INSIDE: USING SWAPS TO MANAGE RISK JANUARY 2011
Boardroom Basics
Essential Leadership Advice from Ethanol Plant Directors like Jill Zimmerman Page 40
Plus
How outreach builds community goodwill Page 46
Finding solutions for DOE’s bogged-down loan program Page 52
www.ethanolproducer.com
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Jeff Tussey GENERAL MANAGER CASTLE ROCK RENEWABLE FUELS WISCONSIN, USA
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CONTENTS
FEATURES 40
DIRECTORS
Always Above Board
52
46
FINANCE
OUTREACH
Good boardsmanship is essential, yet sometimes difficult to achieve. BY HOLLY JESSEN
JANUARY ISSUE 2011 VOL. 17 ISSUE 1
Building Goodwill
Bogged Down
Ethanol producers deploy many community outreach strategies.
The industry is looking for solutions to a flawed U.S. DOE loan program.
BY HOLLY JESSEN
BY KRIS BEVILL
CONTRIBUTIONS 58
DEPARTMENTS 6
Editor’s Note
Producers Seek Solid Boardsmanship, Community Goodwill BY SUSANNE RETKA SCHILL
12 The Way I See It Replace Dichotomy with Unified Policy BY MIKE BRYAN
13 Events Calendar
Upcoming Conferences & Trade Shows
14 View From the Hill 2010 Ins and Outs BY BOB DINNEEN
RISK MANAGEMENT
Using the Futures and Swaps Market to Manage Risk
The use of swaps now exceeds 50,000 lots of open interest.
16 Drive
A New Partnership to Promote Domestic Ethanol BY TOM BUIS
18 Europe Calling
Biofuels: A Market of Political Opportunities BY ROB VIERHOUST
20 Talking Stalk
Prevent Problems by Good Corn Grading BY CHARLES HURBURGH
22 Business Matters
Social Media Pose Risks as Hiring Tool BY DANIELLE D. SMID
24 Business Briefs 28 Commodities Report 30 Distilled 60 Marketplace 62 Ad Index
BY ROBERT ESPOSITO Cover photo by Katie Rocker
Ethanol Producer Magazine: (USPS No. 023-974) December 2010, Vol. 16, Issue 12. Ethanol Producer Magazine is published monthly. 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 | JANUARY 2011
JANUARY 2011 | Ethanol Producer Magazine | 5
EDITOR’S NOTE
This issue of Ethanol Producer Magazine focuses on two aspects of ethanol plants—boardsmanship and community outreach. For our cover story, Associate Editor Holly
PRODUCERS SEEK SOLID BOARDSMANSHIP, COMMUNITY GOODWILL
Jessen spoke to a number of ethanol plant board members, along with industry professionals who advise them, to learn more about effective boardsmanship. Jessen’s story on community outreach—“Building Goodwill”—includes a nugget of wisdom: If you get the kids involved, you get the parents, too. Many ethanol producers welcome students of all ages for tours of their plants. Some plants get high school students involved in laboratory internships and others give students in science classes a chance to see how science is applied in industry. Not only will the students learn about ethanol, but some will become future employees. Although it may take some time away from the job on the part of plant personnel, such efforts are seen as good ways to give back to the community and build support for ethanol. With all the distortions and negative press that ethanol sees, every effort needs to be made to help people better understand how the ethanol process works and how it helps our rural communities and the nation. Associate Editor Kris Bevill rounds out our feature section this month, writing about the frustrations among those pursuing U.S. DOE loan guarantees. Ideas are emerging with a goal of getting the bogged-down program rolling. Some would have predicted the problems. I remember when covering the development of the most recent Farm Bill, a congressman suggested it would be better for the USDA to handle loan guarantees because it has so much experience in administering such programs. He suggested the DOE focus its efforts on funding and coordinating research, an area of its demonstrated expertise. Obviously, his ideas weren’t incorporated into the Farm Bill. We are seeing USDA trying to maximize what programs it can, however, to support biofuels. Here’s hoping the agency’s program to cost-share the installation of 10,000 blender pumps over the next five years is a rousing success.
SUSANNE RETKA SCHILL, EDITOR SRETKASCHILL@BBIINTERNATIONAL.COM
FOR THE LATEST ETHANOL INDUSTRY NEWS VISIT WWW.ETHANOLPRODUCER.COM
CONTRIBUTORS ROBERT ESPOSITO is the head of Latium Capital, a trading division of GFI Securities LLC. Latium Capital trades over-the-counter energy and agricultural products with a focus on ethanol, RBOB, corn and natural gas liquids.
6 | Ethanol Producer Magazine | JANUARY 2011
DANIELLE D. SMID is an attorney with BrownWinick, a Des Moines, Iowa-based law firm, and is actively involved in the firm’s securities, employment, renewable fuels and business and corporate practice areas.
EDITORIAL EDITOR Susanne Retka Schill sretkaschill@bbiinternational.com ASSOCIATE EDITORS Holly Jessen hjessen@bbiinternational.com Kris Bevill kbevill@bbiinternational.com COPY EDITOR Jan Tellmann jtellmann@bbiinternational.com
ART ART DIRECTOR Jaci Satterlund jsatterlund@bbiinternational.com GRAPHIC DESIGNER Sam Melquist smelquist@bbiinternational.com Elizabeth Burslie bburslie@bbiinternational.com
PUBLISHING 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 Chip Shereck cshereck@bbiinternational.com Marty Steen msteen@bbiinternational.com Bob Brown bbrown@bbiinternational.com Gary Shields gshields@bbiinternational.com Andrea Anderson aanderson@bbiinternational.com Dave Austin daustin@bbiinternational.com CIRCULATION MANAGER Jessica Beaudry jbeaudry@bbiinternational.com SUBSCRIBER ACQUISITION MANAGER Jason Smith jsmith@bbiinternational.com ADVERTISING COORDINATOR Marla DeFoe mdefoe@bbiinternational.com
EDITORIAL BOARD Mike Jerke Cilion Inc. Jeremy Wilhelm Commonwealth Agri-Energy LLC Mick Henderson Corn Plus LLLP Keith Kor Golden Grain Energy LLC Walter Wendland Chippewa Valley Ethanol Co. LLLP
Neal Jakel Illinois River Energy LLC Bert Farrish Lifeline Foods LLC Eric Mosebey Lincolnland Agri-Energy LLC Steve Roe Little Sioux Corn Processors LP Bernie Punt Siouxland Energy & Livestock Co-op
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 (701) 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 (701) 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 e-mail to sretkashill@bbiinternational.com. Please include your name, address and phone number. Letters may be edited for clarity and/or space.
Please recycle this magazine and remove inserts or samples before recycling COPYRIGHT Š 2010 by BBI International
JANUARY 2011 | Ethanol Producer Magazine | 7
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THE WAY I SEE IT
Replace Dichotomy with Unified Policy By Mike Bryan
Does America want a robust renewable fuels industry or not? Government seems to be talking out of both sides of its mouth. The flip-flop between comments from the White House and the actions of the U.S. EPA, suggests a bit of a dichotomy. The White House seems to be committed to the development of a healthy biofuels program. President Obama said, “Now, I happen to believe that we should pass a comprehensive energy and climate bill. It will make clean energy the profitable kind of energy, and the decision by other nations to do this is already giving their businesses a leg up on developing clean energy jobs and technologies. But even if you disagree on the threat posed by climate change, investing in clean energy jobs and businesses is still the right thing to do for our economy. Reducing our dependence on foreign oil is still the right thing to do for our security. We can’t afford to spin our wheels while the rest of the world speeds ahead.” At the same time, the EPA took far longer than necessary to implement an E15 blend, even in light of overwhelming research at its disposal, and then confounded the matter by only doing so for 2007 vehicles and beyond. The guidelines for the renewable fuel standard do not allow for growth in the grain-to-ethanol side of the industry and the bar is set so low for cellulose that the motivation to develop and commercialize the technology by private industry is almost non-existent. Another example of biofuel dichotomies in government is the debate over easing or even lifting import tariffs for ethanol. Again, is it the objective of America to have a robust domestic biofuels industry? After all of the rhetoric about free trade, ethanol being a global commodity, and price equalization, it
12 | Ethanol Producer Magazine | JANUARY 2011
comes down to one simple fact. Opening the doors to a flood of imported ethanol will halt the development of the domestic industry. There simply are no economic, environmental or energy security reasons why the United States should even consider doing that. The current policy is working well, it allows for imports but at a rate that still encourages domestic production. Meeting the ethanol needs of America with ethanol imported from Brazil is absolutely counter-productive to the efforts to build a domestic industry over the past 30 years. What happens, for example, when Brazil has a marginal or small sugarcane crop and ethanol production is greatly reduced? The first cut will be exports, which means the United States has to cut back because we have not ramped up our own domestic production because of imports. Imports should be viewed as a supplement to our own production, not part of an overall strategic plan. If America is going to develop a biofuels industry that helps meet its energy security, economic and environmental objectives, then everyone in government must be singing in unison. A church choir may all have the same hymnal, but if they are singing different songs, it’s a bit confusing to the congregation. That’s the way I see it.
Author: Mike Bryan Chairman, BBI International mbryan@bbiinternational.com
EVENTS CALENDAR
National Ethanol Conference February 20-22, 2011
JW Marriott Desert Ridge Phoenix, Arizona Focused on vital marketing, legislative and regulatory, the theme of the 2011 NEC is “Building Bridges to a More Sustainable Future.” Join this premier ethanol networking event hosted by the Renewable Fuels Association. (800) 258-6094 www.nationalethanolconference.com
International Biomass Conference & Expo May 2-5, 2011
RFA to Bring National Ethanol Conference to Phoenix
2/20
The highlight of this year’s National Ethanol Conference sponsored by the Renewable Fuels Association will be the luncheon keynote on the first day. The political couple, James Carville and Mary Matalin, will present a behind-the-scenes look at how the outcome of the 2010 Congressional elections will affect Congress and the 2012 Presidential campaign. Co-authors of the national best-seller “All’s Fair: Love, War, and Running for President,” Matalin and Carville provide audiences with a stimulating, candid and provocative conversation from both sides of the political aisle. They each have more than 30 years of experience in politics and have worked for every president over the past three decades. The 16th annual NEC will convene Feb. 20-22 at the JW Marriott Desert Ridge in Phoenix. In addition to insights on the Washington political scene, NEC sessions are being built around the theme “Building Bridges to a More Sustainable Future.” RFA members and guests will discuss the future of an industry that can and will be the bridge from a national petroleum-fueled economy to one that is anchored in renewable fuels sustainably produced from biomass. Conference sessions include: Future of Biofuels Tax Policy, Where Are We on the Road to Cellulose Commercialization?, Moving Beyond E10, How Will EPA’s GHG Tailoring Rule Impact Your Business?, Global Ethanol Outlook, Market Forecasts and Implications for Biofuels, Building the Next Generation Biofuels Industry and, Regulatory Barriers to the Commercialization of Higher Level Blends. Breakout sessions include discussions on export markets, technology innovations for next generation biofuels, coproduct challenges and blender pumps.
America’s Center St. Louis, Missouri This is the biomass industry’s largest, fastestgrowing event. Plan to join more than 2,500 attendees, 120 speakers and 400-plus exhibitors for the premier international biomass show of the year. (701) 746-8385 www.biomassconference.com
International Fuel Ethanol Workshop & Expo June 27-30, 2011
Indiana Convention Center Indianapolis, Indiana The FEW is the largest, longest-running ethanol conference in the world. Focused on production of grain and cellulosic ethanol, operational efficiencies, plant management, energy use and near-term research and development, the FEW will attract 2,500 attendees. (701) 746-8385 www.fuelethanolworkshop.com
International Biorefining Conference & Trade Show September 14-16, 2011 Hilton Americas-Houston Houston, Texas This forum will allow technology developers to connect with investors and strategic partners, putting them on a path toward deployment. The event will include panels on project finance, market development and technology scale-up for advanced biofuels and biobased chemicals production. (701) 746-8385 www.biorefiningconference.com
JANUARY 2011 | Ethanol Producer Magazine | 13
VIEW FROM THE HILL
2011 Ins and Outs By Bob Dinneen
There can be no doubt that 2010 will go down as a historic year. In Washington, the year was marked by the passage of landmark legislation in the form of health care reform, followed by the inevitable political wrangling that goes along with such legislation no matter who is in charge. We also saw a historic election in 2010, watching a wave of voters—angry over a struggling economy, high unemployment and a seemingly out-of-touch Congress—sweep Republicans into power in the House of Representatives. For the ethanol industry, 2010 was yet another historic year. Ethanol production approached 13 billion gallons. Use of fuel ethanol soared well over 12 billion gallons. And, the U.S. EPA took the first, albeit baby, step to allowing for more use of ethanol in gasoline. As I write this column, important issues still remain unresolved. By the time you read this, we will know if Congress acted to extend important tax incentives for ethanol and other biofuels. We may even have a sense of whether EPA is going to expand the use of E15 to more vehicles. These issues will be addressed in subsequent columns. As is tradition, this column is dedicated to a tongue-in-cheek look at the year that was, and a lighthearted peek into the year that is to come. Without further ado, the 2011 RFA Ins and Outs list.
Out
In
Chris Standlee 1 Massachusetts Ave. NW Speaker Pelosi E-85 pump toppers FFVs Federal fleet Alt Fuel Waivers Ethanol imports Feed wall Legislative gridlock Carbon cap and trade Legislative mark-ups Nonfood feedstocks VEETC extension Al Gore promoting ethanol Verenium PR Newswire Ryan Hunter-Reay Corn oil extraction DOE biofuel grants Rahm Emanuel Underwriters Laboratories GMA 250 Ton Rule CARB’s carbon intensity value California LCFS with ILUC E15 catalyst durability tests DOE E15 tests on 2007 Vehicles A Sweeter Alternative World Bank blaming ethanol Loan guarantees Massive oil spills Competing associations
Chuck Woodside 425 Third St. SW Speaker Boehner E-15 pump labels Flex Fuel Hybrids Blend Your Own blender pumps Ethanol exports (yes, Brazil, even to you) Distillers grains exports Triangulation EPA carbon regulation Oversight hearings Advanced biofuels VEETC reform Al Gore bashing ethanol BP Biofuels Twitter Rusty Wallace Biobutanol conversion USDA BCAP Pete Rouse Blender pumps Unitarian Universalist Ministry for Earth GHG Tailoring Rule Purdue’s revised ILUC calculations Oregon LCFS without ILUC E15 health effects tests Ricardo Engineering assessment on all cars E-Xchange World Bank exonerating ethanol Refundable ITC for cellulose ethanol RFA safety committee Ethanol Alliance Author: Bob Dinneen President and CEO of the Renewable Fuels Association (202) 289-3835
14 | Ethanol Producer Magazine | JANUARY 2011
RFA
The voice of the ethanol industry. Since 1981, the Renewable Fuels Association (RFA) has been the authoritative voice of the ethanol industry. Our efforts have yielded an unequaled record of legislative and regulatory victories. But we consider our track record just the beginning, and are expanding our efforts with a focus on market development. The RFA is a trusted source for reliable LQIRUPDWLRQ DQG VFLHQWLĂ€F DQDO\VLV IRU the industry, policymakers, and media alike. The RFA is the leading expert on ethanol standards and guidelines for safety. We are also the preeminent authority on E10 and E85. The RFA is a member-centered, member-driven organization. Join with us to help build a strong future for the industry. For more information, visit www.ethanolrfa.org, or call (202) 289-3835.
