Arkansas EthanolPresentation to

Arkansas County Farm BureauSeptember 26, 2006

Ethanol Production: Corn and Sorghum

Ethanol Production: Corn and Sorghum

Pretreatment FermentationProductRecovery

Corn/Sorghum:

StarchesSugars

Glucose Ethanol

Amylase Yeast

Products of Ethanol Production from Corn or Sorghum

Ethanol 2.5-2.8 Gallons/bushel depending on efficiency; 100 mgpy plant uses ~36 million bushels

DDGS Distillers Grains Solubles (“mash”) usually dried (DDGS) for transport to feed mills, but can be pumped wet to adjacent feeding operations.

CO2 usually captured and marketed directly by carbon dioxide marketers.

Products from ethanol plant

Source: Kansas Geological Survey

Wet mill process

Wet mill processing plants produce more valuable by-products than the dry mill process. In addition to the ethanol, wet mill plants produce:

Corn gluten meal (which can be used as a natural herbicide or as a high protein supplement in animal feeds)

Corn gluten feed (also used as animal feed) Corn germ meal Corn oil Carbon dioxide (CO2 for soft drinks or dried ice) and High fructose corn syrups. Wet mill plants also cost substantially more to build and have

higher operating costs than dry mill processing plants, and hence are usually much bigger than dry mill plants in order to achieve economies of scale.

Feedstock Process Products

Whole Corn, Sorghum, Barley

Grain Dry Fractionation

Ethanol Plant

Largely Abandoned Dry Fractionation/Biomass Ethanol Process

DDG*

* Degermed, Debranned Grain

Ethanol

Hi-Pro DDGS

Biomass Energy

Conversion

Germ

Bran

The

rmal

Ele

ctric

alAlternate Feedstocks

(Wood Waste)

DDG

Bio

gas

“Gre

en”

Ene

rgy

Germ

Wet DGS and DDGS

Ethanol plants produce one key product other than ethanol: an ingredient for animal feed known as distillers grains solubles (“mash” or DGS). Cargill in Memphis, Tyson in Pine Bluff, and other poultry, catfish, dairy, and other feed plants prefer DGS to whole grains.

Dried DGS (DDGS) is usually preferred for ease of transportation.

Energy use in ethanol production

Two major costs in ethanol production: natural gas and feedstock (usually corn).

Ethanol production requires energy to heat fermentation process.

Drying DGS requires most heat– Dry DGS are in high demand for export.– Wet DGS hard to transport, need feedlot next

door

Energy sources for ethanol plants

Natural gas– Cheaper to install– Volatile prices

Coal– Adds ~$35 M to cost of plant– Gives cogeneration capacity

Wood waste and other cellulose sources– Can use fluid bed process – Readily available and inexpensive at some sites (e.g. Pine

Bluff).

Local and State Revenue

University of Texas, Mississippi State, and University of Missouri studies of ethanol plants of 80-100 mgpy capacity

Directly create 50-60 jobs paying more than $37,000 per year (total payroll >$2 million)

Additional 120 jobs throughout the regional economy.

Impact on regional household income would be at least $79 million during construction and $41 million annually from operations.

Contribution to local and state tax revenues will be about $2.4 million during construction and $1.3 million annually.

Missouri 2003-2004 campaign resulted in: • State income tax credit• $200,000 grant for seed money• Producer credit up to $3.125 M/year for 5 years2005 Missouri legislative session:• By January 1, 2008, all gasoline sold in Missouri must contain at least 10% agriculturally derived ethanol.RESULT: These incentives have resulted in $1.5 billion in investment in proposed ethanol developments, four plants are up and running.

