Page 1

INSIDE: ETHANOL INTELLECTUAL PROPERTY EVOLVES FEBRUARY 2012

Plus Hedging: Vital in Risk Management, Complex in Execution Page 35

Certifying Ethanol for Export to the EU Page 47

www.ethanolproducer.com

Golden

Opportunities

Corn Oil Renders New Synergies for Ethanol and Biodiesel Page 40


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contents

FEBRUARY issue 2012 VOL. 18 ISSUE 2

features 34

RISK MANAGEMENT Pieces of the Puzzle

Hedging strategies have evolved in the ethanol industry By Holly Jessen

DEPARTMENTS 6

Editor’s Note

Effective Outreach By Susanne Retka Schill

7 Ad Index 10 The Way I See It The Power of Pride and Passion By Mike Bryan

11 Events Calendar

Upcoming Conferences & Trade Shows

12 View From the Hill The ILUC Debate,

Four Years Later By bob dinneen

14 Drive

40

CORN OIL Golden Opportunities

Corn oil presents potential ethanol, biodiesel cooperation, co-location opportunities By Holly Jessen

Reaping the Benefits of

a Strong Biofuels Industry By tom buis

16 Grassroots Voice

Ethanol’s Octane Provides

Proactive Opportunity By Brian Jennings

18 Europe Calling

A Pragmatic Approach

to Fuel Taxation By Rob Vierhout

20 Business Matters

The Ethanol IP Evolution By Camille L. Urban

22 Business Briefs

46

SUSTAINABILITY Certifying Sustainability

Exporting ethanol to EU requires a new certification step By Kris Bevill

24 Commodities Report 28 Distilled 52 Marketplace

INSIDE: ETHANOL INTELLECTUAL PROPERTY EVOLVES FEBRUARY 2012

Plus

Ethanol Producer Magazine: (USPS No. 023-974) February 2012, Vol. 18, Issue 2. Ethanol Producer Magazine is published monthly. Principal Office: 308 Second Ave. N., Suite 304, Grand Forks, ND 58203. Periodicals Postage Paid at Grand Forks, North Dakota and additional mailing offices. POSTMASTER: Send address changes to Ethanol Producer Magazine/Subscriptions, 308 Second Ave. N., Suite 304, Grand Forks, North Dakota 58203.

4 | Ethanol Producer Magazine | FEBRUARY 2012

Hedging: Vital in Risk Management, Complex in Execution Page 35

Certifying Ethanol for Export to the EU Page 47

www.ethanolproducer.com

Golden

Opportunities

Corn Oil Renders New Synergies for Ethanol and Biodiesel Page 40

On The Cover Clayton McNeff is co-creator of the McGyan Biodiesel Process, a unique catalytic reactor, that can convert corn oil and a wide range of other low-grade and prime feedstocks to biodiesel. PHOTO: MCGYAN


editor’s note

In need of a morale booster? Mike Bryan’s column this

Effective Outreach Susanne Retka Schill, Editor

month is a good exposition of the passion, drive and perseverance that the ethanol industry has exhibited over the years. Building this industry has never been an easy sell with the public, he reminds us. There may be a trend emerging in the ethanol industry to communicate with and engage the general public more effectively. In the past several months, I have noticed more ethanol plant managers are being quoted in their regional daily papers. From the stories I see, I can’t tell if the contact was initiated by the newspaper or the plant managers, but it is effective. Any newspaper worth its salt will jump at the chance to localize the national news. When an issue comes up that lends itself to comment, I urge you to contact your local newspaper and explain that you’d like to discuss the issue and how it impacts your business and the community. Take advantage of our industry organizations, too, to get some background information and facts to use. And be honest—if the reporter asks a question you don’t know the answer to, simply say you’d rather not comment since you aren’t well-versed on that topic. Mike Jerke, general manager of the Benson, Minn., ethanol plant, took a different approach. When he saw an article that troubled him about an organization’s stance, he wrote to the head of the organization. The letter is brief, courteous but pointed. We share that letter below with the readers of Ethanol Producer Magazine.

sretkaschill@bbiinternational.com

For industry news: www.ethanolproducer.com or Follow Us:

twitter.com/EthanolMagazine

LETTER Mike Jerke, general manager of Chippewa Valley Ethanol shared the following letter he sent to Rob Green, executive director of the National Council of Chain Restaurants, saying, “It’s one thing to be beaten up by Big Oil, it’s another to have Appleby’s, Chilis, McDonalds, IHOP and Cracker Barrel pile on.” He added that he has not yet gotten answers to the questions he poses. Dear Mr. Green, I read with concern the article by Sasha Orman on the Food and Drink Digital website, “National Council of Chain Restaurants Takes on Ethanol,” regarding your association’s position on ethanol from corn. I would appreciate your expounding on the quote attributed to you in the article that states in part, “These subsidies have artificially increased the price of corn, which in turn has driven up costs for restaurants and the customers they serve.” What costs, specifically, are higher for the restaurants you serve? Recognizing that ethanol now displaces 10 percent of the gasoline supply that would otherwise be derived from petroleum sources, studies have estimated that the average American household is saving approxi-

Correction

The story “Good Digestion,” in the January issue of EPM, incorrectly stated the anticipated annual production of biomethane at the Heyburn, Idaho, anaerobic digester owned by Natural Chem Group LLC. Once upgraded, it will produce about 2 million MMBtu of pipeline quality biomethane. 6 | Ethanol Producer Magazine | FEBRUARY 2012

mately $200 to $400 per year because of ethanol. That savings represents dollars that can be spent at the establishments that make up your organization. I was especially troubled by the statement in the article that, “…the organization (NCCR) has now vowed to devise a sustained effort to address these issues and fight for reformed policies, especially once the current VEETC and the tariff expire at the end of December.” [Emphasis added.] If this is an accurate description of the NCCR’s focus there must have been a significant effort to define and quantify the perceived threat. Once again, I would appreciate your sharing what the cost to the restaurant industry is that you attribute to corn-derived ethanol. As misguided as your policy position on ethanol is, your position on commodity speculation is right on. I would submit that is the real issue. Chippewa Valley Ethanol Co. is owned by 900-plus members that have a direct or indirect connection to production agriculture. They will, I am sure, be keenly interested in why the National Council of Chain Restaurants, which represents many eating establishments they frequent, has taken such a strong position against farming, national energy independence and rural economic development. Mike Jerke General Manager Chippewa Valley Ethanol Company Benson, Minn.


AdIndex

EDITORIAL EDITOR

54

Susanne Retka Schill sretkaschill@bbiinternational.com

ASSOCIATE EDITORS

3

Holly Jessen hjessen@bbiinternational.com Kris Bevill kbevill@bbiinternational.com

2012 International Biomass Conference & Expo 2012 International Fuel Ethanol Workshop & Expo

51

2012 National Ethanol Conference

33

Ashland Hercules Water Technologies

15

BetaTec Hop Products

29

BrownWinick Law Firm

32

Buckman

48

Burns & McDonnell

55

CHS Renewable Fuels Marketing

Tom Bryan tbryan@bbiinternational.com

11

Cloud/Sellers Cleaning Systems

SALES

22

CPM Roskamp Champion

42

Fagen Inc.

37

FCStone, LLC

38

Freez-it-Cleen

COPY EDITOR Jan Tellmann jtellmann@bbiinternational.com

ART ART DIRECTOR Jaci Satterlund jsatterlund@bbiinternational.com

GRAPHIC DESIGNER Lindsey Noble lnoble@bbiinternational.com

PUBLISHING CHAIRMAN Mike Bryan mbryan@bbiinternational.com

CEO Joe Bryan jbryan@bbiinternational.com

VICE PRESIDENT

VICE PRESIDENT, SALES & MARKETING Matthew Spoor mspoor@bbiinternational.com

EXECUTIVE ACCOUNT MANAGER Howard Brockhouse hbrockhouse@bbiinternational.com

SENIOR ACCOUNT MANAGER Jeremy Hanson jhanson@bbiinternational.com

ACCOUNT MANAGERS

19 & 56

Chip Shereck cshereck@bbiinternational.com Marty Steen msteen@bbiinternational.com Bob Brown bbrown@bbiinternational.com Andrea Anderson aanderson@bbiinternational.com Dave Austin daustin@bbiinternational.com

CIRCULATION MANAGER Jessica Beaudry jbeaudry@bbiinternational.com

Senior Marketing Manager John Nelson jnelson@bbiinternational.com

EDITORIAL BOARD Mike Jerke, Chippewa Valley Ethanol Co. LLLP Jeremy Wilhelm, Cilion Inc. Mick Henderson, Commonwealth Agri-Energy LLC Keith Kor, Pinal Energy LLC Walter Wendland, Golden Grain Energy LLC Neal Jakel Illinois River Energy LLC Bert Farrish Lifeline Foods LLC Eric Mosebey Lincolnland Agri-Energy LLC Steve Roe Little Sioux Corn Processors LP Bernie Punt Siouxland Energy & Livestock Co-op

Customer Service Please call 1-866-746-8385 or email us at service@bbiinternational.com. Subscriptions to Ethanol Producer Magazine are free of charge to everyone with the exception of a shipping and handling charge of $49.95 for any country outside the United States, Canada and Mexico. To subscribe, visit www.EthanolProducer.com or you can send your mailing address and payment (checks made out to BBI International) to: Ethanol Producer Magazine Subscriptions, 308 Second Ave. N., Suite 304, Grand Forks, ND 58203. You can also fax a subscription form to (701) 746-5367. Back Issues, Reprints and Permissions Select back issues are available for $3.95 each, plus shipping. Article reprints are also available for a fee. For more information, contact us at (866) 746-8385 or service@bbiinternational.com. Advertising Ethanol Producer Magazine provides a specific topic delivered to a highly targeted audience. We are committed to editorial excellence and high-quality print production. To find out more about Ethanol Producer Magazine advertising opportunities, please contact us at (866) 746-8385 or service@bbiinternational.com. Letters to the Editor We welcome letters to the editor. Send to Ethanol Producer Magazine Letters to the Editor, 308 2nd Ave. N., Suite 304, Grand Forks, ND 58203 or e-mail to sretkashill@bbiinternational.com. Please include your name, address and phone number. Letters may be edited for clarity and/ or space.

Please recycle this magazine and remove inserts or samples before recycling

2

Growth Energy

5

ICM, Inc.

8&9

ADVERTISING COORDINATOR Marla DeFoe mdefoe@bbiinternational.com

GENENCOR® - A Danisco Division

Inbicon

36

Indeck Power Equipment Co.

45

Johnson System, Inc.

23

Kennedy and Coe, LLC

27

Lallemand Ethanol Technology

50

Nalco Company

26

Phibro Ethanol Group

21

Pioneer Hi-Bred International, Inc.

39

Renewable Fuels Association

31

RPMG, Inc.

13

Tranter Phe

30

U.S. Tsubaki

17

Veolia Water

49

Vogelbusch USA, Inc.

44

Wabash Power Equip. Co.

43

WINBCO

COPYRIGHT © 2012 by BBI International TM

FEBRUARY 2012 | Ethanol Producer Magazine | 7


The New Ethanol. Refined, retailed, and rolling across America now.

