DDGS and CDS – Fuelling the Greenhouse Industrydtpr.lib.athabascau.ca/action/download.php?filename=mba...The Canadian commercial greenhouse industry is but one example of a sector

DDGS – Fuelling the Ontario Greenhouse Industry

By: Amanda Bickell

Athabasca Executive MBA Applied Project APRJ699

November 21, 2006

DDGS: Fuelling Ontario Greenhouses

Executive Summary Energy is a critical factor in today’s economy. Dependence on fossil fuels is leading to higher prices for many goods and services. Rising costs are reducing profit margins for many sectors. Concern for the environmental impacts of fossil fuel applications has led to escalation of many costs, and restrictions for users of these products. Future success will depend upon finding economical and sustainable sources of energy. The Canadian commercial greenhouse industry is but one example of a sector impacted by the energy challenge. Operators have traditionally used natural gas, or bunker oil to heat the greenhouses. In an effort to reclaim profit margin, the industry is seeking more economical fuel alternatives and has begun to adopt biomass and coal as alternatives. The automotive sector is also searching for a sustainable alternative to fossil fuels. Although argued that it is not the ultimate solution, production and use of ethanol has been adopted throughout North America as an interim step. Using ethanol as a gasoline additive has been shown to reduce greenhouse gas emissions. In addition to the cleaner exhaust, the incorporation of ethanol helps to reduce dependency on non-renewable fossil fuels1. The majority of Canada’s ethanol, 83%2, is produced through the distillation of corn. This process also creates a co-product known as dried distillers’ grains solubles (DDGS). This co-product is currently being used as livestock feed. Its merits as animal feed are arguable. It is best tolerated by ruminants, and can only represent a portion of their feed diet. Research continues to determine how best to apply the product to the swine, poultry and aquaculture industries. Expanding the market for distillers’ grains is critical to the success of the ethanol production model. As ethanol production continues to expand, the feed market will become more saturated. Although the livestock industry can absorb the DDGS currently being produced in the province, the DDGS production projected for 2010 will exceed the reasonable consumption of the product by livestock. While DDGS is a substitute for corn and for soybeans in livestock diets, consideration of the economic forces of these markets suggests that it is global commodity markets that will determine prices. Ontario’s ethanol and livestock producers act as price takers in the market and will need to adapt to falling prices for these commodities. This will put further pressure on the prices of DDGS, lowering them to a point where using the ethanol co-product as a fuel is feasible.

1 OMAFRA (2005, October 7)

2 See Appendices Appendix A – Ethanol Production in Canada

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An abundant supply of a cost effective, consistent, renewable, field crop by-product suggests an opportunity to extend the environmental contribution of the ethanol process. Through an examination of the financial, operational and environmental factors of the greenhouse industry’s current heating systems, a financial comparison of the installation of natural gas, bunker oil, coal, wood and DDGS burning systems was conducted. The financial results suggest that, at current prices, coal is the most financially attractive heating system. The risks associated with using coal as a heat source suggest that it is not the best recommendation for the long term. Environmental considerations, public opinion, government regulation, and market forces suggest that the current benefits to a coal system will not last. Although a DDGS based heating system is not immediately beneficial, it will present opportunity in the near future.

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Table of Contents Executive Summary ........................................................................................................ 2 Table of Contents............................................................................................................ 4 Introduction – The Opportunity........................................................................................ 6 Commercial Greenhouses in Canada ............................................................................. 7

Natural Gas ................................................................................................................. 8 “Clean” Combustion ................................................................................................. 8 Delivery and Storage................................................................................................ 8 Natural Gas Pricing .................................................................................................. 9 Figure 1 - Price History for Natural Gas ................................................................... 9

Bunker Oil .................................................................................................................... 9 Storage and Delivery................................................................................................ 9 Parasitic Costs ....................................................................................................... 10

Coal ........................................................................................................................... 11 Infrastructure.......................................................................................................... 11 Efficiencies and Environmental Impacts................................................................. 11 Coal Pricing............................................................................................................ 11 Figure 2 – Price History for Coal ............................................................................ 12

Wood ......................................................................................................................... 12 Source of Supply.................................................................................................... 12 Product Consistency .............................................................................................. 13 Maintenance and Storage ...................................................................................... 13 Environmental Considerations ............................................................................... 13

The Fuel Dilemma......................................................................................................... 14 Ethanol .......................................................................................................................... 14

Market for Ethanol Co-Products ................................................................................ 15 Carbon Dioxide (CO2) ............................................................................................ 15 Heat ....................................................................................................................... 15 DDGS..................................................................................................................... 15

Greenhouses – A new market for DDGS ...................................................................... 16 Source of Supply ....................................................................................................... 16 Product Consistency.................................................................................................. 16 Technical Requirements ............................................................................................ 16 Environmental Considerations................................................................................... 17

Developing a DDGS Pricing Model ............................................................................... 17 Table 1 - Greenhouse Fuel Price Comparison....................................................... 17

Analysis of Supply ..................................................................................................... 18 Table 2 - Corn Based Ethanol Production in Canada............................................. 18

Analysis of Demand................................................................................................... 19 Cattle...................................................................................................................... 19 Swine ..................................................................................................................... 19 Poultry.................................................................................................................... 20 Other feed applications .......................................................................................... 20 The Demand for DDGS.......................................................................................... 21 Table 3 - Summary of Theoretical DDGS Demand in Ontario................................ 21

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Table 4 - Greenhouse Fuel Cost and Consumption Comparison........................... 22 Analysis of Substitutes............................................................................................... 22

Table 5 - DDGS Price Equivalencies to Substitutes............................................... 23 Figure 3 - Field Crop Price Histories ...................................................................... 23 Corn ....................................................................................................................... 24 Soybeans ............................................................................................................... 25

DDGS as a Fuel ............................................................................................................ 26 Financial Analysis of Heating System Alternatives........................................................ 26

Capital Investment ..................................................................................................... 27 Table 6 - Initial Investment for Heating Systems.................................................... 27

Cash Inflows .............................................................................................................. 28 Depreciation........................................................................................................... 28 Fuel prices ............................................................................................................. 28 Carbon Dioxide ...................................................................................................... 28

Cash Outflows ........................................................................................................... 29 Repairs and Maintenance ...................................................................................... 29 Boiler Supervision .................................................................................................. 29 Ash Disposal .......................................................................................................... 30 Electricity................................................................................................................ 30

Heating System Comparison ..................................................................................... 30 Table 7 - NPV Comparison of Greenhouse Heating Systems................................ 30

Implications of Financial Analysis.................................................................................. 30 Risks of Coal ............................................................................................................. 30 The question of DDGS............................................................................................... 31 Carbon Trading System............................................................................................. 31 Cogeneration Potential .............................................................................................. 31

Conclusions................................................................................................................... 32 DDGS Pricing ............................................................................................................ 32 Viability of DDGS as a Greenhouse Fuel................................................................... 32 DDGS Based Distribution .......................................................................................... 32 Future Opportunities .................................................................................................. 33

Sustainability ................................................................................................................. 33 References.................................................................................................................... 35 Appendices ................................................................................................................... 43

Appendix A – Ethanol Production in Canada............................................................. 43 Financial Appendices................................................................................................. 44

Appendix B - Depreciation Considerations for Fuel System Options ..................... 44 Appendix C - Annual Fuel Costs and NPV of Savings over 10 years..................... 44 Appendix D - Calculation of CO2 Savings from Natural Gas Combustion .............. 45 Appendix E - Present Value of Operational Costs over 10 year Period ................. 45 Appendix F - NPV of DDGS Projects by Price of Fuel ........................................... 45

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Introduction – The Opportunity Energy is a critical factor in today’s economy. Dependence on fossil fuels is leading to higher prices for many goods and services. Rising costs are reducing profit margins for many sectors. Concern for the environmental impacts of fossil fuel applications has led to escalation of many costs, and restrictions for users of these products. Future success will depend upon finding economical and sustainable sources of energy. The Canadian commercial greenhouse industry is but one example of a sector impacted by the energy challenge. In the two year period of 2002-2004 the market’s revenue increased by 7.4% while fuel costs increased by 17.9%.3 Operators have traditionally used natural gas, or bunker oil to heat the greenhouses. In an effort to reclaim profit margin, the industry is seeking more economical fuel alternatives. Multi-fuel heating systems are beginning to be adopted by the industry in response to the volatility of energy prices. To date, these have been predominantly wood-based, but there is also interest in field crop fuels and food processing by-products4. Coal is also being considered as a heating fuel alternative. For the industry and the general public alike, environmental challenges have led to new legislation regarding emissions from combustion engines. All must adapt to new expectations and incur the costs that result. Restrictions on emissions of greenhouse gases have been legislated in many of the developed nations. This has led to the creation of government incentive programs and funding to encourage emission reductions. Global markets for trading of greenhouse gas emission credits, particularly CO2, have been established throughout the world. Although an emissions trading system for Canada has not yet been finalized, it is expected that such a program will be launched in the future5. This has led to both opportunities and challenges for emitting sectors. Research continues to find a sustainable alternative to fossil fuels. Although argued that it is not the ultimate solution, production and use of ethanol has been adopted throughout North America as an interim step. Using ethanol as a gasoline additive has been shown to reduce greenhouse gas emissions. In addition to the cleaner exhaust, the incorporation of ethanol helps to reduce dependency on non-renewable fossil fuels6. The majority of Canada’s ethanol, 83%7, is produced through the distillation of corn. This process also creates a co-product known as dried distillers’ grains solubles