Renewable Fuels Association, One Massachusetts Avenue NW - Suite 820 - Washington, DC 20001 - (202) 289-3835.
DRIVE
A New Partnership to Promote Domestic Ethanol By Tom Buis For years, the conversation about ethanol has stayed among friends and supporters—from inside the Corn Belt to inside the Beltway. The core of Growth Energy’s mission is to expand that conversation and engage those Americans who know little, nothing, or worse, are misinformed about ethanol. By engaging these Americans with an aggressive campaign to promote the facts, we can expand public support for domestic ethanol. Growth Energy did it with our 2010 national TV ad campaign, and we are doing it again in a new partnership announced in early December with NASCAR, America’s most popular sport and one of the most effective marketing operations in the country. In October, NASCAR announced that it would switch to E15 for the 2011 season—a key validation of E15 as a fuel for all Americans just as the U.S. EPA is nearing its final decision on Growth Energy’s Clean Jobs Waiver to bring E15 to all Americans. When Sunoco Green E15 debuts in NASCAR this year with the first rev of engines in Daytona Beach, Fla., it will be a reminder that with American ethanol, the fuel of the future is here today. The transition to Sunoco Green E15 will also take NASCAR’s environmental commitment to the next level. American ethanol, a renewable source of cleaner burning energy grown right here in America, helps create new green jobs and a renewed sense of pride for the American worker, while helping achieve greater energy independence for our country. This partnership with NASCAR means that American ethanol will be able to talk to
16 | Ethanol Producer Magazine | JANUARY 2011
people on both coasts and the South, where the ethanol story has not yet been heard. Through NASCAR’s loyal fan base—second only to national football’s—we will be able to broadcast our story to a brand new audience. Through our partnership with NASCAR, we can tell America that domestic ethanol is the commercially viable alternative we have to oil today. It is not a “someday” fuel, it is here today. And ethanol is made right here in America by our farmers and our workers. We create U.S. jobs, instead of sending them overseas. Domestic ethanol is the key to making our nation energy independent. Every dollar we spend on foreign oil sends $1.55 to other economies overseas. It’s time we keep that money right here at home, and put it to work in American towns and cities, building our economy and putting our workers back on the job. Ultimately, we expect that NASCAR’s adoption of E15 will encourage all American motorists to embrace E15 and other higher blends. E15 is a high octane fuel that provides quality performance without harming engines. At NASCAR’s opening race, the sport’s iconic green flag will feature the American Ethanol brand. As Agriculture Secretary Tom Vilsack recently told the press: “If E15 is good enough for Jimmie Johnson, then it’s good enough for me.” Author: Tom Buis CEO, Growth Energy (202)545-4000 tbuis@growthenergy.org
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EUROPE CALLING
Biofuels: A Market of Political Opportunities By Robert Vierhout
In Europe, much more than in the United States, green (but not just) non-governmental organizations (NGOs) are engaged loudly and aggressively in the biofuel debate. For several years now, a number of NGOs have repeatedly called for stopping governmental support of biofuels. Very vocal during the food versus fuel debate two years ago, they picked up the indirect land use change (ILUC) topic immediately as their new banner to wave. A high degree of professionalism characterizes the way NGOs operate in the public domain: glossy anti-biofuel publications, many public events and scientific studies. The kind and frequency of actions also reveal that a lot of funding is behind today’s NGOs. The innocent spectator seeing how committed these groups appear to be in fighting biofuel policies could come to the conclusion that they are sincere in their beliefs and goals. Recent academic work provides some interesting insight into what actually motivates NGOs in the biofuel debate.
Recently two researchers of the UK University of Essex published the results of their research titled “Battles over Biofuels in Europe: NGOs and the Politics of Markets” by Sarah Pilgrim and Mark Harvey. Their most significant conclusion is that the development of NGO policy on biofuels has been driven more by narrow political opportunities for influence than by broader and more coherent policy responses to global climate change or economic development, or indeed rigorous assessment of the scientific evidence. The mere fact that governments adopted detailed and tailored policies and programs on biofuels including mandates, targets and sustainability criteria show the biofuel market has been politicized. In this context it is irrelevant whether the driver for government involvement is decarbonising transport, as in Europe, or decreasing dependency on oil, as in Brazil and the U.S. Because the market became so political, NGOs saw an easy opportunity to “engage and affect the process of market information.” Europe became the most vulnerable region given the importance that is given to greenhouse gas emission savings and the scientific controversies over the level of saving that can be achieved by biofuels. NGOs used this controversy to improve their profile and visibility. The researchers included some revealing quotes from NGOs in their work such as this one that makes clear how “science” is used by NGOs: “I think the actual premise of Searchinger is sound… Now I don’t know the ins and outs of his model. I just have not had the capacity, and I suspect that of a lot of NGOs—
18 | Ethanol Producer Magazine | JANUARY 2011
we don’t have the capacity to spend a lot of time pulling apart papers like that.” The article is a must for all regulators and politicians. It would increase their savviness on how to deal with the claims made by NGOs on biofuel policy. Too many EU regulators and politicians have been very politically correct when they were, and still are, confronted by the NGO view on biofuel policy. The mere fact that one is dealing with an NGO doesn’t mean its view needs to be taken on-board without hesitation. The work of Pilgrim and Harvey has clearly demonstrated that NGOs and their claims against biofuels deserve caution. A very recent public opinion survey also came with remarkable results on the public’s view on biofuels. Part of a wider survey on biotechnology, two questions on biofuels delivered evidence that a large majority of Europeans (72 percent) believe biofuels should be encouraged. When asked specifically about sustainable biofuels, the survey shows that Europeans are even more supportive—83 percent believe sustainable biofuels should be encouraged. What better evidence can we have to demonstrate that public support for biofuels does exist—contrary to what many NGOs want us to believe? It is a strong message that politicians cannot ignore if they are operating in the political market of biofuels.
Author: Robert Vierhout Secretary-general, ePURE Vierhout@epure.org
TAKING STALK
Prevent Problems by Good Corn Grading By Charles Hurburgh
Good corn grading procedures in ethanol plants will continue to be important as 2009 grain is blended into the 2010 crop. The 2009 corn crop started with field molds (normally the source of mycotoxins), continued with aggressive highmoisture-storage fungi and finished last summer with low-moisture blue eye infections. Whether all these types of damage affect fermentation equally is not known. Fermentation problems cause variability in dried distillers grains with solubles (DDGS) as well as lost ethanol. All types of mold discoloration count equally in the total damage (TD) value. TD levels normally never reach the maximum 5 percent level allowed in No.2 corn grades, but we’ll likely see high TD this year with carryover 2009 corn being blended into 2010 corn harvested with low moisture and little mold. Blending in truckload lots is difficult, and uniformity is hard to maintain, yet there is a clear incentive to push the limits. Buyers perceived as lax in grading will likely receive higher levels. Also, studies have shown the natural tendency of in-house graders is to progressively underestimate higher TD levels. The other major corn grade factors—test weight, moisture and broken corn/foreign material (BCFM)—have less impact on ethanol production. Tests in 2009 showed low test weight had no significant impact on yield, but was associated with more spoilage in storage. Low test weight corn is often lower in protein, which may increase ethanol yield. BCFM is mainly broken corn. Moisture did not diminish yields on a dry matter basis, though it can create storage problems. Mycotoxins pass through the ethanol
process to be concentrated three-fold in DDGS, creating a feed safety issue. In 2009, the cool, wet weather fungi were prevalent and vomitoxin, zearalenone and fumonisin were the mycotoxins found. In hot dry conditions, aflatoxin is more likely. Strip testing is accurate and takes about 10 minutes at a cost of about $10 plus labor. Testing every load is time and cost prohibitive. Test composite samples of inbound corn once or twice per day to spot potential variation in DDGS that would impact buyers. If time-weighted averages show spikes, the individual corn suppliers can be targeted for additional evaluation. Ethanol yield can be estimated to +/- 0.04 gallons per bushel from protein, oil and density measured with a near infrared (NIR) analyzer. Oil content varies much less than protein. Protein is by far the most significant composition factor in corn. For each 1 percent increase in corn protein, ethanol yield drops approximately 0.06 -0.07 gallons per bushel and DDGS protein increases approximately 3 percent on a dry basis. Corn protein varies from 8-10.5 percent and yearly averages can move 0.25-0.5 percent. Uniformity is more important than capturing differences across loads. Protein variation in DDGS of 1-3 percent is more than feed rations account for, but the order of unloading the DDGS barn can help balance the variation. Testing corn composition is best done by a transmission-based NIR unit. These are not the reflectance units useful for testing DDGS, slurry products or fermentation. The fixed cost of a transmission NIR will be about $7,000 to $9,000 per year, plus $1-$2 per sample in operating costs. To upgrade inbound grain evaluation at your
20 | Ethanol Producer Magazine | JANUARY 2011
plant, move forward in steps rather than making large changes at once: Some thoughts on how to proceed: 1. Have one or two of your employees become well trained. Validate their skills with unannounced comparisons with official grades, in a statistically valid manner. Use them to pass these skills to others through random sample checks. 2. Combine a representative, mechanically divided sample over a day or half day and have your best graders check the composites, including mycotoxin values if there is a concern. Compare to individual load grading. 3. Work with scale house employees to recognize poor corn. Time is best spent on these samples rather than trying to fully grade all. This will also introduce unpredictability in grading frequency, which is helpful in maintaining consistency from sellers. 4. Pull samples just ahead of the hammermill. Record the grade, composition and mycotoxin levels and relate the corn quality measures to individual fermenter performance. Keep time-dated grade records on incoming grain and track its movement through the plant. 5. If you are seeing corn quality impacts and your staff does not have the specialized skills needed, or time to build grading skills, consider third party inspection. Corn evaluation is part of total process control and the collection and analysis of data relating quality to plant performance is critical to continuous improvement. Author: Charles R. Hurburgh, Jr. Professor in Charge, Iowa Grain Quality Initiative Iowa State University (515) 294-8629 tatry@iastate.edu
BUSINESS MATTERS
Social Media Pose Risks as Hiring Tool By Danielle D. Smid
The rise in social media sites has provided employers with the opportunity to learn more about job applicants than ever before. It is an enticing notion to be able to take a sneak peak into an applicant’s personal life. But employers must be wary. Using social media such as Facebook, Twitter, LinkedIn or MySpace to screen candidates may be as difficult as navigating through a minefield. While online research offers potential benefits such as easy, convenient and free information regarding a candidate, employers must also be aware of the concurrent risks associated with such research. Social networking profiles often reveal information about a candidate’s protected class—a candidate’s age, race, gender, sexual orientation, gender identity, disability, religious beliefs, military status. This protected information may appear in several different forms within a candidate’s profile. Consider the following scenario: Your company decides to perform a Web search on each of the finalists for a new position. The company’s human resources professional performs the search and finds a picture of one finalist in full costume leading a local gay rights parade.
22 | Ethanol Producer Magazine | JANUARY 2011
What does the human resources professional do with that particular information? If a candidate who is not hired for the position finds out that the company conducted the search and reviewed the candidate’s personal online profile, the company may find itself having to show that it did not rely on improper information when deciding not to hire that particular candidate. When utilizing online resources to research a candidate, employers should review candidates based on their qualifications and not necessarily the information in an online profile. Practically speaking, many times information found online is more fiction than fact. Moreover, even factual information can be misinterpreted when taken out of context. As a result, using online information creates the following dilemmas: Is the information accurate or relevant to the job opening or does it have any bearing on the candidate’s ability to succeed in a given occupation? In addition, employers should be aware that in certain circumstances, reviewing online profiles could lead to an invasion of privacy claim by the candidate. A fine line exists between a candidate’s right to informational privacy and an employer knowing as much as it can about the candidate. Many social media profiles are private and only accessible by “friends” of the candidate. Employers must be careful of the tactics they use to gain access to information on social networks. For example, employers should avoid using someone else’s login information or falsifying information to gain access to a candidate’s profile.