State consumption and incentives

80 to 260 mill gals

29 to 79 mill gals

10 to 28 mill gals

0.25 to 9 mill gals

no data reported

-Tax exemptions- Producer payments

No current state incentives but large mandated oxy-fuel and RFG markets encourage ethanol production

States with incentivesbut little production

States with significantethanol production butno major state incentives

Source: U.S. Department of Transportation, Federal Highway Administration

Federal Regulations and Ethanol

Ethanol first started being used as a fuel additive in the late 1970s when EPA began phasing out lead in gasoline. Removing lead from gasoline lowered the octane level of gasoline. Because of its high octane content, ethanol soon established a role as an octane enhancer.

The Clean Air Act Amendments of 1990 established the Oxygenated Fuels Program and the Reformulated Gasoline (RFG) to control carbon monoxide and ground-level ozone problems. Both programs require that certain urban areas in “non-attainment” add oxygen to their gasoline: 2.7 percent by weight for oxygenated fuel and 2.0 percent by weight for RFG. Blending ethanol with gasoline is one way to meet the oxygenation requirements. Methyl tertiary butyl ether (MTBE) was also used to meet the requirements but is now being discontinued.

Largely due to Government policies, ethanol production grew from about 62 million gallons in 1976 to over 2 billion gallons in 2002

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Million gallons

Source: U.S. Energy Information Administration and USDA, ERS

Energy Tax Actof 1978 gaveethanol a $0.40/galcredit on the Federalmotor fuels tax

Surface TransportationAssistance Act of 1983 increased ethanol tax exemption to $0.50/gal and the blender’s income tax credit to $0.50/gal

Tax Reform Act of 1984increased ethanol taxexemption to $0.60/gal and the blender’s income tax credit to $0.60/gal

Regulations under theClean Air Act Amendments of 1990started in 1992

MTBE discovered inCalifornia drinking waterin 1998

In 1999 CaliforniaGovernor banned MTBE by 12/03

Blender’sIncome tax credit of$0.40/gal

Energy policyAct of 1992applied ethanoltax credits to lower blends

RFG beginsin 1995

Federal Tax Credit 52 cents/gallon

Blenders credit– E10 .52 X 10% = 5.2 cents/gallon E10– E85 .52 X 85% = 44.2 cents/gallon E85

Ethanol plants obtain blenders license readily– Malta Bend, Missouri, plant

Use of blenders license depends on market– MFA objected to Malta Bend use of blenders credit– Arkansas plants exporting to Texas would not conflict with

local distributors’ blending credit.

Energy Policy Act of 2005 Has Major Effect on Bioenergy Development

Renewable fuel standard – renewable fuel blended with motor fuel must increase from <4 billion gallons in 2005 to 7.5 billion gallons in 2012

Federal fleets required to increase their use of alternative fuels

MTBE banned in the United States within 4 years and immunity to liability disallowed

Estimated Effect of the renewable fuels standard (RFS) on future ethanol production

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USDA baseline

RFS

Historical estimates

Effect of MTBE ban

California alone is expected to consume 1 billion gallons of ethanol by 2010 to replace MTBE.

Texas (easily accessible by an Arkansas plant) is expected to require the second highest amount of ethanol to replace MTBE.

At least 2 billion gallons more are needed to replace MTBE

– Wall Street Journal, 5/5/2006

Both Supply and Demand Policies Increase Ethanol Production

Supply Side Incentives– CCC Bioenergy Program– Energy Tax Incentives Act of 2003– Energy Policy Act of 2005

Demand Side Incentive– Renewable Fuels Standard– State Mandates

Source: RFA, 2006.Source: RFA, 2006.

Total Current Capacity at 101 ethanol biorefineries 4797.9

Total Under Construction (32)

/Expansions (6) 2047.5

Total Capacity 6845.4

Updated: June 1, 2006  

Northeast Missouri Ethanol Plant

40 mgpyMaconMissouri

Built by Broinwww.broin.com

50 mgpy ethanol plant in Logan Co, Illinois built by Fagan

NREL Projections of Future Ethanol ProductionNREL Projections of Future Ethanol Production

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Future of ethanol use

75% of all new Brazilian cars are flex-fuel cars which can run on E85 (85% ethanol)

GM, Ford and Chrysler will produce 900,000 flex-fuel cars in 2007

Toyota plans to sell E85 cars in U.S. in 2008 Ethanol is still less than 3% of 140 billion

gallons of gasoline sold in the U.S. every year.

