INSIDE: MEET INDIANAâ€™S CORN, ETHANOL ADVOCATES JUNE 2014
Farmer-Owned Goes Big
An Expanded Business Model For Collaborative Growth Page 60
Benchmarking Enhances Profitability
Capturing RINs Plant to Pump
Avoid EPA, IRS Audits Page 60
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VOLUME 20 ISSUE 6
EDITOR'S NOTE Competitors Can and Do Collaborate By Tom Bryan
10 THE WAY I SEE IT
Don’t Ignore Contribution of Distillers Grains By Mike Bryan
11 EVENTS CALENDAR 12 VIEW FROM THE HILL
Majority of Americans Support the RFS By Bob Dinneen
Farmer-owned ethanol plants band together for success By Susanne Retka Schill
Ethanol producers gain competitive edge through benchmarking By Holly Jessen
Collaborative Growth Platform
‘Iron Sharpens Iron’
Big Oil Lies and Whines By Jim Miller
16 GRASSROOTS VOICE
Do These Regulations Make My Fuel Look Fat? By Ron Lamberty
18 EUROPE CALLING
Think Biorefinery By Robert Vierhout
20 BUSINESS BRIEFS
Producers cut a path directly to retailers By Chris Hanson
Iowa company keeps blenders in compliance By Ron Kotrba
On-site RIN Collection
Regulation Meets Its Match
84 BUSINESS MATTERS
72 CARBON Design of Experiments Validates Corn
Financial Performance: Accounting, RINs and Margin Management By Donna Funk
ON THE COVER Doug Punke and Mike Jerke stand in the RPMG offices in Minnesota. PHOTO: GAMUT ONE STUDIOS
Ethanol Measurement Technology
Solving sample perishability problem facilitates third-party validation tests. By Ron Stites
A Strong Voice in Indiana
Fast facts about the state’s advocacy groups By Jim Dukart
76 CARBON Commodity-Based Fluctuations
Require Proper Accounting in Financial Statements Taking volatility into account for accurate, comparable monthly reports. By Sara DeRoo
80 CARBON What Natural Gas Customers Need to Know About Curtailment
The prospect of more frequent supply nterruptions requires new strategies. By Joe Cooney
Ethanol Producer Magazine: (USPS No. 023-974) June 2014, Vol. 20, Issue 6. Ethanol Producer Magazine is published monthly by BBI International. 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 | JUNE 2014
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Competitors Can and Do Collaborate If you subscribe to Ethanol Producer Magazine or follow us online, you’re probably reading this issue in mid-to-late-May.
President & Editor in Chief email@example.com
Others are picking up this installment of EPM at the 30th annual International Fuel Ethanol Workshop & Expo, which, for three days each June, facilitates a massive exchange of information in an industry that is otherwise fiercely competitive. We’re proud that, after three decades, the FEW is still fundamentally a producer “workshop” rooted in the spirit of collaboration. Fittingly, this month’s cover story looks at a collective of ethanol plants that sought and found strength in numbers and opportunity through partnership. On page 32, we profile Guardian Energy, a group of Midwest ethanol production companies that have teamed up on three ethanol plant acquisitions in the past five years. Each member of Guardian also has an ownership stake in Renewable Products Marketing Group, which markets ethanol, distillers grains and corn oil for 19 ethanol plants, 14 of which now own stock in RPMG. The producers behind both Guardian and RPMG have benefitted from the alliance. As EPM Senior Editor Sue Retka Schill reports in “Collaborative Growth Platform,” RPMG has given smaller ethanol companies a means to achieve better economies of scale in the marketplace while Guardian’s investors have not just multiplied but diversified their gallons. Both enterprises have helped keep farmerinvestors active and relevant in today’s ethanol industry, which is vital. We spotlight another example of the coexistence of competition and cooperation in our page-40 feature, “Iron Sharpens Iron.” EPM Managing Editor Holly Jessen reports on how benchmarking programs help ethanol producers achieve greater efficiency, and we find out that large ethanol producers like Poet believe competition done right promotes creativity and brings about improvement. Independent plants are embracing benchmarking, too. The producers behind Ascendant Partners’ program, for example, open up their books to each other and collaborate in a continuous “group push for performance and best practices” while the 60-some ethanol plants engaged in Christianson & Associates’ 11-year-old benchmarking program share data and size up their financial and operational performance anonymously. Also in this issue, we discover why some ethanol producers are blending ethanol with gasoline onsite to leverage the value of RINs at regional pumps. In “Onsite RIN Collection,” on page 50, Staff Writer Chris Hanson reports that producers have become blenders to make sure the value of RINs, in whole or in part, gets passed on to consumers and is not lost in the distribution chain. Our RIN coverage continues with a Q&A with RINAlliance’s Jeff Hove on page 60. Finally, be sure to read “A Strong Voice for Indiana,” our page-62 profile of the folks behind the Indiana Corn Marketing Council and the Indiana Corn Growers Association, which share office space and staff in Indianapolis, the city hosting this year’s FEW.
