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Corn’s Future as a Biofuels Feedstock

March 3, 2008

Presented at the 44th Annual Illinois Corn Breeders School

2 / 57Topics To Be Covered:Topics To Be Covered:Topics To Be Covered:Topics To Be Covered:

• Current Usage of Corn as a Biofuels Feedstock

• The Energy Independence & Security Act and its Impact on Corn

• Future Prospects for Corn Starch Based Ethanol

• How Fast Will Cellulosic Ethanol Develop

• Which Feedstocks Will Be Used to Produce Cellulosic Ethanol

• Risks to Biofuels Growth

3 / 57About Context:About Context:About Context:About Context:

• Consulting firm founded in 1993

• Focused on Agribusiness

• Services include opportunity assessment, strategic planning, market research, competitive intelligence, research targeting and regulatory compliance

• Publish the “Biotech Traits Commercialized” Outlook

• Make extensive use of subject matter experts

• Clients in N. America, Europe and Asia

• Closely track biofuels to forecast impact to clients

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0

1000

2000

3000

4000

5000

6000

7000

8000

2002 2003 2004 2005 2006 2007

Eth

anol

Dem

and

(mill

ion

gallo

ns)

Imports

Production

U.S. Ethanol Demand

Source: EIA-819 Monthly Oxygenate Report & Context

Est.

U.S. Ethanol Demand Reached U.S. Ethanol Demand Reached 6.8 Billion Gallons in 2007.6.8 Billion Gallons in 2007.U.S. Ethanol Demand Reached U.S. Ethanol Demand Reached 6.8 Billion Gallons in 2007.6.8 Billion Gallons in 2007.

• Ethanol still largely an additive (reformulated gasoline & winter oxygenate)

• Corn provides the lion’s share of feedstocks

• Sorghum used to produce ~100 million gallons

• Imports account for ~450 million gallons

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% of Corn Harvest to Make Ethanol

Source: Joseph Glauber, USDA, “2008 Agricultural Economic Outlook”

19% of Corn Consumption in 2007 19% of Corn Consumption in 2007 Was to Make EthanolWas to Make Ethanol19% of Corn Consumption in 2007 19% of Corn Consumption in 2007 Was to Make EthanolWas to Make Ethanol

7.3%

10.5%

11.8%12.5%

19%

14%

0

0.5

1

1.5

2

2.5

2001/02 2002/03 2003/04 2004/05 2005/06 2006/07

Eth

anol

Cor

n U

se (

billi

on b

ushe

ls)

0

2

4

6

8

10

12

14

16

18

20

Eth

anol

Sha

re o

f Cor

n U

se (

%)

Corn used in Ethanol

%of Corn Crop

• Use of corn for ethanol doubled in the last four years.

• Average price of corn rose 72% over the same period

• Only a huge increase in acres planted kept supply-demand from becoming completely unbalanced.

• USDA forecasts 25% of corn will be used in 2008/09 to make ethanol.

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U.S. Corn Production

Source: Dr. Michael R. Rahm, Mosaic, “The Market Outlook: Revving Up Production Agriculture”; “Q3 Market Analysis Reports”, Potash Corp; Doane Forecast from “Our View from November 2007” by Dan Greenwell, Terra Industries, Inc.; Informa forecast from

Corn Used for Ethanol Is Forecasted Corn Used for Ethanol Is Forecasted to Grow ~75% by 2009/10to Grow ~75% by 2009/10Corn Used for Ethanol Is Forecasted Corn Used for Ethanol Is Forecasted to Grow ~75% by 2009/10to Grow ~75% by 2009/10

2.5

3

3.5

4

4.5

5

2007/08 2008/09 2009/10

Cor

n U

se (

billi

on b

ushe

ls)

Mosiac

Potash

Informa

Doane

USDA

8.7 billion gallons

11.5 billion gallons

12.5 billion gallons • Forecasts are in close

agreement (+/- 5%)

• All five are factored off of build-out of plants already under construction.