Employers must first decide whether it is worth the risk to use social media to screen candidates. Employers may want to consider the reasoning/purpose behind using social media in the hiring process. Employers who conduct online research as a part of the hiring process should work with legal counsel to develop and document an internal policy to govern the use of social networks to screen candidates. Such a policy should define the type or specific positions for which online research will be used to assess candidates. In addition, the written policy should create a standardized process for utilizing the online research including defining the point at which human resources may look to online resources. Also, employers may want to specify in the policy what information the employer is looking for through the online research. A written policy that is consistently followed may help mitigate the risks associated with such screening. Finally, employers may want to consider asking candidates for written consent to use social networking sites as a part of the screening process or at least provide notice to candidates that a background check may be conducted that may include a review of any publicly available social media sites. Employers, however, should avoid snooping into an account that is blocked from public viewing. Author: Danielle D. Smid Attorney, BrownWinick 515-242-2476 smid@brownwinick.com
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BUSINESS BRIEFS People, Partnerships & Deals
Poet LLC plants in Enerkem Inc. appointed Bruce Aitken, president and CEO of Methanex Corp., the Eastern Corn Belt to its board of directors. “As the CEO of the have new faces in the Verenium Corp. appointed Alexander world’s largest supplier of methanol, Bruce top management posiFitzpatrick senior vice president and general will bring to Enerkem invaluable manage- tions. Steve Pittman is counsel. Fitzpatrick has represented several rial experience as well as a strong industrial the new general manager publicly traded biotechnology and pharmaexperience and knowledge of the chemicals at Poet Biorefining-Portceutical companies, including Verenium, in market,” said Enerkem CEO and President land, Ind. Before join- Indianapolis Native numerous collaborations, licensing agreeVincent Chornet. Enerkem’s proprietry ing Poet, Pittman spent Steve Pittman joins Poet with 20 years in ments and financing activity, advising on biowaste-to-biofuels technology produces bi- more than 20 years in engineering, quality tech intellectual property and patent disputes. omethanol as an intermediate for the pro- engineering, quality and and plant operations management. duction of ethanol. The company operates plant operations managea pilot facility in Sherbrooke, Quebec, a ment, including 12 years Katie McKenna has demonstration plant in Westbury, Que- in plant general managejoined the staff at Ferm bec, and has a commercial plant under ment. Pittman’s experiSolutions Inc. as a techconstruction in Edmonton, Alberta. The ence includes project nical support technican. company is simultaneously developing a management, new plant McKenna has a degree in similar project in Mississippi, for which it launches, turnaround acbiology from Centre Coltivities, and realignment received $50 million from the U.S. DOE. lege in Danville, Ky., and In Cliff Enkerm also appointed Dirk E. An- assignments. Cliff Bran- Moving Brannon is the new is trained in all aspects of New Hire Katie dreas senior vice president of business de- non is the new general manager in Marion, will put her fermentation. Danville- McKenna joining Poet biology training into velopment, North America, and promoted manager at Poet Biore- Ohio, after 23 years with based Ferm Solutions is use as a fermentation Ohio, Sony in the optical Patrice Ouimet, to senior vice president, fining-Marion, a fermentation product specialist. media manufacturing continuing in his role as chief financial of- replacing Dave Brooks group. provider, offering support from its staff with ficer. Andreas most recently worked at the who moved to manage backgrounds in the microbiology and bioworld’s largest owner-operator of wind gen- Poet’s newest plant in chemistry of fuel ethanol production. eration facilities, Iberdrola Renewables Inc. Cloverdale, Ind. Brannon Patrice joined Enerkem as chief financial of- worked for 23 years with Sony in the optical meficer in February. Lignol Energy Corp. appointed Colin dia manufacturing group, South chief technology officer. He will conincluding leadership in tinue to serve on the board of directors. South plant construction Newest Plant Dave Jim Nussle, former was the founding president of Mascoma Corp. and management, Brooks is moving eight-term Congressman and held senior leadership positions in the life from Marion, Ohio, to quality assurance, lead Poet’s newest and Director of the Office sciences industry with Fonterra Cooperative process improve- plant in Cloverdale, of Management and Budget Ind. Group and ViaLactia Biosciences. ment and business under President George W. Separately, Lignol announced that its vice development Prior to joining Poet in Bush, was named president president of research Alex Berlin is leaving the 2009, Brooks served in leadership poand chief operating officer company to join Novozymes as manager, prositions with Sabert Corporation, Hilex of Growth Energy. Nussle, Beltway Expertise tein chemistry division. Lignol and Novozymes who has served on the board Jim Nussle is the new Poly Co. and Sonoco Products Co., all have an active joint development program to profile voice for manufacturers of plastic products. The of directors of Growth En- high Growth Energy. make cost effective cellulosic ethanol from Cloverdale plant was acquired by Poet ergy since February 2009, wood and remain committed to the collaborastarted in the newly created position on from AltraBiofuels in June of 2010. Poet is tion. currently completing $30 million in process Nov. 1. 24 | Ethanol Producer Magazine | JANUARY 2011
Sponsored by
and plant design changes. The plant is expected to reopen in spring of 2011.
GTL Resources USA Inc. and its subsidiary, Illinois River Energy LLC, have appointed Jeffrey Lemajeur chief financial officer. He will provide financial oversight for both GTL and IRE and participate in overall strategy and business development initiatives. The company’s strategy is to adopt emerging technologies in the 115 MMgy plant in Rochelle, Ill., and to become an advanced biorefiner, adding revenue streams to the base ethanol business. GTL’s goal is to further grow by applying these new technologies to other ethanol plants through merger, acquisition and licensing.
Bob Randle, formerly a commercial development expert with Genencor-a Danisco division, has joined Genera Energy LLC as vice president of business development. Wholly owned by the University of Tennessee Research Foundation, Genera provides a vehicle to leverage state and federal funding with private research and development and strategic partnerships, including a joint venture with Dupont Danisco Cellulosic Ethanol LLC in Vonore, Tenn.
Archer Daniels Midland Co. has realigned its senior leadership in support of a commitment to significantly grow shareholder value, according to Chairman and CEO Patricia Woertz. John Rice, who leads the company’s commercial and production teams, was named vice chairman. He will focus
on extracting value from existing assets and driving operational excellence. Steven Mills, chief financial officer since 2008, was named senior executive vice president, performance and growth. Ray Young will take over the role of chief financial officer and become a senior vice president. Young comes to ADM from General Motors Co., where he most recently served as vice president, international operations, based in Shanghai, China. Previously, he served as GM’s chief financial officer.
Live ethanol and biodiesel trading kicked off Oct. 28 on the web-based U.S. Biofuels Exchange, the US-BX. Registered users can post, buy, sell and place offers on biofuels for sale or biofuels wanted at www.us-bx.com. Although there are other online trading exchanges for biofuels, US-BX is unique in utilizing “cloud computing,” requiring no software to purchase, download or install. “We offer biofuels producers, brokers, blenders, distributors, importers, exporters and marketers the ability to anonymously buy and sell ethanol and biodiesel as well as the ability to make, receive and choose between multiple offers on listings,” said James Kaufman, US-BX vice president.
ICM Inc. has signed a contract with Hereford Renewable Energy LLC, a subsidiary of Murphy Oil USA Inc. to retrofit the 115 MMgy Panda Ethanol plant in Hereford, Texas. Hereford Renewable Energy LLC acquired the uncompleted plant from the lenders of its former owner, Hereford Biofuels LP, which filed for bankruptcy. The retrofit is anticipated to be completed by the end of the first quarter 2011.
Texas-based Celanese Corp. announced plans to build one or two coal-toindustrial ethanol plants in China and one natural gas-to-industrial ethanol plant in Clear Lake, Texas. The company uses elements of its core acetyls technology combined with advancements to make industrial ethanol out of basic hydrocarbons, including natural gas, coal and pet coke. While the company is focusing on industrial uses at this time, such as ethyl acetate production, it is exploring opportunities for fuel ethanol applications.
DuBay Biofuels-Greenwood LLC, a proposed 3 MMgy ethanol plant in Greenwood, Wis., recently received a $1.7 million Wisconsin Energy Program loan and $300,000 from the city of Greenwood for land development. DuBay Biofuels, a wholly owned subsidiary of Caseus Energy LLC, will produce ethanol from whey permeate, a cheese production waste product. The company is in the permitting process and expects the ethanol plant to be up and running in the fourth quarter of 2011.
Didion Milling Inc., a producer of fuel ethanol and food-grade milling products, has implemented Intellego Grain software at its processing plant in Cambria, Wis. Christianson & Associates PLLP, a developer of enterprise resources planning (ERP) software implementation for biofuels producers, partnered with the Didion team to develop the fully automated ERP system, which integrates the procurement of corn, production, tracing of food and fuel, and the delivery of financial statements. JANUARY 2011 | Ethanol Producer Magazine | 25
BUSINESS BRIEFS People, Partnerships & Deals
Groundbreaking took place Oct. 15 in Danville, Va., for a Sustainable Energy Technology Center. The new center will conduct research and development projects for ethanol, biodiesel and bioproducts, evaluating how southern Virginia’s land could be used for renewable energy projects. It is funded by a grant from a Virginia Tobacco Indemnification Commission and Community Revitalization Commission. Research on biomass including hybrid poplar, switchgrass and Jerusalem artichoke will be extended to incorporate biofuel conversion research at the new center.
In its legal battle to protect its patent, GreenShift Corp., and its subsidiary, GS CleanTech Corp., added Flottweg AG and Flottweg Separation Technologies Inc. to its list of suits. ICM Inc., GEA Westfalia Separator Inc. and 14 ethanol plants in Illinois, Indiana, Iowa, Minnesota, Wisconsin and North Dakota are also being sued for patent infringement. Those cases were consolidated in August and will be tried in the Southern District Court of Indiana.
Using a proprietary gene construct, California-based iDiverse has successfully modified yeast to be highly resistant to a suite of lethal stresses including heat and osmotic stresses, acetic and lactic acid stressors and, in cellulosic processes, furfurals, resulting in ethanol yield improvement of 5 to10 percent. “Our technology is applicable to current fuel ethanol manufacturing processes using corn and sugar cane as starting materials, and also to those being developed to use cellulosic biomass. Our technology keeps cells alive in extreme conditions, including those found in biomass processes,” explained Richard Schneeberger, director of business development.
a subsidiary of Pacific Ethanol Inc., to sell all ethanol produced by the 55 MMgy plant when it becomes operational again in early 2011. ™
For the second year, Kansas Ethanol LLC, Lyons, Kan., received the Award of Honor from ERI Solutions Inc. for demonstrating the highest commitment to safety, receiving the highest combined scores in the areas of ERI safety audit scores, OSHA incident rates and workers compensation. The second tier Award of Excellence— those plants ranking in the highest 10 percent—included Advanced BioEnergy South Dakota LLC, Huron, S.D.; Adkins Energy, Lena, Ill.; Bonanza BioEnergy, Garden City, Kan.; East Kansas Agri-Energy, Garnett, Kan.; and Western Plains Energy, Oakley, Kan. The ERI safety group is made up of more than 65 ethanol producers.
Sheetz Inc., a family-held convenience store chain, has established an East-West Clean Fuel Corridor where E85 can be purchased between Pittsburgh and Harrisburg, Pa. “We are taking this step to help our customers who want to use E85,” said Stan Sheetz, president and CEO. “They shouldn’t have to search for E-85 locations as they travel. Our goal is to expand the use of E-85 into more locations and to extend the corridor and help our customers.” The company operates more than 380 convenience locations throughout Pennsylvania, West Virginia, Maryland, Virginia, Ohio and North Carolina.
AE Advanced Fuels Keyes Inc., a California ethanol plant currently being retrofitted, has signed an exclusive marketing agreement with Kinergy Marketing LLC,
26 | Ethanol Producer Magazine | JANUARY 2011
Brazil’s Petrobras has signed a 10year contract to supply hydrated ethanol to Toyota Tsusho Corp. Brazilian sugarcane ethanol will be used as a feedstock to produce the biobased plastic, Bio-PET, that Toyota Tsusho is deploying with a partner in Taiwan. The contract calls for 143,000 cubic meters of ethanol per year (about 38 MMgy).
Midtex Oil LP utilized Protec Fuel LLC’s turnkey E85 fuel program for its E85 stations, the latest opening in Kerrville, Texas. Midtex now has three E85 stations in Texas. Based in Boca Raton, Fla., Protec provides turnkey ethanol programs for retailers, fleets and fuel distributors throughout the U.S., including site selection, station design, equipment and installation, conversion, grant assistance and support with marketing and sales.
Pall Corp. has developed a modeling system to help researchers and process developers. The specialist in filtration, separation and purification has developed a research and modeling scale (RAMs) crossflow filtration system that integrates a high level of data collection with a small batch production capacity to facilitate large-scale process and economic modeling during early stages of development. The RAMs system will help developers understand how membranes can be applied to their processes, and can be used to develop early stage guidance for the use of membranes in several applications areas.
Emerson Industrial Automation has released a video using a humorous story line to describe global water issues and the company’s new system. Using a specially engineered polybutylene material, the System Plast New Generation helps producers move from a soap- and water-lubricated system to a dry-running system, saving water expense, eliminating the cost of lubricants and improving safety.
Fluid Components International announced its ST75 flow meter, designed for process gas, fuel gas, inert gas, waste gases and air in small line sizes, has received FM Global and CSA International approval for safety in rugged process industry plant environments. In hazardous factory areas and crowded plants where explosive, flammable or toxic gases may be present near transmitting electronics, the ST75’s remote mounting capabilities ensure an accurate and low-maintenance measurement solution for small line size gas and air flow applications in hard-to-reach locations. The
company also announced that it has opened a subsidiary in Beijing.
Butamax Advanced Biofuels LLC has opened a biobutanol technology laboratory in Brazil. Tim Potter, CEO Butamax, was joined by Ricardo Vellutini, DuPont do Brasil’s president, for the ribbon cutting and media tour of the new facility Nov. 3. Butamax has developed an all new technology which will enable economic production of biobutanol through existing sugarcane mills, according to the company. Butamax was formed to develop and commercialize biobutanol as a next generation renewable biofuel combining DuPont’s proven industrial biotechnology experience and BP’s global fuels market knowledge. In addition to Brazil, Butamax is conducting research in India, the United Kingdom, Germany and the United States.
Aventine Renewable Energy Holdings Inc. named Calvin Stewart to serve as its chief accounting and compliance officer. Before joining Aventine, Stewart served as chief financial officer of White Energy Inc. He also worked at Dresser Inc., a global manufacturer of highly engineered energy infrastructure and oilfield products and services, and at Siemens Maintenance Services.
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) 746-8385, or e-mail it to sretkaschill@bbiinternational.com. Please include your name and telephone number in all correspondence. JANUARY 2011 | Ethanol Producer Magazine | 27
COMMODITIES People, Partnerships & Deals
Natural Gas Report
Prices to stay below historic average Nov. 29—The natural gas market was, as usual, fairly volatile in the year just closed. We started with the highest monthly closing price for the entire year—$5.81/MMBtu. Generally, prices declined throughout the year with a market low of $3.29/MMBtu in November. As the chart shows, there was a strong downward trendline during most of the year. Prices should rebound starting in 2011. Note the positive trendline starting in 2011 and extending three years. The rebound never gets back to January 2010 levels and instead tops out at $5.73/ MMBtu in December 2013. Actual and projected prices reflect the extreme bearish factors dominating the natural gas market. Drilling levels and production numbers continue to be strong even though prices are weak. Industrial demand is far from pre-reces-
BY CASEY WHELAN
sion levels with little improvement expected soon. Finally, funding seems to be readily available for production activities with low interest rates and foreign money interest. Current market prices for 2011-’13 are attractive by historic standards. The projected average for 2011-’13 is $4.92/ MMBtu, while the actual average in 2006’09 was $6.77/MMBtu. It is tempting to layer-in hedges since gas prices now can be locked-in at levels lower than historic prices. Could prices go lower? Our view is they reflect weak fundamentals and when, and if, any of those fundamental factors
change, prices will likely rebound. If you are risk averse, defensive hedges may be appropriate. On the other hand, if you are a risk taker, monitor fundamentals and move into the market when and if drilling/production turns negative and/or demand begins to rebound.
