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Value Added Agriculture Program
www.iavaap.org
Biodiesel Industry Overview
Value Added Agriculture Program
www.iavaap.org
On-Highway
56%
Farm
6% Industrial
4%Military
1%
Electric Utility
2%
Oil Company
1%
Off Highway
4%
Commercial
6%
Railroad
5%
Residential
11%
Vessel Bunkering
4%
Diesel Usage by Sector
Value Added Agriculture Program
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Demand Benchmarks
• Assumptions – RFS of 7.5 billion gallons– Biodiesel will serve 15% of RFS demand
• RFS 7.5 billion x .15% = 1.125 BGY of biodiesel
Value Added Agriculture Program
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Energy Sector %distillate usage (mill gall) B2 B10 B20
On-Highway 56 35784 715.68 3578.4 7156.8
Residential 11 7029 140.58 702.9 1405.8
Farm 6 3834 76.68 383.4 766.8
Commercial 6 3834 76.68 383.4 766.8
Railroad 5 3195 63.9 319.5 639
TOTAL USAGE (mill gal) 63900 1278.00 6390.00 12780.00
Diesel Use by Sector
Value Added Agriculture Program
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RFS ProjectionsEthanol/Biodiesel ProjectionsBased on 7.5-BGY RFS
-1000
0
1000
2000
3000
4000
5000
6000
7000
Year
MG
Y
Biodiesel
Ethanol
Poly. (Biodiesel)
Poly. (Ethanol)
Value Added Agriculture Program
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U.S. Biodiesel ProductionBiodiesel Production MGY
0
10
20
30
40
50
60
70
80
1999 2000 2001 2002 2003 2004 2005
Year
MG
Y
Value Added Agriculture Program
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Biodiesel Capacities
• 45 biodiesel plants with dedicated capacity of 180 MGY
• Convertible capacity is estimated at 110+ MGY• 54 facilities under construction or under
consideration in 30 states with an additional 600+ MGY capacity (2005)
• 200 projects under consideration with over 2.5 BGY
• 18 under consideration in Iowa
Value Added Agriculture Program
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Biodiesel Capacities cont.
• 5 newest mid-western plants add 150 MGY
• New plants range in size from 1-60 MGY
Value Added Agriculture Program
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U.S. Biodiesel Production
Value Added Agriculture Program
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Balancing Demand and Capacity
0100200
300400
500600
700800900
MGY
1999 2001 2003 2005 2007
Year
Building Capacity
ProposedCapacity
Dedicated andConvertibleCapacity Production
Value Added Agriculture Program
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Feedstock
• Vegetable Oil– Seed Crushing – 29 Billion Pounds a Year
• Animal Fat– Animal Harvesting– 12 Billion Pounds a Year
Value Added Agriculture Program
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Feedstock Uses• Human Food• Baking or Frying• Salad or Cooking Oils • Margarine oils • Confectionary fats • Animal feed, Lubricants, Paints, Varnish, Resins,
Plastic and Soap • 38 Billion Pounds a Year
Value Added Agriculture Program
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Feedstock Carryover
• 2.5 Billion Pounds Vegetable Oil– 1.8 Billion Pounds Soybean Oil– 0.7 Billion Pounds Corn, Palm, Cottonseed &
Others
• 0.4 Billion Pounds Animal Fats– 0.36 Billion Pounds Inedible Tallow & Yellow
Grease – 0.04 Billion Pounds Edible Tallow & Lard
Value Added Agriculture Program
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Feedstock to Biodiesel
• 2.9 Billion Pounds of Oils or Fats
• 7.65 Pounds of Oils or Fats per Gallon
• 379 Million Gallons of Biodiesel per Year
• 1.5 gallons/ bushel of soybeans
Value Added Agriculture Program
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$1.53$1.91
$2.30$2.68
$3.06$3.44
$1.25
$1.75
$2.25
$2.75
$3.25
$3.75
$0.20 $0.25 $0.30 $0.35 $0.40 $0.45
Feedstock Price $ /Pound
Bio
dies
el F
eest
ock
Cos
t $
/Gal
lon
Value Added Agriculture Program
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Soybean Oil (crude/de-gummed) Central IL Percentage of time in the Price Range
from March 2003 to June 2006
0.0%
10.0%
20.0%
30.0%
20-22 22-24 24-26 26-28 28-30 30-32 32-34
Price in Cents per Pound
Value Added Agriculture Program
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U. S. Average B 100 Biodiesel Percentage of Time in the Price Range
from March 2003 to June 2006
32.3%
13.5% 12.9%15.5%
0.0%
6.5%
19.4%
0.0%5.0%
10.0%15.0%20.0%25.0%30.0%35.0%
$2.0
0-$2
.20
$2.2
0-$2
.40
$2.4
0-$2
.60
$2.6
0-$2
.80
$2.8
0-$3
.00
$3.0
0-$3
.20
$3.2
0-$3
.40
Value Added Agriculture Program
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Biodiesel Pressures Feedstock Price
• New Demand on Oil & Fats will Increase Feedstock Price
• Which Use will be Priced Out of the Market?• Human Uses – Animal Feed – Industrial• Or Biodiesel
Value Added Agriculture Program
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Value Added Agriculture Program
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Value Added Agriculture Program
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Will supplies adjust?• We won’t run out of vegoil/fats
– In the short run it may look like we will– Extreme volatility with price run-up likely– Food end users making plays already
• Price will ration
• Oil seed producers will innovate
• High prices make other feedstock sources feasible
• Palm is most likely to expand
Value Added Agriculture Program
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Soy meal Constraint?
