to use as a liquid fuel. It can also be convertedâ&#x20AC;&#x201D;via known technologyâ&#x20AC;&#x201D;into biobased chemicals, the most predominant being the common platform chemical ethylene. Once an ethanol molecule is processed into ethylene, it can be further refined into a plastic material known as polyethylene. While using ethanol as a feedstock to produce ethylene is relatively new, the finished chemical itself is not new, as it has traditionally been derived from crude oil. In fact, recent statistics show it is the most produced organic compound in the world. Information published by the National Petrochemicals and Refiners Association notes that the colorless, flammable gas is one of the most important olefin chemicals on the market. It is used extensively in chemical synthesis and in the production of plastics. Steam cracking is the common method used to create ethylene using a crude oil feedstock. The vast majority of ethylene that enters the market is produced using this method. Ethanol can also be used to produce the chemical via a process that involves dehydration and heating ethanol with concentrated sulfuric acid or a catalytic method. While a minority of ethylene entering the market is produced this way, several companies in South America are actively producing biobased ethylene using sugarcane ethanol as a feedstock, proving there is room in the market for a biobased alternative. Ethylene can be used to produce a wide variety of other chemicals and materials, including polyethylene, a widely used plastic in packaging film and plastic bags. At least one company in Brazil, Braskem S.A., is working to bring sugarcane ethanol-derived biobased propylene to market. Propylene is considered the second most important platform chemical produce in the chemical industry, after ethylene. APRIL 2012 | Ethanol Producer Magazine | 55

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CHEMICALS

It is has also traditionally been derived from crude oil and is used to manufacture a wide variety of products, including fibers for clothing and carpeting.

Market Analysis

A December Lux Research report on the biochemical industry addresses the growing biobased chemical market in South America. That report, titled “Global Bio-based Chemical Capacity Springs to Scale,” notes that by 2016, consolidation—both within the biomaterials and biochemical sector, and regionally—is expected to occur. According to the analysis, momentum derived from existing production capacity will influence regional specialization. In fact, Kalib Kersh, a Lux Research analyst and lead author of the report, says the South American biochemical market is primarily being driven by the abundance of ethanol and the conversion of ethanol into ethylene and polyethylene. The companies pursuing biobased ethylene production are large Brazilian chemical companies, he says. “They make huge quantities of petroleum-based ethylene and other chemicals. Now, they are sort of putting their feet in the water to establish this technology, and show brand owners that it is available.” Some brand owners have been using polyethylene from Braskem for more than a year already, Kersh continues. While petroleum-based ethylene is relatively inexpensive, the biobased alternative is currently more expensive. That said, Kersh notes that most brand owners are likely to prioritize biobased materials for particular projects. To date, he says Braskem has been known to receive hefty premiums for the renewable polyethylene it produces, demonstrating many brand owners are willing to pay a premium for biobased alternatives. Statistics published by the Renewable Fuels Association show that Brazil produced 6.9 billion gallons of sugarcane ethanol in 2010. While final numbers for 2011 are expected to be down, Kersh says the production of ethanol-derived biochemicals should not be impacted, as those projects take in a small fraction of Brazil’s yearly ethanol production. He also notes that in the long term, however, limits to ethanol yield could impact the overall rate of growth of the biochemical sector in South America. Kersh points out growth in the ethanol-to-chemical space will probably

come at a faster rate than some similar materials, such as polyhydroxyalkanoate (PHA), another form of biobased plastic. Kersh also stresses that the future of ethanol-to-biochemical products is in no way expected to remain exclusively in South America and is expected to find a home in the U.S. “I think that there is going to be a general trend for conversion from ethanol,” he says. “So, wherever you have ethanol, I think that you are going to see ethylene and other chemicals being made from that.” Considering the U.S. is the world’s largest ethanol producer, it only makes sense that ethanol-derived biochemical production will eventually find a home here. The U.S. Energy Information Administration estimates that U.S. ethanol plants produced nearly 13.3 billion gallons of ethanol in 2010, the vast majority of which was derived from corn. As more advanced and cellulosic biofuels enter the market, the production of ethanol-derived biochemicals could provide an economically feasible option for ethanol producers to increase market demand for ethanol while producing a higher-value commodity. “I think it’s probably one of the big stories for 2012; that conventional ethanol producers in the United States are going to start wanting other options,” Kersh says. “And, I think that other options are going to be available to them increasingly.” While Kersh notes that there hasn’t been any real movement in the U.S. market yet, he thinks that it’s only a matter of time before we start hearing about biobased polyethylene being manufactured using U.S. produced ethanol.