FOR INDUSTRY NEWS: WWW.ETHANOLPRODUCER.COM OR FOLLOW US: 6 | Ethanol Producer Magazine | JUNE 2014
ADVERTISER INDEX VOLUME 20 ISSUE 6
EDITORIAL President & Editor in Chief Tom Bryan firstname.lastname@example.org Vice President of Content & Executive Editor Tim Portz email@example.com Managing Editor Holly Jessen firstname.lastname@example.org Senior Editior Susanne Retka Schill email@example.com News Editor Erin Voegele firstname.lastname@example.org Staff Writer Chris Hanson email@example.com Copy Editor Jan Tellmann firstname.lastname@example.org
ART Art Director Jaci Satterlund email@example.com Graphic Designer Raquel Boushee firstname.lastname@example.org
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Agra Industries Ashland Water Technologies 2014 Fuel Ethanol Workshop & Expo 2014 National Advanced Biofuels Conference BBI Project Development BetaTec Hop Products Bilfinger Water Technologies Buckman Butterworth, Inc. Clariant Produkte Cloud/Sellers Cleaning Systems Contec Systems CPM Roskamp Champion Croda, Inc. DuPont Industrial Biosciences Fagen Inc. Ferm Solutions Inc. Fluid Quip Process Technologies, LLC Gamajet Cleaning Systems, Inc. Global Refractory Installers and Suplliers Greenbelt Resources Corporation GreenShift Corporation Growth Energy Hydro-Klean LLC ICM, Inc. Inbicon Interra Global Corporation INTL FCStone Inc. Iowa Economic Development Authority Lallemand Biofuels & Distilled Spirits Leaf Technologies Louis Dreyfus Magnetec Inspection, Inc. Methes Energies Mist Chemical & Supply Company Nalco, an Ecolab Company Nationwide Boiler Incorporated Natwick Associates Appraisal Nelson Engineering, Inc. New Holland Agriculture North American Industrial Services Novozymes POET-DSM Advanced Biofuels Premium Plant Services, Inc. ProQuip, Inc. RPMG, Inc. Sukup Manufacturing Co. Sulzer Pumps Solutions, Inc. Syngenta: Enogen Tower Performance, Inc. Tramco, Inc. U.S. Water Services Vecoplan LLC Verenium Vogelbusch USA, Inc Wabash Power Equipment WB Services, LLC West Agro Executive Brands WINBCO
34 8 90 58 84 48-49 20 26 67 56 46 44 38 87 92 41 52 9 55 64 75 21 2 45 11 24-25 77 79 85 17 59 39 82 28 78 47 31 81 68 71 70 83 13 66 37 69 19 73 30 74 5 3 & 57 27 15 35 54 53 36 29
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JUNE 2014 | Ethanol Producer Magazine | 7
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THE WAY I SEE IT
Don’t Ignore Contribution of Distillers Grains By Mike Bryan
I know that I am preaching to the choir when I say this, but it is frustrating to see figures tossed about that ethanol will consume 5 billion bushels of corn in 2014. Distillers grains’
contribution seems to be continually ignored. It is a major factor that has to be part of the equation. If the projections are correct and ethanol production uses 5 billion bushels of corn in 2014, distillers grains will account for approximately 1.2 billion bushels of that total. This is corn that otherwise would have likely gone into feeding cattle, hogs, poultry and other animals. It still does, it is simply fed to livestock in the form of a high-protein feed supplement. It reduces the overall consumption of grain because of its higher nutrient value. This isn’t rocket science, but it almost always gets lost in the translation, either by intention or by simple research negligence. For example, the average beef cow consumes approximately 15 pounds of dry matter per day. Part of that dry matter is almost always corn. A feeding ratio of 25 to 30 percent distillers grains improves weight gain and reduces the amount of corn required to be fed to obtain the same effect. As a result, rather than 5 billion bushels, the production of ethanol consumes only 3.8 billion bushels of corn annually. That’s 25 percent less saddled on the back of ethanol. The forecast for corn production in 2014 is around 13 billion bushels. This means that ethanol production will consume only 21.5 percent of the U.S. corn crop. Some have suggested that ethanol consumes as much as 40 percent. How ridiculous. The food vs. fuel argument is a dead horse. It’s not valid
10 | Ethanol Producer Magazine | JUNE 2014
now and it never has been a valid argument against ethanol. There are so many things derived from a bushel of corn, some with great merit, some with marginal merit and perhaps some even detrimental to mankind. Ethanol clearly falls into the category of high merit. The 21.2 percent of our burgeoning corn crop used in ethanol production pales when we look at the environmental, economic and energy security benefits that ethanol provides. To suggest that ethanol has driven up global food prices and is depriving people of food in Third-World countries is the argument of those who have long ago lost the argument and are now simply grasping at any straw they can to save face. Ethanol has been one of America’s great success stories. Few industries have started from zero and contributed as much to the environment, rural economic development and our nation’s energy supply as ethanol. Whenever we see such exaggerated numbers thrown about, we need to call out those using the numbers and take them to task. An exaggeration left unchallenged becomes fact. That’s the way I see it.