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the way i see it

The Power of Pride and Passion By Mike Bryan

Have you ever wondered what really drives the ethanol industry? Given the challenges it has faced over the years, it would seem as though it should have been dead and buried long ago. Thirty-five years later it’s still moving forward. The progress can’t be credited to overwhelming consumer demand, ease of market penetration, lack of competition, or any of the normal things that propel most industries to success. In fact, just about every roadblock imaginable has been laid before this industry. I have concluded that it’s pure passion. Passion for what we all believe to be for the greater good and passion for a cause has a profound effect on so many people living in rural communities and the country as a whole. So just below the surface of making a profit, there is an abiding sense of honor, pride and commitment that few other industries possess, or frankly even need to succeed. I believe that without that sense

10 | Ethanol Producer Magazine | FEBRUARY 2012

of pride and passion, we would have long ago been simply another chapter in the energy history book. Instead, we’re making history, carving new innovative pathways to the world’s energy future. What began as a plan by President Carter to appease the public outrage over the Arab oil embargo, has become a national commitment that has spread globally. I doubt when President Carter called Archer Daniels Midland in 1977 and asked them to consider producing ethanol, he could have imagined what the real outcome of that call would be. Those who have witnessed the grand opening of an ethanol plant and seen the pride well up in the eyes of farmers who struggled, sometimes for years, to find funding to build the plant, understand what I mean when I use the term passion. In the formative years of this industry, the decision to build wasn’t made in the boardroom on the 50th floor, it was made in the local cafe over coffee and donuts. It wasn’t a decision based on bottom line profits, it was a decision predicated on improving the lot of those in the community and building a future for the next generation to help keep them on the farm. There are few industries indeed, that have survived and prospered solely on pride, passion and unyielding determination. Today’s ethanol industry

stands as a monument to those people who had the vision, the commitment and, yes, the passion to forge ahead when the odds were so stacked against them. As we enter a new era of public policy for this industry, I am confident that it will not only survive, but will prosper like never before and move to the next level of excellence. The billions of dollars that America’s ethanol industry pumps into the economy and the contribution it makes to energy security and the wellbeing of rural communities will never be overshadowed by a few self-serving naysayers. The Renewable Fuels Association’s National Ethanol Conference in Orlando, Fla., Feb. 22-24,will once again demonstrate to the world the vibrancy and passion of the ethanol industry. We’ll see you there. That’s the way I see it!

Author: Mike Bryan Chairman, BBI International mbryan@bbiinternational.com


events calendar

2012 Fuel Ethanol Workshop & Expo Speaker Presentation Deadline Feb. 10 Don’t Miss Your Opportunity to Present Call for Speakers The FEW is the ethanol industry’s largest and longest running annual exchange of ideas, progress and discovery. Don’t miss this unparalleled opportunity to share your knowledge and expertise with the largest assembled ethanol audience in the country.

Speakers at BBI International events enjoy: • Complimentary registration • Inclusion in both print and electronic marketing campaigns • Captive audience of key decision makers and stakeholders • Opportunity to appear in targeted ‘panel preview’ marketing efforts • Exposure to message through post conference presentation

Select from Four Presentation Categories: Track 1: Production and Operations Track 2: Leadership and Financial Management Track 3: Coproducts and Product Diversification Track 4: Cellulosic Ethanol 866-746-8385 speakers@bbiinternational.com www.fuelethanolworkshop.com

National Ethanol Conference February 22-24, 2012 Gaylord Palms Resort | Orlando, Florida Since 1996, the RFA’s National Ethanol Conference has been recognized as the preeminent conference for delivering accurate, timely information on marketing, legislative and regulatory issues facing the ethanol industry. With numerous networking opportunities, pivotal business meetings are conducted that bring together some of the most influential companies and organizations in the ethanol industry.

Tankman™

(202)315-2466 | www.nationalethanolconference.com

Sellers 360

International Biomass Conference & Expo April 16-19, 2012 Colorado Convention Center | Denver, Colorado

A New Era in Energy: The Future is Growing

Organized by BBI International and coproduced by Biomass Power & Thermal and Biorefining Magazine, this event brings current and future producers of Bioenergy and biobased products together with waste generators, energy crop growers, municipal leaders, utility executives, technology providers, equipment manufacturers, project developers, investors and policy makers. It’s a true one-stop shop—the world’s premier educational and networking junction for all biomass industries. Presentation ideas are being accepted online.

Jumbo™

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International Fuel Ethanol Workshop & Expo June 4 -7, 2012 Minneapolis Convention Center | Minneapolis, Minnesota

Evolution Through Innovation

Now in its 28th year, the FEW provides the ethanol industry with cutting-edge content and unparalleled networking opportunities in a dynamic business-to-business environment. As the largest, longest running ethanol conference in the world, the FEW is renowned for its superb programming—powered by Ethanol Producer Magazine. Presentation ideas are being accepted online through Feb.10.

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FEBRUARY 2012 | Ethanol Producer Magazine | 11


view from the hill

The ILUC Debate, Four Years Later By Bob Dinneen

Four years ago, the biofuels industry was boorishly introduced to the theory of indirect land use change, or ILUC. Timothy Searchinger’s now infamous article in the February 2008 edition of Science magazine boldly suggested increased corn ethanol production in the United States would lead to massive deforestation and conversion of grassland in nations halfway around the world. These hypothetical land conversions, he proffered, would release large amounts of stored carbon, indirectly making ethanol’s carbon footprint twice as bad as gasoline’s. We knew it was a crazy theory four years ago. But it seems even crazier today, as the understanding of ethanol’s impact on land use has significantly progressed over the past four years. The scientific community has better data, improved modeling tools, and a better appreciation of the uncertainty and complexity involved in ILUC analysis. But, above all, they have the benefit of some experience and hindsight. Real world data show that Searchinger was dead wrong in his predictions that ethanol expansion would cause U.S. farmers to plant fewer soybean acres, or that they would “…directly plow up more forest or grassland.” In fact, soybean acreage increased to record levels in 2008, 2009 and 2010. And a

12 | Ethanol Producer Magazine | FEBRUARY 2012

recent report from USDA shows U.S. grassland has increased to its highest level since 1964 and forestland is at its highest point since 1978. Meanwhile, total U.S. cropland has dropped to its lowest level since USDA began collecting data in the 1940s. From 2002 to 2007 alone, cropland dropped by 34 million acres, or nearly 8 percent (incidentally, ethanol production tripled during that period). Empirical data also prove wrong Searchinger’s notion that “higher prices triggered by biofuels will accelerate forest and grassland conversion” in South America. Data from Brazil’s Ministry of Science and Technology show dramatic reductions in Amazon deforestation over the past five years. In fact, 2010 saw the lowest level of deforestation since the government began collecting the data in 1988. Academics have recently begun to examine this empirical data to scientifically test the Searchinger hypothesis. One recent study, led by Michigan State University Professor Bruce Dale, used a “bottom-up, data-driven, statistical approach,” to determine that biofuel production in the United States through 2007 “probably has not induced any indirect land use change.” Researchers at Oak Ridge National Laboratory similarly found “…minimal to zero indirect land use change was induced by use of corn for ethanol over the last decade.” The Oak Ridge findings are based on a rigorous examination of empirical data from the 2001-‘08 time period, a span in which U.S. ethanol production more than quadrupled. While methods to empirically verify the past occurrence and magnitude of

ILUC continue to improve, the economic models used to predict potential future ILUC also are being refined. For instance, recent updates and improvements to Purdue University’s GTAP model resulted in a dramatic reduction of predicted ILUC emissions. In the latest Purdue analysis, the corn ethanol ILUC factor was found to be 14 grams CO2 equivalent per megajoule (g/MJ), compared to the value of 30 g/MJ used by California regulators and the EPA. A 2011 analysis conducted for the European Commission by the International Food Policy Research Institute placed the corn ethanol ILUC factor at 10 g/MJ. Contrasting these latest estimates with Searchinger’s outrageous value of 104 g/MJ shows his worst-case analysis was simply out of touch with reality. Unfortunately, advancements in the science of ILUC have not been mirrored by improvements in biofuels regulations that penalize ethanol for hypothetical ILUC emissions. California and EPA continue to rely on outdated and inflated estimates of ILUC, to the detriment of our industry. As highlighted by U.C. Berkeley economist David Zilberman at a recent Coordinating Research Council workshop (which RFA co-sponsored), the current regulatory treatment of ILUC is “pretentious,” “shifts attention from real problems,” and “creates uncertainty for investors.” We couldn’t agree more. And that’s why RFA continues to push for improvements in both the science and the policy of ILUC. Author: Bob Dinneen President and CEO of the Renewable Fuels Association (202) 289-3835


DRIVE

Reaping the Benefits of a Strong Biofuels Industry By Tom Buis

We are still at the beginning of the new year but, as expected, ethanol critics are wasting no time in attacking us. Last year, our opponents blocked our efforts to reform the blenders tax credit and open the transportation fuels market to true competition. Now they are focusing on the renewable fuel standard (RFS), which serves as a crucial support for the ethanol market. The RFS was enacted by a bipartisan Congress as part of the 2005 Energy Policy Act, and expanded in 2007 under the Energy Independence and Security Act. The RFS has been the single most effective tool at producing the only largescale, commercially viable alternative to gasoline refined from oil—ethanol. Today, just four years into what is defined as a 15 year plan, we are on target to reach the 15 billion gallon threshold from grain-based ethanol. And with a continued commitment to the RFS, we can achieve the 36 billion gallon goal with cellulosic and advanced biofuel. But, we must stick to the plan. Abandoning the RFS now would be a step backward. It would put OPEC further in control of our economy and perpetuate our addiction to foreign oil—an addiction that has significantly impacted our

14 | Ethanol Producer Magazine | FEBRUARY 2012

national economy and our geopolitical standing. Over the last 40 years, we’ve spent trillions of dollars importing oil, often from nations that are corrupt, politically unstable or outright hostile to U.S. interests. We have been at constant war in the Middle East for the past 20 years for access to oil, at a cost of untold trillions in taxpayer dollars, the loss of more than 6,000 soldiers and creation of a whole new class of wounded warriors, thousands of whom will need long-term care funded by our government. The intent of Congress when it wrote the renewable fuel standard was to grow an American fuels industry that would help us break free from this addiction and its dire consequences. In fact, the RFS is the only national energy policy in place designed to reduce our dependence on foreign oil through the increased use of biofuel. We can accelerate our progress toward reaching the RFS through the widespread use of E15 and installation of flex-fuel pumps. Moving the nation to E15 will create 136,000 new jobs and will reduce carbon emissions the equivalent of taking 1.35 million cars off the road—and reduce the need to import 7 billion gallons of oil a day. And, a full move to E15 will send the right signals to investors, creating the market that will drive the growth and commercialization of cellulosic ethanol— ethanol produced from biomass feedstock, such as citrus waste, wood waste or corn stover—which is nearing commercial

viability. Today, several leading grain ethanol makers are nearing market-scale production for cellulosic ethanol and with the right market signals we will continue to see more producers enter the market. The cellulosic ethanol industry will create significant jobs for rural communities, help deliver energy security to the U.S. and reduce harmful emissions in the air. The U.S. DOE’s Argonne National Laboratory found that cellulosic ethanol promises to reduce carbon emissions by 86 percent compared to gasoline. While it may take some time to bring all the pieces together, we are well on our way to reaping the economic and national security benefits of a strong, domestic biofuels industry. A strong commitment to the RFS and an open fuels market will strengthen our energy security, generate more U.S. jobs that can’t be outsourced and improve our environment.