– Source: Financial Times, 4/19/06

ENERGIZING AMERICA: Farmers Fueling Our Energy IndependenceMay 11, 2006 New House Bill

Increase Production of American-made Biofuels– Doubles the percentage of renewable fuels sold in America in six

years.– Extends tax credit for ethanol and biodiesel through 2015 and

increases tax benefits to small biofuel producers. Expand the Market for and Distribution of Biofuels

– Increases the percentage of “flex-fuel” vehicles that run on ethanol, or gasoline.

– In seven years, 75 percent of all cars made in America would be flex-fuel cars.

– Increases the number of gas stations offering ethanol (E-85) and biodiesel through new incentives and requirements.

Encourage Local Domestic Ownership– Provides federal incentives to smaller ethanol and biofuel plants,

so that independent, locally-owned facilities that produce biofuels can grow and thrive, improving our rural communities.

Feedstock is drawback in Delta

Ethanol production in Arkansas faces a current lack of feedstock (corn or sorghum), higher price of grain, and aflatoxin fears.

A feasibility analysis by BBI (www.bbibiofuels.com), shows 36 million bushels of corn can be obtained locally and by rail at Stuttgart for $2.61 per bushel and locally, by rail and barge at Helena for $2.60/bushel.

To maximize benefits to Arkansas, feedstock availability must increase.

Corn in the Delta

Corn is excellent rotation crop for cotton If the 250,000 acres decrease in rice acres

projected early this year in Arkansas had all gone into corn production, the 36 million bushels needed for a 100 mgpy plant could be achieved.

Besides price increase, what will help farmers decide to grow corn? Ownership.

Farmers pledge delivery of corn bushels to gain equity in plant.

Benefits– Plant has more secure and local supply.– Arkansas’ economic benefits increase.– Farmers gain ownership in plant.– Local commitment to plant increases.

Drawbacks– Expected yields may not materialize and thus

farmers may not deliver as promised.

Historic Return on Investment

•Even small (20 mgpy) plants and a replay of the lowest historical prices of ethanol, DDGS, and CO2 would result in at least a 12% return on investment 83.3% of the time.

•A study of five ethanol facilities in Iowa found an average return on investment of 35% for the period 1998-2003

Bootheel Agri-Energy LLC

SIKESTON, MO, April 5, 2006 (AP) - An ethanol plant that's planned for southeast Missouri will provide up to 65 jobs.  Construction of the $205 million plant in Sikeston is expected to start in November.

Bootheel Agri-Energy says it will buy 160 acres in an industrial park for a plant that will produce 100 million gallons a year.  Once completed, it will be the largest ethanol plant in the state and one of the largest in the country.

The plant will use about 35 million bushels of corn a year.  Company officials announced the plant in November officials when they had narrowed the list to three sites in Sikeston and Scott City.

Return on investment today

Bootheel Agri-Energy LLC in Sikeston, Missouri expects 100% return on investment at current prices.– Not on river, will bring in corn by rail & truck– Coal-fired, not natural gas

At $1.46/gal, 30-40% ROI is projected depending on plant size and fuel source.

Gross margins

At $1.86/gallon value of ethanol and 24 cents/gallon for DDGS, value of ethanol is $2.10.

Subtracting corn at 70 cents/gallon and natural gas at 33 cents record gross margin of $1.07.

100 mgpy plant has gross margin of $107,000,000.

– Source: FAPRI, University of Missouri

Current prices

Most ethanol is sold on flat price 6 month contracts which are currently over $2.50 per gallon.

Ethanol sold on spot market has reached above $3/gallon.