• Demand for corn for ethanol doubles from 2007 to 2009

• 2008 EISA requirement won’t be made without imports

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• The Energy Independence & Security Act of 2007 (EISA) contains a revised RFS and builds on EPAct 2005.

• Title II covers ethanol, biodiesel and other advanced biofuels including butane and biogas.

• EISA specifies the amount of biofuels to be blended into motor fuels, not how much is produced.

• Total volume is to grow from 9 billion gallons in 2008 to 36 billion gallons in 2022

• The volumes of biofuels specified are minimums.

• It does not address the blender's credit (see the energy title of the Farm Bill)

Can’t Talk About Corn’s Future Can’t Talk About Corn’s Future Without Talking about EISAWithout Talking about EISACan’t Talk About Corn’s Future Can’t Talk About Corn’s Future Without Talking about EISAWithout Talking about EISA

EISA Overview

EISA is Congress’ script for the biofuels Industry

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RFS Volumes per EISA

Source: H.R. 6, Energy Independence & Security Act of 2007

ESIA Calls for a Transition from Corn to ESIA Calls for a Transition from Corn to Cellulose to Make EthanolCellulose to Make EthanolESIA Calls for a Transition from Corn to ESIA Calls for a Transition from Corn to Cellulose to Make EthanolCellulose to Make Ethanol

• EISA scripts industry development over three periods.

• First priority appears to be total biofuels target

• No explicit volumes of corn-starch based EtOH.

• Corn-starch based ethanol gets U.S. to E10, advanced biofuels gets U.S. to E20

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Bio

fuels

Volu

me (

bill

ion g

allo

ns)

Conventional Biofuels

Cellulosic Ethanol

Other Advanced Biofuels

Biodiesel

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1. Reducing energy usage

2. Reduce GHG’s

3. Address concerns about corn-starch based ethanol

EISA Has Several “Themes”EISA Has Several “Themes”EISA Has Several “Themes”EISA Has Several “Themes”

Corn is considered a first generation biofuel and its use will be limited

• Impact assessment on the production of feed grains, livestock, food etc. required by mid-2009

• New study to improve energy efficiency of biorefineries

• New corn-starch based ethanol plants must reduce lifecycle GHG emissions by 20% (compared to gasoline)

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• Corn production will rise to 14.15 billion bushels

• Acres planted increase to 91.9 million

• The price of corn goes up 8.3%

• Corn-based ethanol production will rise to 14.5 billion gallons

• Use in ethanol production reaches 5.22 billion bushes and exceeds all other uses except for feed by 2015

EISA’s Impact to Corn:EISA’s Impact to Corn:EISA’s Impact to Corn:EISA’s Impact to Corn:

Is this the end of the story?

That depends on cellulosic ethanol…

According to FAPRI*…

* Food and Agricultural Policy Research Institute, “The Energy Independence and Security Act of 2007: Preliminary Evaluation of Selected Provisions”

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• Collection & storage logistics

• Pretreatment costs

• Improved enzymes to hydrolyze cellulose and hemicellulose

• Increased conversion rates for both 5 and 6 carbon sugars

• Increased titers

• Reduction in capital costs

At This Point Cellulosic Ethanol At This Point Cellulosic Ethanol Still Faces Some Big HurdlesStill Faces Some Big HurdlesAt This Point Cellulosic Ethanol At This Point Cellulosic Ethanol Still Faces Some Big HurdlesStill Faces Some Big Hurdles

Many question whether it is ready for commercialization

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0

20

40

60

80

100

120

140

Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11

Pro

duct

ion

Cap

acity

(m

illio

n ga

llons

)

Timing of New Capacity to Produce Cellulosic Ethanol (DOE Funded Projects)

Cellulosic Ethanol Production Is Cellulosic Ethanol Production Is Likely to Fall Short of EISA TargetsLikely to Fall Short of EISA TargetsCellulosic Ethanol Production Is Cellulosic Ethanol Production Is Likely to Fall Short of EISA TargetsLikely to Fall Short of EISA Targets

Project development & plant start-up could push full-scale operation out further

2010 EISA Cellulosic

Requirement

• Range Fuels’ project only one started (Nov. 2007)

• Three projects are phased, full scale production could be delayed or canceled

• 2011 EISA requirement is 250 million gallons, 2012 requirement is 500 million gallons

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• The annual cellulosic requirement can be waived if “… the projected volume of cellulosic biofuels production is less than the minimum applicable volume…” per EISA.