Corn Report
Current corn market volatility beats 2007-’08 Nov. 29—The corn market has been temperamental. Nearby corn futures experienced a high Nov. 9, at $6.05. The market soon collapsed 98.75 cents, touching a low of $5.06¼ Nov. 23. What changed? Multiple factors impacted the market: China’s rising food inflation, support for the U.S. dollar, ideas of bigger corn acreage ahead and long liquidation following record long funds. The November USDA supply/demand saw a further reduction of corn yields to 154.3 bushels per acre. Total supply was lowered 125 million bushels from the previous month. Total demand was reduced by 50 million bushels, even though ethanol demand increased, offsetting bigger reductions in livestock and exports. USDA projects ethanol will consume 4.8 billion bushels of corn in the current marketing year with
livestock utilizing 5.3 billion, exports 1.95 billion and other industrial use at 1.38 billion. Total demand is 13.43 billion bushels. This lowers carry-out to a dangerous 827 million bushels, a 6.2 percent carry-out to use ratio. This market cannot afford any hiccups in the next growing season. The chart illustrates historical corn price changes by month, week and day. Previously, 2007’08 was the most volatile. The current year has already proven to be more so, with the chart only showing through October. Any
28 | Ethanol Producer Magazine | JANUARY 2011
BY JASON SAGEBIEL
increasing demand will have an impact, as will any planting or growing concerns in the next season. The market has discovered where rationing begins—above the $6 mark— keeping traders tense trying to balance U.S. corn supply and demand.
REPORT
Regional Ethanol Prices ($/gallon on Nov. 29) Front Month Futures (AC) $2.140
RACK
REGION
SPOT
West Coast
2.345
2.525
Midwest
2.180
2.350
East Coast
2.275
2.460 SOURCE: DTN
DDGS Report
Corn gyrations impact DDGS market BY SEAN BRODERICK
Nov. 29—The gyrations in the corn futures are pulling DDGS prices all over the place. Overall, though, values have gained as a percentage of corn over the past month—even as post-harvest corn basis escalates. We have seen a large increase in swine usage year over year, as vomitoxin is now nearly non-existent. The Chicago container market continues as if there is no end to demand. And, even the California dairy demand is starting to come around—it is still not uniformly profitable, but more optimistic than of late. The bulk export market is virtually non-existent with a very small amount of business done out of the Gulf—
nowhere near last year at this time. The business should come back—vessel freight is getting more reasonable. Last spring’s West Coast business, seen in increments of a couple of boats per month, will not be replicated this year unless things pick up in a hurry. Going forward, corn futures will obviously affect DDGS prices. The Mexico crop, which was much better this year than last, will start to run out in the first quarter of 2011, so we should see exports pick up down there. Although China is not doing as much bulk business, its appetite for high quality corn won’t go away, and containers will facilitate movement until bulk business can resume in earnest.
Regional Gasoline Prices ($/gallon on Nov. 29) Front Month Futures (RBOB) $2.2846
REGION
SPOT
West Coast
2.366
2.385
Midwest
2.153
2.180
East Coast
2.313
2.383
RACK
SOURCE: DTN
DDGS Prices ($/ton) LOCATION
JAN. 2011
DEC. 2010
Minnesota
145
145
110
Chicago
165
165
170
Buffalo, N.Y.
162
162
136
Central Calif.
201
198
145
Central Florida
179
179
JAN. 2010
153 SOURCE: CHS Inc.
Corn Futures Prices DATE
(March corn, $/bushel)
HIGH
LOW
CLOSE
Nov. 29, 2010
5.60
5.50 1/4
5.53 1/4
Oct.29, 2010
5.96
5.84
5.95
Nov. 29, 2009
4.20 1/4
4.07 1/4
4.12 SOURCE: FCStone
Ethanol Report
Ethanol, gasoline prices flip flop BY RICK KMENT
Nov. 29—November was an interesting study of both the ethanol and gasoline markets, as trends in both markets from the past several months reversed. The ethanol price has dropped nearly 20 cents per gallon, giving up its 15 cent premium on the gasoline market. The RBOB gasoline market gained nearly 20 cents per gallon in November, as it trades at a strong premium to the ethanol futures once again. This reversal comes from not only the corn market fall, but also the redeveloping of commercial and noncommercial buying interest in the energy market. Traders continue to focus on commodities in expectation that the economy will continue
to build through the first half of 2011, bringing increased demand for gasoline. This could drive additional ethanol demand, as increased overall usage of gasoline would support increased blending. Corn prices continued to move in a moderate range over the past several weeks, as concerns of overall global economies have created havoc in the market. In turn, ethanol prices will likely continue to bounce higher and lower—following the corn market. Interest will likely be focused on the noncommercial buying activity in the grain market, rather than any direct movement of overall commercial market needs.
Cash Sorghum Prices ($/bushel) NOV. 24, 2010 OCT. 28, 2010 NOV. 19, 2009 Superior, Neb. Beatrice, Neb. Sublette, Kan. Salina, Kan. Triangle, Texas Gulf, Texas
4.94 4.79 4.66 4.89 4.91 4.89
5.39 5.14 5.04 5.27 5.29 5.44
3.44 3.38 3.17 3.47 3.50 3.93 SOURCE: Sorghum Synergies
Natural Gas Prices
($/MMBtu)
DEC. 1, 2010 NOV. 1, 2010 DEC. 1, 2009 NYMEX
4.27
3.83
4.76
N. Ventura
4.29
3.34
4.73
Calif. Border
4.23
3.14
4.70
SOURCE: U.S. Energy Services Inc.
U.S. Ethanol Production Output
(1,000 barrels)
Per day
Month
End stocks
Sept. 2010
869
26,061
17,405
Aug. 2010
870
26,963
17,340
Sept. 2009
741
22,218
15,283
SOURCE: U.S. Energy Information Administration
JANUARY 2011 | Ethanol Producer Magazine | 29
DISTILLED
Ethanol News & Trends
It’s How You Say It While overwhelming scientific evidence suggests E15 is perfectly acceptable for use in vehicle models 2001 and newer, consumers won’t see scientific reports when they pull up to the gas pump. Instead, their fuel purchase will be heavily influenced by one small square piece of paper. The power of that label’s language is not being overlooked by ethanol and petroleum industry members as they file comments on the U.S. EPA’s proposed E15 label before the Jan. 3 deadline. During a public hearing held by the U.S. EPA Nov. 16 in Chicago, Ron Lamberty, vice president and director of market development for the American Coalition of Ethanol, reminded EPA officials of the issues that resulted from the “surgeon general-style warning labels” used by retailers when E10 was introduced. “That type of labeling primarily served to cause doubt in consumers, create false fears and form irrational linkages to problems that had no relation to ethanol,” he said. “That fear gave unscrupulous mechanics and repairmen an opportunity to take advantage of concerned customers by charging them for mysterious problems supposedly caused by ‘gasohol.’ … The issue of labeling is significant to the ethanol industry, and history shows that ethanol labels cause as many problems—and maybe more problems—than ethanol itself.” The ethanol industry prefers a white E15
label that does not include a warning about possible damage to vehicles. Industry representatives believe it is fair to omit this warning because there is no conclusive evidence that E15 could cause damage to unapproved vehicles. Lamberty says including the word “damage” on the label would validate unsubstantiated claims. ACE’s alternative suggestion is a statement which informs consumers that using E15 in unapproved vehicles is a violation of federal law. John Eichberger, vice president of government relations for the National Association of Convenience Stores, says his group is not anti-E15. Rather it is focused on enabling its members to profitably sell E15 and to dissuade misfueling. He urged the agency to convene a conference of stakeholders to address legal concerns before the rule is finalized. Growth Energy CEO Tom Buis expressed confidence in consumers and said he believes the EPA will design a fair label. “Many consumers today are required to use premium fuel, and diesel drivers have a bifurcated market that requires them to be educated about their fuel choices at the pump,” he said. “Consumers are capable of reading a label. They have been doing it for years.” Over 1,000 comments had been filed by mid-November, demonstrating the need for
SOURCE: U.S. EPA
Careful wording on E15 label crucial to industry
A Start The U.S. EPA’s proposed label for E15 features a warning that it could cause damage to un-approved vehicles. The ethanol industry opposes this language.
Label it In comments made to the U.S. EPA regarding its proposed E15 label, the American Coalition for Ethanol said it prefers wording similar to the current E85 label.
careful language. Many comments from private citizens indicated concern that the EPA’s approval of E15 is a mandate and that using the fuel will damage their vehicles. —Kris Bevill
Tit for Tat
Ethanol advances, opposition files lawsuits It seems that every time the ethanol industry gains increased federal support, anti-ethanol groups protest. So it was no surprise when a coalition of ethanol opponents filed a lawsuit Nov. 9 with the D.C. Circuit Court of Appeals to challenge the U.S. EPA’s partial E15 waiver approval. Led by the Grocery Manufacturers Association, the American Petroleum Institute, the National Chicken Council, the National Council of Chain Restaurants of the National Retail Foundation, the National Meat Association, the National Pork Producers Council, the National Turkey Federation and the Snack Food Association joined forces again, claiming the EPA’s E15 30 | Ethanol Producer Magazine | JANUARY 2011
approval improperly authorizes an increase in the ethanol content of gasoline. The groups claim the EPA lacks statutory authority to approve the increase and issued its decision prior to the completion of thorough testing.Many of the plaintiffs are significant consumers of corn. The National Turkey Federation said in a disclosure statement accompanying the lawsuit that 70 percent of the cost of producing turkeys is feed, and corn is the single largest ingredient in turkey feed. Therefore, “NTF’s members have a direct interest in all legislation, regulation, and litigation that affects the distribution and availability of corn.” —Kris Bevill
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Political Winds
How will the new leadership impact ethanol policies? Some strong ethanol advocates lost in the November election, including Earl Pomeroy and Stephanie Herseth Sandlin, acknowledges Bob Dinneen, president of the Renewable Fuels Association. Many more won, however, including Sen. Chuck Grassley, Sen. Mark Kirk and Rep. John Shimkus. “And, more importantly, for the most part, those defeated were replaced with equally strong advocates for value-added agriculture and ethanol,” Dinneen says. The key, says Tom Buis, CEO of Growth Energy, is educating new legislators about ethanol. “We have to go educate people about the issue and the facts,” he says. “We think if the facts get out there, we win.” Asked about a Republican-led House, the RFA and Growth Energy give the same answer. Ethanol is, and always has been, a bipartisan issue. It doesn’t matter which party is in power. Instead, ethanol is typically a regional issue. People from the Midwest typically understand the economic benefits of ethanol better than those from other areas, Buis says. What is clear, Dinneen says, is that there will be a focus on reducing taxes and reigning in spending. There needs to be a debate about how to foster continued growth for the ethanol industry, attract funding for cellulosic ethanol and help commercialize other advanced biofuel technologies, such as algae and biobutanol. “This conversation ought to include whether and how we address tax policy for all fuels, including petroleum,” Dinneen says. “The ethanol industry, and the domestic biofuel industry as a whole, ought not be asked to unilaterally disarm while extensive government support continues for petroleum companies.”
House Leader Rep. John Boehner is the new Speaker of the U.S. House of Representatives in the 112th Congress.
Senate Supporter Sen. Debbie Stabenow, new chairperson of the Senate Agriculture Committee, is a supporter of biofuels.
It will be a challenging climate for ethanol but also one of opportunity. “If we keep the focus on jobs; if we make the connection between increased ethanol use and reduced energy imports and a growing economy; if we demonstrate how ethanol production and use saves taxpayer dollars by increasing tax revenues and reducing farm program costs; then the 112th Congress and the American public will continue to support our industry and policies to assure its continued growth and evolution,” Dinneen says. With the House shakeup, Rep. Nancy Pelosi will become minority leader and Rep. John Boehner will become Speaker of the House. In terms of support for ethanol, neither Dinneen nor Buis feel it will be much of a change. Boehner hails from Ohio and has been supportive of renewable fuels in the past. Rep. Collin Peterson will become the ranking minority member on the House Agriculture Committee and Rep. Frank Lucas will step into his shoes as ranking majority member. Lucas is from Oklahoma and has a degree in agricultural economics. “I don’t
Friend to Farmers Rep. Frank Lucas, majority leader of the House ag committee, speaks with Future Farmers of America members in this 2009 photo.
think you’ll see a lot of difference between him and Collin Peterson,” Buis says. In early December, during the lame duck session, it was still unknown who would lead the House Energy and Commerce Committee. Three or four candidates were vying for the spot, Buis said, some of whom are from the Midwest and some who aren’t. The Senate retained its Democratic majority. Sen. Debbie Stabenow of Michigan will become the next chairperson of the Senate Agriculture Committee, replacing Blanche Lincoln of Arkansas, who lost her bid for re-election. Stabenow is a long-time supporter of biofuels. “Agriculture is critical to Michigan’s economy, employing a quarter of our workforce,” Stabenow says. “Not only does agriculture create jobs and feed our families across America, but it is also helping us develop new fuels and energy sources.” —Holly Jessen
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A Changing Tide
Ethanol’s influence grows in global trade The U.S. ethanol industry was created in part to displace the need for imported oil. But how is domestic ethanol use impacting the global gasoline market? A report issued by research and consulting firm Energy Security Analysis Inc. offers a surprising look at the impact U.S. ethanol is having on transportation fuels markets worldwide. ESAI’s clients consist mainly of international oil companies and refiners. The report was written from a conventional fuels perspective and focused on transportation fuels markets in the Atlantic Basin, which includes North America, Latin America and Europe, and evaluated how alternative fuels are being integrated with traditional fuels. While the markets included in the study are already some of the largest biofuels markets in the world, ESAI researchers found that the continued growth of biofuels demand, specifically ethanol in North and Latin America and biodiesel in Europe, will squeeze out a significant portion of gasoline demand over the next two years. In the U.S., increased demand for ethanol as a result of growing renewable fuel standard requirements will cut the need for gasoline imports by more than half of 2008 levels within the next two years. The result is an emerging transportation fuel market that includes ethanol as a primary component, says Sander Cohan, ESAI principal and lead alternative fuels researcher for the firm. “This is a tipping point,” he says. “The volume of ethanol blending in the United States has moved from something that is a relatively small amount to something that is a substantial and very real part of mainstream fuels. This is a change to the business model that should be addressed sooner rather than later.” Because of ethanol’s growing role in the U.S. market, exporters of gasoline to the U.S. will find themselves with a stockpile of petroleum, Cohan says. Traditionally, the U.S. has consumed about 1 million barrels of gasoline imports per day. In the past, much of that demand has been supplied by Europe, which traditionally has a substantial surplus of gasoline. Europe ships gasoline to the U.S. and the U.S. backhauls diesel to Europe. Cohan says this arrangement has been convenient for both markets, but that is about to change. “As the United States exports diesel, it has less of an appetite for gasoline,” he says. “What that means is that European gasoline has to go elsewhere. They have to start looking for new markets.” As a result, European gas suppliers are expected to target replacement markets in areas of the Middle East and Africa. Another new issue brought about by increased ethanol con-
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The Squeeze Demand for ethanol as a result of the U.S. renewable fuel standard is beginning to impact the nation’s demand for imported gasoline. SOURCE: ENERGY SECURITY ANALYSIS INC.