Author: Tom Buis CEO, Growth Energy (202)545-4000 tbuis@growthenergy.org


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GRASSROOTS vOICE

Ethanol’s Octane Provides Proactive Opportunity By Brian Jennings

Over the past 25 years, the American Coalition for Ethanol has recognized the need to be nimble and adapt tactics in pursuit of our mission to make American ethanol the consumer fuel of choice. In 1987, our initial emphasis was to educate legislators in a few core states and sponsor ethanol-fueled dirt track races to familiarize mechanics and gas station owners with ethanol’s high-octane performance. Those efforts soon expanded to provide desperately needed policy leadership at the federal level and to educate petroleum marketers nationwide about the benefits and blending economics of ethanol. Indeed, ACE took the initiative to be the first group to support enactment of a renewable fuels standard (RFS) in Congress and to sponsor studies on midlevel ethanol blends such as E30 which led to blender pump promotion. In 2012, much of our focus will pivot to states to help ensure the remaining hurdles to E15 use are cleared. This will involve working with other groups to change laws and regulations at the state level and proactively promoting the benefits of E15 for consumers and petroleum marketers. We can and will apply the lessons we learned from the expansion of E10 use in the states to help make the transition to E15.

16 | Ethanol Producer Magazine | FEBRUARY 2012

Congressional gridlock prevented the enactment of ethanol legislation last year, but that doesn’t mean federal energy policy stood still. To the contrary, President Obama rode herd over two landmark energy policy changes in 2011, rules controlling emissions from coal-fired power plants and proposed aggressive new fuel economy standards (corporate average fuel economy, or CAFE rules) for automobiles. Given the ongoing partisan bickering and legislative logjam in Congress, which will likely worsen in this presidential election year, ACE will play an active role in the CAFE and other key federal rulemakings in 2012. The new CAFE standards apply to light-duty vehicles beginning in model year 2017, requiring a nationwide average of 54.5 miles per gallon by model year 2025. While the automakers agreed to this overall fuel savings goal in negotiations with the Obama administration, it will nevertheless be very challenging for them to meet. In fact, unless refiners are compelled to clean up their fuel in tandem with new CAFE rules, automakers, at no fault of their own, will be unable to meet the new fuel economy standards and keep the air we breathe clean and safe. The reason is aromatics, which are classified as hazardous air pollutants. This is where ethanol enters the picture, as the cleanest and most affordable form of octane on the planet. ACE will make the case in the CAFE and other rulemakings this year that if ethanol’s

clean octane is allowed to replace the toxic, expensive, and energy-inefficient aromatics (benzene, toluene, xylene) that refiners use to add octane to fuel, the resulting benefits will be substantial—reduced oil use, cleaner and safer air, and more demand for American-made ethanol. Replacing benzene, toluene and xylene in transportation fuel with ethanol’s clean octane would be analogous to getting the lead out of gasoline and would set up the predicate for how we can someday fulfill a goal many in the industry have for widespread use of E30 or similar midlevel blends. Tactically, focusing on these rulemakings allows ACE to go on offense for ethanol, doing an end-run on Congress in a way that could have a profound impact on the future of ethanol use. That is not to say we’re ignoring Capitol Hill. Indeed, as we’ve indicated numerous times already, ACE and other groups will work together to protect the RFS in 2012 and address other legislative priorities. In that spirit, I’ll close this month by encouraging everyone to participate in ACE’s upcoming grassroots fly-in to Washington, D.C., scheduled for March 2728. I hope to see you in D.C. next month.

Author: Brian Jennings Executive Vice President, American Coalition for Ethanol (605) 334-3381 bjennings@ethanol.org


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Europe Calling

A Pragmatic Approach to Fuel Taxation By Robert Vierhout

One would think that a relatively easy way for governments to promote biofuels would be to tax biofuels less than fossil fuels—avoid lengthy debates on mandates and simply change the taxation structure in such a way that biofuels will have by far the competitive edge over fossil fuel. Unfortunately, it isn’t that straightforward to create such a level playing field in the EU. Problem 1: Not only is an adjustment needed between taxing fossil fuels and biofuels, but also to balance the fuel market between diesel and gasoline. Under existing EU law, member states need to respect minimum levels of fuel taxation. These EU minimum levels are different between diesel (33 eurocents per liter) and gasoline (36 eurocents per liter). Not a huge difference, but member states can play with the tax level to promote one over the other and also to willingly distort the internal market. For example, diesel/ gasoline taxes in eurocents per litre in Luxemburg is 32/46, in Germany, 47/66, whereas in the UK, 66/66. The highest tax for gasoline is in the Netherlands (80 eurocents) which has a diesel tax of only 42. Clearly, there are several other taxes that influence the consumer’s choice, but the fuel tax is decisive. Problem 2: Changing the taxation

18 | Ethanol Producer Magazine | FEBRUARY 2012

structure at EU level seems often more difficult than changing the EU treaty. Several states see fiscal change as intervening in what is considered, deep down, a national prerogative. The UK is a case in point. Equalizing the tax level in the entire EU would help in obtaining a balanced fuel market and undoing competition distortion—something the UK could only support. But the fact that Europe is determining the level of taxation nationally (even if these are indirect taxes) is unpalatable for the Brits. Problem 3: Some EU member states gain a lot of money by keeping taxes on fossil fuel artificially low with the purpose either to support the trucking sector through low diesel prices or to boost sales of diesel to nonresidents. Take Luxemburg (500,000 inhabitants) luring lorries to their country with low fuel taxes. The result is that the neighboring country, Germany (75 million inhabitants), is losing revenues big time by having a diesel tax 15 eurocents per liter higher. The weird thing is that Germany doesn’t like the taxation proposal because the diesel car manufacturers, a major political force in Germany, fear loss of market share if taxes become more equal. Giving in to the car lobby means hundreds of millions of euros per year less tax income for the German state. The estimate is that for Luxemburg the extra income per capita is around 1,400 Euro per year. The present energy taxation law results in perverse effects causing shortages of diesel, surpluses of gasoline,

discrimination of biofuels when taxed as fossil fuels and loss of government income when taxes are unequal in neighboring countries. So, change is needed, but any substantial progress does not seem to be happening. Since April, member states are trying to agree on a more balanced tax law. After a delay of more than a year before the bill was put to the member states, the Polish president of the EU spent most of the past six months derailing the proposal, because it runs counter to Poland’s coal policy. All hopes are now set for the first half of this year when the Danes hold the presidency. Even though a brand new government and not very experienced, the Danes want a pragmatic approach: Focus the law on what really will deliver a change in European transport fuel consumption by aligning taxation of diesel and gasoline and forget about all the other goodies, such as introducing a CO2-based tax, taxation on energy density or a higher tax on coal. Such a pragmatic approach would resolve the perversities we are having with the present law. Even though it would not be the best possible outcome for biofuels in general, it would be still beneficial for ethanol in the long run. Fiscal equalization between fossil fuel will benefit gasoline and, hence, ethanol. Author: Robert Vierhout Secretary-general, ePURE Vierhout@epure.org


business matters

The Ethanol IP Evolution By Camille L. Urban

Working with a firm that provides services to numerous ethanol plants provides an interesting outside/in perspective that has provided an opportunity to witness a present-day evolution.

Many ethanol plants were the result of a vision held by a group of investors, a design/build plan that included a license to a specified process, and a lot of hard work. But it wasn’t long until the operators of these plants began to add components to the design/build and to tweak conditions of the licensed process to produce ethanol better, faster, cheaper. The evolution includes equipment and processes developed for production of value-added byproducts to extend the ethanol profit. During the past few years, the role of the process and equipment providers began to change, as well. Now, design/build providers design and build in cooperation with the ethanol company, rather than provide a turnkey, nearly take-itor-leave it project. But this evolution is not without rough patches. Now, the operators of the plants make adjustments, add components and tweak conditions of the processes provided for turnkey plants. A few of these improvements rise to the level of invention. And that raises an interesting question: Who owns the innovations made by those using the processes or equipment, when the original process or equipment was provided by another? One would think that an entity supporting and/or funding the innovation (the ethanol plant) would be the hands20 | Ethanol Producer Magazine | FEBRUARY 2012

down rightful owner, right? But the combination of inventor’s rights under United States patent law and the fine print in some of the provider contracts may obliterate that assumption. Inventors in the United States are the owners of their inventions unless a) there is a contract in place stating otherwise or, b) the inventor is an employee who invented something that is within the scope of his employment, in which case the employer owns the invention. For comfort and certainty related to scope of employment, it is advisable to include invention assignment obligations in all employment contracts. Many of the provider contracts include an assignment provision that requires assignment to the provider of any improvements made by the plant to the process or equipment. You may want to read that sentence again. Technically, that means the provider owns the improvement and could exclude the very plant that developed the innovation from using it. You may want to dig out that agreement before you invest in improvements. If such a clause exists, the provider should be willing to pay for some of the development costs. More importantly, the process provider should agree to a royalty-free and perpetual license back to the plant. Many provider contracts have addressed this issue by including just such a license. The provider retains commercial benefit of the plant’s improvement; the plant retains a right to use. What’s both wonderful and terrible about innovation, though, is that it is often the result of collaboration, with two

entities working toward, and finding, a solution to a problem. Without contractual obligations to the contrary, under United States patent law an invention resulting from such collaboration will be deemed jointly invented. This means either joint inventor may sell or license its interest to any other party it wishes and could result in no competitive advantage. Even if both parties wish to out-license the invention, there will quickly be a race to the bottom for royalty rates. What’s the remedy for this unfortunate situation? Careful drafting of an agreement BEFORE the collaboration begins is crucial to a happy ending. The terms should cover the uses allowed for each party and structure accounting as necessary. Further, the agreement must address later improvements made by only one of the parties. It is important to remember that inventions and innovations are the logical and beneficial result of evolution. If you wish to enjoy the benefits of your own evolution in the ethanol production world, however, checking current agreement terms or drafting addendums may be a necessary evil. Author: Camille Urban

Attorney, Patents, Trademarks and Copyrights BrownWinick Law Firm (515) 242-2451 curban@brownwinick.com


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Trucking Manager Ralph Roberts joins Lincoln Energy as general manager, transportation, overseeing all operation aspects related to the trucking fleet.

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Biofuels Trader Tommy Rose brings a background as an ethanol trader to Lincoln Energy.

Greenville, S.C.,based Lincoln Energy Solutions recently hired three new managers to bring industry expertise to the growing biofuels solutions supplier. Larry Breeding joins Lincoln as a fuel specialist/ product manager with experience in biodiesel production and engineering. Ralph Roberts has oversight for safety procedures, policies, customer reviews, staff management and fleet maintenance in the company’s truck fleet. Tommy Rose is responsible for bulk ethanol and biodiesel sales, serves as renewable identification number coordinator and manages the hedge desk.

John Castle has been appointed president and CEO of Aventine Renewable Energy Holdings Inc., having served as the interim CEO since August. He joined the company as chief financial officer in April and on July 20 was promoted to executive vice president and chief operating officer. The company also appointed Calvin Stewart as chief financial officer, having served as interim CFO since August. 800-366-2563 | WATERLOO, IOWA

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ZeaChem Inc. added Nancy Buese as the third independent member and audit chair on its board of directors. She brings 20 years of financial leadership to the board and currently serves as senior vice president and chief financial officer of Denver-based MarkWest Energy Partners LP.

CPM Roskamp Champion 22 | Ethanol Producer Magazine | FEBRUARY 2012

Tech Support Chase Lane brings several years experience working at a Texas ethanol plant to his new position with Ferm Solutions.

Chase Lane has joined the technical optimization team at Ferm Solutions Inc. He will serve in the Southwest, including Texas, southwest Kansas, Colorado and New Mexico. He joins the ethanol industry service provider with several years experience at the former Hockley County Ethanol plant in Levelland, Texas.