• Any of the EISA specified volumes (total renewable fuels, advanced biofuels, cellulosic biofuels and biodiesel) can be permanently modified for 2016 and after if:

Congress Left Several Congress Left Several “Escape Hatches” in EISA“Escape Hatches” in EISACongress Left Several Congress Left Several “Escape Hatches” in EISA“Escape Hatches” in EISA

Shortfalls in cellulosic ethanol production were considered a distinct possibility

Waivers and Modification of Annual Volumes

1. volumes waived were at least 20% of the required amount for two consecutive years or…

2. volumes waived were at least 50% for a single year

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U.S. Biofuels Supply – 2008 to 2022

Context is Predicting There Will Be Context is Predicting There Will Be A Shortfall in Cellulosic EthanolA Shortfall in Cellulosic EthanolContext is Predicting There Will Be Context is Predicting There Will Be A Shortfall in Cellulosic EthanolA Shortfall in Cellulosic Ethanol

Production will only reach 3 billion gallons by 2015

• Technology will take longer to develop than what proponents think.

• It will be a number of years before one or two emerge as most economical

• Plant standardization will take a period of years

• A major constraint will be attracting capital.

0

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Bio

fue

ls V

olu

me

(b

illio

n g

allo

ns)

Unmet Volume

Imports

Cellulosic

Other Advanced

Biodiesel

CornShortfall

Imports

Cellulosic

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U.S. Biofuels Supply – 2008 to 2022

A Shortfall Could Be an A Shortfall Could Be an Opportunity for CornOpportunity for CornA Shortfall Could Be an A Shortfall Could Be an Opportunity for CornOpportunity for Corn

Use of corn starch would depend on feed and food prices

• Additional corn-based ethanol is unlikely to be allowed before 2016.

• Amount would be limited to some % of incremental volume from annual yield gain.

• Increases in acres planted could boost corn-starch based ethanol even further.

0

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Bio

fuel

s V

olum

e (b

illio

n ga

llons

)

Unmet Volume

All Other

Corn

0

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40

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Bifu

els

Vol

ume

(bill

ion

gallo

ns)

Unmet Volume

Added Corn

All Other

Corn

16 / 57Growth In Cellulosic Ethanol Is Growth In Cellulosic Ethanol Is Also an Opportunity for CornAlso an Opportunity for CornGrowth In Cellulosic Ethanol Is Growth In Cellulosic Ethanol Is Also an Opportunity for CornAlso an Opportunity for Corn

A major concern is how much feedstock can be sustainably provided

Cellulosic Feedstock Required to Produce 3 Billion Gallons

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Fee

dsto

ck (

mill

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dry

wei

ght t

ons)

17 / 57Multiple Types of Feedstock Multiple Types of Feedstock Are Being ConsideredAre Being ConsideredMultiple Types of Feedstock Multiple Types of Feedstock Are Being ConsideredAre Being Considered

Each has its pluses and minuses

Forest Residues

Energy Crops

Municipal Solid

Wastes

Agricultural Residues

18 / 57No Single Feedstock Is Most No Single Feedstock Is Most Preferred by Plant DevelopersPreferred by Plant DevelopersNo Single Feedstock Is Most No Single Feedstock Is Most Preferred by Plant DevelopersPreferred by Plant Developers