3 Mailvaganam, S. (2005) 4 Harrison, D. (2006, April) 5 Environment Canada, (2006, October 21) 6 OMAFRA (2005, October 7)

7 See Appendices Appendix A – Ethanol Production in Canada

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(DDGS). This co-product is currently being used as livestock feed. Its merits as animal feed are arguable. It is best tolerated by ruminants, and can only represent a portion of their feed diet. Research continues to determine how best to apply the product to the swine, poultry and aquaculture industries. Expanding the market for distillers’ grains is critical to the success of the ethanol production model. As ethanol production continues to expand, the feed market will become more saturated. It has even been suggested that the distillers’ grains surplus will reach such a point that ethanol producers will be paying to dump the co-product into landfill8. Such an outcome would reduce the profitability of ethanol and would also negatively impact its environmentally friendly image. An abundant supply of a consistent, renewable, field crop by-product suggests an opportunity to extend the environmental contribution of the ethanol process. The following examines the potential for distillers’ grains to relieve the greenhouse industry’s dependence on fossil fuels. To determine its feasibility, the economics of the DDGS market must be understood. The technology to burn DDGS must be financially viable. Finally, if proven to be a feasible fuel alternative, DDGS must be made available to the greenhouse market. This report will answer the following questions:

1. What can be expected of DDGS prices for the next 10 years? 2. At what prices does using DDGS as a greenhouse fuel make financial sense? 3. Can a viable business be created to link the DDGS producers to the greenhouse

farms? Secondary research has been conducted to better define the needs and current practices of the greenhouse industry in Canada with emphasis on the Ontario market. This information has been supplemented with interviews of industry participants. Results are presented herein.

Commercial Greenhouses in Canada In Canada, in 2004, over 19 million square meters of land were dedicated to commercial greenhouses. Sales of flowers, plants and vegetables totalling over $2 billion supported the livelihoods of over 43,000 employees. 51% of this business was located in Ontario.9 Fuel costs represent between 15% and 35% of the operating costs of commercial greenhouses10. Greenhouse operations use many different fuels to maintain an appropriate house temperature and to produce carbon dioxide. Heat is required throughout the year to extract humidity from the house, and also offset night time temperature drops. Natural gas and bunker oil have been used to fuel boilers and provide heat. Price pressures and environmental concerns have prompted the industry to explore alternative fuel sources. Some greenhouses have installed biomass boilers 8 Romahn, J. (2006, March 21) 9 Mailvaganam, S. (2005) 10 Hughes, J. (2003)

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which can burn wood, field crop fuels and food processing by-products. None of these fuels is considered ideal and costs continue to rise. Through an examination of the fuel sources currently being used by the industry, the viability of distillers’ grains can be determined.

Natural Gas Natural gas is the preferred fuel. It burns cleanly, does not require storage facilities on the farm site, and has reliable supply. It is also the most costly fuel option and price volatility presents considerable risk for greenhouse operations.

“Clean” Combustion Natural gas combusts completely, producing very little contaminants. When used as the only fuel source, greenhouse heating equipment requires less maintenance as compared with other fuel systems which produce toxins and residues that damage the equipment. The relatively pure exhaust from the combustion process allows carbon dioxide to be extracted from the flue gases and used in the greenhouse. Since plants require CO2 for photosynthesis, operators increase the CO2 concentration in the greenhouse to encourage faster, more productive plant growth11. Extracting CO2 for dosing purposes reduces the amount of CO2 that must be purchased for this purpose, therefore reducing operating costs. This extraction requires installation of a condensing unit and is an additional capital consideration for this process. This investment has been warranted in the past as the cost of CO2 has been a significant operational expense. Annual costs for liquid CO2 are approximately $10,000/acre of crop12. However, CO2 prices are falling. The gas is being collected as a by-product from ethanol production, many manufacturing processes and most importantly, the oil sands projects of Alberta. As prices fall, the financial advantage of CO2 collection in the greenhouse is weakening. There remains an environmental advantage to the CO2 condensing. Since the CO2 produced from the combustion of natural gas can be applied to the crop and captured by the plants, the operation is not releasing CO2 into the atmosphere and is reducing its emission of greenhouse gases. Once details of the carbon trading system in Canada are finalized, there could be additional financial opportunities for greenhouses using this process.

Delivery and Storage Natural gas is easily managed by the greenhouse operator. Storage and delivery fees are included in the price from the supplier who manages these concerns on the operator’s behalf. Onsite storage is limited and optional in most areas where greenhouses operate in the province.

11 Blom, T. et al (2003) 12 Quiring, P. Personal communications of May 2006

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Natural Gas Pricing The price of natural gas is volatile and is rising. The posted, delivered natural gas rate from Union Gas increased from $7.27 per gigajoule (GJ) in January of 2003, to $10.94 per GJ in October of 200613. A summary of natural gas pricing is depicted in Figure 1 - Price History for Natural Gas. Prices tend to be higher during the winter months, but it is during this period that most of the greenhouse heat is required. Greenhouses purchase natural gas in such large quantities that each producer will negotiate a contract with a gas supplier. The prices negotiated tend to be $1.00 to $1.50 below the rates published on the company website14. For the purposes of financial analysis, it will be assumed that the operator can negotiate the $1.50 per GJ price savings.

Figure 1 - Price History for Natural Gas

Union Gas' Commercial Natural Gas PricesAdapted from Union Gas Data at

http://www.uniongas.com/aboutus/regulatory/rates/summary/ratesummary.asp

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Bunker Oil Number 6 heavy oil (also known as marine oil but referred to in the greenhouse industry as bunker oil) is another fuel used for heating. It is currently less costly than natural gas, but like other fossil fuels, its price is rising. The lower input cost of this fuel is countered with environmental and operational challenges.

Storage and Delivery Bunker oil is rarely available to greenhouses through a pipeline. Therefore, the oil is delivered by tanker truck and stored at the farm. Oil prices include the delivery, but the

13 Union Gas (2006) http://www.uniongas.com/aboutus/regulatory/rates/summary/ratesummary.asp 14 Quiring, P. (2006)

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farmer must invest in and maintain an oil storage infrastructure. Retaining walls, a concrete pad and a storage tank are required. The storage of the oil presents environmental risks. An April 2006 spill in the Leamington, Ontario area renewed concerns for proper storage and handling of the oil15. A spill of 15,000 gallons of bunker oil into Lake Erie cost a greenhouse owner over $100,000 in 200116. Although no changes have been announced as of this date, it is expected that more stringent storage standards, regulations, inspections and fines will be implemented in the near future.

Parasitic Costs Bunker oil is thick and doesn’t flow without first being warmed. Its temperature must be held at 50°C17 to allow it to be pumped from the storage tank into the boiler. Both warming and pumping consume some energy in order to eventually produce heat. A system of fuel lines and pumps must be installed and maintained to deliver the fuel to the heating system. This additional complexity adds additional costs. Unlike natural gas, bunker oil has high sulphur content and upon combustion, releases sulphuric acid. This will corrode the stack, the tubes, the boiler and other structures within the heating system much more quickly than in a natural gas system. There is also a risk that the sulphuric acid can be emitted into the atmosphere. If this sulphuric acid enters the greenhouse, it can corrode the house structure and kill the crop. This is not common, but is a real risk associated with a malfunction of this heating system. Bunker oil burners are most effective when running continually. In the winter, the combustion temperature in the furnace is maintained at an efficient level. In the warmer seasons, when daytime heating is not required, inefficient combustion at each evening start up increases average costs per GJ of heat. Combustion is not complete at the lower temperatures of the initial process and results in higher pollutants being released through the stack. These dark black plumes of smoke that are emitted from the greenhouse chimneys are a regular sight in the greenhouse region and draw much negative public attention to the use of this fuel. These pollutants can be significantly reduced through installation of scrubbers and precipitators. All of these complications increase operating and maintenance costs and have become known as parasitic costs of bunker oil. It is estimated that an additional 6% of the fuel costs must be added when considering the cost of this fuel choice18. There are also inventory carrying costs to consider that are not incurred using natural gas.

15 Molnar, D. (2006, April 17) 16 Stewart, B. (2001, February 12) 17 Energy Solutions Center (2004) 18 Energy Solutions Center (2004)

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Coal Coal burning boilers are being considered as a less expensive heating alternative. Price is not the only consideration. Storage of the fuel and mechanized input processes increase the capital requirements for installation of this heating system. Ash removal must also be considered. Further, coal prices are experiencing upward price pressure due to demand in Asia19.

