Bio-energy: Questions Producers Should be Asking

Ray MasseyUniversity of Missouri

Commercial Agriculture Program

Ethanol Case Study

• Who benefitted from the corn ethanol boom?– Ethanol industry– Corn producers– Input suppliers– Land owners– Rural economies – to the extent corn producers

benefited– Non-rural economies – to the extent input suppliers

and land owners live in non-rural areas.

Allocation of Ethanol Profits

Source: Ag Marketing Resource Center – Who Profits from the Corn Ethanol Boom?

Ethanol Bankruptcies

• How many ethanol plants have gone bankrupt in the last few years?

• Des Moines Register, November 18, 2008: “An Omaha investment banker said the current roster of 16 bankrupt ethanol plants, five of them in Iowa, will grow to as many as 40 by early next year as the industry is squeezed by falling prices and volatile markets.”

• Bankruptcy causes included financial and operational problems.

Renewable Fuel Standard20

08

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

0

5

10

15

20

25

30

35

40

Corn-based Ethanol Cellulosic BiofuelBiomass-based Diesel Undifferentiated Advanced Biofuel

Year

Bill

ions

of G

allo

ns

Source: EPA, EISA of 2007

Policy Involvement

• The 2009 renewable fuel standard (RFS) will be 10.21% to ensure that at least 11.1 billion gallons of renewable fuels be blended into transportation gasoline.

• Conventional vehicles can run on no more than 10% ethanol.

• Using 11.1 billion gallons of renewable fuels will require selling E85 because E10 can’t meet the standard.

Policy Involvement

• Sen. Charles Grassley, R-Ia., made a similar point in a letter to the Democratic congressional leadership last week. Any taxpayer funding for the automakers "must be accompanied by enforceable commitments to FFV production and alternative fuel use" (Des Moines Register, Nov 19, 2008).

Policy Involvement Summary• RFS requires more than 10% blend – or use of

E85.• Suggested that auto bailout require commitment

to flex fuel (E85) vehicles.• Flex fuel vehicles cost more.• E85 cost more than E10 per BTU (or mpg).• Policy Result: Buy cheaper foreign cars and

hasten the demise of the US auto industry.

Questions from Ethanol Case Study

• What is the system? You need to know the technical, economic and environmental impacts of new fuels.

• What is the policy? You need to know how committed the government is to biofuels and how they will express that commitment.

• What are the economics? You need to know basic economic principles that impact all business dealings.

System Questions

• What limitations do I have?• What are the potential negatives? Who

will try to hinder my involvement in this?• What are the potential benefits? Who will

help?• What by-products will be produced? How

used or disposed of?

System example:Water requirements

• Ethanol plants (dry process) require at a minimum 4 gallons of water for every gallon of ethanol produced. Much of the water used in the process is released as steam so the remaining amount is highly concentrated with salts and minerals.

Groundwater is found in abundance only in those areas that are in the south half of the state and along the yellow shaded area

surrounding major waterways. The others areas mainly rely on surface water for high quality and quantities of water

Water Requirement Questions(Bob Broz questions)

• What are the cost-benefit ratio for hauling a long way?• What are the water quality needs for a plant ?• What are the water quantity needs for a plant?• What other industry or growth in a community do we give

up by placing a large centralized plant in an area that will use a large portion of the water supply?

• What is the cost of transporting feedstuffs to areas where they can be utilized?

Water Requirement Questions(Bob Broz questions)

• Are the areas for centralized plants livestock production friendly?

• Many of the counties in North Central Mo. have health ordinances keeping out CAFOs but we may need to market for feedstuffs to make a centralized plant cost effective.

• There are also concerns with other components of the community infra-structure that we need to look at. - Roads, sewers, emergency vehicles, etc.

• Do the benefits and taxes obtained from a plant out weight the concerns with having the plant from an environmental and human health aspect.

Policy Questions• Will the EPA enforce the mandate? How? • What will the USDA do with regard to CRP acres

and biomass production?• What is the administration’s overall energy

policy? Cheap fuel or pollution reduction?• When will alternative transportation (electric,

hydrogen, etc) become feasible?

Economic Questions

• What is the risk-reward tradeoff?• What is the limiting resource that will

accrue the residual profits (or losses) from a new industry?– What happens when prices decrease? Lower

to the next best use. • For corn the next best use is feed. • What is the lower price limit of a biomass that has

no other current market?

Economic Questions

• Where can I sell my feedstock?• When will a business start buying?• What will be the optimal feedstock• What organizational structure should be in

place?• Do you look at this as a business

investment or a lifestyle (e.g. sell investment when profitable or keep always)?

Economic Questions

• What competitive advantage do I have?– DDG feedstock needs to be next to existing

ethanol plant.– Wood feedstock likely to be where wood is

currently used as a feedstock into paper.– Money is made when someone looks outside

the expected limitations to find opportunity.