Many different ideas on which is best

DOE Commercial Biorefinery Grant Recipients

Agriclutural Residues Yard Wastes

Forest Residues/ Wood

Wastes Energy Crops

corn stover switch grass

wheat straw

milo stubble

citrus peels grass clippings wood wastes

tree trimmings

Blue Fire Ethanol19.0

green wastes wood wastes

corn fiber

corn stover

wheat straw switch grass

barley straw

rice straw

corn stover

unsaleable timber

forest residues

31.0Poet

Range Fuels 10.0

Iogen 18.0

Alico 20.9

Feedstocks

Abengoa 11.4

DeveloperPlant Capacity (million gallons) Four Different

Feedstock Strategies:

1. Multiple Ag residues

2. Single Ag residue

3. Multiple municipal and yard wastes

4. Forest residues

19 / 57Will One Type of Feedstock Prove Will One Type of Feedstock Prove More Desirable/Economical?More Desirable/Economical?Will One Type of Feedstock Prove Will One Type of Feedstock Prove More Desirable/Economical?More Desirable/Economical?

Process technology and location could be major determinants of what is used

Feedstock Comparison:

Yield (tons/acre)

Density (lbs./ft3)

Land Required

(1000 acres)Harvest

FrequencyCo-Location Possibilities

Collection & Transporation

LogisticsCurrent

AvailabilityEst. Cost

** Agricultural Residues

0.5-2.0 7-10 182.5 1/yr.Existing

Ethanol Plants

Bale or Single-Pass Harvesting

Very High $50-60

** Forest Residues

1-20 18-22 73 1/12 yrs.Existing

Pulp MillsChipping or

BundlingMedium ~$55

*** Municipal Waste

n.a. 12-20 n.a. daily LandfillsExisting Trash

CollectionLow Very Low

* Energy Crops

1-4* 8-10 121.7 1-2/yr. ? New Near Zero ?

Note: Land required is for a single 25 million gallon plant

20 / 57Corn Stover and Wheat Straw Are the Corn Stover and Wheat Straw Are the Most Readily Available Ag ResiduesMost Readily Available Ag ResiduesCorn Stover and Wheat Straw Are the Corn Stover and Wheat Straw Are the Most Readily Available Ag ResiduesMost Readily Available Ag Residues

Corn stover has slightly higher carbohydrate content, greater availability and can be co-located at existing ethanol plants

Feedstock Comparison:

Yield (tons/acre)

Density (lbs./ft3)

Land Required

(1000 acres)Harvest

FrequencyCo-Location Possibilities

Collection & Transporation

Logistics Availability

(million tons)Est. Cost

Corn Stover

2 7-10 182.5 1/yr.Existing

Ethanol Plants

Bale or Single-Pass Harvesting

75 $50-60

Wheat Straw

0.75 ~8 486.7 1/yr. ? Existing 11 $45-50

Note: Land required is for a single 25 million gallon plant

21 / 57Utilizing Just Corn Cobs Has Advantages Utilizing Just Corn Cobs Has Advantages (vs. stalks, leaves, husks, etc.)(vs. stalks, leaves, husks, etc.)Utilizing Just Corn Cobs Has Advantages Utilizing Just Corn Cobs Has Advantages (vs. stalks, leaves, husks, etc.)(vs. stalks, leaves, husks, etc.)

• Cobs are twice as dense as stalks – lower transportation costs

• Wouldn’t have to be baled

• Harvest could be done the same time as the grain – no contamination from dirt

• Could remove ~0.5 tons per acre

• Seed corn producers could provide an initial supply of cobs

• Projected price is $30-60 per ton

Corn cobs would be easier to collect, store and transport

22 / 57Corn Fiber Is Another (Overlooked) Corn Fiber Is Another (Overlooked) Potential Cellulosic FeedstockPotential Cellulosic FeedstockCorn Fiber Is Another (Overlooked) Corn Fiber Is Another (Overlooked) Potential Cellulosic FeedstockPotential Cellulosic Feedstock