Author: Mike Bryan Chairman, BBI International email@example.com
EVENTS CALENDAR International Fuel Ethanol Workshop & Expo June 9 -12, 2014 Indiana Convention Center Indianapolis, Indiana Now in its 30th year, the FEW provides the global ethanol industry with cutting-edge content and unparalleled networking opportunities in a dynamic business-to-business environment. The FEW is the largest, longest running ethanol conference in the world—and the only event powered by Ethanol Producer Magazine. 866-746-8385 | www.fuelethanolworkshop.com
National Advanced Biofuels Conference & Expo October 13-15, 2014 Hyatt Minneapolis Minneapolis, Minnesota Produced by BBI International, this event will feature the world of advanced biofuels and biobased chemicals— technology scale-up, project finance, policy, national markets and more—with a core focus on the industrial, petroleum and agribusiness alliances defining the national advanced biofuels industry. With a vertically integrated program and audience, this event is tailored for industry professionals engaged in producing, developing and deploying advanced biofuels, biobased platform chemicals, polymers and other renewable molecules that have the potential to meet or exceed the performance of petroleum-derived products. 866-746-8385 | www.advancedbiofuelsconference.com
National Ethanol Conference February 18-20, 2015 Gaylord Texan Resort & Convention Center Grapevine, Texas The NEC provides attendees with timely information on critical regulatory, marketing and policy issues facing the ethanol industry. Experts will speak to the current market situation, and address how we as an industry can continue to grow through innovation, new technologies and feedstocks, and by developing more diverse and global markets. 202-289-3835 | www.nationalethanolconference.com
International Biomass Conference & Expo April 20-22, 2015 Minneapolis Convention Center, Minneapolis, Minnesota Organized by BBI International and produced by Biomass 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. 866-746-8385 | www.biomassconference.com
VIEW FROM THE HILL
Majority of Americans Support the RFS By Bob Dinneen
The American people have spoken. New polling
numbers show overwhelming support for the renewable fuel standard (RFS). The RFS garnered the support of 65 percent of Americans in a recent poll conducted March 16-18 by American Viewpoint. One thousand people were polled by phone on a variety of energy related issues, including the RFS, higher-level ethanol blends, next-generation biofuels and Big Oil tax subsidies. Trends show that support for the RFS has been rising over the past several years. In 2012, 61 percent of Americans supported it. That number rose to 64 percent last year and continues to rise. The following are questions and answers from the poll. As you may know, there is currently a renewable fuels standard that requires a certain amount of the fuel produced each year to come from ethanol, biodiesel and other renewable sources that aren’t fossil fuels to reduce foreign oil dependence and greenhouse gas emissions. Do you favor or oppose this requirement? Favor: 65 percent Oppose: 26 percent Don’t know: 8 percent But resounding support of the RFS isn’t the only result worth looking at. Cellulosic ethanol, the next-wave ethanol production, garnered support from 66 percent of those polled. Cellulosic ethanol is coming on the scene in a big way as Ineos Bio began producing at a commercial level last year and at least four more plants are slated to begin production this year. The government has considered giving incentives to help fund the expansion of a new fuel known as cellulosic ethanol, which is a biofuel produced from wood, grasses and other nonedible parts of plants. Do you favor or oppose these incentives? Favor: 66 percent Oppose: 24 percent Don’t know: 9 percent Additionally, Americans show an active dislike and opposition toward tax breaks and incentives given to Big Oil.