Infrastructure Coal can be delivered to greenhouses via truck. It must then be inventoried in covered storage equipped with conveyor and/or auger systems to continually deliver coal from storage to the furnace. Coal burning leaves 1-2% ash waste20 for the farmer to manage. This must be dumped in landfill. Tipping fees are considerable as ash waste is very dense. Boiler technologies generally include an ash removal system that uses water to cool and facilitate removal of the ash from the boiler. The water ensures an airlock between the furnace and the de-ashing system but leaves ash waste that is nearly one third water, increasing the weight and therefore, the disposal costs.

Efficiencies and Environmental Impacts Burner technologies are improving and the ability to efficiently burn coal is creating new opportunities for this fuel source. Modern coal combustion systems produce emissions levels within provincial standards. However, combustion is not comparable to that of natural gas and CO2 cannot be efficiently condensed from this combustion process.

Coal Pricing The delivered price of coal to Southwestern Ontario greenhouses is currently $4.50/GJ21. As world demand for coal is expected to continue to rise, prices are also likely to increase.

19 Energy Information Administration (2006, June) 20 Quiring, P. Personal communications of July 14, 2006 21 Quiring, P. South Essex Fabricating (personal communications of September 6, 2006)

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Figure 2 – Price History for Coal

Average cost of Metallurgical CoalPriced at Coke Plants and at Export Docks

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Wood The search for alternative fuel sources has led many in the industry to invest in biomass boilers. These boilers produce heat from renewable sources such as field crops and food processing waste. Wood remains the most prevalent fuel in this segment and is the least expensive biomass alternative, currently priced at $4.00/GJ delivered to the greenhouse22.

Source of Supply Wood is collected from construction and demolition sites; from sawmill waste, from exhausted pallets, and other such sources. However, consistency of supply is questionable. Operators using this fuel have adapted to the uncertainty of supply by expanding storage capacity. This allows greater flexibility when negotiating price but requires investment in space and infrastructure.

22 Quiring, P. South Essex Fabricating (personal communications May 29, 2006)

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Product Consistency The quality of the product varies. Shipments are likely to include plastic, metal, resin, glue, rubber, insulation and other contaminants which can impact boiler efficiency, increase ash content and damage the boiler system. Physical contaminants such as nails, hinges and other metal waste can obstruct and damage the feeding systems. Chemical contaminants are also responsible for impurities in the flue gases preventing CO2 collection and raising environmental concerns. While the chemical composition of exhaust from coal and bunker oil combustion can be predicted, and equipment installed to collect its impurities, this is not the case with waste wood.

Maintenance and Storage The contaminants in the waste wood supply cause the fire tubes of the boiler to become coated with residues reducing efficiency and damaging the boiler. Further, because of the variability of the fuel, complex technical features of the boiler must be incorporated to manage and control the combustion process. This raises the costs of the boiler system and also requires constant modifications be made to control the combustion process23. Like coal, storage of wood requires space and infrastructure. Spontaneous combustion of wood stores increases risks and costs24. As wood chip piles sit in storage, microbial decay creates heat in the centre of the piles. This heat can build to the point of ignition. If this occurs, the farmer loses the fuel inventory and can also incur damages to other aspects of the operation. Given this risk, wood chip storage is regulated by the fire marshal in Ontario. This regulation has increased the storage costs of wood by requiring added investment in safety infrastructure and additional space between storage locations25. As with all solid fuels, a conveyor and/or auger system must be installed to feed the boiler furnace. Unlike coal, which is delivered in a consistent form, wood fuel is variable. The system must be able to accommodate various sizes and consistencies of pieces. Failing this, the farmer must invest in a chipping and sorting machine which will reduce the wood to the appropriate size for the furnace and remove any large contaminant pieces. The additional investment also increases the flexibility afforded by the system to incorporate other biomass matter including vines from expended crops and other field crop waste.

Environmental Considerations By using wood waste, the farmer is decreasing the wood that would be sent to landfill and reducing the operation’s dependency upon fossil fuels. Emissions must be managed as CO2 capture is not feasible and impurities of the wood supply can cause toxins to be emitted through the flue gases.

23 Callens, J. Vyncke Energietechniek n.v. (personal communications May 29, 2006) 24 Office of the Fire Marshall (1998) 25 Office of the Fire Marshall (1998)

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Ash removal and disposal are to be expected with wood burning boilers as 5% of material will remain as ash after combustion. This raises complications and costs associated with this fuel. Like coal, the boiler technology uses wet ash conveyors to ease ash movement and cooling while maintaining the air lock of furnace. The ash is very heavy and disposal in landfill will result in tipping fees. As an alternative disposal method, wood ash can be spread on farmland as a soil amendment26. This alternative is less costly. In fact, if the farmer has open land, the investment in the spreading equipment and labour are the only costs.

The Fuel Dilemma None of the fuels currently being used in the greenhouse industry is considered ideal. Cost, logistics and environmental implications of existing alternatives leave greenhouse operators settling. Increasingly price competitive market forces and rising energy costs are threatening the profitability of the sector. A cost efficient, easily managed, reliable and environmentally responsible alternative is sought. The sustainability of the greenhouse industry in Ontario is challenged.

Ethanol The need for economical and sustainable fuel sources is not unique to the commercial greenhouse industry. Commitment to reducing greenhouse gas emissions has led the Ontario government to establish “the Renewable Fuels Standard”. This requires that by 2007, all gasoline sold in the province must contain 5% ethanol. By 2010 this requirement increases to 10%27. In 2004 15.7 billion litres of gasoline were consumed in Ontario; 39% of the Canadian total28. Even with no growth in consumption, Ontario will require 785 million litres of ethanol to meet the 5% target for 2007, and 1.57 billion litres by 2010. The Ontario government is dedicating millions of dollars in both capital and operating funding to support the expansion of the ethanol production in the province. It is estimated that by 2007, 780 million litres of ethanol will be produced in the province annually. Table 2 - Corn Based Ethanol Production in Canada, details the country’s current and planned capacity. In Ontario, there are two companies currently producing ethanol. At its Chatham, Ontario plant, Commercial Alcohols produces 187 million litres of ethanol through its continuous corn distillation process. Commercial Alcohol’s Tiverton, Ontario facility produces 25 million litres of ethanol through a batch distillation process29.

26 Alberta Agriculture Food and Rural Development (2002, February) 27 Aker, C. (2005, January 17) 28 Statistics Canada (2005) 29 Commercial Alcohols (corporate website www.comalc.com).

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In July of 2006 Suncor began ethanol production in Sarnia, Ontario at its St. Clair ethanol plant. At full operational capacity, this plant will produce 200 million litres of ethanol annually30. Ethanol is heralded as an environmentally sound alternative to fossil fuels as it is generated from a renewable source. However, the process is not without its critics. Ethanol production requires considerable heat energy which is often created from burning natural gas. There is debate as to whether the process yields a positive net energy result31. The debate of the process’s sustainability must also consider its co-products. Each bushel of corn distilled produces 10.22 litres of ethanol as well as 8.16 kg of carbon dioxide and 8.16 kg of dried distiller’s grains solubles (DDGS)32. Effective management of these co-products is required to ensure that the process realizes the environmentally sound expectations driving its support.

Market for Ethanol Co-Products

Carbon Dioxide (CO2) CO2 is generated from the distillation process, but also from the combustion of natural gas used to heat the process. At present, this co-product is collected and sold to chemical distributors.

Heat The distillation process requires a considerable amount of heat. Once distillation is complete, the residues are heat dried to a powder the consistency of sand to facilitate storage, shipping and to prevent the product from decaying. Waste heat is lost through the plant’s chimney.

DDGS Dried distiller’s grain solubles (DDGS) are the residues that remain once fermentation of the corn is complete and the alcohol has been distilled and collected. They are sold into the livestock feed market as a source of protein. The vast majority of this co-product is sold to feed cattle. There has been some experimentation and discussion regarding the use of these co-products as feed for swine, poultry and fish. However, the feed source is not ideal and can only represent a portion of the animal’s diet. Ruminants remain the preferred consumers. Distillers’ grain products compete with traditional feed products. Prices are therefore based upon the commodity prices of feed alternatives such as soy meal, corn, and other commercial feeds. Prices for DDGS range between $85 and $125 per tonne33. 30 Ryley, T. (2006, August 31) 31 Coxworth, E. (2006, February) 32 Kansas Ethanol (no date) 33 Graham, G. Commercial Alcohols (personal communication of May 9, 2006)

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The feed market is price sensitive. Livestock producers operate in an industry of narrow margins and carefully evaluate their input costs. Storage and transportation of the DDGS is costly and therefore limits the market to which an ethanol plant can economically ship its DDGS. The sale of this co-product is an important factor in the profitability model of ethanol plants. As more ethanol is produced, this feed market will become saturated and the DDGS will be in surplus, putting downward pressure on the DDGS price. Developing an alternative market could stabilize the price.