John Harangody has been promoted to chief operating officer of Houston-based Atlas Commodity Markets. He most recently held the same position with Atlas Grain in Chicago and previously served as director of commodity products for CME Group. “Coming changes in the regulatory environment for OTC derivatives present challenges, but also significant opportunities,” Harangody said. “Atlas is in a strong position to assist our customers to successfully adapt to new market structures.” Marquis Management Services Inc. has tapped Beth Steinhour to become its director of environmental affairs. With her 21 years of experience, Jason Marquis, company president, said Steinhour will bring a new level of expertise to the regulatory and environmental compliance issues that Consultant to Director biorefineries face. “We As senior consultant believe with our plan for with Weaver Boos Consulting, Beth continued growth in the Steinhour advised biorefining industry, Beth ethanol, agrichemical is a strategic addition to and biomass facilities across Illinois and the Marquis Management the Midwest on development, permitting team,” he said. and compliance.


BUSINESS BRIEFS

Sponsored by

Mark Beemer is the new president of R3Fusion Inc.â&#x20AC;&#x2122;s ethanol division, responsible for the development and deployment of the ethanol water separation business for North America. He will oversee the manufacturing partnerships, installation arrangements and operation startup of R3Fusionsâ&#x20AC;&#x2122; patented SPaCeR, water separation and purification technology. Most recently Beemer served as chief commercial officer for Osage Bio Products and as a board member at Hawkeye Renewables LLC. Speedling Inc., specialists in feedstock propagation, named four to its biomass feedstock advisory committee. Iowa State University assistant professor of agronomy Emily Heaton focuses on best management practices for perennial energy crops, with particular emphasis on miscanthus and switchgrass. Tom Voigt, associate professor and extension specialist in crop sciences at the University of Illinois-Urbana-Champaign, leads the Energy Biosciences Institute feedstock program and North Central Sun Grant feedstock partnership in miscanthus. Lynn Sollenberger, professor of grassland science, University of Florida, specializes in the ecology and management of tall grasses for bioenergy applications. John Caveny, president of Environmentally Correct Concepts Inc., partnered with the University of Illinois in planting an on-farm miscanthus research plot in 2002, now the oldest research plot in the U.S. Speedling propagates and sells plugs of the sterile Illinois clone of miscanthus from Caveny Farm.

Poet LLC is more than 75 percent of the way to achieving its water reduction goal set in its environmental initiative dubbed â&#x20AC;&#x153;Ingreenuity.â&#x20AC;? With startup of the proprietary Total Water Recovery system at its 18th ethanol production facility, Poet Biorefining â&#x20AC;&#x201C; Chancellor (S.D.), the company has

Share your industry briefs To be included in Business Briefs, send information (including photos and logos if available) to: Business Briefs, Ethanol Producer Magazine, 308 Second Ave. N., Suite 304, Grand Forks ND 58203. You may also fax information to (701) 7468385, or e-mail it to sretkaschill@bbiinternational.com. Please include your name and telephone number in all correspondence.

now reduced water use by more than 770 million gallons per year from 2009 use. The goal is to reduce water use by 1 billion gallons annually by 2015. Chancellorâ&#x20AC;&#x2122;s Total Water Recovery System saves the plant 131 million gallons of water per year. That savings means Chancellor uses 2.6 gallons of water for each gallon of ethanol produced, down from 3.5.

Interstates Companies has earned the Safety Training and Evaluation Process Diamond status, the highest safety designation awarded by Associated Builders and Contractors Inc., for its safety performance. It is the only company to achieve this designation in each of the four chapters it belongs to, Iowa, Rocky Mountain, Cornhusker and Arizona. Headquartered in Sioux Center, Iowa, Interstates Companies specializes in turnkey electrical systems for industrial, hazardous and value-added agriculture facilities, including ethanol plants. In 2012, Lee Enterprises Consulting Inc. of Little Rock, Ark., intends to expand its services now concentrated on the biodiesel sector into the ethanol, biomass, wind, solar and geothermal sectors. â&#x20AC;&#x153;We are currently the worldâ&#x20AC;&#x2122;s largest biodiesel consulting group, and most of our consultants and strategic partners are already very involved in the other alternative fuels,â&#x20AC;? said Wayne Lee, principal owner. The groupâ&#x20AC;&#x2122;s current appraiser, environmental expert, QA experts and grant writers have backgrounds and experience in these areas, and each of the groupâ&#x20AC;&#x2122;s larger strategic partnersâ&#x20AC;&#x201D;Stoel Rives (legal), Christianson & Associates (accounting), IMA of Kansas (insurance), FCStone Merchant Services (feedstock financing), and Executive Leadership Solutions (staffing) â&#x20AC;&#x201D;already has a very significant presence in these other alternative fuels sectors.

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FEBRUARY 2012 | Ethanol Producer Magazine | 23 .$&:DVKLQJWRQ9HUWLFDOLQGG

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commodities Natural Gas Report

Natural gas price chart shows collapse Dec. 23—It is useful to step back and look at a longer timeline. The accompanying chart shows the weekly, closing natural gas price for January 2012 on the NYMEX from 2007 to Dec. 22. It’s been quite a ride! The perceived value has varied from $11.46 per million Btu (MMBtu) in June 2008 to $3.13 on Dec. 12, a 73 percent drop. The average price has been $7.20 per MMBtu, 130 percent higher than the current price. A killer combination of reduced demand and increased supply absolutely crushed prices. Natural gas prices generally rallied from 2007 through mid-2008 as the economy boomed with increasing demand from robust housing construction, strong industrial demand and rapid development of natural gas-fired electric generation. The economy fell off the cliff in mid- to late 2008 and demand destruction started the precipitous price drop.

By Casey Whelan

Prices flattened out in 2009 at about $7.50 per MMBtu as the economy stabilized. Then, supply-side shocks kicked in as the energy industry began to realize the size and scope of natural gas shale resources. We moved from a need to import to meet growing natural gas demand to concerns about excess supplies. Adding to the complexity, and facilitating price drops, was the fact that shale formations generally can be developed and operated profitably at much lower prices than traditional resources. Soft demand, strong supply and changes in natural gas production economics explain

why the market dropped by more than 70 percent in less than four years. What will the next four years bring? I doubt it will be another 70 percent drop; however, we have seen $1 in the past.

Corn Report

South American weather to impact market next Dec. 23—The grain markets observed new recent lows in December. March corn traded as low as $5.76 1/4 amidst turmoil in the EU and slowing global economy. The market began to exhibit short covering just before Christmas and was influenced by weather issues in Argentina and Brazil. Already, Argentine corn production has been forecast lower than the current USDA estimate of 29 million metric tons (mmt). Argentina’s production in 2010-’11 was 22.5 mmt. Argentina was expected to export 20 mmt corn during 2011’12 as compared to 15 mmt the previous year. The accompanying chart illustrates historical U.S. and Argentine corn exports. The cash domestic market was tighter than normal during harvest, and basis levels a year ago at some processors were 30 to 40 cents wider than this fall. Producers were re-

luctant to make sales as prices slipped from summer highs. Basis was strong as ethanol margins remained robust into the fourth quarter. The main change in the Dec. 9 USDA supply and demand report was to lower the food, seed and industrial sector by 5 million bushels due to decreased sweetner production. Carryout was 848 million bushels, up from the previous month, and down from last year’s 1.128 billion bushels. A year ago, the corn market rallied 24 cents on the mid-January USDA report as yield decreased by 1.5 bushels per acre and carryout was estimated at 745 million bushels—a 5.5

24 | Ethanol Producer Magazine | FEBRUARY 2012

BY JASON SAGEBIEL

percent carryout-to-use ratio, one of the lowest figures to date. Since then, however, the market has experienced carryout-to-use ratios under that level.


report

Regional Ethanol Prices Front Month Futures (AC) $2.183 REGION

SPOT

RACK

West Coast

$2.235

$2.650

Midwest

$2.215

$2.600

East Coast

$2.320

$2.576 SOURCE: DTN

Regional Gasoline Prices

DDGS Report

DDGS price adjusting to more normal value vs corn BY SEAN BRODERICK Dec. 23—DDGS cash prices fell again in December, as the relationship to corn returned to more normal levels, and as buyers found options such as corn gluten feed, soy and canola meals. Demand has been steady, especially in the Chicago container markets, where we see buying in advance of the Chinese New Year. Still no word on a resolution of the Chinese anti-dumping case, and all demand from there has been via containers, and not bulk, as was the case in last year’s record exports. Supply is feeling the effects of ethanol plants producing as much as possible before VEETC ends. There is no shortage of distillers grains, except for a few locations. Additionally, the marketplace is

seeing evidence of DON (Deoxynivalenol) in this year’s corn, especially around Ohio. This is affecting demand on the Eastern seaboard, especially North Carolina hog producers, who were looking for feeding options anyway due to DDGS prices. DDGS is in the fluid process of revaluing to regain lost markets when values as a percentage of corn got too high in the past 60 days. Container export demand will stay strong through the first half of January, with good demand from Mexico. Animal feeding profitability needs to stay strong to regain lost demand, and we are wondering how the expiration of the VEETC will affect plant run time and supplies.

Front Month Futures Price (RBOB) $2.687 REGION

SPOT

RACK

West Coast

$2.967

$2.881

Midwest

$2.611

$2.615

East Coast

$2.697

$2.715 SOURCE: DTN

DDGS Prices ($/ton) location

FEB 2012

JAN 2012

Minnesota

180

195

FEB 2011 165

Chicago

195

227

175

Buffalo, N.Y.

186

232

175

Central Calif.

248

260

222

Central Fla.

216

232

199 SOURCE: CHS Inc.

Corn Futures Prices Date Dec. 23, 2011

(March Futures, $/bushel)

High

Low

Close

6.21 3/4

6.14 1/2

6.19 1/2 5.95 1/2

Nov. 23, 2011

6.08

5.91

Nov. 23, 2010

4.05 1/4

3.97 1/4

4.04 3/4 SOURCE: FCStone

Cash Sorghum Prices ($/bushel) LOCATION

Ethanol Report

Ethanol prices adjust to changing parameters BY RICK KMENT Dec. 23—Ethanol and gasoline markets saw huge adjustments in December with the expected expiration of the blenders credit and export tariff. Other factors, too, kept ethanol and gasoline markets volatile. Following the expiration of December contracts and rolling to January ethanol contracts at a 32-cent-per-gallon discount during the first week in December, retail and wholesale ethanol markets started to adjust to the lower price levels. Although demand for ethanol remained strong through the end of the year and is expected to remain seasonally strong in early 2012, the pullback from sharp surges in buyer interest and short term supply tightness during November left the market at an unsustainable level once production and

shipping caught up with the stabilizing demand. At the same time that ethanol supplies had finally caught their breath from playing catchup all summer and fall, active buying redeveloped in the energy market and helped to push futures prices higher once again. Although commodity and financial markets remained extremely volatile as 2011 closed, retail energy prices stabilized slightly due to the sluggish demand typically seen in the first quarter. Traders are extremely cautious about domestic and global economic indicators, and prices will likely remain volatile. Ethanol prices adjusted lower but stabilized before the holidays, while energy markets saw significant wholesale support, even though not all gains passed through the system.

DEC 20, 2011

NOV 28, 2011

DEC 29, 2010

Superior, Neb.

5.85

5.77

5.79

Beatrice, Neb.

5.75

5.62

5.56

Sublette, Kan.

5.77

5.67

5.43

Salina, Kan.