sumption in the U.S. is the demand cycle for RBOB (reformulated blendstock for oxygenate blending). Foreign producers look to the U.S. East Coast as an RBOB demand center, which is changing from a steady year-round market to a seasonal market. “You’ll see foreign exports really peak in the May-June-July period,” Cohan says. “For exporters to the U.S., they’re starting to see a shift in trade patterns and that requires a change of strategy.” Because ethanol will consume a larger share of the gasoline market in the next two years, ESAI expects the U.S. to shift its focus towards ethanol blending. The firm predicts in its report that ethanol blending demand will rise from just over 775,000 barrels per day in 2010 to 850,000 barrels per day in 2012. How will this affect oil and refining operations? Cohan expects they will assume larger roles as producers and blenders of biofuels over the coming years. “Oil companies and refiners are very savvy firms,” he says. “They’re starting to address this very seriously and this is a definitive example of the tide changing.” —Kris Bevill
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Strike a Deal
Union accepts Aventine offer Union workers at the 160 MMgy Aventine Renewable Energy Inc. ethanol plant in Pekin, Ill., ratified a collective bargaining agreement with Aventine Oct. 29, well before a Nov. 21 deadline. The United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industry and Service Workers International Union represents Aventine’s hourly employees at the Pekin plant, about 44 percent of the company’s employees. Oct. 12, union workers at the Pekin plant rejected Aventine’s “last, best and final offer for a new contract,” according to company filings with the U.S. Securities Exchange Commission. One day before the deadline after a three-week extension, the union and Aventine came to an agreement. “The benefit and base wage packages for the currently covered employees remain substantially similar to those in the previous collective bargaining agreement,” says a Nov. 4 SEC filing. “The currently covered employees will also receive lump sum annual payments of $750 in November 2010 and November 2011.” Unionization in the ethanol industry is uncommon. —Holly Jessen
Paying for Pumps Michigan producer supports 2 installations
Executives at all 27 plants in the Poet LLC family have been challenged to pursue blender pump installations in their respective areas. Poet Biorefining-Caro, a 53 MMgy plant located about two hours north of Detroit, recently contributed $50,000 toward blender pump installations at stations owned by Cooperative Elevator Co. and Ignash Petroleum Inc. The plant’s general manager, Dave Gloer, says Poet CEO Jeff Broin issued the challenge to pursue blender pumps about two years ago. “It’s taken a long time to make this happen,” he says. “We worked on this project for more than a year. Very few ethanol plants have been successful in getting blender pumps installed in their areas.” In exchange for the $25,000 per-pump contribution, Cooperative Elevator and Ignash have agreed to purchase ethanol directly from the Caro plant. The cooperative began purchasing E100 from the plant earlier this year and hopes to increase its demand to more than 10,000 gallons per month, says Tim Sielaff, vice president of petroleum for the co-op. Ignash will purchase E85 and has a goal of selling more than 800 gallons of E85 per day at its new site. —Kris Bevill JANUARY 2011 | Ethanol Producer Magazine | 33
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Will 2011 be the Year?
For years, cellulosic ethanol has been five years away from commercial viability. With several companies making significant progress in 2010 towards groundbreaking and five expected to be in production, will 2011 be the year that cellulosic ethanol finally makes its commercial debut? The U.S. EPA, which still projects volumes well below the initial targets, on Nov. 29, announced the final volume requirements for the 2011 renewable fuel standard, with the cellulosic biofuel volume set at only 6.6 million gallons. The EPA named DuPont Danisco Cellulosic Ethanol LLC, Fiberight LLC, KL Energy Corp., Range Fuels Inc. and KiOR, a cellulosic diesel fuel producer, as the companies it expects to produce cellulosic biofuels in 2011. Among the cellulosic ethanol companies hitting significant milestones in late 2010 is Fulcrum BioEnergy Inc. In midNovember, Fulcrum became the first to reach the negotiation phase of the DOE loan guarantee program for its proposed 10.5 MMgy municipal solid waste (MSW) cellulosic ethanol plant near Reno, Nev. Construction is expected to begin by the end of the year, with start of production in 2012. Ted Kniesche, vice president of business development for Fulcrum, tells EPM that the U.S. is on the verge of seeing several commercial-scale cellulosic ethanol plants start construction. “These breakthrough plants, along with consistent energy policy from Washington will lead to even further breakthroughs, more investments and more production,” he says. Washington needs to strengthen its support for advanced and cellulosic biofuels in order to maintain this momentum, he adds, suggesting three policies he believes the White House and Congress should support. • The 30 percent investment tax credit that currently benefits renewable power
PHOTO: BLUEFIRE RENEWABLES
Cellulosic projects break ground
Dirt Work Mississippi-based Century Construction has begun groundwork on the BlueFire Renewables cellulosic ethanol plant site at Fulton, Miss.
projects should be passed for biorefineries to stimulate capital markets and help bridge the fundraising gap. • A definition of renewable biomass needs to be developed that can accommodate new feedstocks and technologies. • The renewable fuel standard needs continued and strong support, including mandates for advanced and cellulosic fuels. As long as funding from the U.S. DOE doesn’t dry up, Arnold Klann, CEO of BlueFire Renewables Inc., agrees that 2011 will be a big year for cellulosic ethanol. BlueFire is very close to securing final DOE loan guarantee approval for a planned 19 MMgy cellulosic ethanol facility in Fulton, Miss. The company announced Nov. 10 that initial site work had begun after it had received its final air, wastewater, and storm water permits from the Mississippi Department of Environmental Quality. Enerkem Inc. has two projects in the works. In November, the DOE issued a Finding of No Significant Impact for the company’s proposed 20 MMgy Pontotoc, Miss., MSW-to-ethanol plant. The company expects to start construction in the first half of 2011, with the project built in two phases, 10 MMgy at a time. In addition, construction kicked off in August at the company’s 10 MMgy plant in Edmonton, Alberta.
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Cellulosic ethanol developer INEOS New Planet Bioenergy, a joint venture between INEOS Bio and New Planet Energy LLC, started work in November, tearing down a 35-year old Ocean Spray grapefruit processing plant that has been closed for five years. The company plans to build an 8 MMgy production facility at the Indian River County, Fla., location to process post-recycled MSW and forestry and agricultural waste. In addition, it will produce 6 megawatts of electricity, of which a third will be sold to the grid, according to David King, president of the joint venture. Demolition of the Ocean Spray facility will be complete in January. British firm AMEC, selected as the engineering, procurement and construction contractor, will start construction in May. “The plant will be mechanically complete in the first quarter of 2012 and starting up the second quarter,” he says. For King it’s very exciting to finally see a physical manifestation after years of talk. 2011 may not be the year that many cellulosic ethanol plants start churning out product, he says, but it’s certainly shaping up for a busy year of construction, at the INEOS plant and others. “I think there will be a lot of momentum around the industry in terms of getting steel in the ground,” he says. —Holly Jessen
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Closer than Thought
Cellulosic ethanol costs rapidly decline, barriers are surmountable The race to commercial viability for cellulosic ethanol may be coming to a close, according to a Boston Consulting Group report. Alternative energy technologies are poised to reshape the energy landscape—with a potential to disrupt the status quo by 2025, according to a report released in November, “What’s Next Production Cost Declines for Cellulosic for Alternative Energy.” It’s a result that admittedly Ethanol SOURCE: BOSTON CONSULTING GROUP surprised the authors of the report, says Balu Balagopal, a senior partner and managing director for BCG. “The silent revolution is happening,” he says. Authored by Balagopal, Petros Paranikas, partner and managing director, and Justin Rose, principal, the report focuses on six alternative energy technologies for transportation and power generation. Under transportation, the study examined advanced biofuels and electric vehicles. For electric vehicles, it concluded the technology will become economically attractive for lead market segments by 2020. Broad adoption, however, will require lower battery costs, plus slow fleet turnover means it will take a decade before electric vehicle numbers increase materially. On the other hand, the authors challenge the skeptics who say advanced biofuels will only be viable by 2020 at the earliest. “We believe that their fundamental economic viability will likely be established over the next few years or certainly well before 2020,” the report says. “Then the pace of adoption will be influenced primarily by how quickly the infrastructure barriers … can be overcome.” Large-scale cellulosic facilities are expected to reach unsubsidized retail-cost parity with gasoline at $3 a gallon between 2012 and 2015. BCG analysis shows the production cost of cellulosic ethanol is at $1.99 a gallon for 2012, dropping to $1.59 a gallon for 2014. “We certainly saw advanced biofuels as something that was definitely going down the cost curve, and while there were many barriers they were surmountable,” Balagopal tells EPM. “Lignocellulosic ethanol [in particular] is far closer to cost competitiveness than it is often given credit for.” Biobutanol is also mentioned in the report as having superior properties as a fuel. Algae technologies have long-term promise but are in the very early stages of development, the report says. Sugarcane ethanol is noted as being an exception among first-generation ethanol technology—competitive with gasoline today and reducing carbon emissions by as much as 90 percent. —Holly Jessen
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NIMBY reversed
Community rallies around Powers Energy One Many ethanol producers have heard the cry of “not in my backyard” (NIMBY). Fortunately, naysayers aren’t the only ones who speak up. Powers Energy One of Indiana, a 42 MMgy garbage-to-ethanol plant proposed for Lake County, Ind., has seen its share of controversy in the past year. After three untroubled years in development, the project was attacked in the local media with a campaign of rumors and lies, says Gerry Scheub, Lake County commissioner. The ringleaders were some of the media itself, a small group of politicians and an area landfill, which is set to lose business should the plant become reality. At a public meeting in November the ethanol plant’s supporters attacked back. Of about 400 people attending the meeting, at least 380 were supporters, Scheub tells EPM. The supporters cheered before the meeting started and some carried signs that read “Garbage to Ethanol vote YES.” Some were from Schneider, Ind.,—the smallest town in the county with 300 residents—where the $254 million ethanol plant is to be built. Before it was selected as the location for the ethanol plant, the town held a public meeting, during which an “overwhelming majority” signed a petition in favor of the ethanol plant, says Richard Wright, a member of the town and Lake County Solid Waste Management District boards. It was four years ago when Scheub first met Earl Powers, chairman and CEO of Powers Energy of America Inc. Lake County was looking for a 20-year waste stream solution and Scheub was, and is, very enthusiastic about the idea of converting waste into ethanol, or, as he puts it, turning garbage into a commodity. The county commissioner would like to do something about this country’s addiction to foreign oil, which has contributed to the national debt as well as resulting in the deaths of many U.S. soldiers. “I think that’s wrong and 36 | Ethanol Producer Magazine | JANUARY 2011
I would love to be somebody who is reversing that,” he says. Job creation is behind much of the support from Lake County residents. Once completed, the plant will employ 250 people for an average of $18 to $20 an hour, Scheub says. Constructing the plant will bring in another 500 workers. It would also solve a waste management issue for Lake County. Current tipping rates for garbage disposal are $38 to $43 a ton, with rates expected to rise to $49 a ton in 20 years, says Jeff Langbehn, executive director of the solid waste district. Tipping fees at Powers Energy One start at $17.50 a ton and go down to $17.25 once input exceeds 2,000 tons of municipal solid waste (MSW) daily. The plant will turn garbage into ethanol, recycle metal and glass leaving a small percentage of MSW to be landfilled. On top of all that, the plant will generate income for local governments. Schneider, the host community, will get 3 cents for every gallon of ethanol produced at the plant, says Clifford Duggan, attorney for the solid waste district. For every ton of MSW processed at the plant, the solid waste district will receive $2.50, of which 90 percent will be distributed to cities in the district based on the number of households per community. Finally, the county will receive taxes from Powers Energy One. “Not bad, huh?” Scheub asks. The project underwent serious scrutiny before getting this far, Langbehn tells EPM. After review by the solid waste district board, it was turned over to an engineering firm, a university and an accounting firm for examination. Langbehn himself has seen the technology at work during five visits to the INEOS Bio pilot plant. “There has been an enormous amount of study to see if this thing does what they say it does,” he says. Alas, those who have set themselves against the project aren’t interested in hearing about the positives. “They’re just interested in being negative,” Scheub says. —Holly Jessen
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A Long Time Coming PHOTO: PHOTO: WEYLAND BIOETHANOL A/S
Norwegian developer brings cellulosic pilot plant online
Cause for Celebration Weyland BioEthanol CEO Petter Bartz-Johannessen, far left, State Secretary Per Rune Henriksen, and Statiol New Energy’s Norway Department of Oil and Energy business developer Guntis Aboltins-Abolins are pictured at the opening of Weyland’s cellulosic ethanol pilot plant.