Greenhouses – A new market for DDGS The biomass boiler technology being adopted by the greenhouse industry can be adapted to allow DDGS to be used as a fuel. This alternative fuel offers the consistency of coal with the environmental advantages of being generated from a renewable source. Preliminary testing from Vyncke Energietechniek has indicated that 1 tonne of DDGS will yield 20 GJ of heat34.

Source of Supply Ontario’s largest ethanol producers are located in Sarnia and in Chatham. Chatham is 65 km from the Leamington greenhouse area and Sarnia is 160 km. Proximity to the greenhouse industry is an advantage to both of these plants. Since fermentation processes at both Sarnia and Chatham are continuous, DDGS is produced at a consistent rate. Unlike wood, the supply of DDGS is reliable and regularly scheduled deliveries could be arranged. This continuous supply would allow the farmer to dedicate a smaller amount of space and infrastructure to fuel storage. This would also ease the cash flow burden of stockpiling fuel that can be experienced with other biomass alternatives.

Product Consistency Unlike the wood currently being consumed in the biomass boilers, DDGS is a consistent product that is in a workable form. The DDGS can be safely stored using technology already developed by agricultural applications for silage and grain storage. Gravity fed and/or auger systems could be installed within the greenhouse to feed the boiler furnace. The consistency of the DDGS product would allow these systems to be much simpler than those required for wood.

Technical Requirements Although the product is consistent, it exhibits a low ash melting point. This requires special modifications of the furnace system of the boiler to prevent the DDGS ash from collecting as sludge within the furnace and coating the heat chamber walls. This raises

34 Callens, J. Vyncke Enegrietechniek n.v. (personal correspondence of May 29, 2006)

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the price of the boiler system. Like other biomass fuels, the DDGS boiler would require constant monitoring.

Environmental Considerations The DDGS boiler would be fitted with a wet ash conveyor system similar to that of the wood boilers. DDGS has an ash content of 4.20%35 that would require disposal after combustion. Like wood ash, this could be spread on agricultural land as a soil amendment. Flue gases generated from the combustion of DDGS will require scrubbers and precipitators to clean the exhaust before its emission. Given the complexity of the fuel, and its chemical composition, collecting carbon dioxide is not feasible with current technology.

Developing a DDGS Pricing Model In order to determine if the investment in DDGS boiler technology is warranted, the pricing of DDGS must be examined. DDGS is currently being sold at prices ranging from $85 to $125 per tonne36. At current prices, DDGS would cost greenhouse operators between $4.25 and $6.25 per GJ. A comparison of the delivered price per GJ of each fuel alternative is presented in Table 1 - Greenhouse Fuel Price Comparison. Comparison of price alone suggests that wood is the most cost efficient alternative.

Table 1 - Greenhouse Fuel Price Comparison Natural

GasBunker "C" Oil

Coal Wood DDGS

Units of Purchase M3 L tonne tonne tonneGJ per unit of purchase 0.03818 0.03912 27 14 20Price per GJ $9.44 $6.14 $4.50 $4.00 $4.25

However, the increased complexity of the delivery, storage, and operation of the biomass boiler must be considered. Further, there is speculation that the prices of DDGS will fall well below the current minimum of $85.00 per tonne. Ethanol production is expanding in Ontario and across the continent. US production is also expected to rise dramatically. 2005 production from US ethanol plants totalled 1.5 billion gallons, 56.8 billion litres. This is expected to increase to 6.3 billion gallons, 238.5 billion litres by the end of 200737. If this were to occur, DDGS could be the more attractive option for the long term.

35 Tiffany, D. (2006, May 16) 36 Personal correspondence, Pete Quiring, June 7, 2006 37 Renewable Fuels Association (2006, February)

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DDGS is primarily consumed by the livestock feed market and initial prices have been based upon its feed substitutes. DDGS can meet two nutritional needs for livestock. If fed for energy, DDGS replaces corn. If fed for protein, the most common substitute is soybean meal. As the typical substitutes, the prices of these commodities have direct influence on the DDGS price. With supply expected to rise, and demand based upon the well documented feed industry, the future pricing of DDGS can be extrapolated. With estimates of future prices, the return on an investment in a DDGS based heating system can be evaluated and compared to the other fuel alternatives.

Analysis of Supply In 2004, Ontario imported 160 million litres of ethanol from the US in order to meet the market demand of 310 million litres (OCPA, no date). This supply challenge was not unforeseen and both the provincial and federal governments have responded with support for the expansion of ethanol production. The federal government’s ethanol expansion program has invested $118 million to expand production across the country (Natural Resources Canada, 2005). In July of 2005, the government of Canada was projecting that by the end of 2007 Canadian ethanol production would be 1.4 billion litres per year. Not all of this production will utilize corn as the basis of the fermentation process as most of the plants planned for and operating in western Canada are wheat based (Coxworth, 2006). As is shown in Table 2 - Corn Based Ethanol Production in Canada, over 900 million litres of this production will result from fermentation of corn. Nearly 87% of this production is located in Ontario.

Table 2 - Corn Based Ethanol Production in Canada

Plant Name City Province StatusAnnual Ethanol

Production(millions of

litres)

Annual Corn Consumption

(millions of bushels)*

Annual Corn Consumption(1,000 metric

tonnes)*

Annual DDGS production

(1,000 metric tonnes)*

Commercial Alcohols Windsor ON in construction 199 19.47 494.55 158.97 Commercial Alcohols Chatham ON active 187 18.30 464.73 149.38 Commercial Alcohols Tiverton ON active 25 2.45 62.13 19.97 Integrated Grain Processors Co-Operative Inc. Brantford ON in construction 119 11.64 295.74 95.06 Power Stream Energy Services Collingwood ON in construction 52 5.09 129.23 41.54 Suncor Sarnia ON active 200 19.57 497.03 159.77 Commercial Alcohols Varennes PQ in construction 120 11.74 298.22 95.86

902 88.25 2,241.63 720.56 Data compiled from BBI International (2005, October 18), Natural Resources Canada (2005, July 7), and company websites

*indicates a calculated value based upon industry averages from Thompson(2004 July/August)

Totals for corn based ethanol producers

Production of 902 million litres of ethanol will generate 720,560 tonnes of DDGS. To produce sufficient ethanol within the province to meet the 1.57 billion litres demand created by the 10% ethanol content standard set for 2010, the province will need to further expand production by 788 million litres. If this were to occur, 629,490 additional tonnes of DDGS would be supplied to the market. Total supply of DDGS at the 2010 production level will be 1,350,050 tonnes per year.

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Analysis of Demand The primary market for DDGS is the livestock feed market. DDGS can be included in the dry ration for cattle, swine, poultry and even fish.

Cattle DDGS can represent 10-20% of the dry diet of cattle without negatively affecting the growth rate or quality of the animal38. The cattle population in Eastern Canada has remained relatively stable over the last sixteen years.39 This stable population is projected for the foreseeable future as well. Therefore, the theoretical total demand for DDGS as a feed supplement can be projected based upon the feed consumption in the province from 2001. In that year the province’s cattle consumed 7,705,300 tonnes of feed40. If the midpoint of the 10%-20% advisable ration, 15%, is applied to this statistic, it is projected that the Ontario herd could consume 1,155,795 tonnes of DDGS annually. The cattle population in Ontario alone could absorb over 531,000 tonnes of DDGS beyond the Ontario production projected for 2007. This is equivalent to the addition of nearly 665 million litres of corn-based ethanol production, only 123 million litres less than the ethanol production required by the government’s 2010 10% content target. Should the province continue to import some of its ethanol from other provinces or from the nearby markets of the Northeastern United States, domestic DDGS production can theoretically be absorbed by the domestic feed market.

Swine Recent studies have suggested that DDGS can be successfully fed to swine. In fact, some research suggests that the product may have a beneficial effect on gut health in the animals41. Recommended rations range from 5% - 50% depending upon the developmental stage of the animal and the protein composition of the DDGS. The feed alternative is not considered ideal however. Although the variability of the protein molecules in the DDGS does not significantly impact its potential as a heat source, it does impact the usefulness of the material as food for swine42. This uncertainty is creating doubt for hog producers regarding the wisdom of feeding DDGS. DDGS carries a second risk as a feed supplement for hogs; this takes the form of mycotoxins. Mycotoxins are produced by moulds that can affect corn in both the field and in storage. The process of fermentation and drying of fermented residues does not remove these toxins which can be harmful to pigs43. These can be problematic in areas such as Ontario, where harvest can be delayed due to high precipitation, providing ideal conditions for the proliferation of these moulds and their toxins. Once again, this has no

38 Trenkle, A. (2003, November) 39 Statistics Canada. (2006, August) 40 Statistics Canada. (2002, December) 41 Aker, C. (2005, January 17) 42 Thaler, B. (2002, August) 43 Thaler, B. (2002, August)

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impact on the use of DDGS as fuel but is a consideration to farmers considering it as a swine diet supplement. Despite these risks, DDGS is being slowly introduced into this livestock production industry, primarily in the finishing segment, with a generally recommended ration of 20%. Statistics Canada reported that the demand for feed in the hog sector in 1999 was 2,225,600 tonnes44. The theoretical demand for DDGS in the Ontario hog industry, is based upon this historical demand for feed as the province’s swine population has remained relatively constant and is not expected to vary from this level.45. Had each animal consumed its full ration, 445,120 tonnes of DDGS would have been demanded by this sector. Adoption rates are not readily available given the recent implementation of this research. However, sales of DDGS suggest that to date producers have not embraced this feed alternative. Only 1% of the DDGS produced in North America annually is consumed by swine46. Ethanol producers expect to further penetrate this market in future as study into the benefits and management of this feed alternative continues. Should Ontario’s pork producers embrace DDGS, the sector could absorb the co-product of 557 million litres of ethanol production, 71% of the province’s current output.