• DDG is huge competitor 12.32 MMT in ’05/’06
• Domestic soy meal use could drop
• Meal price will become global competitive (as in very cheap)
• Crush for oil and price meal for clearance– Crush margins will eventually suffer
Value Added Agriculture Program
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Scenario Planning• Three studies• <$120 meal• $.35 oil• Little impact on bean price• Feed protein glut• New meal volumes must be exported
Consider $40 crude petroleum
Value Added Agriculture Program
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Is US Soy Competitive?
• Palm oil yields in Malaysia about 3.9MT/ha• Canola oil yield in EU about 1.34 MT/ha• Soy oil yield in US is about 0.55 MT/ha• Sunoil yield Ukraine is about 0.42 MT/ha
Value Added Agriculture Program
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Business Model• Close to Market or Close to Feedstock?• Global, National or Local market?• Strategic partner financial integration?• Back integrated?• Forward integrated?
Look for “Platform Plays” to emerge
Value Added Agriculture Program
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Stand-alone Business Model• Refineries never remain stand-alone
• Business plan built on today’s economics means certain death
• Find ways to integrate key chain functions
• Must be very strategic on location
• Roll-up or M&A target strategy?
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Virtually Integrated
• Partnered with REG or other aggregators
• Vested strategic partners
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Full Equity Model
• Seattle waste grease plant– No borrowed money– Novel tech– Local market
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Global Business Model
• Dow Halterman Houston, Texas– Deep water– Toll processor (World Energy)– Produce in EU and US– Source and sell globally
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Chain Integrated Business Model• Dreyfus in Claypool, Indiana
– Bean origination– 50 mil bushel crush– 80 mil gallon biodiesel– Trans/Log issues handled– Long-term off-take agreements– Import/Export capability
Dreyfus is claiming its position among the ABCD’s by adding Biodiesel into the processing mix.
Value Added Agriculture Program
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Lender Perspective• Loads of uncertainty
– Concentrated feedstock sellers– Renewal of the blender’s credit– Product demand
• Bundle working capital with term• They want in but on their terms
– 7 to 10 year term on 20 year life facility?– Cash sweep on operating profits to pay down half the debt in
three years.
Value Added Agriculture Program
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Lender PerspectiveWorking Capital
• May need ten times ethanol – depends on biz model– 15 to 40 cents per capacity gallon
• Some recommend one year debt reserve– Shutdown scenarios
• Consider catastrophic cash flow scenarios – ($40 crude)– $.35 cent vegoil– Supply interruption– Transportation interruption
Value Added Agriculture Program
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Large Investor Perspective• Very Risky. (need higher baseline IRR)• Hate novel technologies• Few companies working on demand side• Must be a low cost producer • Must have off-take truly tied in• Loss of subsidies would be fatal• Experienced management tough to find
Tons of people doing projects; very few forming businesses
Value Added Agriculture Program
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Risk Management• Cross hedges difficult and risky
– Basis risk is tough – ($1.20 basis shift in ethanol vs. Nymex)
• Risk premiums high in many off take agreements– Align for supply…stay nimble on price– Know you can get it gone
• Risk premiums high for feedstock agreements– Align for supply…stay nimble on price– Know you will have feedstock
Value Added Agriculture Program
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Risk
• Few/strong players control feedstock• Massive global growth• US is not (nor will be) least cost• Market drivers are tenuous (sulfur)• Fighting the food market for feedstock (moral dilemma)
Tons of people wanting to make biodiesel; few are working on demand
Value Added Agriculture Program
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Certainty??
• Feedstock issues are paramount
• Vegoil price will rise
• Rail tanker car crunch
• New crush requires meal exported
• Meal price will drop
• Stand-alone refineries will be vulnerable
Value Added Agriculture Program
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Contact Us
For more information:ISU Value Added Ag Program1111 NSRICAmes, IA 50011515-294-0588www.iavaap.orgwww.agmrc.org
Value Added Agriculture Program
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Questions About Technical Issues?
• www.biodieselbasics.com, or contact • Rudy Pruszko
Center for Industrial Research and Service (CIRAS)Iowa State University ExtensionNICC Town Clock Center680 Main StreetDubuque, Iowa 52001-6818Phone: 563-557-8271 ext [email protected]