Brazilian Projects

Ethanol-based biochemical production in Brazil has actually been a reality off and on for more than six decades when, according to Braskem’s renewable technologies director in Brazil, Antonio Morshbacker, his country was home to two very small biobased polyethylene production facilities. Of course, Morshbacker says, the chemical wasn’t considered “renewable” at that time, as there really wasn’t any petroleum-based alternative available in the Brazilian market. Furthermore, he notes that the local market for polyethylene was very small around 1950. Industrial-scale sugarcane ethanol production began in Brazil in the mid-1970s,

CHEMICALS

Morshbacker continues. The use of ethanol as a chemical feedstock, however, was essentially over by the late 1980s, in part, because Brazil’s petrochemical industry began to mature, plus government subsidies that encouraged the use of ethanol as a chemical feedstock were discontinued. Braskem actually operated a 100,000 ton ethanol-to-ethylene plant in the ′80s. According to Morshbacker, that ethylene was used as a component to produce a PVC that was 50 percent renewable. When Braskem made the move to get back to the biopolymers space, it was decided to go with a familiar production method. The company’s original ethanol-to-ethylene plant had long since been disassembled, so in late 2006 a new pilot plant was built. Morshbacker says that the pilot plant not only enabled Braskem to improve the production technology and train employees, it also offered a method to produce a variety of biobased polymers to seed the market. In September 2010, Braskem brought its commercial-scale green polyethylene plant online. The facility now has an annual production capacity of 200,000 tons. Morshbacker adds it doesn’t convert all of the biobased ethylene into polyethylene, but sells a small amount to Lanxess AG. The German company aims to convert biobased ethylene into ethylene propylene diene monomer (EPDM) on a commercial scale, according to a company spokesman. The rubber is conventionally produced using petroleum-derived ethylene and propylene. Lanxess’ existing EPDM plant in Triunfo, Brazil, currently produces 40,000 tons of traditional EPDM rubber per year. However, Braskem will soon supply biobased ethylene to the facility via pipeline. Braskem is developing other biobased chemicals via sugarcane ethanol as well. According to Morshbacker, the company plans to begin production at an ethanol-to-propylene in 2013. The propylene will be further refined into polypropylene. The capacity of that plant will be at least 30,000 ton per year, says Morshbacker, but it could be more. The final production capacity will be determined after pilot operations are concluded, he says. Dow Chemical Co. is one another company moving forward with plans to produce biochemicals using sugarcane-ethanol feedstock. According to Luis Cirihal, Dow’s business director of renewable alternatives

and business development in Latin America, Dow is engaging in a joint venture project with Mitsui & Co. Ltd. to produce biobased polyethylene. The project is vertically integrated, and includes the production of sugarcane ethanol, the conversion of ethanol into ethylene, as well as the conversion of ethylene into polyethylene. Cirihal says that sugarcane cultivation is underway, and engineering and equipment fabrication are advancing for the new sugarcane-to-ethanol plant in Santa Vitória, Minas Gerais. That facility is expected to begin operation in 2013, Cirihal says, noting that the first ethanol plant will have the capacity to produce 240,000 cubic meters (63.4 million gallons) of ethanol per year. Once the entire project is online, Cirihal notes that sugarcane will be converted to ethanol, which will be converted to ethylene via a dehydration process. The ethylene will then be converted into polyethylene via a polymerization process. “Once fully operational, this back-integrated platform will be enabled to produce high-performance biopolymers to serve the packaging and hygiene markets,” Cirihal says. Regarding the decision to locate the new facility complex in Brazil, Cirihal notes that the country has one of the strongest economies in the world and is the world’s largest producer of ethanol from sugarcane. “There is [also] availability of agricultural land, agricultural and environmental aspects, logistics, good infrastructure and access to qualified labor,” he continues. “In addition, the flexible packaging market is increasing in Brazil and other Latin America countries.” While interest in biobased polymers is increasing all around the world, Morshbacker cautions against overestimating the shortterm reach of the product. While the production of biobased plastics is growing, he stresses biobased plastic is fully expected to remain a niche product for the next 20 years, when he estimates up to 20 percent of plastics could be biobased. Author: Erin Voegle Associate Editor, Biorefining Magazine (701) 540-6986 evoegele@bbiinternational.com

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58 | Ethanol Producer Magazine | APRIL 2012

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