Poultry Recent research suggests that DDGS can be incorporated into the diets of poultry without significant ill effects. Turkey diets can include up to 20% DDGS47 while broiler chickens can be fed 12-18% DDGS diets48 and laying hens can consume approximately 10%-12%49. Like the swine industry, there has been limited adoption of this alternative food source among poultry producers. Ontario’s poultry industry is dominated by chickens, and so a ration rate of 14% will be applied to the calculation of theoretical DDGS demand. The 2001 poultry feed demand for Ontario was 819,900 tonnes50. Potential for DDGS is therefore 114,786 tonnes, the DDGS co-product produced from 143 million litres of ethanol.

Other feed applications The need to expand the market for DDGS has led researchers to study the feed potential for many other livestock segments including sheep, horses, and aquaculture. Recommended rations are inconclusive at this time as agricultural and animal science groups continue research into the co-product’s impact on animal health and production. These sectors represented only 0.56% of the feed demanded in the province in 200151.

44 Statistics Canada. (2002, December) 45 Statistics Canada. (2006, October) 46 University of Minnesota. (2006, June 16) 47 Noll, S.L. & Brannon, J. (2006) 48 Lumpkins, B., Batal, A. & Dale, N. (2003) 49 Lumpkins, B., Batal, A. & Dale, N. (2005) 50 Statistics Canada (2002, December) 51 Statistics Canada (2002, December)

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Even substantial adoption of the feed alternative in these segments will not significantly impact the demand considerations.

The Demand for DDGS As is shown in Table 3 - Summary of Theoretical DDGS Demand in Ontario, the theoretical demand for DDGS in the province of Ontario suggests that more than 2.7 times the current DDGS production could be absorbed by the province’s livestock feed market.

Table 3 - Summary of Theoretical DDGS Demand in Ontario52

Livestock Annual Feed Rations

Demanded (tonnes)

Recommended DDGS ration

Theoretical Annual DDGS

Demand (tonnes)

Ethanol Production

Related to DDGS Demand (L)

Cattle 7,705,300 15% 1,155,795 1,446,836,517Swine 2,225,600 20% 445,120 557,205,967Poultry 819,900 14% 114,786 143,690,340Provincial Totals 10,750,800 1,715,701 2,147,732,824 However, not all producers choose to include DDGS in the dry rations. Animal science research has shown that potential harm from DDGS can be managed by restricting the quantity included in the animal’s diet. Advantages of the co-product as feed have been limited to the swine segment and have not been significant enough to encourage switching. DDGS can be fed to livestock; there is not yet compelling evidence to suggest that it should be. The adoption of DDGS as feed is much more advanced in the cattle industry than any other. Although it cannot absorb the 1.35 million tonnes of DDGS that will be produced to reach the 2010 demand for ethanol, it can certainly absorb current production. In order for the 2010 DDGS production to be sold entirely to the livestock producers of the province, adoption rates of 100% for cattle, 40% for swine and 15% for poultry would be required. Economic studies of including DDGS in livestock production organizations suggest that some economic advantage to the alternative is possible when substitute prices are high. It is generally preferred by producers to feed traditional ingredients, including corn and soybeans, when they are available and priced competitively. This would suggest that demand for DDGS is somewhat elastic. To determine if the required adoption rates are feasible, prices of substitutes must be considered. If DDGS is found to be a viable fuel for the greenhouse industry, the sector can consume nearly all of the DDGS that would be produced if the province were to meet its

52 Compiled from Lumpkins, B., Batal, A. & Dale, N. (2003), Lumpkins, B., Batal, A. & Dale, N. (2005), Noll, S.L. & Brannon, J. (2006), Statistics Canada (2002, December), Trenkle, A. (2003, November)

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2010 target for production. There are 2,442 acres of greenhouse in Ontario53. The industry therefore requires between 19.536 million and 24.420 million GJ of heat annually. The theoretical demand for the greenhouse industry for DDGS, as well as for the fuels already considered, is outlined in Table 4 - Greenhouse Fuel Cost and Consumption Comparison.

Table 4 - Greenhouse Fuel Cost and Consumption Comparison Natural Gas Bunker "C" Oil Coal Wood DDGS

Units of Purchase M3 L tonne tonne tonneGJ per unit of purchase 0.03818 0.03912 27 14 20Units required for 8,000 GJ per acre annually 209,517 204,502 296.30 571.43 400.00 Units required for 10,000 GJ per acre annually 261,896 255,627 370.37 714.29 500.00 Price per GJ $9.44 $6.14 $4.50 $4.00 $4.25Annual price per acre (8,000GJ/acre) $75,520 $49,080 $36,000 $32,000 $34,000Annual price per acre (10,000GJ/acre) $94,400 $61,350 $45,000 $40,000 $42,500Total acres in Ontario 2,442 2,442 2,442 2,442 2,442 Maximum Industry Consumption in units of purchase 639,550,820 624,241,158 904,444 1,744,286 1,221,000 Should these two markets begin to compete for the DDGS supply, this will exert upward pressure on the price of the co-product. Once again, the role of substitutes for the feed market becomes critical.

Analysis of Substitutes Livestock producers must balance the cost savings of less expensive feed alternatives with the impact these substitutes have on the value of the end product. Since the rations discussed in the demand section were based upon studies seeking no significant loss in either the quality of the livestock product, nor its quantity (weight gain), a straight comparison of price is feasible. Dairy nutritionists commonly equate one pound of DDGS to 0.6 pounds of shelled corn and 0.4 pounds of soybean meal54. Based upon this feeding ratio and standard weight conversions, 1 tonne of DDGS is equivalent to 23.62 bushels of corn or 14.70 bushels of soybeans for feeding. These conversions have been applied to pricing to establish the equivalency prices of corn and soybeans to DDGS found in Table 5 - DDGS Price Equivalencies to Substitutes. For each DDGS price given, the “per bushel” price for corn and soybeans was calculated. Market prices below those listed here for each of the substitutes would result in producers feeding the traditional product rather than DDGS. Prices higher than those listed here would suggest that there is economic advantage to feeding DDGS and its adoption would be encouraged.

53 Mailvaganam, S. (2005, May 02) 54 Kaiser, R.M.

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Table 5 - DDGS Price Equivalencies to Substitutes DDGS Price

($/tonne)Corn price ($/bushel)

Soybean ($/bushel)

$70 $2.96 $4.76$75 $3.18 $5.10$80 $3.39 $5.44$85 $3.60 $5.78$90 $3.81 $6.12$95 $4.02 $6.46

$100 $4.23 $6.80$105 $4.45 $7.14$110 $4.66 $7.48$115 $4.87 $7.82$120 $5.08 $8.16

All prices shown in Canadian $ Historical prices for both of these crops are shown in Figure 3 - Field Crop Price Histories, to provide comparison to the equivalencies.

Figure 3 - Field Crop Price Histories55

Annual Average Price Received by U.S. producersMarketing Years 1975-2006

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

1975

-76

1977

-78

1979

-80

1981

-82

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

2005

-06

Marketing Year

US$

per

bus

hel

Corn Soybeans

55 United States Department of Agriculture. (2006, October 12) Futures price forecast model: estimates for the season-average price and counter-cyclical payment rate for corn and for soybeans.

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Current prices for corn are $2.30 Canadian per bushel with spring futures rising to near $3.00 per bushel. At this price, livestock producers would feed corn rather than the higher priced DDGS. Soybean prices are currently $6.51 Canadian per bushel. This suggests that the price of DDGS is much more closely related to soybeans than corn, as the DDGS equivalency price related to the soybean price is much closer to the current $85 per tonne. It is evident that these two substitutes do not affect the DDGS prices in similar ways. Considering the feed value of each can explain this relationship.