It only took 20 years and 1,000 experiments. In 1987, Karl Weydahl and Knut Helland, co-founders of Norway-based Weyland BioEthanol A/S, began collaborating with Bergen University to develop a process to convert cellulose to ethanol. In October, the company opened the doors at its 200,000 liter (approximately 53,000 gallon) facility in Bergen, Norway, and has plans to scale up to a commercial facility after its process proves efficient at the pilot-scale. “Weyland aims to become an international supplier of technology for production of bioethanol from cellulosic feedstocks,” says Weyland CEO Petter Bartz-Johannessen. “The pilot plant will allow us to demonstrate the technology’s suitability for full-scale production.” The technology that was so long in the making is based on concentrated acid hydrolysis. At the core is a patent-pending acid recovery method that recovers approximately 98.5 percent of the acids and solvents used in the process and produces high yields of ethanol—approximately 1 liter of ethanol for every 8 pounds of feedstock. The company has verified its process with multiple cellulosic feedstocks, including sugarcane bagasse, corn stover, rice straw, hardwoods, softwoods, wood wastes and paper wastes. Weyland believes its process will make it an international leader of cellulosic ethanol technology. “Our dream scenario is to achieve this in Norway, enabling Norway to contribute to the production of renewable energy and the creation of green jobs,” Bartz-Johannessen says. “However, this requires both political determination and drive.” It also requires capital. Norway-based Statoil, which is one of the world’s largest oil and gas production companies, began investing in the company in 2009. Statoil is invested in several ethanolrelated technologies, including California-based Bio Architecture Lab Inc., which is developing a consolidated bioprocessing technology to convert seaweed to ethanol. Statoil is also partnered with DONG Energy and Royal DSM for the Kalundborg Cellulosic Ethanol Project, using Inbicon A/S’ agricultural waste-to-ethanol technology. One hundred Statoil retail stations in Denmark are currently selling Bio95 2G, an E5 blend of Inbicon’s second-generation ethanol. —Kris Bevill
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California Rising
Unique incentives inspire investments to restart facilities California’s innovative Ethanol Producer Incentive Program (CEPIP) appears to be having an almost immediate positive impact on ethanol producers in the state. The program, which began accepting applicants last summer, offers payments to producers when ethanol crush spreads are low and requires producers to repay those funds when spreads are high. Producers will be able to receive an incentive of up to 25 cents per gallon of ethanol produced, capped at $3 million per year per facility, during months when the ethanol crush spread is less than 55 cents per gallon. During months that the crush spread is greater than $1 per gallon, participating producers will be required to pay back incentives at a rate of up to 20 cents per gallon of ethanol produced. In order to qualify for the program, ethanol plants must be located in California, have an operating capacity of at least 10 MMgy and be actively producing ethanol. Initially, only Calgren Renewable Fuels LLC was pegged to participate in the program. Other producers had applied for and been approved to participate in the program, but Calgren was the only facility operating. That has recently changed, due in part to the incentives offered by the state. Pacific Ethanol Inc. received program participation approval for its 60 MMgy plant in Stockton and its 40 MMgy plant in Madera while the plants were still idle. Since receiving the incentive program approval, the company has been able to acquire the financing necessary in order to restart both facilities. Paul Koehler, the company’s vice president, confirmed that the program played a role in Pacific Ethanol’s ability to restart production. “The CEPIP program was a definite positive factor to the lenders and owners in the decision to restart Stockton as it provides assurance of payments when corn-to-ethanol spreads are low,” he says. “The California Ethanol Producer Incentive and the California Low Carbon Fuel Standard demonstrate to lenders and investors that the State of California is serious about building a renewable transportation fuel production industry.” In late-November, Pacific
Pacific Ethanol Stockton—restart Dec. 2010 AE Advanced Fuels Keyes—restart 1Q 2011 Pacific Ethanol Madera—restart TBD AltraBiofuels Phoenix Bio Industries—idle Calgren Renewable Fuels—operating
Ethanol said it planned to restart the Stockton facility within the next month. A restart at the Madera plant was still in the works and would occur “as market conditions permit,” according to Koehler. In early November, AE Biofuels Inc. announced that its subsidiary, AE Advanced Fuels Keyes Inc. was being retrofitted and prepared to begin producing in the first quarter of 2011. The 55 MMgy plant has been idle since 2009. Once operational, the facility will qualify to begin receiving payments through CEPIP as dictated by the corn-to-ethanol spreads. Price assurance offered through the program also played a role in AE Biofuels acquiring the $4.5 million needed to repair the Keyes facility, according to Andy Foster, president and chief operating officer of the company’s advanced biofuels division. The incentive program’s official start date could not be determined until the state passed its budget. Legislators were finally able to do so in October and it is anticipated that the program will be officially rolled out by the end of January. —Kris Bevill
Green Racing
PHOTO: GROWTH ENERGY
Ethanol show car unveiled
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Rusty Wallace, left, and Carl Edwards, former champions with National Association for Stock Car Auto Racing (NASCAR), unveil the American Ethanol show car Dec. 2 in Las Vegas. NASCAR has a 6-year agreement with American Ethanol to use E15 in its races. The group is led by Growth Energy and includes nearly 100 different entities.
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Combine and collaborate Groups realign to advance goals
Sweet sorghum as an advanced biofuel feedstock will get a boost from a new collaboration of the National Sorghum Producers and the Sweet Sorghum Ethanol Association. With NSP in the lead role and SSEA providing organizational support, the collaboration committee will develop and implement a legislative advocacy program. NSP has already been working with the U.S. EPA on certifying sweet sorghum as an advanced biofuel feedstock through the renewable fuel standard petition process. “Elevating awareness of sweet sorghum’s vast potential as a biofuel feedstock is a precondition to building a sweet sorghum ethanol industry,” says Steve Vanechanos, chairman of EPEC Biofuels Holdings Inc. and chairman of the joint collaboration committee In Europe, the European Bioethanol Fuel Association (eBIO) and the older, France-based European Union of Ethanol Producers have merged to form the Ethanol Producers Union for Renewable Energy (ePURE), representing 80 percent of the installed production capacity in Europe. “The need to merge was obvious,” says Lutz Guderjahn, COO of CropEnergies AG and vice president of ePURE. “Today’s political agenda is simply too vast to be handed by companies standing on their own.” In the biodiesel industry, a second group has been formed to represent the industry in addition to the well-established National Biodiesel Board. A group of biodiesel advocates formed the Global Biofuels Alliance Inc. as a new nonprofit trade association for small to mid-size biofuel producers, marketers, distributors and associates. The alliance will first focus on reinstating and extending the Federal Biodiesel Blenders Tax Credit, adding that it expects that priorities will eventually shift from “the traditional tax credit to other policies.” The group was formed because there was a need for a voice for small- and medium- sized companies, the announcement said. —Holly Jessen
Digested Power
Project receives recovery funds United Ethanol LLC has started work on installing an anaerobic digester at its 50 MMgy ethanol plant in Milton, Wis. A portion of the plant’s thin stillage will be used to create methane, and reduce natural gas use by up to 25 percent. The $6.75 million project is being supported with $2.25 million in state energy program funds, funded through the American Recovery and Reinvestment Act. The anaerobic digester is expected to reduce the number of fermentation solids that have to be recycled, reduce fermentation inhibitors, reduce evaporator bottlenecks and eliminate syrup loadout. Technology provider Eisenmann Corp. will install the digester. The project should take about a year to complete. JANUARY 2011 | Ethanol Producer Magazine | 39
DIRECTORS
Focus on Ethanol The East Kansas Agri-Energy ethanol board meets regularly with staff. PHOTO: KATIE ROCKER
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DIRECTORS
Always Above
Board
Serving as an ethanol plant board member can be a difficult, yet highly rewarding, task. BY HOLLY JESSEN
Fiduciary duties. Due diligence. Risk management. Strategic planning. Ethanol plant board members have a list of weighty duties to navigate. Jill Zimmerman keeps the shareholders in mind at all times as she participates in the regular board meetings of East Kansas Agri-Energy LLC. The duty of a board member is to represent shareholders, she says, and everything the board does should be examined through that lens. Does it increase shareholder value? Is it good for the company? Does it fit with the goals for the future? This can be a heavy responsibility, especially because many times shareholders are family, friends and neighbors. “You sat on the front porch and you sold it to your brother, so if it doesn’t do good, you are in trouble,” she tells EPM.
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Learning Curve
there isn’t a single philosophy for long term capital planning. It disrupts the company’s ability to set or pursue a strategic vision. “That division keeps them from being effective and having the focused future that they planned for,” he says. “Even when you plan, it sometimes doesn’t work, but some of these [boards] seem not to have a plan because of the divisions in their boards and management.
In his time working with ethanol plant board members, Scott McDermott, a partner in accounting firm Ascendant Partners Inc., has noticed there are many inexperienced board members. Compared to the ag- Young Boards Ascendant Partners’ riculture and food industries, Scott McDermott which the company also works says not only is board experience scarce, but with, the ethanol industry is individual director goals still a relatively young industry. can vary widely. “A lot of them have very smart board members, but there is not a ton of board experience,” he Fully Engaged says. Board members have very An inexperienced board important fiduciary duties. If member will need time to underthey don’t properly carry out stand such basic things as how these duties, they could be leto conduct a board meeting, set gally liable—as a board or even up and work on committees and Diligence Required as an individual. “Sometimes prioritize important decisions. Kennedy and Coe’s I don’t think board members There’s two ways to learn those Donna Funk says some board members fully understand what fiduciary things, No. 1, from other board don’t fully understand duties and liability exposure members with more experience their responsibilities. they really have by being on a or, No. 2, through the “school board,” says Donna Funk, a of hard knocks,” he says. member of Kansas-based acBeyond that, board memcounting and consulting firm, Kennedy bers need to know their way around commodity markets and understand commod- and Coe. Funk has seen cases of board memity volatility. In some cases, an ethanol plant board member may be a newcomer bers not being fully engaged at the board to the industry. “There’s a pretty tough level. Some vote on things they don’t learning curve in an industry that is as understand and without doing their due volatile as it gets, from a margin business diligence, she says. Another thing board volatility standpoint,” McDermott tells members should keep in mind is that if information is shared with shareholders EPM. Another issue is that different people or the community, it should be shared with got into the business for different reasons. everyone, not just a few. “Sometimes it Some are long term players in the etha- takes a while for them to understand what nol business. They are patient and will- gets discussed in the board room needs to ing to wait to get cash out the business. stay in the board room and not get talked Others got involved during the boom about at the coffee shop the next day,” and thought that would last forever, he Funk says. If a lawsuit is filed it doesn’t says. They thought ethanol was going to mean anybody did anything wrong or be a money printing press without risk. that the lawsuit will be successful, but it is “Frankly there is some sticker shock,” he something to be cautious about. “You’ve says. “When you make good money, you got to be careful in how you’re presenting make good money, but it also comes with yourself and what information you are some losses.” Board members with differ- sharing so that you don’t help create that ent priorities can cause divisions because false perception,” Funk says.
42 | Ethanol Producer Magazine | JANUARY 2011
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McDermott agrees that board members need a better understanding of their legal obligations. Some simply don’t know what they are, while others need to be reminded, something he believes the legal counsel to the board should do periodically. “To be honest with you, I’ve been very surprised that there hasn’t been more litigation during this tough time,” he says. The thing to remember is that these regulations and rules are put in place for a reason. “We don’t like them,” he adds, “but we hate to admit that they probably make for a better company.” Brad Rayl, who serves as a board member for Kansas Ethanol LLC, in Lyons, Kan., confirms that fiduciary duties can be a tricky thing. Still, the board he serves on is made up of people with extensive experience on other boards so they have a good understanding of what it means. Care needs to be taken when board members do business with the ethanol plant—a highly likely scenario in rural America. As long as everything is above board, and everyone knows what’s happening, there’s nothing wrong with that, Rayl says. At Kansas Ethanol some board members are farmers and sell grain to the plant, but they don’t get
special treatment. Another director owns a feedlot and buys distillers grains from the plant, and is treated like any other customer. Rayl is part owner in an insurance broker agency which provides insurance to the plant, but his company isn’t the only one that board members consider when it’s time to renew policies, he says. Zimmerman sees due diligence as the most critical task a board member can do. It’s vital, she says, to be very thorough and never underestimate the amount of homework you need to do to understand all facets of the business and company. This is necessary to help make good decisions and speak intelligently at board meetings. “It’s your responsibility to bring yourself up to speed,” she says. Top Level Focus Funk says boards often struggle with finding the right balance between what the board is responsible for and what it should let management do. Although how that separation is set up varies, the board should not cross the line into what it is paying management to do. “The board is the top level, overarching level of governance,” she says. “The board’s focus
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should be more on the corporate strategy, goal setting—the vision piece.” Management, on the other hand, is in charge of the day-to-day operations. For example, the board hires the top level management and the management hires the employees below them. The board should restrict its involvement in employee issues to the top level only, leaving management to deal with other employees. “If an employee would come to me with a problem, I am the wrong guy to talk to,” Rayl says. In some cases the board members are people who have been involved with the project from day one, Funk says, starting with fundraising all the way to plant construction and start up. They may not realize what they are doing, but they sometimes attempt to micromanage every decision simply because they are so used to being heavily involved. Once the board has hired a management team, however, it’s time to step back and let them do their
jobs. “There very often is a struggle in that transition,” she says. While a board may feel like it is directing a small company, it’s best not to think that way, Funk tells board members. She advises them to think of themselves as a company with a larger corporate structure, such as IBM Corp.—a board that meets regularly, not to make the day-to-day decisions of the company, but to set higher level corporate strategy. McDermott agrees that having clear roles and responsibilities is key. “If everybody is a manager, nobody is a manager,” McDermott says. “You’ve got to have clear leadership—clear management of the company, clear board leadership.” The structure can vary, however. On a coop board—a background many ethanol plant board members come from—the management sets the vision and the board reinforces it. Some ethanol plants combine elements of a co-op board and a public
corporation. “It depends on the types of board members and types of shareholders where in the continuum you find the model,” he says, adding that every board needs to find a clear separation between the duties of the board and management, and do it in a way that works for it. Dick Sterrett serves on three ethanol plant boards: Kansas Ethanol, Western Plains Energy LLC and Sterling Ethanol LLC, which also includes Yuma Ethanol LLC and Bridgeport Ethanol LLC. He says it this way. “Don’t rock the boat that’s sailing fine.” Building Expertise With all the potential pitfalls facing ethanol plant boards, how can boards educate themselves? Funk suggests reading books on leadership and boardsmanship along with attending board training sessions. Another way to gain insight is by talking to seasoned board members and
DIRECTORS
the board attorney. Generalized board leadership programs are helpful, McDermott agrees. But training that’s specific to ethanol plant boards is hard to find. “In this space, there’s nothing specialized,” he says. One thing boards can do is hire consulting companies to assist. Kennedy and Coe works with boards during strategic planning sessions to help them understand roles and responsibilities, how to have effective planning sessions and set goals and action items, Funk says. Ascendant Partners offers help with strategic planning too, plus works with plants on operational benchmarking and performance improvement initiatives, McDermott adds. East Kansas Agri-Energy works with Kennedy and Coe at yearly strategic planning sessions for the board and upper level management. It’s a very valuable exercise that Zimmerman recommends other boards take part in. They use the SWOT Analysis tool, which evaluates strengths, weaknesses, opportunities and threats, to determine if last year’s goals were achieved and whether anything has changed. The board then reviews it quarterly, she says. The difficulty is that some board members don’t realize there’s a problem until faced with an issue. Often the attitude is that other boards may need help but their board is just fine. “They don’t realize how disconnected they are,” McDermott says. But in times like these, boards can’t afford to neglect a strong strategic focus. Without it, plants are put into the position of getting handed a future that simply happens, versus a future that’s wanted. “Not having a plan for where you want to be is a recipe for getting an outcome you don’t like,” he says.
where the next dollar was going to come from. Today, she says with satisfaction, the plant has very little debt and investors have all their money back plus more. Before Sterrett started as a board member he didn’t realize how long it would take a diversified group of people to make good decisions, he says. In addition, it can be difficult to find dedicated people willing to serve—much like in politics. Still, he
encourages people to open their eyes and jump in. “Columbus took a chance,” he says. “Why not you?” Rayl has fun doing what he does. “If you don’t look forward to doing something, why subject yourself to it?” he asks. “Life is too short I think.” Author: Holly Jessen Associate Editor, Ethanol Producer Magazine (701) 738-4946 hjessen@bbiinternational.com
Step up and Serve Despite the difficulty and potential liabilities facing board members, Zimmerman, Sterrett and Rayl say it is a rewarding experience. Zimmerman remembers the early days when the board wasn’t sure JANUARY 2011 | Ethanol Producer Magazine | 45
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Beautification Fifth graders in Sioux Falls, S.D., plant trees on their school grounds that were donated by Poet LLC, in honor of Arbor Day. PHOTO: POET LLC
46 | Ethanol Producer Magazine | JANUARY 2011
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Building Goodwill Ethanol producers are doing good things in their communities. BY HOLLY JESSEN
Whether sponsoring educational programs with area schools, hosting plant tours or giving to charities and organizations, directors and employees at ethanol plants work hard to educate their neighbors and positively impact their communities. By so doing,
they spread a positive message about ethanol—one person at a time. Mike Jerke, chairman of the Renewable Fuels Foundation, which works to meet the education, research and strategic planning needs of the industry, believes most ethanol plants are active in their communities but emphasizes that role shouldn’t be taken lightly. “It really is up to us producers,” he says.