5.98

5.99

5.78

Triangle, Texas

5.97

5.56

5.75

Gulf, Texas

6.76

6.70

6.12

SOURCE: Sorghum Synergies

Natural Gas Prices

($/MMBtu)

LOCATION

JAN 1, 2012

DEC 1, 2011

Jan 1, 2011

NYMEX

3.17

3.36

5.24

NNG Ventura

3.08

2.89

4.25

CA Citygate

3.40

3.60

4.35

SOURCE: U.S. Energy Services Inc.

U.S. Ethanol Production

(1,000 barrels)

Per day

Month

End stocks

Oct. 2011

906

28,092

18,072

Sept. 2011

888

26,645

18,437

Oct. 2010

886

27,471

17,278

SOURCE: U.S. Energy Information Administration

FEBRUARY 2012 | Ethanol Producer Magazine | 25


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distilled

Ethanol News & Trends

Next Up

It’s only been a few months since Abengoa Bioenergy broke ground on its 23 MMgy multifeedstock cellulosic ethanol plant in Hugoton, Kan., but so far, construction of its first commercial-scale cellulosic facility is still “right on track,” according to Executive Vice President Chris Standlee, and should be ready for commissioning by the end of 2013. “We are very anxious to prove our technology at the commercial level and we are comfortable and confident that it’s going to be as expected,” he says. “It will be efficient, effective and meet our expectations.” The company is also already exploring options for the location of its second commercial-scale cellulosic plant, but won’t begin constructing that facility until 2014, after the Hugoton plant is operational. “We’re not looking to start construction on a new facility in the immediate future by any means, but it’s never too early to be planning our next move,” Standlee says. Future Abengoa cellulosic plants will likely be co-located with its existing corn ethanol facilities, primarily because the necessary infrastructure already exists in those locations. “We have the facilities, the roads, the offices, the relationships with the local producers and the states,” Standlee says. “So we’re just simply building on what we already have. It’s going to be much more efficient to do that.” Abengoa’s hub of ethanol production is in Nebraska, where the company operates an 88 MMgy plant in Ravenna and a 55 MMgy plant in York. Its cellulosic technology was also first proven at a pilot scale in York. Other Abengoa corn ethanol plants are located in Kansas, New Mexico, Illinois and Indiana. The two smallest of those plants, the 30 MMgy plant in Portales, N.M., and the 25 MMgy plant in Colwich, Kan., were temporarily shut down at the end of the year due to depressed market conditions. Doug Bice, corporate project develop-

PHOTO: BBI INTERNATIONAL FILE PHOTO

Abengoa in early planning for second cellulosic plant

Feedstock Centric As Abengoa Bioenergy continues construction on its first commercial-scale cellulosic ethanol plant in Kansas, the company is making plans for the second. The availability of water is a prime concern, as is the availability of existing feedstocks and the potential to develop more.

ment manager at Abengoa Bioenergy, says that aside from logistical considerations, the availability of biomass and other natural resources, namely water, will be major factors in the selection of future cellulosic sites. “Water is a critical component for functionality of the plant,” he says. While the Hugoton plant is expected to use mostly corn stover and switchgrass as feedstocks, the company’s technology is multifeedstock capable and future plants will need to be located near an abundance of various energy crops and residues. “It’s difficult to build a facility and rely on dedicated energy crops because farmers are reluctant to plant those crops until a facility is constructed,” Standlee says. “For our next plant, we’ll be looking at areas that have existing feedstocks available and the potential to develop more. Particularly, we think the dedicated feedstocks will have a great opportunity to provide the highest yields on a feedstock-per-acre basis.” Abengoa has received numerous federal financial awards over the past few years to support the Hugoton plant. In 2011 the USDA approved a Biomass Crop Assistance Program project to assist in establishing switchgrass acres near the plant. The company also

28 | Ethanol Producer Magazine | FEBRUARY 2012

received a $132.4 million loan guarantee from the U.S. DOE in late September. Standlee says government support has been instrumental in developing the Hugoton plant and BCAP has been especially important in establishing new feedstocks. “One of the major challenges in the cellulosic industry is feedstock,” he says. “That’s not just in the growth of the feedstock, but also the harvesting, the storage, the delivery. Any time you’re dealing with a brand new use for a feedstock there are challenges to overcome. The BCAP program has the potential to ease the pain of developing cellulosic ethanol production.” Recent challenges to BCAP, federal loan guarantee programs and other federal incentives to support renewable energy industries make it difficult to predict whether financial assistance will be available to aid future Abengoa projects and Standlee says he’s not sure whether the company will continue to pursue those projects with federal backing. “We’re still in the process of trying to build Hugoton and prove the economics at a commercial scale in that facility,” he says. “A lot of things can happen in two or three years. We’ll see what happens.” —Kris Bevill


distilled

Cropland Decline?

USDA releases latest accounting of U.S. land uses A quick glance at the “Major Land Uses” report released in December by the USDA’s Economic Research Service, reveals some interesting statistics about total cropland area. The report, which was first released in 1945, is compiled about every five years, coinciding with the latest Census of Agriculture. This year’s report is based on 2007 land uses and puts cropland at 408 million acres— the lowest level since the first records were taken in 1945. That’s 34 million acres, or 8 percent, below the previous low in 2002. However, digging deeper into the report shows that the decline is partly due to a change in how the 2007 Census of Agriculture estimated cropland pasture, one part of total cropland. From 2002 to 2007 there was a 26 million acre decline in cropland pasture, offset by a 27 million acre increase in grassland pasture and range. In other words, the methodological change by the Census of Agriculture meant millions of acres of cropland pasture were reclassified from temporary to permanent pasture. “Indeed, a comparison with National Resources Inventory data suggests that much of the change may be a result of the methodological change rather than an actual

land use change due to farm Principal U.S. crops harvested, 48 contiguous states, 2002-2007 operator or owner decisions,” 2002 2007 1963-’81 1981-’07 2002-’07 Million acres Percent change the report said. “Because of Food Crops 130.8 126.9 78.3 -35.3 -4.0 the change in methodology, Feed crops these two estimates are not Corn, all 76.8 92.6 14.9 9.4 15.8 strictly comparable with prior Sorghum, all 7.7 7.2 -1.5 -8.3 -0.5 years.” Oats 2.1 1.5 -11.9 -7.9 -0.6 What of ethanol’s poBarley 4.1 3.5 -2.2 -5.5 -0.6 tential impact on land use Hay 64.5 61.0 -6.8 1.4 -3.5 change, which critics have so Total feed crops 155.2 165.8 -7.5 -10.9 10.6 loudly decried? The report Other crops 12.6 11.2 -3.2 -4.2 -1.4 does briefly address this question, concluding that since the Total principal crops 298.6 303.9 67.6 -50.4 5.2 data is presented only though Distribution may not add due to rounding. Sources: USDA, Economic Research Service calculations based on data for principal crops harvested from Daugherty (1995) USDA/National 2007, it doesn’t address more Agricultural Statistics ervice (1999b, 2005, and 2009b). recent developments. “In recent years, higher corn prices, age to corn production. That shift from soy driven partly by increased demand for corn to corn was offset, however, by other shifts, as an ethanol feedstock, have contributed to primarily cotton into soybeans. “Total acreage complex changes in the production of princi- in harvested crops on corn and soybean farms pal crops,” the report said. expanded, with about a third of the increase It also examines data from a survey of due to shifts from hay and CRP land, as well as corn and soybean farmers published in “The increases in double-cropping and a reduction Ethanol Decade: An Expansion of U.S. Corn in idle land,” the land use report said. Production.” This USDA report found that —Holly Jessen expansions in corn acreage from 2006 to 2008 were a result of soybean farmers shifting acre1

1


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E85 on the Rise

ND E85 sales top 1 million gallons for first time; other states also show strong growth Sales of E85 throughout 2011 in several Midwestern states easily exceeded their previous yearâ&#x20AC;&#x2122;s totals, according to data from the American Lung Association and the Iowa Renewable Fuels Association. The increased demand can be attributed to growing consumer awareness of the fuel and consumersâ&#x20AC;&#x2122; desire to

burn cleaner, domestically produced fuel, the groups say. In Iowa, the nationâ&#x20AC;&#x2122;s top ethanol-producing state, E85 sales in 2011 had already topped the entire previous year by the end of September. Nearly 9.8 million gallons of E85 were sold between January and September,

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30 | Ethanol Producer Magazine | FEBRUARY 2012

compared to a total of 9.3 million gallons in 2010. â&#x20AC;&#x153;Itâ&#x20AC;&#x2122;s exciting to see Iowans increasing their commitment to mid-and high-level ethanol blends,â&#x20AC;? IRFA Executive Director Monte Shaw says. â&#x20AC;&#x153;E85 keeps money here at home and reduces our dependence on foreign oil. Ethanol blends from E15 to E85 are the future for Iowa and America.â&#x20AC;? Consumers north of Iowaâ&#x20AC;&#x2122;s border are also consuming more E85. The American Lung Association says Minnesota E85 sales were up 26 percent for the first eight months of 2011 compared to the same time period in 2010. Between January and August, the stateâ&#x20AC;&#x2122;s retailers sold a whopping 14.2 million gallons of E85, compared to about 11.3 million gallons sold during the same months in 2010. The state also made headway in increasing the amount of renewable fuels used in state vehicles. From January to September 2010, state agencies used about 724,800 gallons of E85. During the same months in 2011, that number was up by about 12,000 gallons. The Minnesota SmartFleet Committee says E85 now accounts for approximately 19 percent of its light-duty fuel purchases, which is an improvement toward meeting the state directive of reducing gasoline use in state vehicles by 50 percent from the 2005 baseline by 2015. North Dakota has also notably increased its use of E85 in the past year. The stateâ&#x20AC;&#x2122;s retailers surpassed the 1 million gallon mark for the first time by the end of September, far exceeding the previous yearâ&#x20AC;&#x2122;s total E85 sales of about 660,000 gallons. In 2009, only about 275,000 gallons of E85 were sold in the state. The sudden skyrocketing of E85 sales in North Dakota is at least partially due to a program launched in late 2009 that provides financial incentives to retailers who install blender pumps in the state. To date, there are about 71 E85 fueling stations in North Dakota, according to the ALA. Minnesota is home to more E85 stations than any other state and has about 360 sites. Iowa has nearly 160 E85 locations, according to the IRFA. â&#x20AC;&#x201D;Kris Bevill


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Financing Big Growth Breakthrough Big River adds capacity Mascoma gains support from Valero, DOE

Mascoma Corp. received some early holiday presents that will help the company construct its commercial-scale hardwood cellulosic ethanol plant in Kinross, Mich. Two weeks before Christmas, it settled with Valero Energy Corp. for the oil refiner and ethanol producer to provide the majority of the funding for the $232 million project to construct, commission and start up the facility. Less than a week later, Mascoma announced up to $80 million in funding from the U.S. DOE, in addition to $20 million previously awarded. Kinross Cellulosic Ethanol LLC is a joint venture of Frontier Renewable Resources LLC, a subsidiary of Mascoma, and Diamond Alternative Energy LLC, a subsidiary of Valero. Construction on the 20 MMgy cellulosic ethanol plant is expected to begin this spring and should be completed by late 2013. Valero will hold a majority interest in the joint venture, provide project management during construction and operate the completed plant. The oil refiner will also market the ethanol and has the option to expand the facility to up to 80 MMgy. A minority interest holder, Mascoma developed the proprietary consolidated bioprocessing (CBP) technology over the past five years and will also receive royalties based on ethanol yield milestones for a certain time period. The two will partner on additional cellulosic ethanol facilities. “This partnership provides an exciting opportunity to combine Mascoma’s innovative CBP technology platform and expertise with Valero’s project management, operating, distribution and marketing capabilities,” says George Stutzmann, Valero vice president of alternative energy. “We view this first commercial-scale cellulosic ethanol facility in Kinross and our partnership with Mascoma as an important foundation for potential expansion beyond Kinross.” —Holly Jessen