Corn Corn prices are presumed to be affected by the ethanol producers in two ways. Since corn is the primary ingredient in the fermentation process, producers are considered an important buying group. According to Commercial Alcohols, the price of corn will increase by approximately four to six cents per bushel for every hundred million bushels of corn used56. As is shown in Table 2 - Corn Based Ethanol Production in Canada, only 88 million bushels of corn will be consumed by the Canadian ethanol producers in the 2007 projected volumes. According to the Commercial Alcohols’ estimate, this would raise the price of corn by less than four cents per bushel. However, across all of North America, “the ethanol industry uses about 600 million bushels of corn, or about 7% of the North American annual corn crop”57. This impact estimate suggests that corn prices are 24-36 cents per bushel higher than they would be if the ethanol market was not demanding this product. If this were true, corn would be near the lowest price levels experienced in the market since 1975. The low North American corn prices are more significantly impacted by US agricultural policy. Subsidies support corn production and have resulted in significant corn stores being held in the United States. This surplus is driving prices down. The 2006 production forecast for the United States is 11.114 billion bushels58. Canada does not provide such subsidies to its producers and so to meet its demand for corn, the country must import. In the 2004/2005 season, Canada increased its corn imports by 17% to 2,375,000 tonnes59, 93.5 million bushels. Canadian ethanol and livestock producers are price takers in this market. The global outlook for corn projects an increase in demand and a moderate increase in prices. This is not expected to deplete, but only reduce the US corn stores60. Corn is abundant and markets are stockpiling. The demand from the ethanol producers is not

56 Commercial Alcohols (no date) www.comalc.com57 Commercial Alcohols (no date) www.comalc.com58 Baker, A. & Allen E. (2006, September 14) 59 Baker, A. & Allen E. (2006, September 14) 60 Ag-Alert 26,17 Sept 13, 2006

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http://www.comalc.com/



currently having a significant impact on prices. Low corn prices reduce operation costs for ethanol plants but discourage the substitution of DDGS for feed. This applies downward pressure on DDGS prices and negatively impacts the ethanol plant’s revenue from this co-product. Corn prices then, are more critical to the operational cost considerations of ethanol producers than to their co-product pricing. Corn prices will affect the likelihood that livestock producers will feed DDGS. Both current prices, and those projected for the future indicate that there is little financial incentive to switch from corn to DDGS. If corn is fed for its energy, DDGS is a poor substitute. The residues from the fermentation process contain little carbohydrate. DDGS is much better served as a source of protein. It follows then, that the prices of DDGS relate much more closely to the soybean market.

Soybeans Soybean meal is a primary protein source for the dairy, beef and swine industries. There are many other markets for soybeans and their production is expanding throughout the world. There is particularly notable growth in the Chinese market where demand for vegetable oil and soy based food products is growing along with this economy’s growing per capita wealth. The Chinese demand is also fuelled by a growing livestock industry in the country61. Like corn, soybeans are being used to create fuel. It has been suggested that the bio-diesel industry could exert upward pressure on soybean prices; this pressure has not materialized. Like corn for ethanol, the demand of the bio-diesel sector for soybeans has not altered the quantity demanded sufficiently to affect prices. Soybean production is also subsidized in the United States and has resulted in surplus being stockpiled. These stores are expected to grow this year62. The United States has remained the world’s largest producer of soybeans but will likely be overtaken by Brazil in the next agricultural year63. Developing economies such as Brazil are expanding production at a faster pace than their corresponding consumption, resulting in larger supplies throughout the world64. Global soybean production is expected to expand at a faster pace than demand throughout the world. This is expected to have a lowering impact on world soybean prices. A comparison of the current soybean price and the DDGS equivalency prices demonstrates that the price of DDGS is much more closely related to soybean prices than to corn. As more closely related substitutes, this is to be expected. As the supply

61 Organization for Economic Cooperation and Development (2006, June 29) 62 Anderson, J. (2006, July 13) 63 Organization for Economic Cooperation and Development (2006, June 29) 64 Organization for Economic Cooperation and Development (2006, June 29)

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of DDGS grows with ethanol production expansion, prices for the co-product will likely fall relative to soybeans in order to secure the largest market possible. Since the prices of both corn and soybeans are set on world markets, and since the Canadian market for both is relatively small, the impact of DDGS substitution in the Canadian livestock market is not going to affect the prices of these commodities. It is likely that global trade in these agricultural commodities will continue to set prices to which the ethanol producers will need to adapt. Moderate term outlooks project prices to trend downward for both soybeans and corn, with soybeans seeing a real price decline of 10% and soybean meal falling more than 20% by 201065. If the postulated price relationship between soybeans and DDGS holds true, DDGS prices can be expected to fall to between $75 and $68 per tonne based upon the world market prices. The DDGS surplus will drive this price lower. Unless the DDGS price falls significantly below the equivalency price for soybeans, it is unlikely that it will secure the required share of the feed market. Prices below $70 per tonne translate into $3.50 per GJ and hold potential for the greenhouse industry to use DDGS as fuel.

DDGS as a Fuel The analysis of the livestock feed industry demand for DDGS suggests that the Ontario producers must overwhelmingly embrace DDGS as a feed source in order for all DDGS to be utilized. The analysis of pricing equivalencies between DDGS and its substitutes, corn and soybeans, suggests that current prices of DDGS and these feed commodities favour use of the traditional feeds. It would appear that both the quantitative and qualitative nature of the market will put downward pressure on the price of DDGS. Should DDGS prices correct themselves to be consistent with substitutes, it can be expected that the future price of DDGS will be $70 per tonne or less. Therefore, it is valuable to explore the financial aspects of a DDGS based heating system for the greenhouse industry compared to natural gas, bunker oil, coal, and wood.

Financial Analysis of Heating System Alternatives In all cases, the comparison of various new fuel systems purchases will be subject to the standard depreciation for farm equipment. This uses the declining balance method of 20% per year, with only 10% deductible in the first year66. The applicable tax rate is 22% for greenhouses67.

65 Organization for Economic Cooperation and Development (2006, June 29) 66 Vandervecht, R. Partner, Collins Barrow – Leamington, ON. Personal communications of September, 2006 67 Vandervecht, R. Partner, Collins Barrow – Leamington, ON. Personal communications of September, 2006

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Despite the depreciation rate established by the government, greenhouse growing operations expect heating equipment projects to have a useful life of 10 years. Salvage values are expected to be zero for all installations. The costs to dismantle and extract the system consume the scrap value of the recyclable materials68. All fuel options can utilize the same systems for delivering heat to the greenhouse regardless of the boiler type installed. The following comparisons consider only those capital and operating expenses that differ between the fuel system options. Greenhouses in Ontario require between 8,000 and 10,000 gigajoules (GJ) of heat per acre of greenhouse per year69. This varies based upon weather conditions, and the quality of the greenhouse structure. For the purposes of this financial comparison, fuel consumption is based upon the midpoint, 9,000 GJ, of the per acre heating demand range. This consumption will be applied to a 25 acre farm scenario. It will be assumed that the installation will take place before the end of 2006 to fix a reasonable interest rate. The cost of capital for such an agricultural installation is currently 6.5%70, and this rate will be applied to the net present value calculations. Since natural gas carries the highest per GJ price, it will be used as the basis of comparison for the other alternatives. Fuel savings are calculated as the difference between the natural gas price and the price of the alternative.

Capital Investment The initial investment in the heating systems for each of the fuel alternatives are outlined in Table 6 - Initial Investment for Heating Systems.

Table 6 - Initial Investment for Heating Systems71

Installation Comparison Natural Gas Bunker Oil Coal Wood DDGSBoiler 350,000 250,000 1,000,000 1,500,000 2,500,000 Storage - building - 165,000 210,000 420,000 210,000 Initial Investment 350,000$ 415,000$ 1,210,000$ 1,920,000$ 2,710,000$ The costs of the boilers vary significantly. This difference is due to the complexities of the furnace systems for the solid fuels. Note that the cost of a natural gas boiler includes the additional investment of a CO2 condenser to allow the flue gases to be collected for use in the greenhouse. Storage costs are estimated based upon the unique accommodations required of each fuel. Bunker oil requires holding tanks and pre-warming systems. Coal, wood and DDGS require either hoppers or covered storage buildings. In the case of wood, larger storage spaces are required due to the uncertainty of supply. Also budgeted for wood is the cost of sorting and grinding equipment used to accommodate larger wood fuel pieces.

68 Quiring, P. Personal communications of May, 2006 69 Quiring, P. Personal communications of May, 2006 70 Bickell, A. Farm Credit Canada – Essex, ON. Personal communications of October, 2006. 71 Quiring, P. Personal communications of May, 2006 – estimates based upon recent installations of South Essex Fabricating

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Cash Inflows

Depreciation Given the vast difference in the prices of the initial installations, tax savings realized from depreciation account for a significant addition to the net present value considerations. Appendix B - Depreciation Considerations for Fuel System Options, outlines these differences. In order for the operation to realize these inflows, it must be profitable in each of the 10 years under consideration.