Jerke is general manager of Chippewa Valley Ethanol Co. LLLP in Benson, Minn., one example among many of an ethanol plant active in its community. Ethanol plant personnel can get involved in their communities by partnering with local schools or even by speaking to area clubs. And, although it would be nice to think that the people who live near ethanol plants understand how the industry benefits the economy and environment, that is not always the case. “We can’t take that for granted,” Jerke says. “The fact is, there’s a lot of misinformation out there.” From the moment he was hired, Mike Erhart, CEO of Prairie Horizon Agri-Energy LLC, was told by board members that community involvement was a priority. It’s a mandate he and staff at
JANUARY 2011 | Ethanol Producer Magazine | 47
PHOTO: UNITED ETHANOL
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Guiding Tours Visitors from a French cooperative tour United Ethanol.
the ethanol plant are glad to carry out. The plant is, after all, very much a part of Phillipsburg, Kan. It purchases grain from area corn farmers and uses the roads, and the children of employees are enrolled in area schools. “I think it’s extremely important that we support them,” he says. “If all we do is take, that’s just an Ebenezer Scrooge approach.” In Milton, Wis., United Ethanol makes outreach a priority as well. It’s important to help people understand the benefits an ethanol plant can bring a rural area and the country as a whole, says Alan Jentz, vice president of grain operations and risk management.
Teach ‘em Young Many ethanol plants focus on students, from elementary on up to college. For example, Poet LLC recently partnered with the Education Resources Center of South Dakota at Dakota State University to add information about the environment and ethanol to existing curriculum. South Dakota history is mandatory learning for fourth grade students, according to Autumn Bates, marketing manager for Poet. A program called South Dakota Road trip, a 13-week virtual trip around the state, is available as a voluntary supplement to the history course. Poet worked with DSU to add several stops to the existing program, she says. This year the trip will include 22 stops, including one at the Poet Research Center in Scotland, S.D. In addition, Poet helped 48 | Ethanol Producer Magazine | JANUARY 2011
PHOTO: PRAIRIE HORIZON
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Sponsoring Teams Prairie Horizon sponsors this girls softball team, which rode in a local parade promoting the game as well as ethanol.
add information about hydropower, wind energy, energy conservation and the environment. “South Dakota is a state that has huge renewable energy potential and has been working for years to become a net energy exporter,” Bates says. “So we feel that ethanol and other sources of renewable energy are a big part of our state’s history and future.” Last year, 4,200 South Dakota youngsters participated in the road trip, which starts in January and ends in April. This year the hope is that number will increase to 5,000. “We are well on our way already,” Bates adds. At the end of the classes, Poet will give each student a tree seedling to plant in honor of Arbor Day. This program started last year, Bates says, with fifth graders in the areas around Poet plants across the country planting trees. Tree dispersal this year will be expanded to include the road trip students in South Dakota as well as all fourth graders near Poet plants in other states. “So it will be a big number, a lot of trees being planted,” she says. The RFF, through a partnership with the Future Farmers of America, has created a curriculum on ethanol for high school and college students. Free to educators, it features six units of curriculum in all, which explain what ethanol is, the production process and the impacts the industry has on agriculture, the environment and the economy.
Ethanol processes and career opportunities are covered in the renewable fuels sector. EPM found several examples of individual ethanol plants working directly with their local schools. For more than a year, CVEC has partnered with Benson High School on a renewable energy course to be repeated yearly. The school decided that with an ethanol plant in town, it would use grant funds to teach students about ethanol production. CVEC’s lab manager helped the teacher decide what equipment should be purchased and even helped teach the class. In addition to small-scale ethanol production, the students also learned about fuel cells, wind energy and solar energy. Out of that class, two students completed internships at CVEC, working in the lab for an hour a day during school hours. After the internships were completed, the students were hired to do maintenance at the plant over the summer, Jerke says. Both boys have indicated an interest in studying renewable energy at the college level. The Poet Biorefining plant in Chancellor, S.D., focuses most of its outreach efforts on children. Adults can often be set in their ways so it’s a good place to start changing the attitudes of the next generation. “They’re very open minded and willing to listen,” says Rick Serie, general manager. The plant stays busy with visits from area schools throughout the year. Lennox, S.D., second graders in a Business Buddies pro-
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gram come to the plant for a tour each year. A Sioux Falls, S.D., environmental class of high school upperclassmen also tours each year to learn how to produce ethanol. As big supporters of Future Farmers of America, plant employees were glad to work with student members as they prepared a presentation on the pros and cons of E15. The students gave their presentation to the plant’s management team in preparation for their trip to a state competition. Several employees are also involved in an annual pheasant hunting event for children, Serie says. In honor of former board member John Ludens, who died of pancreatic cancer, the plant holds an annual golf tournament. The proceeds are given as scholarships to the children and grandchildren of members planning to pursue a career in agriculture or ethanol. At the seventh tournament this year nearly $8,000 was distributed, Serie says. To be considered, a student must write a paper and give a presentation. “We put them through quite an extensive interview process,” he says. The Chancellor plant isn’t the only one with a scholarship program for students entering agriculture-related careers. United Ethanol started its own scholarship program in 2010, joining many other ethanol plants that have similar programs. Children are a big target audience for Prairie Horizon Agri-Energy, too. “Normal-
ly if you get the kids interested you get the parents interested as well,” Erhart says. He recalls one student whose science fair fermentation project won the state competition and was presented at the national competition. To do the project, he came to the plant for help in learning about fermentation. Lab employees helped him measure ethanol yield using different yeasts without requiring expensive equipment, Erhart says. The student measured output of CO2 with a balloon and by measuring the circumference of the balloon, calculated the fermentation rate. Although plant employees helped, they didn’t do the project for him. “We kind of pointed him in the right direction,” he says. Other students have come out to the plant to interview employees and write papers on topics such as food versus fuel. Erhart also went to the local high school to speak to students, not about fuel, but on how to fill out job applications and do well in an interview, something he knows a bit about. “We interview hundreds of people,” he says.
Community Outreach But outreach isn’t just about teaching youth about ethanol. Sometimes it’s about being out there, flipping burgers at a fundraiser, contributing financially to a good cause or joining the local chamber, Erhart says. That kind of community involvement shows the plant cares about the community.
50 | Ethanol Producer Magazine | JANUARY 2011
That’s why Prairie Horizon sponsors the second largest rodeo in Kansas. Among the many activities the plant is involved in at the rodeo, it also raises funds for and awareness of breast cancer. During the “Tough enough to wear paint” event, the company gave $1 for every person who came to the rodeo wearing paint, Erhart says. They also passed a hat in the stands for contributions from the fans. All in all, more than $8,000 was raised. The plant is also a financial supporter of the Court Appointed Special Advocate Association. In a related effort to help children, plant employees volunteer with the Big Brother, Big Sister program, and once raised several thousand dollars in a bowling team showdown with another local company. “Basically we’re suckers for kids,” Erhart says. United Ethanol often offers plant tours including one this spring when the six finalists of the 2010 Alice in Dairyland contest visited. United Ethanol has hosted foreign visitors, too, including a group from a French cooperative and agricultural officials from Brazil. In addition, the company supports local organizations, such as the food pantry, YMCA, law enforcement and fire department. Author: Holly Jessen Associate Editor of Ethanol Producer Magazine (701) 738-4946 hjessen@bbiinternational.com
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52 | Ethanol Producer Magazine | JANUARY 2011
FINANCE
Bogged Down Will improvements to the U.S. DOE’s Loan Guarantee Program be enough to drag cellulosic projects out of the financing muck? BY KRIS BEVILL
Descriptions of the U.S. DOE Loan Guarantee Program range from “promising” to “complete failure” depending on who you ask and whether they are applicants in the program. Renewable Fuels Association President Bob Dinneen
speaks passionately on the topic and has consistently called out the DOE for unresolved problems within the program. The rigorous application process clearly puts cellulosic biofuel projects at a disadvantage, he says, and makes it nearly impossible for first-of-a-kind projects to be commercialized. The bill “is largely seen as a complete failure to date in terms of bringing next generation biofuel technologies to the marketplace,” Dinneen wrote in a September blog post confronting the DOE. The RFA has repeatedly called for the program’s reform, but has received little response from the DOE. Applicants such as BlueFire Renewables Inc. and Fulcrum BioEnergy Inc. have the most hands-on experience as cellulosic producers attempting to acquire financing, but they hold back from publicly criticizing the program while their applications are still pending. What they will say, however, is that they remain hopeful their applications will be accepted and that the November advancement of Fulcrum’s application to the term sheet negotiation step is a promising sign for the cellulosic industry. “The DOE program is a very valuable program to kick off this new industry of ethanol production,” says Rick Barraza, vice president of administration at Fulcrum. “It’s been a lot of hard work to apply but I think the DOE has been cooperative. It’s a very rigorous program and is a lot of work for companies. We think we were successful with DOE because we came to the table with a very attractive project for a number of reasons.” Fulcrum has applied for approximately $70 million from the loan guarJANUARY 2011 | Ethanol Producer Magazine | 53
FINANCE • • • • • • SELL • RENT• LEASE • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Drawing Board Fulcrum Bioenergy Inc. is currently negotiating terms for a $70 million U.S. DOE 10HP TO 250,000#/hr • • loan guarantee that will partially fund a 10.5 MMgy cellulosic ethanol plant in Nevada. 250,000#/hr Nebraska 750 psig 750OTTF • • 150,000#/hr Nebraska 1025 psig 900OTTF •• 150,000#/hr Nebraska 750 psig 750OTTF •• antee program, 60 percent of the working through the initial due • 150,000#/hr Nebraska 350 psig diligence phase and had acquired • project’s total cost. The proposed • • Sierra Biofuels Plant near Reno, 115,000#/hr Nebraska 350 psig all of the environmental permits • • Nev., is expected to produce 10.5 necessary for its proposed 19 80,000#/hr Nebraska 750 psig • MMgy wood waste-to-ethanol 80,000#/hr Erie City 2000 psig 800OTTF •• MMgy of municipal solid waste• based ethanol and will also proplant in Fulton, Miss. BlueFire 75,000#/hr Nebraska 350 psig • • duce 16 megawatts of electricity. O is seeking $215 million from the 70,000#/hr Nebraska 750 psig 750 TTF • • The company filed its initial apDOE to fund its $296 million • 60,000#/hr Nebraska 350 psig Milestone Reached • plication for a DOE loan guarconstruction contract. Rick Barraza, • 40,000#/hr Nebraska 350 psig • vice president of • antee in 2009. The second part 20,000#/hr Erie City 200 psig administration at • • of the application was filed in Fulcrum, says the DOE The Process Slog 10-1000HP Firetube 15-600 psig • • early 2010. In order to advance has been cooperative The initial DOE loan guar• as the company is the ALL PRESSURE AND TEMPERATURE • to term negotiations with the first to advance a loan antee program, Section 1703, • COMBINATIONS SUPERHEATED • DOE, Fulcrum had to acquire application. was created in 2005 in order to • AND SATURATED • long-term feedstock and offtake support technologies that re• • agreements, prove its gasification duce greenhouse gas emissions. • RENTAL FLEET OF MOBILE • In 2008, the American Recovery • technology to the DOE, sign TRAILER-MOUNTED BOILERS • a contract with an engineering, and Reinvestment Act included • 75,000#/hr. Nebraska 350 psig • • procurement and construction funding for a new loan guaran75,000#/hr. Optimus 750 psig 750°TTF • • firm, acquire the necessary pertee section, Section 1705, with 60,000#/hr. Nebraska 350 psig • • mits for construction and show the goal of financing clean en• 50,000#/hr. Nebraska 500 psig • proof of equity capital. “It’s been ergy projects that would other• 40,000#/hr. Nebraska 350 psig • a long and hard effort with the In Process wise have a difficult time acquir• 30,000#/hr. Nebraska 350 psig • DOE and we’re glad we’re to this BlueFire CEO Arnie ing funding due to the collapsing Klann is hoping his • 75-300HP Firetube 15-600 psig • company will soon point,” Barraza says. “We realize credit market situation. Very few • follow Fulcrum into the • applications have been filed for ALL BOILERS ARE COMBINATION GAS/OIL • there is more to do and we are next step with DOE. • • not done, but we’ve reached an Section 1703, most likely beENGINEERING • START-UP • • important milestone.” cause the applicant would be FULL LINE OF BOILER AUXILIARY • • “That was, I would susrequired to pay for any credit SUPPORT EQUIPMENT. • Electric Generators:• 50KW-30,000KW • pect, one of the highest rated projects subsidy costs associated with approved • • DOE had,” BlueFire CEO Arnie Klann loan guarantees. The 1705 program, how• • said shortly after Fulcrum’s term sheet anWEB SITE: www.wabashpower.com ever, does not require the applicant to pay • 847-541-5600 • FAX: 847-541-1279 •• nouncement in November. “My feeling is for credit subsidy costs. During testimony E-mail: info@wabashpower.com • given to the Senate energy committee at a • if [the DOE] got that one out, I would • September hearing, Jonathan Silver, execu• hope that they could get the rest out by the POWER • EQUIPMENT CO. • end of the year. We’re hopeful that we’ll tive director of the DOE’s loan program, • 444 Carpenter Avenue, Wheeling, IL 60090 • be next.” In mid-November, BlueFire was said the agency had issued four conditional •
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PHOTO: FULCRUM BIOENERGY INC
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FINANCE
commitments under the 1703 program and 10 under the 1705 program since 2008. Combined, the commitments represent $13 billion in loan guarantees. None of the commitments were made to biofuels projects. Before a loan guarantee can be granted, applicants must pass an extensive six-step process which includes project summary reviews, due diligence and term sheet negotiations, credit analysis and review, deal approval, post-conditional commitment due diligence and financing negotiation and, finally, closing. “By better leveraging our existing resources and reengineering our processes, we have been able to significantly reduce the amount of time it takes to review applications, to expedite the transaction approval process and to provide greater transparency in our work,” Silver told the senators. “Over the last few months, we have significantly improved the pace at which we are processing transactions, and aim to do even better.” Tim Newell, senior advisor at U.S. Renewables Group, a private equity firm that has invested in Fulcrum and other renewable projects, testified at the September Senate energy committee hearing and commended Silver and the loan guarantee office for its progress. “Our firm has experienced its own share of frustrations, especially early on when the program was critically hampered by a lack of personnel generally, and a lack of seasoned project finance professionals,” he told the senators. “Over the past year, my firm has seen a major transition in the operation of the DOE loan guarantee program under Jonathan Silver, including the much-needed attention of seasoned project finance professionals with extensive energy financing experience. The proof of that change is striking.” Newell said it previously would not be uncommon for his firm to wait at least three months for the DOE to approve a simple project summary. In August, however, the DOE approved a Part 1 application in just six days. “That is progress you can measure,” he added.