A fourth ethanol plant now bears the Big River name. Big River Resources LLC closed the acquisition of the former Western Wisconsin Energy LLC plant Dec. 1. “The plant continued operations as normal through the acquisition and continues to operate at full capacity as Big River Resources Boyceville LLC,” Jim Leiting, general manager of Big River Resources tells EPM. The 55 MMgy Boyceville, Wis., plant began producing ethanol in 2006. Big River Resources

was formed as a cooperative but evolved into a joint venture holding company structured for multiple ethanol plants. The company operates ethanol plants in West Burlington, Iowa, and Galva, Ill., as well as being a majority shareholder and managing partner in a plant in Dyersville, Iowa. With the recent purchase, Big River Resources’ plants have a combined capacity of 380 MMgy. The company is also an investor in Absolute Energy LLC, a 100 MMgy ethanol plant in St. Ansgar, Iowa, and owns a development site in Grinnell, Iowa, as well as 10 million bushels of grain holding capacity in five locations in Illinois. —Holly Jessen

FEBRUARY 2012 | Ethanol Producer Magazine | 31


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Waste Not

What better company to invest in waste-to-biofuels ventures than one that deals with waste? In November, Waste Management Inc. closed an equity investment in Fulcrum BioEnergy Inc. and agreed to provide a secured loan facility of up to $70 million in funding for the company’s proposed Sierra BioFuels plant. A month later, Waste Management and EB Investments invested $15 million in Canadian funds (about $14.5 million) for a minority equity interest in Enerkem Alberta Biofuels L.P. View in August The Enerkem Alberta Biofuels commercial facility is under construction in Edmonton. This isn’t the first time Waste Management has partnered with these companies. Fulcrum BioEnergy, which is working to doubling its renewable energy production by 2020 and investing in build a 10 MMgy municipal solid waste-to-ethanol facility near Reno, emerging technologies for managing waste. “We have a very wide range Nev., has entered into long-term feedstock agreements with Waste of thermal, chemical and fermentation technology investments,” Muir Management. Construction is underway and the plant is expected to be- says. The company has a portfolio of nearly 30 investment projects, acgin production in the second half of 2013. The 36 MMly MSW ethanol quisitions and joint ventures working to recover materials and resources plant Enerkem Inc. is building in Edmonton, Alberta, has also received from waste, according to its 2011 sustainability report update. That inequity investments from Waste Management in the past. That plant is cludes Terrabon LLC, developer of a waste-to-fuel conversion techexpected to begin production in 2012. A second 10 MMly sorted MSW nology that converts biomass to high-octane gasoline; InEnTec Inc., a and wood residue ethanol plant, planned for Pontotoc, Miss., is under waste gasification company that operates a commercial demonstration development. plant in Arlington, Ore.; and Agnion Energy Inc., which has research Waste-to-ethanol isn’t the only advanced technology Waste Man- and development facilities in Germany to perfect its allothermal gasifiagement is supporting, Wes Muir, the company’s director of corporate cation technology that converts wood-based biomass into synthetic gas, communications tells EPM. The company has two sustainability goals: Muir says. —Holly Jessen

PHOTO: ENERKEM

Ethanol is one part of Waste Management’s sustainability goals

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RISK MANAGEMENT

34 | Ethanol Producer Magazine | FEBRUARY 2012


RISK MANAGEMENT

Pieces of the The ethanol industry’s understanding of hedging has evolved over the years, making it a vital puzzle piece in profitable operation By Holly Jessen

If there’s one thing the experts can agree on it’s that hedging is a complex topic. One simplified way to describe it is as a type of insurance. In a forward contract, an ethanol plant that has a contract for corn at a certain price will save money if, later on, the price of corn shoots up. On the other hand, the company takes the risk that the price of corn could also go down. “Somewhere you need to be able to offset the risk of that movement,” says Jim Leiting, general manager of Big River Resources LLC. “Because if the value of your corn changes, for every 30-cent move in corn, you need a 10-cent move in ethanol to stay even.” One common hedging practice is for ethanol producers to also enter into a contract on the futures market, typically to sell corn at a specific price on a certain future date. An ethanol plant that has a forward contract with a farmer is obligated to purchase corn, say at $7 a bushel, even if corn prices fall to $6. To protect from a big financial loss, the company can enter into a futures contract at the same time, theoretically guaranteeing a certain price. By hedging one investment against another, the company reduces its potential loss. “The whole principle is to limit your exposure to flat price movement in a commodity market that’s very volatile,” Leiting says. Ethanol plants typically seek price protection for four main commodities—corn, natural gas, ethanol and distillers grains. Some plants also pro-

FEBRUARY 2012 | Ethanol Producer Magazine | 35


RISK MANAGEMENT

duce corn oil. Distillers grains and corn oil cannot be hedged directly. Although distillers grains is traded on the futures market, there’s not enough volume for it to be an effective hedge, Leiting says. The products can, however, be hedged against the commodities they track in price movements, such as corn and soybean oil. Today, managing the margins is vitally important, according to Leiting. In 2011, corn ranged from as low as $3.80 to more than $7. “Our operating margins, generally in the ethanol plant, are about 20 cents a gallon,” Leiting says, “so you really can’t have exposure to that flat price swing.” Part of managing the margin is locking in the price of corn as well as ethanol. “They may be missing out on even bigger profits by doing that, because they are locking in these prices early,” April King, assurance and advisory services supervisor for Christianson & Associates PLLP, tells EPM. “But most of the plants have learned, I think, that they are happier doing that and that’s a safer route to go, rather than leaving themselves exposed to the fluctuations of the different commodities.”

Loose to Tight The chart shows the dramatic swing when ethanol prices moved towards tight correlation with corn in 2010 and 2011 compared to earlier years.

The ability to make forward sales of ethanol hasn’t always been available to producers, points out Neal Kemmet, general manager of Ace Ethanol LLC, a 40 MMgy ethanol plant in Stanley, Wis. His company selected a Cana-

dian firm, Elbow River Marketing, specifically because it allowed Ace to lock in ethanol prices. “That certainly wasn’t the case three years ago when we signed on with Elbow River—they were one of the three ethanol marketing firms


RISK MANAGEMENT

that would, in fact, fix a price on a forward ethanol contract,” he says. Surprisingly, there are still some ethanol plants that do almost no hedging. “I was just out at a plant last week that did almost no hedging,” King said. “However, because of their location, it is working for them—they are completely playing the spot.” A company that operates in the spot market is a market taker. It takes whatever the market gives them, good or bad, says Jason Sagebiel, director of renewable fuels for INTL FCStone, “which can be very good—we’re coming off good margins right now [in December]—or it can be very bad—we are going into bad margins as you go into Q1,” he says. “Everything has its pros and cons.” Some ethanol producers do both. At Ace Ethanol, a certain percentage of ethanol sales are left open to the spot market, Kemmet says. Those percentages change, depending on the time of year, taking into account that the first quarter is typically difficult from a spot market perspective, while the fourth quarter is good. “Our profit targets and the amount we are willing to hedge is a lot different from quarter four than it is from quarter one,” he says. “We treat each quarter differently when it comes to how much margin we are going to lock and what our margin targets are.”

through 2006 and 2007, we saw a decoupling of ethanol and unleaded gasoline, or what became RBOB pricing, meaning they each had a supply and demand curve, and what we saw is you might see gasoline rise and ethanol may not have risen with it,” he says. “But what came along with that is the cost of ethanol, and the cost of ethanol production began to be recognized by the buyers, and ethanol prices began to correlate more with corn.”

Data from Christianson & Associates’ Biofuels Benchmarking program, in which 63 ethanol plants participated in 2010, shows that the price relationship between corn and ethanol was negatively correlated in 2009, a correction year after the volatility of 2008. In 2010, however, corn and ethanol pricing was nearly perfectly correlated, meaning reduced volatility, lower risk and stabilized profits. That strong correlation between corn and ethanol prices

Hedging History

To understand hedging strategies for the ethanol industry today, it is helpful to look back. Many of the founding members of the industry were farmers who hailed from cooperatives that dealt with buying and selling of only one type of product—corn and other grains. “The strategies for managing price volatility were pretty straight forward back in the old days,” King says, “so there was limited or simplistic hedging that took place.” The industry has evolved significantly. “We are learning a lot, not only about production and efficiency, but the management is getting a lot savvier on developing hedge strategies,” she says. Hedging strategies, of necessity, have also evolved as the market has. When Leiting began working in the ethanol industry in 2005, ethanol prices were correlated with unleaded gasoline prices, he says. Today, ethanol prices track more closely with corn prices. “As we rolled FEBRUARY 2012 | Ethanol Producer Magazine | 37


RISK MANAGEMENT

continued in 2011, with benchmarking program data for the first three quarters showing an about 95 percent correlation. Another change from 2005 to 2007 compared to today is narrower margins, Leiting says. Pre-2008 margins were wide enough that commodity price changes didn’t hit ethanol plants nearly as hard as they do today. “You may have had less or more, depending on what that market did, but with the margin being as wide as it was, you still had a profitable plant,” Leiting says. Today’s ethanol plants, however, are likely to be working with margins between 10 and 20 cents a gallon. “In that environment, your ability to be profitable is very sensitive to the volatility in these four key commodities,” he says. A lesson from the past is the importance of availability of working capital. “In 2008, when the corn market went clear to $8, working capital became so constrained that even large companies such as ADM, Cargill and

Bunge reached the limits of what they could borrow against their positions to maintain their hedge,” Leiting says. Of course, 2008 was the year of bankruptcies, including VeraSun Energy Corp., the second largest ethanol producer in the U.S. at the time. “If you have positions on, and the market moves in a direction against you in the futures market, then you have to be able to fund those moves and keep your hedges in place,” he says. “So working capital and the availability of working capital is a huge issue.”