State Average Fuel Ethanol Rack Prices provided by Axxis Petroleum, www.axxispetro.com

Date: Thursday, May 11, 2006

Iowa: 2.9519

Illinois: 2.9005

Kansas: 3.0019

Michigan: 2.8500

Minnesota: 2.9032

Missouri: 2.9739

North Dakota: 2.9652

Nebraska: 2.9492

South Dakota: 2.9809

Wisconsin: 2.7906

ENERGY OVERVIEW

U.S. currently uses approximately 138 billion gallons of gas 35 billion gallons of diesel 8 billion gallons of ethanol will be

needed just to replace MTBE.

Investing in Ethanol Share prices of ethanol producing companies are rapidly

increasing. The largest U.S. ethanol producer ADM has seen its share price climb 85% so far this year.

May 10, 2006, ADM announced plans to increase annual production 50% in next 2 years to 1.575 billion gallons.

Pacific Ethanol, plant under construction, Bill Gates invested $85 million for next 4 plants.

Sikeston plant raised $70 million in 5 months.

Ethanol IPOs Most ethanol plants privately held by farmers. 2nd largest ethanol producer, Verasun, raised

$419.8m in an IPO. Shares closed >30% above the offer price. Financial Times, 6/15/06.

Hawkeye Holdings and US Bioenergy will have IPOs this week and in October (respectively).

Private placement is quicker due to less SEC regulation, but must limit number of investors.

Arkansas has advantages over Midwest

Whether return on investment will be higher or lower at a Delta plant than at plants in the Upper Midwest will be influenced by demand from Texas for ethanol to replace MTBE.  Some analysts contend Texas will require the second highest amount of ethanol to replace MTBE of any state. 

Demand for co-products of ethanol production (DDGS) by feedmills in Memphis (Cargill), Mississippi (poultry and catfish feed plants), and Arkansas (poultry and catfish) could also make return on investment higher from a Delta plant than from Midwestern plants. 

Available following receipt of signed non-disclosure/confidentiality agreement

Feasibility analysis on best sites for ethanol in Arkansas.

All financials for business plan 5 year pro forma income statements Expected return on investment Estimated equity needed Plant employment structure 

Next steps

$51,000 grant awarded by USDA/VAPG will:– Establish foundation for equity drive – Finalize ownership team– Incorporate business structure

LLC or hybrid New Generation Cooperative/LLC

Grant must be matched by local contributions before funds will be released by USDA.

Ownership group will be established this fall

Two phase equity drive– Accredited investors only, private placement

Recruit ~100 investors at $30,000 each$3 million– Purchase discounted shares at 50 cents on dollar

Perform engineering studies, construction plans, hire management, develop final prospectus

– 2nd phase: two classes of stock raise at least $60-70 million committed delivery of 15 million bushels

www.deltanetwork.org

Results of Sikeston Equity Drive

We plan to pattern our efforts on the recent equity drive for an ethanol plant in Sikeston, Missouri. 

Raised more than $70 million in less than 6 months. 

The Sikeston group chose a private placement over a public offering to save legal costs and time (to take advantage of high investor interest and increasing ethanol prices).

1908 original Model T Ford ran solely on ethanol

Ethanol is still less than 3 percent of the nation's 140 billion-gallon annual demand for gasoline.

1908 original Model T Ford ran solely on ethanol

Ethanol is still less than 3 percent of the nation's 140 billion-gallon annual demand for gasoline.

Is the future even brighter for ethanol?

Commodity Credit CorporationSection 9010: Continuation of the Bioenergy ProgramLead Agency: Farm Service AgencyKey Staff Contact: Jim Goff, BioenergyProgram@wdc.usda.gov

Established by USDA in FY 2001 to encourage ethanol and biodiesel production. Cash payments available from the CCC to bioenergy producers compensating them for a portion of their increased commodity purchases:

Under 65 million gallons, payment on 1 bushel for every 2.5 bushels of corn or soybeans used for production

65 million gallons or more, payment will be 1 bushel for every 3.5 bushels of corn or soybeans used for production