Corn Ethanol Process and Production Economics

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1 1 Corn Ethanol Process and Production Economics Presented to the 2007 Fertilizer Outlook and Technology Conference Arlington, VA November 8, 2006 John M. Urbanchuk Director, LECG LLC 1255 Drummers Lane, Suite 320 Wayne, PA Tel:

2 2 Ethanol (CH 3 CH 2 OH) Ethyl alcohol made primarily by converting starch in agricultural products to sugar and then to alcohol. Used as an additive to enhance octane and add oxygen to motor gasoline. Most ethanol sold as a 10% blend (E-10) E-85 is slow out of the blocks due to infrastructure constraints

3 3 U.S. Ethanol Production Million Gallons 4,000 3,500 3,000 2,500 2,000 1,500 1, Source: US Energy Information Administration; Renewable Fuels Association

4 4 Most ethanol today is made from the corn dry milling process Plants by Process Capacity by Process Wet Dry Other Bil Gal Wet Dry Other Source: BBI International; RFA

5 5 Feedstock and energy costs are the key to ethanol profitability Feedstocks typically account for almost two-thirds of operating costs. Co-product credits (distiller s grains and CO 2 ) are crucial to controlling feedstock costs. Energy costs are a close second in importance. Using co-generated power from waste-coal or landfill gas as a boiler fuel can cut production costs.

6 6 Corn Used for Ethanol Production Percent 1,800 1,600 1,400 1,200 1, Mil Bu Corn Use Pct of Total Use Source: USDA/ERS

7 7 Today s ethanol industry is Midwest based

8 8 Feed stocks account for about 60% of production costs $/Bu $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $ Corn Prices No. 2 Yellow Corn, Chicago Corn Farm Source: USDA/ERS Feed Grain database

9 9 Co-product (DDG) prices closely follow corn prices $/Bu $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $ $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 $/Ton No. 2 Yellow Corn, Chicago DDG, Lawrenceburg, IN Source: USDA/ERS Feed Grain database

10 10 Ethanol prices closely track gasoline prices Cents/Gal 10/3/2006 9/3/2006 8/3/2006 7/3/2006 6/3/2006 5/3/2006 4/3/2006 3/3/2006 2/3/2006 1/3/ /3/ /3/ /3/2005 9/3/2005 8/3/2005 7/3/2005 6/3/2005 5/3/2005 4/3/2005 3/3/2005 2/3/2005 1/3/2005 Chicago Ethanol Reg Gasoline, NY Source: OPIS; EIA

11 11 Technology and Capital Cost Conventional grain fermentation ethanol production technology is well understood. Current technology for cellulosic ethanol is another matter. Current technology for cellulosic ethanol is the acid hydrolysis process. Capital costs are almost 4X that of dry mill ethanol. Enzyme technology holds promise for improved economics, but is not yet commercialized.

12 12 Bioenergy Crop-based Processes Raw Material Pretreatment Current Yield (gal/ton) Potential Yield (gal/ton) Production Cost ($/gal) Capital Cost ($/gal) Com l Crops Mechanical $1.12 $1.10 Biomass Gasification Unknown $2.40 Biomass Acid 52 $1.80 $4.70 Hydrolysis Biomass Base 120 $0.75 $2.40 Hydrolysis Source: Paul W. Gallagher. Energy Production with Biomass: What Are the Prospects? Choices. 1 st Quarter (1)

13 13 What does it take to produce a gallon of ethanol? Input Corn Enzymes Yeast Chemicals Denaturant Electricity Natural Gas Steam Water Quantity Units Bu Lb Lb Lb Gal Kw Mcf Lb Gal LECG LLC

14 14 What does it cost to make a gallon of ethanol today? Corn, Cent Ill Cash ($/bu) DDG ($/ton) CO2 ($/lb) Feedstock Costs Byproduct credits (DDGS) Carbon Dioxide Net Feedstock Costs Cash Operating Expenses Electricity Fuels Enzymes, Yeast, Chemicals Water & sewer Denaturant Maintenance Labor Admin & Other Costs Subtotal Total Costs $3.26 $89.14 $2.50 ($/Gal) $1.185 $0.276 $0.007 $0.903 $0.048 $0.276 $0.056 $0.007 $0.044 $0.053 $0.055 $0.045 $0.585 $1.488 Source: LECG. LLC. Corn and ethanol prices on 10/31/06; August 2006 natural gas prices

15 15 Even at today s rising corn prices, ethanol is profitable! ($/Gallon) Revenue from ethanol sales Net Operating Cost EBITDA Depreciation Interest cost (60% debt, 10 8%) Net Income ROI ($1.75/gallon capital cost) $2.07 $1.49 $0.58 $0.18 $0.05 $ % LECG, LLC November 2006

16 16 Ethanol Profitability Matrix (EBITDA) Corn Price Ethanol Price $0.88 $1.06 $1.24 $1.43 $1.61 $1.79 $1.97 $3.00 $0.63 $0.81 $0.99 $1.18 $1.36 $1.54 $1.72 $2.75 $0.38 $0.56 $0.74 $0.93 $1.11 $1.29 $1.47 $2.50 $0.13 $0.31 $0.49 $0.68 $0.86 $1.04 $1.22 $2.25 ($0.12) $0.06 $0.24 $0.43 $0.61 $0.79 $0.97 $2.00 ($0.37) ($0.19) ($0.01) $0.18 $0.36 $0.54 $0.72 $1.75 ($0.62) ($0.44) ($0.26) ($0.07) $0.11 $0.29 $0.47 $1.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00

17 17 How is the industry likely to grow? 15,000 12,500 10,000 7,500 5,000 Million Gallons 2, Source: LECG LLC October 2006

18 18 Projected Sources of Ethanol 1,000 1,342 12,296 14, ,453 11,996 13, ,341 11,667 13, ,045 11,208 12, ,611 11, ,785 10, ,723 9, ,524 7, ,809 6, ,659 4, ,592 3, (MGY) (MGY) (MGY) (MGY) Cellulose Feedstocks Corn Production Other ETOH LECG LLC October 2006

19 Why is ethanol desirable? Ethanol is renewable and has a significant positive net energy balance. Ethanol provides important environmental benefits.

19 19 Why is ethanol desirable? Ethanol is renewable and has a significant positive net energy balance. Ethanol provides important environmental benefits. Increased demand for grain improves farm revenues and reduces the cost of government programs. Ethanol reduce America s dependence on imported oil, expands the economy, creates jobs, and puts money into the pockets of American consumers.

20 20 Thank you, Questions?

Agricultural Outlook Forum Presented: March 1-2, 2007 U.S. Department of Agriculture

Agricultural Outlook Forum Presented: March 1-2, 2007 U.S. Department of Agriculture ECONOMIC IMPACTS ON THE FARM COMMUNITY OF COOPERATIVE OWNERSHIP OF ETHANOL PRODUCTION John M. Urbanchuk Director, LECG