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 19087 Tel: 610-254-4021 E-mail: jurbanchuk@lecg.com
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 U.S. Ethanol Production Million Gallons 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 Source: US Energy Information Administration; Renewable Fuels Association
4 Most ethanol today is made from the corn dry milling process Plants by Process Capacity by Process 120 100 80 60 40 20 0 1991 1995 2001 2006 Wet Dry Other Bil Gal 6 5 4 3 2 1 0 1991 1995 2001 2006 Wet Dry Other Source: BBI International; RFA
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 Corn Used for Ethanol Production Percent 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 16 14 12 10 8 6 4 2 0 Mil Bu 1983 1981 1987 1985 1991 1989 1995 1993 1999 1997 2003 2001 2005 Corn Use Pct of Total Use Source: USDA/ERS
7 Today s ethanol industry is Midwest based
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 $1.00 1998 1997 1996 1995 1994 1993 1992 1991 1990 Corn Prices 2003 2002 2001 2000 1999 2006 2005 2004 No. 2 Yellow Corn, Chicago Corn Farm Source: USDA/ERS Feed Grain database
9 Co-product (DDG) prices closely follow corn prices $/Bu $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 $/Ton No. 2 Yellow Corn, Chicago DDG, Lawrenceburg, IN Source: USDA/ERS Feed Grain database
10 Ethanol prices closely track gasoline prices 450 400 350 300 250 200 150 100 Cents/Gal 10/3/2006 9/3/2006 8/3/2006 7/3/2006 6/3/2006 5/3/2006 4/3/2006 3/3/2006 2/3/2006 1/3/2006 12/3/2005 11/3/2005 10/3/2005 9/3/2005 8/3/2005 7/3/2005 6/3/2005 5/3/2005 4/3/2005 3/3/2005 2/3/2005 1/3/2005 Chicago Ethanol Reg Gasoline, NY Source: OPIS; EIA
11 Technology and Capital Cost Conventional grain fermentation ethanol production technology is well understood. Current technology for cellulosic ethanol is another matter. Current technology for cellulosic ethanol is the acid hydrolysis process. Capital costs are almost 4X that of dry mill ethanol. Enzyme technology holds promise for improved economics, but is not yet commercialized.
12 Bioenergy Crop-based Processes Raw Material Pretreatment Current Yield (gal/ton) Potential Yield (gal/ton) Production Cost ($/gal) Capital Cost ($/gal) Com l Crops Mechanical 106 106 $1.12 $1.10 Biomass Gasification Unknown $2.40 Biomass Acid 52 $1.80 $4.70 Hydrolysis Biomass Base 120 $0.75 $2.40 Hydrolysis Source: Paul W. Gallagher. Energy Production with Biomass: What Are the Prospects? Choices. 1 st Quarter 2006 21(1)
13 What does it take to produce a gallon of ethanol? Input Corn Enzymes Yeast Chemicals Denaturant Electricity Natural Gas Steam Water Quantity 0.364 0.037 0.005 1.121 0.030 0.750 0.014 20.0 4.700 Units Bu Lb Lb Lb Gal Kw Mcf Lb Gal LECG LLC
14 What does it cost to make a gallon of ethanol today? Corn, Cent Ill Cash ($/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 $1.488 Source: LECG. LLC. Corn and ethanol prices on 10/31/06; August 2006 natural gas prices
15 Even at today s rising corn prices, ethanol is profitable! ($/Gallon) Revenue from ethanol sales Net Operating Cost EBITDA Depreciation Interest cost (60% debt, 10 years @ 8%) Net Income ROI ($1.75/gallon capital cost) $2.07 $1.49 $0.58 $0.18 $0.05 $0.36 33.3% LECG, LLC November 2006
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 How is the industry likely to grow? 15,000 12,500 10,000 7,500 5,000 Million Gallons 2,500 0 2015 2013 2011 2009 2007 2005 2003 2001 1999 1997 1993 1995 1991 1989 1987 1985 1983 1981 Source: LECG LLC October 2006
18 Projected Sources of Ethanol 1,000 1,342 12,296 14,638 2015 500 1,453 11,996 13,948 2014 250 1,341 11,667 13,258 2013 200 1,045 11,208 12,453 2012 150 773 10,611 11,533 2011 100 637 9,785 10,521 2010 50 507 8,723 9,279 2009 25 371 7,524 7,920 2008 0 306 5,809 6,115 2007 0 245 4,659 4,905 2006 0 312 3,592 3,904 2005 (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. 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 Thank you, Questions?