Accounting Puzzle Piece

Something Christianson & Associates has discovered is that because there are different accounting options for derivative (or financial) instruments and hedging, it can be difficult to compare the hedging data of one ethanol plant to another. Specifically, ethanol plants have the option to recognize certain instruments or not, which can be confusing or misleading to board members or investors. This can be a significant

issue the industry as a whole should be aware of, King says. The issue starts with a 1998 statement from the Financial Accounting Standards Board, outlining different accounting options, the first two of which are known as fair value hedges and cash flow hedges. Due to the work involved, and the fact that these accounting methods are very complicated, the majority of, if not all, ethanol producers do not use these accounting methods. “Normally the benefits don’t outweigh the costs,” King says. The third category, which King refers to as normal derivative accounting, requires that all derivative instruments are recorded on the balance sheet with any gains or losses in the fair value charged through earnings in the current period. When companies utilize forward contracts they have two options: recognize the forward contracts as derivative instruments or designate them as normal purchases and sales. With the second option, the end result is that these forward contracts become off-balancesheet arrangements, for which the changes in fair value are not recognized in the financial statements. This simplified accounting method worked well for ethanol plants in the past, when an ethanol plant’s hedging efforts primarily included forward contracts, King says. “In effect, only half of the economic hedge is being recorded,” she says. “In annual financial statements, the effect is not as obvious since hedging gains and losses are combined with the related revenues or cost of sales, but interim statements generally disclose the accounts separately, often sparking concerns from investors, lenders and board members.” What’s the solution? Ethanol plants that do not recognize forward contracts as derivative instruments on their financial statements may want to consider a change in their accounting methods. “They do have the option to treat those in the exact same manner as they are treating their other positions, which would be to mark those to market as well, so that you are actually showing true results in your financial statements,” King says. Author: Holly Jessen Associate Editor, Ethanol Producer Magazine (701) 738-4946 hjessen@bbiinternational.com

38 | Ethanol Producer Magazine | FEBRUARY 2012


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CORN OIL

Golden

Opportunities Corn oil forges a link between ethanol and biodiesel production By Holly Jessen

Ethanol producers are adding corn oil extraction to their technology arsenal in increasing numbers, providing an ideal opportunity for the ethanol and biodiesel industries to cooperate or even co-locate. On

the cooperation side, the biodiesel producers, such as Renewable Energy Group, are already using corn oil produced at ethanol plants as a biodiesel feedstock. On the other hand, co-location of ethanol plants and biodiesel production hasn’t yet gotten off the ground. While some wonder if it ever will, Mcgyan Biodiesel LLC is one company actively working to make it happen. REG, the largest biodiesel producer in the U.S., currently operates one biodiesel plant that converts corn oil from nearby ethanol plants and has plans for retrofits at additional REG facilities. “As our industry grows, we are going to need to develop additional capabilities to use new feedstocks, and corn oil is the one growth feedstock that we see out there,” says Dave Elsenbast, vice president, supply chain. REG isn’t the only biodiesel producer to turn to corn oil. The company, which owns/operates more than 210 MMgy of biodiesel produc-

40 | Ethanol Producer Magazine | FEBRUARY 2012


CORN OIL

Golden Opportunity Clayton McNeff holds up a bottle of biodiesel produced with waste cooking oil at the Mcgyan Biodiesel pilot plant. The Mcgyan process has been used to convert many oils including corn oil, to biodiesel. PHOTO: MYCGYAN

FEBRUARY 2012 | Ethanol Producer Magazine | 41


CORN OIL

tion, closely tracks corn oil numbers for both the biodiesel and ethanol industries. By internal REG estimates, about 10 percent of biodiesel produced in 2010 was from corn oil. Although corn oil is an increasingly popular feedstock, with biodiesel production numbers increasing upwards of 800 MMgy in 2011, that percentage is likely to drop. “Certainly the amount of corn oil being separated and being sold into the biodiesel market is up in 2011 vs. ’10 but probably has not kept pace with the growth of the biodiesel industry in total production,” he tells EPM. On the other side of the equation, REG estimates that in 2010 about 35 percent of ethanol plants had corn oil extraction in place. By the end of 2011, Elsenbast estimates that number will rise to above 40 percent. “There is going to be rapid expansion continuing on into 2012,” he says. “The inedible corn oil extraction technology offers great profit opportunities to the ethanol producers with very limited risk.” Notably, three top ethanol producers have

installed back-end corn oil extraction technology at their dry mill plants. Green Plains Renewable Energy Inc. spent the past year retrofitting all nine of its ethanol plants and now produces about Promising Supply 120 million pounds of Corn oil is a growth area for biodiesel crude corn oil yearly. feedstocks, though it Valero Renewable Fuels requires know-how to process it successfully, Co. LLC, which opersays Dave Elsenbast, ates 10 ethanol plants REG vice president, supply chain. with a combined capacity of 1,110 MMgy, plans to add the technology to four of its plants by spring and has left the door open to corn oil at another five dry mill ethanol plants, saying it will “study the possibility” after instillation at the first four plants is complete. Poet LLC has developed Voila, a trademarked, low free fatty acid corn oil. The company installed the technology first at its Poet Biorefining plant in Hudson, S.D., and announced in early De-

cember that it had been installed in four more plants. In all, the Poet plants have the capacity to produce about 100 million pounds of corn oil yearly. The two largest markets for crude corn oil from ethanol plants are feed and biodiesel production, says Joe Riley, general manager of FEC Solutions, which markets corn oil for three ethanol plants. Some corn oil also goes into industrial, oleochemical and export markets. “We’re always looking for new and higher value markets for the product,” he adds. While the market for corn oil is still shaking out, in general, it’s a good feedstock for biodiesel producers because it’s priced lower than soy oil. Ethanol producers want to sell into the biodiesel market because they can typically get better prices than for feed. “Feed is kind of the bottom rung of the food chain, so to speak,” he says. “If you can’t get rid of something, essentially, you will feed it to an animal. ... I think it’s in the feed market right now because it hasn’t found the higher value markets that it should be in.”


CORN OIL

Co-location Can-Do

It’s a concept that’s been batted around for a long time: Could biodiesel plants co-locate with ethanol plants that extract corn oil and thereby have an onsite feedstock source? Mcgyan Biodiesel says it’s on the verge of getting it done. The Anoka, Minn., company has a letter of intent to build 3 MMgy biodiesel plants next to two ethanol plants, utilizing corn oil produced onsite, says Steve Rupp, president. Construction is expected to begin in 2012. “Conservatively speaking, they would start to come online at the beginning of 2013,” he says, adding that although the modular system could be built in different sizes, 3 MMgy is ideal. “That size works very well with a 100 MMgy ethanol facility because that’s about the right amount of oil that they would get out of their DDGS,” he says. The Mcgyan Biodiesel Process has been operating successfully since November 2009 at the 3 MMgy Ever Cat Fuels LLC facility in Isanti, Minn. It’s a stand-alone operation that converts corn oil shipped in from ethanol

plants. In addition, the biodiesel plant utilizes waste oils, such as used cooking oil from area restaurants. But that’s not all. “We’ve tested probably over 50 different types of oil in our laboratory and we haven’t found any oils that we can’t turn into biodiesel using our process,” he says. When working with an ethanol plant partner, Mcgyan licenses its biodiesel technology, which works with any of the existing back-end corn oil extraction technologies. The company then oversees installation of the modular system and trains the operators. In exchange, Mcgyan receives a royalty payment based on revenues, Rupp says. Although it depends on existing infrastructure, such as onsite holding tanks, a stand-alone Mcgyan upgrade to an ethanol plant would cost $7 to $8 million, he tells EPM. The project would have an estimated 18-month to two-year payback. With investment in the Mcgyan system, ethanol producers can bring in higher profits for biodiesel than selling corn oil for feed, and add needed diversification. Producing biodie-

sel onsite at an ethanol plant could be particularly attractive to petroleum company owners, something that is becoming more common in the ethanol industry, Rupp says. Rather than purchasing renewable fuels or renewable identification numbers (RINs), these companies find it cheaper to produce their own renewable fuels. The Mcgyan model will succeed because its biodiesel conversion process can handle the high content of free fatty acids contained in crude corn oil, he says, something the traditional biodiesel production process cannot do. “That’s really where we shine,” he says. “We have the ability, using our process, to handle any combination of free fatty acids and triglycerides. So you can take 100 percent food grade oil, you can take 100 percent waste product or rancid oil or you can take any combination of the two. It’s very flexible in terms of the feedstocks that can be used.” Perhaps the biggest advantage, however, is that the ethanol plant would only need to hire a few additional employees to operate the

FEBRUARY 2012 | Ethanol Producer Magazine | 43


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biodiesel plant. The 3 MMgy Ever Cat Fuels plant, which runs 24/7, has a full staff of 12. A Mcgyan biodiesel plant integrates with the existing control system of the ethanol plant, requiring no new management positions and only about four operators and one laboratory technician. “[That] is going to reduce their biodiesel production cost,” he says. Another possible synergy is that ethanol could be used in place of methanol for biodiesel production. With the current economic conditions, an ethanol producer can get much more out of selling its ethanol than producing biodiesel with the product, Rupp says. Still, the Mcgyan process does make it possible for the production of a “fully green biodiesel,” which could, in the future, command a premium in the marketplace. The company has also successfully produced biodiesel using butanol or propanol. Finally, Rupp emphasizes that Mcgyan biodiesel plants wouldn’t be in competition with currently idled plants, as those facilities utilize soybeans and traditional process technology. The system could technically process soy oil, yes, but it wouldn’t make economic sense. “It’s not our mission to take food and turn it into biodiesel,” he adds. “We’re just taking nonfood-grade materials, waste products, low-level material that in the past may have been just burned and used for Btu value, like heating value, or just put into a landfill. Those are the types of feedstocks that we like to use.” Not everyone looking at co-locating ethanol and biodiesel production has their eye on corn oil as a feedstock, however. One World Clean Energy Inc. wants to build integrated biorefineries that co-locate ethanol and biodiesel production as well as green natural gas and electrical power. The company is skipping over corn oil as a biodiesel feedstock, however, because it considers the single feedstock model a “short-term solution at best,” says William Bivens, CEO and founder. The company plans to build plants in the U.S. and internationally based on a model that produces 10 MMgy ethanol, 10 MMgy biodiesel and 10 megawatts electricity, at an estimated capital cost of $100 million. It

recently added two additional designs—a 1/1/1 and 5/5/5 for total capital costs of $10 million and $50 million. Feedstocks for ethanol would be any starch crop or starch waste and for biodiesel any animal fat, waste cooking oil or vegetable oil. Electricity or natural gas would be produced from any organic waste. In October, the company announced it had secured its first memorandum of understanding to construct and commission a $115 million integrated 10/10/10 biorefinery in South Africa. Although co-locating biodiesel and ethanol plants hasn’t come to fruition yet, FEC Solution’s Riley believes it makes a lot of sense. He’s thinking about the more than 100 diesel trucks that are at the plant daily, dropping off corn and picking up ethanol or distillers grains. What if an ethanol plant were to put in a pump and sell the biodiesel it produces to those drivers? What if that ethanol plant put in a convenience store and also sold its Short Term William Bivens, CEO own ethanol? So far, and founder of One the industry hasn’t World Clean Energy Inc., considers the jumped on that idea. single feedstock model “It would have to be a a “short-term solution at best.” rather entrepreneurial plant until it has been proven by somebody,” he says, adding that ethanol plants already get a good price for corn oil, so there isn’t a lot of incentive to go to value-added propositions. As more ethanol plants add corn oil extraction technology, however, the price will be driven down. It’s called puking the market, Riley says, and it’s already starting to happen. “We’re getting closer and closer to it, so we’re starting to see substitute products’ value decrease,” he says. “They decrease for a lot of different reasons, but the pressure from corn oil is apparent in the feed market.”