Fuel prices Consideration of the forces affecting the price of DDGS suggests that the current market value of $85 per tonne is high, and will adjust quickly once the ethanol production in the province expands. The increasing supply of DDGS relative to a stable demand, combined with projected corn and soybean prices as substitutes for DDGS suggest that a price of $70 per tonne could be negotiated with the suppliers. A customer such as a greenhouse, which could guarantee regular purchase, in a large quantity, could possibly negotiate even further price reductions. Nonetheless, $70 per tonne is used in this consideration. Fuel costs vary month to month based upon weather conditions and crop timing. Annual fuel purchases will be considered for this decision. It is likely that costs of fossil fuels will continue to rise, and that prices of DDGS will not. However, since these projections are uncertain at this time, the prices for all fuels will be kept constant for the ten year period under consideration. Costs of the various fuel alternatives and the net present value of savings compared with natural gas are outlined in Appendix C - Annual Fuel Costs and NPV of Savings over 10 years.

Carbon Dioxide Only one of the fuel alternatives, natural gas, provides the opportunity for the greenhouse operation to realize cost savings on another input, namely carbon dioxide. The NPV of the savings realized from reduced liquid CO2 purchases over the ten year period is as is outlined in

A.Bickell 28


Appendix D - Calculation of CO2 Savings from Natural Gas Combustion. Recommended dosing levels for CO2 vary relative to the crop, the type of greenhouse structure, and the number of daylight hours available for photosynthesis. The mid-range of these recommended dosing levels is 65kg/ha/hour72, and will be applied to the rationale for this decision. Based upon this dosing recommendation, and the sunlight hours in the south western Ontario region, the potential annual consumption of CO2 for a vegetable greenhouse operation is 129,941.5 kg/ha, or 52,585 kg/acre. The annual CO2 consumption for a 25 acre farm is therefore 1,314,636 kg. Unfortunately, this is only 11.7% of the total CO2 that would be produced from the natural gas combustion process intended to heat the house. The excess CO2 is emitted as exhaust and cannot be considered in the savings equation.

Cash Outflows As with consideration of the inflows, only those costs that are unique to the fuel source are considered in this decision. All systems will require some degree of repair and maintenance. As was outlined during the consideration of each fuel alternative, there are costs that are unique to each fuel source. Natural gas is once again considered the base comparator as its repairs and maintenance costs are minimal, there are no waste considerations, nor are there any parasitic costs to be considered.

Repairs and Maintenance The bunker oil systems include warmers and pumps which allow the oil to flow from storage to furnace. The parasitic costs of bunker oil also include the erosion of the boiler stack and other house structures. Coal, wood and DDGS systems have conveyor and auger systems to move the solid fuel material. The ash removal systems and the burner mechanisms within the furnaces are also more complex. These complexities account for the greater costs of repairs and maintenance over the life of the boiler system. The figures included for consideration are the expenses incurred beyond that of a natural gas system.

Boiler Supervision The complexity of the wood burning boiler and DDGS burning systems require manual supervision of the combustion process. The salaries of two full-time individuals have been considered totalling $120,000 per year.

72 Blom, T. et al. (2003, May)

A.Bickell 29


Ash Disposal Ash is produced in the coal, wood and DDGS heating systems. Wood and DDGS ash can be spread on agricultural land to be disposed. Coal ash must be sent to landfill and tipping fees amount to $8,813 per year73.

Electricity The conveyors and moving parts of the solid fuel boiler systems require electricity to operate effectively. This additional energy consumption also includes the boiler’s additional monitoring equipment. The feeding, sorting and grinding equipment required for the wood based system is included as well.

Heating System Comparison Upon consideration of the information presented herein, it has been determined that a coal fired boiler system is the most financially advantageous choice. A summary of this analysis is included in Table 7 - NPV Comparison of Greenhouse Heating Systems.

Table 7 - NPV Comparison of Greenhouse Heating Systems NPV Project Summary Natural Gas Bunker Oil Coal Wood DDGSInitial Investment 350,000$ 415,000$ 1,210,000$ 1,920,000$ 2,710,000$ NPV Operational Costs (10 years) -$ 71,888$ 854,123$ 1,725,319$ 1,653,431$ Total Outflows 350,000$ 486,888$ 2,064,123$ 3,645,319$ 4,363,431$ NPV of Dep'n Tax Advantage 52,600$ 80,271$ 234,044$ 371,376$ 524,181$ NPV of Fuel Savings (10 years) -$ 5,345,716$ 7,990,385$ 8,799,128$ 9,607,872$ NPV of Carbon Dioxide savings 1,030,126$ -$ -$ -$ -$ Total Inflows 1,082,726$ 5,425,987$ 8,224,429$ 9,170,504$ 10,132,053$ Net Cost of Fuel System (732,726)$ (4,939,099)$ (6,160,306)$ (5,525,185)$ (5,768,622)$

Implications of Financial Analysis Socially responsible businesses consider the broader implications of their decisions, not only the financial ones. The relative costs of the heating systems examined herein leads to the conclusion that coal fired heating systems are the preferred choice for the greenhouse industry. However, the environmental ramifications of this non-renewable fuel alternative cannot be ignored.

Risks of Coal Expansion of coal systems in the province will require diligent attention to environmental emission standards by all users. Should greenhouse operators fail to comply with environmental expectations, penalties could be severe. Financial and legal ramifications are likely for irresponsible operators. Tipping fees present another risk to this option. Coal ash is disposed of in landfill. As the challenge to reduce landfill usage mounts, the costs of ash disposal could also rise.

73 1.5% ash content x 9,000 GJ x 25 acres / 27 GJ per tonne / two thirds ash content per tonne (1/3 of ash waste is water) x $47 per tonne tipping fee (as per P.Quiring, personal communications of May 2006)

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There is also uncertainty regarding the future acceptability of this fuel. Since the province of Ontario has committed to ending its dependence on coal fired power plants by 200974, similar expectations are likely for the private sector. A coal heating system installed now should be operational until 2017 at minimum. Public tolerance for this fuel source may not last as long as the equipment. Public perception of the fuel source may also impact the market acceptance of the greenhouse’s product. As most of the producers grow vegetables, clean and environmentally responsible perceptions of the operations are important. Trends valuing safer food sources and organically grown products do not align well with this fuel source.

The question of DDGS The net present value of the cost savings of a DDGS heating system over a natural gas application is increased by over $400,000 when the price of DDGS drops by $5 per tonne75. Should the price of DDGS drop to $65 per tonne, this alternative would become the most economically viable. Without the price change, the DDGS option continues to have the least impact on the environment as it consumes a renewable fuel, and produces environmentally manageable ash waste.

Carbon Trading System Canada has yet to announce its carbon trading system. Renewed attention to Canada’s Kyoto commitment could lead to renewed implementation efforts in this regard. A coal based system would not be treated favourably under such a system. If Canadian CO2 trading takes a form similar to that of the European Union, greenhouse operators would be able to realize a positive cash inflow from the system. Using these renewable fuels rather than fossil fuels would free carbon equivalent credits for sale on the emissions trading markets. In this case, both wood and DDGS would represent more economically viable alternatives than has been calculated above. A 25 acre greenhouse operating on natural gas will produce over 11,000 tonnes76 of carbon dioxide annually. This volume presents a significant opportunity for emissions reduction.

Cogeneration Potential Rising electricity prices have also been under the consideration of greenhouse operators. Some have installed cogeneration units in order to supply their own electricity.

74 Ontario Ministry of Energy. (2005, June 15) 75 See Appendix F - NPV of DDGS Projects by Price of Fuel 76 See Appendix D - Calculation of COB2B Savings from Natural Gas Combustion

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Since the deregulation of Ontario’s electricity market, electricity can be sold into the province’s grid. Power generated from renewable sources can be sold to Ontario Hydro for 11 cents per kwh77. Boilers installed in greenhouses create steam for cogeneration units and then heat exchangers use remaining energy to heat greenhouses. Additional efficiency can be added in the form of a trigeneration unit which adds a CO2 condenser to the unit. Although the maximum project size is 10 MW, and 20 year contracts are typical78, this opportunity also suggests that by committing to a non-renewable heating system such as coal, a greenhouse operator may not realize the long term financial benefits forecasted above. Once again, wood and DDGS work favourably with this alternative.

Conclusions Upon review of the ethanol and greenhouse industries, it can be concluded that although DDGS is not currently a viable heating option for greenhouses, its prospects for the near future are positive.

DDGS Pricing The DDGS demand of the livestock feed market is sufficient to meet current and near future needs. Expansion of the province’s ethanol production to its 2010 targets will create a surplus of DDGS in the market and will drive prices down.

Viability of DDGS as a Greenhouse Fuel At current DDGS prices, the additional investment required to purchase the technically complex DDGS boiler system is not recovered in a ten year period. Changes to any number of factors could quickly change the financial viability of the fuel. Should DDGS prices fall to $65 per tonne or lower, or fossil fuel prices climb further, this situation will change in favour of DDGS. Emissions regulations and initiatives of the provincial and federal governments could also change this recommendation. Periodic review of the DDGS scenario is recommended to determine when the market forces have shifted this viability equation.