Federal Favoritism According to the RFA, these slight improvements are a positive step, but ma-
The Approval Process There are six steps involved in the approval process for a U.S. DOE loan guarantee. As of mid-November, Fulcrum is the only cellulosic project to advance as far as the term sheet step, but it was anticipated that BlueFire may make similar progress by the end of 2010. Following is a brief description of each step in the application process. • Intake. This first step is a twopart process consisting of a summary application followed by a more comprehensive application if the project is deemed worthy. • Initial Due Diligence and Term Sheet Negotiation. Program authorities examine the project’s technology and financial model. Environmental reviews are conducted. Outside consultants are brought in to analyze the project’s legal and market merits. If no issues are discovered during that due diligence process, term negotiations for the loan may begin. • Credit Analysis and Review. Program staffers evaluate and calculate the applicant’s credit subsidy score for every aspect of the project, including pledged collateral, market risk, technology risk, regulatory risk, contractual foundation, operational risk and recovery profile. • Deal Approval. If a project makes it this far into the process, the Energy Secretary becomes involved and evaluates whether a loan guarantee should be granted. But first, a committee of senior DOE officials must again review the project and, if approved, send it to a credit review board, the Office of Management and Budget and the U.S. Treasury department. If the credit review board approves, the secretary can offer his/her approval. The project then goes back down the administrative ladder to the loan program officials, who can finally offer a conditional loan guarantee commitment to the applicant. • Post-Conditional Commitment Due Diligence and Financing Documents Negotiation. Any remaining due diligence is completed and final loan documentation is drafted. • Closing. Loan program officials conduct a final credit analysis and the project is allowed to move to financial closing after the OMB approves the credit subsidy score.
FINANCE
jor modifications still must be made in order for the loan guarantee program to provide the assistance for which it was designed. Of particular concern is the required long-term off-take agreements and feedstock supply contracts. This step unfairly favors power generation projects over fuel projects, according to Dinneen. “Anyone even tangentially aware of fuel markets knows this is simply not how fuel markets operate,” he says. “The markets for electricity and fuels function differently. As such, the loan guarantee program must reflect these differing real-world circumstances in determining the qualifications of various applicants. We can’t bury costs in a rate base and we don’t have long-term supply agreements. As long as the DOE loan guarantee program is going to ignore the realities of fuel marketing, and hold to a risk assessment equivalent to that of any private sector bank, it will not be the tool Congress intended to assist emerging technologies over the investment valley of death.” Fulcrum and BlueFire have managed to sign offtake and supply contracts, but not without struggle. Klann says creating and finalizing such agreements without an estimated financing approval date has been the most difficult aspect of the application process thus far for BlueFire. “That’s been the hardest hurdle in the essence of getting everything to work together time-wise when one of the biggest pieces, which is the loan guarantee program, is not nailed down.” RFA points out that the program, which was designed to help commercialize risky, innovative technologies, includes a requirement for some applicants to provide data from a commercial-scale
facility. This requirement is nearly impossible for applicants who are applying for funding specifically so that they can scale-up their projects from demonstration to commercial scale. Another irony of the program is that it was created to provide financing to projects that would otherwise have difficult accessing capital, yet the program itself is running short on capital. In 2009, approximately $2 billion was redirected from the loan guarantee program to pay for the Cash for Clunkers program. In 2010, Congress approved the transfer of another $1.5 billion from the loan program to state budget accounts. “That $3.5 billion, assuming the DOE had this program operating appropriately, which it does not, would have financed up to a dozen commercial-scale cellulosic and other next-generation ethanol projects,” Dinneen says. In Newell’s testimony to the Senate committee, he said it appears the Office of Management and Budget initiated the transfer of funds away from the loan guarantee program and that the agency is overstepping its administrative role in the loan guarantee process. U.S. Renewables Group has determined that if all projects that were in the due diligence phase in August were approved, the loan guarantee program’s entire budget would be used by February, seven months before the program is scheduled to end. “Renewable energy trade associations and members of Congress are still seeking to fully understand OMB’s role in evaluating these applications and why OMB appears to be a major cause of delay in issuing these guarantees,” Newell said in his testimony. “OMB’s level of involvement and review times appears to exceed that of other federal loan guarantee programs.”
FINANCE
Other Options The USDA’s loan guarantee program appears to be increasingly viewed as the best alternative for federal financing of cellulosic projects. BlueFire filed an application with the USDA in August as a direct result of the DOE’s program delays, according to Klann. “We have two bites at the apple, so to speak,” he says. “We’re hoping for either a USDA or a DOE guarantee.” Klann says the USDA already has a proven track record funding biofuels projects, (it approved loan guarantees previously for Range Fuels Inc. and Sapphire Energy Inc.) whereas the DOE has yet to complete a biofuels application. “The USDA knows how to manage risk,” he says. “I believe they may be more adept at managing risk than the DOE. But from a financial standpoint, the DOE appears to be better.” The DOE’s loan guarantees offer a lower interest rate and direct lending, which means less negotiating with private banks, he says. During comments made to attendees at the Cellulosic Biofuels Summit held Nov. 15-17 in Washington, D.C., Dinneen also praised the USDA for its role in providing assistance to cellulosic producers. “There is clearly more hope for the USDA’s loan guarantee program,” he said. “Secretary [Tom] Vilsack and Under Secretary [Dallas] Tonsager are committed to seeding investment and appear willing to accept a few inevitable failures in order to assure the desired successes. But even with that program, the influence of bean counters at OMB could ultimately undermine the program’s intent.” Legislative reform may be the only way the DOE loan guarantee program can achieve widespread success. An Oct. 25 memo
sent to President Obama from Carol Browner, the assistant to the president for energy and climate change, Ron Klain, chief of staff to vice president Joe Biden, and Larry Summers, White House economic advisor, stated their belief that the program is valuable enough to be extended past its scheduled expiration date of Sept. 30, 2011, but extensive reform is also necessary. Silver has also reportedly admitted that a necessary overhaul of the loan guarantee program will only be possible through legislation. But while loan guarantees can certainly play a vital role in advancing risky technologies such as cellulosic biofuels, Silver pointed out in his Senate testimony that they shouldn’t be considered the only option for advancing these technologies. “It is important to recognize that the loan programs represent only one of a variety of potential approaches to providing federal support for clean energy,” he said. “We must think about enabling private sector clean energy financing in a comprehensive manner, ensuring that our limited resources are deployed in the most effective and coordinated manner. Only then will we be able to create an environment where the private sector will invest in clean energy technologies at a scale needed to reach our national clean energy goals.” Author: Kris Bevill Associate Editor, Ethanol Producer Magazine (701) 540-6846 kbevill@bbiinternational.com
RISK MANAGEMENT
CONTRIBUTION
Futures, Swaps Market Can Help Manage Risk An array of new financial instruments helps the industry overcome financial challenges and thrive. BY ROBERT ESPOSITO My first exposure to the business of corn came 15 years ago at Lehigh University, where I played on the varsity soccer team. During our preseason workouts, we would go on hour-long runs through the many cornfields of Bethlehem, Pa. Fast-forward to the present, and those corn fields I trudged through are now the main focus of my everyday life.
When I think back to my days in college I realize that there are many parallels between running through the cornfields and managing the ethanol industry today: endurance through difficult conditions, adapting to one’s surroundings, and the rewards of hard work. Over the past four years, the industry has been bombarded by adverse publicity, wild price swings, and activists questioning our very existence. Politicians and citizens alike had spirited political debates over the merits of using corn for food or fuel when prices rose to $7 a bushel. Gasoline prices
Chicago Board of Trade ethanol traded a dollar below ethanol, swaps have over 50,000 lots of decreasing discretionary blending. open interest and are now clearA few producers faced cash flow able through NYMEX Clearport. problems, yet demand continued to This makes trading financially increase. Despite all these growing settled ethanol swaps available to pains, the industry has endured anyone who has a futures tradand is showing signs of prosperity ing account and takes away the ahead. Trading Swaps counterparty risk of nonpayment One place where the industry Robert Esposito handles ethanol swaps associated with ISDAs. has shown signs of progress is as the head of Latium Due to the volatility of comin the growth of financial instruCapital. modity prices, hedging by producments to service its practitioners. ers is necessary, prudent and vital to their Four years ago, ethanol futures only had 2,000 lots total open interest, and financially existence. For ethanol producers, this means hedging the price of inputs (corn), costs (ensettled ethanol swaps were not yet cleared ergy) and outputs (ethanol). Just a few years on an exchange. Only banks and companies back, producers could only easily hedge their large enough to have an ISDA agreement could trade ethanol swaps. The International inputs and costs, but not their output. Swaps and Derivatives Association Inc. has In addition to hedging, the most crucial created an ISDA master agreement which lesson learned over the past four years is the importance of managing cash flow. When sets guidelines for privately negotiated overthe-counter (OTC) swaps. buying inputs and hedging outputs in a rising In such a short time, much has changed. market, producers face a double drain on their cash. They buy corn and at the same Today, ethanol futures volume has increased to more than 10,000 lots of open interest. time make margin calls to support an etha-
58 | Ethanol Producer Magazine | JANUARY 2011
RISK MANAGEMENT
Open interest is the total number of outstanding contracts that are held by market participants at the end of each day. If both buyer and seller are initiating a new position, then open interest will increase by one contract. RBOB is an acronym that stands for Reformulated Blendstock for Oxygenate Blending. RBOB took the place of unleaded gasoline on the NYMEX in 2006. A crush spread is when a trader purchases a futures contract of a base commodity, such as corn, and sells short the equivalent futures contract of its products, such as ethanol or corn oil.
nol hedge. In this case, one needs enough cash to maintain this double drain until the final product is sold and income is received. While hedging sounds simple in theory, some ethanol companies have not done the best job in streamlining their hedging activities. Different departments do not always communicate with each other and as a result a company can over hedge when they could just trade internally. Hedging managers need to start looking at the company’s overall exposure and not just individual department risks. Part of the ethanol industry’s current success is due to its ability to adapt to the current financial environment. The greater financial system is still based on trust that a counterparty will deliver, but these days one cannot be too sure. As such, in the past year, ISDAs have lost their appeal. No longer will companies accept being exposed to counterparty risk when it is unnecessary and the majority of OTC ethanol products are cleared through exchanges. Although ethanol futures volume has increased over the years, the majority of ethanol trading still happens in the OTC swap market.
Types of Swaps The most liquid ethanol product in the market today is the CBOT Calendar Average Swap (or simply CBOT swap), based upon next month’s futures price. For example, a January CBOT swap settles at the same price
as the February ethanol futures contract. A standard contract is 14,500 gallons per lot, half the size of an ethanol futures contract, and is based on Chicago area pricing. Since this swap settles financially, there are no concerns of delivery. Since its settlement price is based on the futures contract, the price is easy to track. The next most liquid contract is the Chicago Platts ethanol swap, which also settles financially. The settlement price is based on the average price of Chicago Platts for each day, and the contract size is 42,000 gallons per lot. It is often traded as a differential spread to RBOB swaps since they are the same contract size. The NY Harbor ethanol swap is also 42,000 gallons per lot contract and is based on the daily average pricing of NY Harbor Platts. Generally speaking, the NYH swap trades approximately 10 cents over the Chicago-based swap, accounting for transport cost. That spread has traded anywhere from 4 cents to 14 cents, however. There are often arbitrage opportunities to be found in the locational spreads as the prices are sometimes well below or above the transport cost. Over the years this was the contract of choice for exporters (especially from Brazil). Currently, with high Brazilian sugar prices and U.S. ethanol prices in the $2.30 range, it is not economically feasible for Brazilian producers to export ethanol to the U.S. The ethanol/RBOB differential is perhaps the most common trade in the industry, though it can be a very volatile trade since ethanol and RBOB do not often correlate. There is a lot of activity in the market when RBOB trades at 50-60 cents over ethanol, and profit taking when the differential flattens out. This trade allows end users (blenders) to lock in their ethanol price at a discount to RBOB while they receive the 45cent ethanol blenders credit. Another very popular trade is the ethanol/corn crush spread. The CBOT ethanol swap is an equivalent size of one corn
contract. One corn contract represents 5,000 bushels of corn, which produces approximately 14,500 gallons of ethanol, good for a corn/ethanol ratio of 2.9 bushels per gallon. This makes the CBOT swap easily traded versus corn as a crush spread. The simple crush formula is the price of corn divided by 2.9 and then subtracted from the price of ethanol. This basic formula does not account for the dried distiller grains, which are also produced during the crush. An example of the simple crush spread is if Q4 CBOT swaps trade at $2 and Q4 corn swaps trade at $5, then the crush spread is 27.5 cents. ($2 – ($5/2.9) = $0.275) The most popular way to trade corn is still the corn futures market, which is very liquid, although more and more ethanol hedgers are using calendar average corn swaps to hedge the crush. Similar to the ethanol swaps, corn swaps are traded OTC, settled financially and clearable over Clearport. A third way to hedge corn is through an exchange traded fund called the Teucrium corn fund (NYSE symbol: CORN). The corn fund is the closest equivalent to corn futures in the market today and trades as an equity. This provides a new way to hedge corn without having to open a futures account. For the first time, anyone with a stock account can trade a corn-tracking fund. Fifteen years have passed since my Lehigh soccer days. I now run along New York City’s Central Park Reservoir rather than the cornfields of Bethlehem. Although I am a little slower, a little heavier, and I miss the days of running through cornfields, I am very proud to be part of an ethanol industry that continues to endure, adapt and revolutionize the global energy markets. Author: Robert Esposito Head of Latium Capital, a division of GFI Securities LLC (212) 968-2745 R.Esposito@latium-capital.com
The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reflect the views of Ethanol Producer Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s). JANUARY 2011 | Ethanol Producer Magazine | 59
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