• Corn fiber is ~8% of the weight of the kernel

• There are no collection, storage or transportation issues

• Its use would not reduce soil organic matter

• It has zero cost to both dry and wet mills

• Wet mills already separate out the fiber – dry mills are beginning to use fractionation

• It could be processed at existing ethanol plants

• Its only weakness is that it contains twice as much hemicellulose as cellulose

Ethanol plants could increase their output 6-7% using corn fiber

23 / 57We Project that Corn Will be the We Project that Corn Will be the Most Common Cellulosic FeedstockMost Common Cellulosic FeedstockWe Project that Corn Will be the We Project that Corn Will be the Most Common Cellulosic FeedstockMost Common Cellulosic Feedstock

Corn Stover 38%

Energy Crops 5%

Urban Wood Waste

15%Mill

Residues 5.0%

Logging Residues

10%

Corn Fiber

5%

Corn Cobs 16%

Corn in total will provide 59% of the cellulosic feedstock required in 2022

Wheat Straw 6%

• 36 million tons of feedstock will be required to produce 3 billion gallons of cellulosic EtOH.

• Urban wood wastes, mill residues and corn fiber will be exploited first.

• Corn cobs, wheat straw and corn stover come next.

• Energy crops are last.

24 / 57Cellulosic Ethanol Will Develop Where Cellulosic Ethanol Will Develop Where the Cheapest Feedstocks Are At.the Cheapest Feedstocks Are At.Cellulosic Ethanol Will Develop Where Cellulosic Ethanol Will Develop Where the Cheapest Feedstocks Are At.the Cheapest Feedstocks Are At.

State incentives could play a large role

• Cellulosic ethanol technology will allow development outside of the Midwest.

• Development near population centers would mitigate transportation issues.

• Midwest still figures prominently

25 / 57Risks to Corn’s Future as a Risks to Corn’s Future as a Biofuels FeedstockBiofuels FeedstockRisks to Corn’s Future as a Risks to Corn’s Future as a Biofuels FeedstockBiofuels Feedstock

Economics are the primary risk

• Discontinuation of the blenders credits

• State regulations on ethanol blends

• Corn isn’t “green” enough

• Distribution bottlenecks

• Competition (Coal-to-Liquids)

• EISA impact assessment

• Elimination of the import tariff

• Slow adoption of DDGS in monogastric rations

• Corn prices

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Summary:Summary:Summary:Summary:

• Near term forecasts have already pegged usage of corn in ethanol at 4.5 billion gallons by 2009/10 (before EISA was passed).

• Over the near term ethanol from corn will fall somewhat short of targets but imports will take up the slack.

• Corn-based ethanol will meet the 2015 EISA target of 15 billion gallons by 2015.

• Cellulosic ethanol will not develop fast enough to meet EISA targets. Our projection is that production will reach 3 billion gallons by 2022.

• The shortfall will open up opportunities for corn-starch based ethanol. We project EPA will allow corn to fill a portion of the shortfall (1.5-2.0 billion gallons by 2022.

• Many different feedstocks will be used to make cellulosic ethanol. Ag residues will provide 65% of cellulosic feedstock in 2022.

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Summary:Summary:Summary:Summary:

Corn will be the bridge between first and second generation fuels.

• Corn residues will be the most widely used Ag residue because of their availability and the opportunity to co-locate production at existing ethanol plants.

• Readily available feedstocks, already being collected will be the first utilized. Corn fiber will have a niche.

• Corn cobs will be utilized extensively before plants turn to corn stover.

• Corn will lead all other commercially produced feedstocks in ethanol per acre for at least another 8-10 years

• Continued improvement in corn yields offer long term possibilities

• The biggest risks to corn’s future are the potential elimination of the import tariff, greater DDGS utilization and corn prices

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For more information contact:

Jim Murphy, The Context Network (515) 225-2204 (office) (515) 468-1956 (cell) jim.murphy@contextnet.com www.contextnet.com

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