Cooperation Model

REG doesn’t believe co-location of


CORN OIL

PHOTO: ONE WORLD CLEAN ENERGY

Brad Albin, vice president of manufacturing for REG agrees. “We don’t think it’s probably rational to put in a small 1.5 to 3 MMgy biodiesel production facility when there is 2 billion gallons of capacity out there that is sitting there waiting.” For now, REG believes the best model is what the company is already doing at its 60 MMgy Seneca, Ill., biodiesel plant—sourcing All-in-One One World Clean Energy Inc. announced in October it corn oil from nearby ethahad secured its first memorandum of understanding to construct and commission an integrated biorefinery in South Africa to produce10 MMgy of nol plants. Not only is REG ethanol and 10 MMgy biodiesel, plus 10 megawatts of electricity daily. Seneca strategically located to source corn oil, but it’s ethanol and biodiesel plants will happen—at two hours from Chicago least not with today’s technology and eco- where it can sell its biodiesel. For this, REG’s nomic conditions. First, there is more than first corn oil-to-biodiesel plant, the technol2 billion gallons of biodiesel capacity today ogy was in place when acquired. “That’s, in with a market size of only 800 to 1 billion gal- fact, one of the main reasons we purchased lons. Due to that overcapacity, the company that plant,” Albin says. doesn’t believe there will be any new largeAnother strike against the idea of coscale greenfield biodiesel plants built anytime location is the complexity of converting corn soon. “Technology is constantly changing and oil into biodiesel. “It is difficult to process improving, so this is a question that needs to into biodiesel feedstock and we certainly, be asked quite often,” Elsenbast says. over our time in history, have gone through

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our learning curve to perfect the conversion of inedible corn oil into biodiesel,” Elsenbast says. Finally, there’s the evolution of ASTM specifications for biodiesel to consider. Plants looking to co-locate risk having to upgrade their biodiesel plant to meet new specs. For now, REG believes ethanol plants will continue to maximize revenues by selling corn oil, not converting it to biodiesel at co-located plants, Albin says. The market for renewable chemicals, which REG will be entering in the very near future, will likely attract the attention of more ethanol producers than biodiesel production. “Today, I don’t think that you are going to just build a plant next to an ethanol plant for the sole reason of running corn oil through it,” he said. “I think the risks are too high.” Author: Holly Jessen Associate Editor, Ethanol Producer Magazine (701) 738-4946 hjessen@bbiinternational.com

NdjYdcÉi]VkZid`cdl?d]chdcHnhiZbidWZ [Vb^a^Vgl^i]djgldg`#6hdcZd[i]ZXdjcignÉh aZVY^c\bVcj[VXijgZghd[XVilVa`h!idlZgh!VcY hjeedgihigjXijgZh!djgegdYjXihXVcWZhZZc dc[VgbhVcY^cV\g^XjaijgVaWjh^cZhhZh[gdb XdVhiidXdVhi#6cYdjgXdbb^ibZciidhjeZg^dg egdYjXihVcYjceVgVaaZaZYhZgk^XZXVcWZhZZc dci]Zhb^a^c\[VXZhd[ZVX]VcYZkZgndcZd[ djghVi^hÒZYXjhidbZgh#>[ndjlVci\gV^chidgV\Z egdYjXihi]Vildg`Vh]VgYVhndjYd!k^h^ijhVi lll#?d]chdcHnhiZb>cX#Xdb idYVndgXVaa-%%".+'"&).*#

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FEBRUARY 2012 | Ethanol Producer Magazine | 45


SUSTAINABILITY

EU target for GHG reduction by 2020

46 | Ethanol Producer Magazine | FEBRUARY 2012


SUSTAINABILITY

Certifying

Sustainability Ethanol bound for the EU undergoes new scrutiny By Kris Bevill

Some savvy ethanol producers saw the writing on the wall and began the process of certifying the sustainability of their product a couple of years ago, but others are only now coming to realize the importance of certification, if they want to remain a player in the booming ethanol export business. In July 2011, the European Union belatedly approved the first seven voluntary sustainability schemes for biofuels as required by the Renewable Energy Directive. The directive, commonly referred to as RED, requires all 27 EU member states to increase the amount of renewable energy they use to 20 percent by 2020. Ten percent of the member statesâ&#x20AC;&#x2122; transportation fuel must be derived from sustainable biofuels by 2020. To qualify as sustainable, biofuels must be certified through one of the approved schemes to ensure that they are not derived from lands converted from rainforests or grasslands, that the entire production process is deemed sustainable and that the biofuels reduce greenhouse gas (GHG) emissions by 35 percent compared to petroleum. The directive came into effect in December 2010, but the European Commission did not approve the first set of schemes until seven months later. Sustainability schemes are approved by the EC, but they are operated by private companies and institutions. A total of 25 schemes were submitted for EC approval prior to the July announcement. The commission is continuing to assess the applications not yet approved, but as of late 2011, the seven originally recognized schemes continue to be the only methods of certifying sustainability on a 27-member state scale. Other national systems may be used, but are only valid in the member state where the system was created.

FEBRUARY 2012 | Ethanol Producer Magazine | 47


SUSTAINABILITY

Approved Schemes â&#x20AC;˘ International Sustainability and Carbon Certificationâ&#x20AC;&#x201D;a global initiative including a large number of companies from the supply chain and non-governmental organizations including the World Wildlife Fund. â&#x20AC;˘ Bonsucro EUâ&#x20AC;&#x201D; a roundtable initiative that serves as a standard for sugarcane-based ethanol with a focus on Brazilian sugarcane production. â&#x20AC;˘ Roundtable for Responsible Soy EU REDâ&#x20AC;&#x201D;a version of the Roundtable for Responsible Soy scheme designed to meet the requirements of the Renewable Energy Directive. It serves as a standard for soy-based biodiesel with a focus on Argentinean and Brazilian soy production. â&#x20AC;˘ Roundtable on Sustainable Biofuels EU REDâ&#x20AC;&#x201D;a roundtable initiative that covers all types of biofuels and has a global scope.

â&#x20AC;˘ 2BSvsâ&#x20AC;&#x201D;otherwise known as the Biomass Biofuels Sustainability voluntary scheme, the scheme is a French initiative that covers all types of biofuels and is global in scope. â&#x20AC;˘ RBSAâ&#x20AC;&#x201D;developed by industry member Abengoa, the scheme covers ethanol and has a global scope. According to the EU Commission, it is characterized by a mandatory requirement to calculate actual GHG values as opposed to also allowing default values. â&#x20AC;˘ Greenergy Brazilian bioethanol verification programâ&#x20AC;&#x201D;also an industry initiative, the standard was developed by UK-based fuel distributor and biodiesel producer Greenergy and is applied to Brazilian sugarcane ethanol.

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SUSTAINABILITY

For American ethanol producers seeking to supply a piece of the European demand, certification of their fuel has become a must-have if they want to be a competitive player in the market. Some U.S. companies have gone through the process and Robert Demianew, U.S. director for certifications for Control Union Inc., says it’s not too late for those producers who are not yet certified. Demianew’s company has seen steady interest from producers over the past year and he expects that to continue. “We have ethanol plants coming onboard every month,” he says. “We actually now have biodiesel plants coming on. The opportunities are still there. The EU is a very big market, so the demand side is still very strong. Depending on the particular markets that you are in, or the particular products you’re dealing with, if you are going to be selling to Europe, very likely you’ll be running into demand for these types of certifications.”

The Process

So what does it take to become certified? First and foremost, ethanol producers should evaluate the marketplace and identify a buyer for their product. Once they have determined their role in the EU market, they can go about the business of selecting a scheme. The International Sustainability and Carbon

Certification is the most well-known of the approved schemes and has been the scheme of choice to date in North America. Other approved schemes, such as the Roundtable on Sustainable Biofuels, have only recently begun to implement their standards. Each scheme has its own unique qualities. Many were developed directly for the EU and most are feedstock or region-specific, so the producer should carefully select the scheme that best meets its needs. Matthew Rudolph, regional manager, Americas, at the RSB, says producers should approach certification as not just being something they need, but rather something they can do that will prove their sustainability. “The majority of producers are very efficient, but there are a few bad apples,” he says. “If biofuels are done the right way, one way they can demonstrate that they are on the same side as the environmentalists is by becoming certified.” Rudolph says the certification process consists of four steps: the producer’s selfevaluation, which includes self-risk assessment and self-evaluation against the scheme, the scheme’s review of the producer’s information, approval and issuance of a code to the producer, and the producer’s selection of a certification body. After a certification body is contacted by the producer, it conducts an

audit to determine the producer’s sustainability and issues a certificate.

Certification Hurdles

As of late 2011, the Control Union had certified the sustainability of about 25 U.S. ethanol companies under the ISCC standard. The certification process is just that—a process—but Demianew says it doesn’t have to be a painful one. In fact, it is very likely the ethanol plant will be halfway to certification before the actual process even begins. “Most of the ethanol plants are probably 50 to 60 percent ready, but they need to make sure they have the GHGs calculated and that they have enough of a farm base ready to sign,” he says. Because the EU did not create a default GHG value for corn ethanol, some facilities may need to hire a consultant to determine their GHG calculations. Every step of the production process must be considered when determining the plant’s GHG value, right down to the grams of carbon dioxide equivalent produced for every bushel of corn. Some plants employ personnel able to conduct these evaluations, but others will have to bring in consultants at an added expense. Calculating GHG emissions takes time, but convincing farmers to sign self-declarations could prove to be the most difficult step

FEBRUARY 2012 | Ethanol Producer Magazine | 49


SUSTAINABILITY

for producers. To show a sustainable chain of production, ethanol plants must be able to prove that a percentage of their feedstock has been certified as sustainable. This step begins by convincing farmers to sign a selfdeclaration agreeing to commit to sustainable agriculture production. The self-declarations are not complicated, nor do they typically require any changes at the farm. They also do not cost the farmer anything or subject them to frequent checkups or potential fines.

However, Demianew says ethanol plants have sometimes had a hard time explaining that to their feedstock providers, leaving the farmers skeptical and unaware of the importance of the document. â&#x20AC;&#x153;The challenge to the industry is to get this outreach to the farmers and let them know what it is theyâ&#x20AC;&#x2122;re participating in,â&#x20AC;? he says. â&#x20AC;&#x153;We have not seen that the farmers have to make any changes to their current practices. Farmers are generally good stewards of

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the land. The difference here is that they just have to demonstrate through documentation what theyâ&#x20AC;&#x2122;re doing. If they can do that, they can participate. But farmers can be somewhat reluctant to sign anything, which means the elevator or ethanol plants need to encourage, inform and educate the farmers about what the documentation is.â&#x20AC;? Some of the more creative efforts taken by ethanol plants to inform farmers about the sustainability process include town hall meetings, offering higher purchase prices for certified corn or incentives in the form of gift cards to farmers who participate. The number of farmers required to participate in the process will vary depending on the plant and selected scheme and, in some cases, the ethanol plants are farmer-owned and more likely to have success in signing up farmers to the program.

Worth the Cost? 7UHDWUDWHFRQWURODQGWHVWLQJKDVDOZD\VEHHQDKDVVOHÂŤ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ÂąLQ HYHU\JDOORQ 5HGXFHYDULDELOLW\DQGFRVW0D[LPL]HTXDOLW\ DQGFRQVLVWHQF\ &KDUW\RXUZD\WRKLJKHUSURÂżWVÂŤGLVFRYHU1DOFR(&$3OXV DWZZZQDOFRFRP75$&( 2UFDOO3KLO%XUHPDQDW

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50 | Ethanol Producer Magazine | FEBRUARY 2012

Cost of certification could be the largest drawback for producers when considering taking on this task. Participation in the schemes is voluntary so it may be difficult to justify the expense, but Rudolph stresses the value of proven sustainability and says certification could also be attractive to financiers. And considering that the domestic market is at its blend wall, anything producers can do to expand their marketing abilities may be well worth the cost. Demianew says certification can be viewed by ethanol producers as an outlet to new markets and an assurance that they will be able to enter the European market if and when they decide to do so. They can go through this process and not sell one gallon into Europe,â&#x20AC;? he says. â&#x20AC;&#x153;They might sell it on the domestic market, but they want to be in the position so that when that opportunity opens up they can sell it.â&#x20AC;? Author: Kris Bevill Associate Editor, Ethanol Producer Magazine (701) 540-6846 kbevill@bbiinternational.com


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NationalEthanolConference.com FEBRUARY 2012 | Ethanol Producer Magazine | 51


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EPM MARKETPLACE 52 | Ethanol Producer Magazine | FEBRUARY 2012

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www.sekab.com FEBRUARY 2012 | Ethanol Producer Magazine | 53


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54 | Ethanol Producer Magazine | FEBRUARY 2012

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