DDGS Based Distribution Upon finding that DDGS is not a viable fuel alternative at current prices, it follows that it is not feasible to develop a business to serve as a DDGS distributor. Examination of the industry has also shown that the quantities at which a greenhouse could consume DDGS, a direct relationship between the ethanol plants and the greenhouse operators is feasible and an intermediary not required. A 25 acre greenhouse, using 9,000 GJ of heat per acre annually, would consume 12,500 tonnes of DDGS. An ethanol facility of 187 million litres, such as the

77 Ontario Power Authority. (2006, March 21) 78 Ontario Power Authority. (2006, March 21)

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Commercial Alcohols plant in Chatham, Ontario, need only contract with approximately twelve such greenhouse operators to completely sell its DDGS production. Given that the ethanol producers have a DDGS sales function in place, this business is well within their capabilities. An intermediary would add little value to this model.

Future Opportunities Through investigation into the greenhouse industry and ethanol production industry, unexpected opportunities were identified. Although both are large consumers of natural gas, their operations could be aligned in a complimentary fashion. Ethanol plants produce excess heat, and excess carbon dioxide. Heat is currently being lost to the atmosphere through the ethanol plant chimney. Greenhouses have developed heat storage technology to manage their heat production capacity. Through water storage tanks, heat is collected during the day and then used in the evening to supplement evening heat production. This same heat management system could be applied to a greenhouse that was located in proximity to an ethanol plant. If located in the area immediately surrounding the ethanol facility, the greenhouse could purchase the plant’s “waste” heat. Carbon dioxide could also be sold directly to the surrounding greenhouses. Ethanol plants currently contract with chemical companies to collect, transport and trade the CO2 produced. The added processes certainly add to the costs of the gas. Again, there is opportunity for a symbiotic relationship. DDGS is not currently priced to be attractive to the greenhouse industry. Some of this price is a result of the transportation costs of loading and shipping the product. Ethanol plants also require heat to operate. It is possible that as natural gas prices rise, and the market price for DDGS falls, it may be more valuable to the plant as a fuel than as a co-product. Finally, the possibility for greenhouses to use DDGS as cogeneration fuel could also be adopted by the ethanol plants. Electricity may be a more valuable co-product.

Sustainability In order for ethanol to meet environmental expectations, its producers must resolve the impending problem of DDGS oversupply. The greenhouse industry is not likely to adopt this co-product without realizing some financial gains. The greenhouse industry is facing rising fuel costs and environmental pressures. Left to financial considerations alone, coal, a non-renewable fuel source, is the most attractive solution to the energy challenges. Introduction of environmental sustainability initiatives such as carbon trading, and premium prices for renewable fuel based electricity production will tip the economic

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measures in favour of the sustainable options. For the greenhouse operator, the decision to invest in DDGS in the near future is very much dependent upon the influence environmental stakeholder groups can have on public policy.

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http://www.bbibiofuels.com/crfs/index/2004.html


refrigeration systems. Packaging, crop management and business management systems are also provided by this company. Mr. Quiring is also the owner of Nature Fresh Farms, a 67 acre, state of the art greenhouse operation in Leamington, Ontario which produces both peppers and tomatoes. Mr. Quiring is one of the industry’s leaders and his experience with his own greenhouse operation, and that of the operations he has constructed, has provided valuable insights and details.

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Appendices

Appendix A – Ethanol Production in Canada

Plant Name City Province StatusAnnual Ethanol

Production(millions of L)

Basis of Distillation

Commercial Alcohols Windsor ON in construction 199 cornCommercial Alcohols Chatham ON active 185 cornCommercial Alcohols Tiverton ON active 25 cornIntegrated Grain Processors Co-Operative Inc. Brantford ON in construction 119 cornPower Stream Energy Services Collingwood ON in construction 52 cornSuncor Sarnia ON active 200 cornCommercial Alcohols Varennes PQ in construction 120 cornPermolex Ltd. Red Deer AB active 12 wheatHusky Oil Marketing Company Minnedosa MB active 10 wheatHusky Oil Marketing Company Lloydminster SK in construction 130 wheatNorAmera BioEnergy Corp. Weyburn SK in construction 25 wheatPound-Maker Agventures Ltd. Lanigan SK in construction 12 wheat

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Financial Appendices

Appendix B - Depreciation Considerations for Fuel System OptionsDepreciation Comparison Natural Gas Bunker Oil Coal Wood DDGSDepreciation year 1 (10%) 35,000 41,500 121,000 192,000 271,000 Depreciation year 2 (20%) 63,000 74,700 217,800 345,600 487,800 Depreciation year 3 (20%) 50,400 59,760 174,240 276,480 390,240 Depreciation year 4 (20%) 40,320 47,808 139,392 221,184 312,192 Depreciation year 5 (20%) 32,256 38,246 111,514 176,947 249,754 Depreciation year 6 (20%) 25,805 30,597 89,211 141,558 199,803 Depreciation year 7 (20%) 20,644 24,478 71,369 113,246 159,842 Depreciation year 8 (20%) 16,515 19,582 57,095 90,597 127,874 Depreciation year 9 (20%) 13,212 15,666 45,676 72,478 102,299 Depreciation year 10 (20%) 10,570 12,533 36,541 57,982 81,839 Tax Rate 22%Tax Advantage of DepreciationYear 1 7,700 9,130 26,620 42,240 59,620 Year 2 13,860 16,434 47,916 76,032 107,316 Year 3 11,088 13,147 38,333 60,826 85,853 Year 4 8,870 10,518 30,666 48,660 68,682 Year 5 7,096 8,414 24,533 38,928 54,946 Year 6 5,677 6,731 19,626 31,143 43,957 Year 7 4,542 5,385 15,701 24,914 35,165 Year 8 3,633 4,308 12,561 19,931 28,132 Year 9 2,907 3,446 10,049 15,945 22,506 Year 10 2,325 2,757 8,039 12,756 18,005 NPV of Dep'n Tax Advantage 52,600$ 80,271$ 234,044$ 371,376$ 524,181$

NPV is calculated considering the 6.5% interest rate used throughout the model.

Appendix C - Annual Fuel Costs and NPV of Savings over 10 years Fuel Costs Natural Gas Bunker Oil Coal Wood DDGSPrice per GJ 9.44$ 6.14$ 4.50$ 4.00$ 3.50$ Annual fuel costs(9,000 GJ per acre annually) 2,124,000$ 1,380,386$ 1,012,500$ 900,000$ 787,500$

Annual savings relative to natural gas -$ 743,614$ 1,111,500$ 1,224,000$ 1,336,500$ NPV of Fuel Savings (10 years) 5,345,716$ 7,990,385$ 8,799,128$ 9,607,872$

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Appendix D - Calculation of CO2 Savings from Natural Gas Combustion

Carbon DioxideCO2 Productionkg of CO2 per GJ heat from natural gas 50 Average heat requirement per acre (GJ) 9,000 # of acres in scenario consideration 25 kg of CO2 produced annually 11,250,000

CO2 UseAnnual CO2 dosage per acre 52,585 # of acres in scenario consideration 25 Max kg CO2 utilization 1,314,636

CO2 cost savingsPrice per kg of CO2 0.1090$ Annual CO2 savings 143,295$ NPV of Carbon Dioxide savings 1,030,126$

CO2 costs provided through personal communication with N. DiNiro of DiNiro Hothouse.

Appendix E - Present Value of Operational Costs over 10 year Period Operational Costs Natural Gas Bunker Oil Coal Wood DDGSRepairs and Maintenance - 10,000 90,000 90,000 90,000 Boiler Supervision - - - 120,000 120,000 Ash Disposal - - 8,813 - - Electricity - - 20,000 30,000 20,000 Total annual operational costs - 10,000 118,813 240,000 230,000 NPV Operational Costs (10 years) -$ 71,888$ 854,123$ 1,725,319$ 1,653,431$

Appendix F - NPV of DDGS Projects by Price of Fuel NPV Project Summary DDGS - $60 DDGS - $65 DDGS - $70 DDGS - $75 DDGS - $80Initial Investment 2,710,000$ 2,710,000$ 2,710,000$ 2,710,000$ 2,710,000$ NPV Operational Costs (10 years) 1,653,431$ 1,653,431$ 1,653,431$ 1,653,431$ 1,653,431$ Total Outflows 4,363,431$ 4,363,431$ 4,363,431$ 4,363,431$ 4,363,431$ NPV of Dep'n Tax Advantage 524,181$ 524,181$ 524,181$ 524,181$ 524,181$ NPV of Fuel Savings (10 years) 10,416,615$ 10,012,243$ 9,607,872$ 9,203,500$ 8,799,128$ NPV of Carbon Dioxide savings -$ -$ -$ -$ -$ Total Inflows 10,940,796$ 10,536,425$ 10,132,053$ 9,727,681$ 9,323,310$ Net Cost of Fuel System (6,577,365)$ (6,172,994)$ (5,768,622)$ (5,364,250)$ (4,959,879)$

Changes to Net Cost of Fuel Systems resulting from $5/tonne change in price of DDGS.

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