12 | Ethanol Producer Magazine | JUNE 2014
That industry holds a death grip on the fuel market and it’s appalling that they continue to receive billions of dollars’ worth of tax incentives from hard-working American taxpayers. Two-thirds of Americans oppose tax incentives for Big Oil. It is time to eliminate these 100-year-old tax subsidies to the petroleum industry once and for all. As you may know, oil companies receive $4 billion to $5 billion in government subsidies and special tax treatment and incentives for things like equipment depreciation, oil depletion allowances and foreign investment tax credits for taxes they pay in foreign countries. Do you favor or oppose these tax incentives? Favor: 22 percent Oppose: 66 percent Don’t know: 11 percent And speaking of vehicles, 78 percent of Americans support the development of vehicles that run on alternative fuels other than oil. Roughly one out of every four vehicles sold today is a flex-fuel vehicle, capable of running on E85. Additionally, more than half of all vehicles produced this year by General Motors, Ford and Chrysler will be flex-fuel vehicles. The support for alternatives to oil is overwhelming and we will continue to push for the production of flex-fuel vehicles and maintain our long-time support for the Open Fuel Standard. Do you favor or oppose requiring automobile manufacturers to build cars that will run on fuel sources other than oil, such as electricity, natural gas and biofuels? Favor: 78 percent Oppose: 19 percent Don’t know: 3 percent It’s clear that the American people support the RFS and next-generation cellulosic ethanol. And yet, the RFS is facing opposition on all ends. It’s time policymakers give Americans what they want and need, stable and continued support of the RFS. It’s time our lawmakers start listening to the American people. Author: Bob Dinneen President and CEO, Renewable Fuels Association 202-289-3835
For years, we’ve been told that cellulosic ethanol is a “fantasy fuel.” And it is.
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Big Oil Lies and Whines By Jim Miller
Time and again, we hear Big Oil complain that renewable identification numbers (RINs) are a burden and increase the cost of the renewable fuel standard. They claim RINs drive up prices of fuel for the consumer. These allegations are a direct contradiction to a number of independent analyses and empirical data. RINs have been cited by groups like the American Petroleum Institute as one of the primary reasons why the blending requirements of the RFS must be scaled back, but when one looks at the situation, it is clear that this is an erroneous statement made by an industry that is far too comfortable with distorting the truth. Ethanol generally trades at prices less than gasoline. On average, ethanol sells at a 56-cent discount per gallon on the wholesale market compared to the wholesale cost of gasoline. By incentivizing greater distribution and sale of a fuel that costs less per unit of volume, RINs and the RFS drive the retail price of gasoline down, not up as Big Oil has claimed. The cost of RINs is not a “tax” paid to the government or a premium received by ethanol producers. In fact, RINs are provided by ethanol and other renewable fuel producers at no cost to their customers. They are provided to ethanol purchasers for free. Money is paid from one company to another in the fuel production, blending and retail sectors. Companies with a shortage of RINs purchase them from other companies within the market that have a surplus. The bottom line is that if an obligated party, generally an oil refiner, decides not to blend enough ethanol to meet its obligation under the RFS, it can purchase RINs as an alternative method to achieve compliance. Even if the refiner choses to purchase RINs, the net cost to consumers is zero. RINs are paid for by obligated parties, such as refiners and importers, rather than consumers at the pump. In addition, as the RIN price rises, it creates an incentive for refiners to offer higher ethanol blends—like E15, E30 and E85—at a discount to consumers.
14 | Ethanol Producer Magazine | JUNE 2014
But not all refiners or other obligated parties have to purchase RINs. Many refiners purchase ethanol directly and blend it into their gasoline. Since they obtain RINs for free when they buy ethanol, they don’t have to purchase extra RINs to meet their RFS requirements, and indeed they may be able to generate additional revenue by selling RINs, if they have a surplus. Those refiners who purchase RINs in lieu of blending renewable fuels must still sell their product at a price that competes with refiners that have not incurred additional RIN costs. Therefore, in a competitive marketplace, refiners who refuse to blend have to absorb the cost of the RINs and won’t be able to pass those costs on to consumers. The retail market for gasoline is both highly competitive and highly transparent. There are roughly 150,000 retail gasoline stations in the U.S., all selling the same product with prices posted for all to see. Customers are simply in search of the lowest available price. A driver can easily bypass one station in favor of another selling for just a few cents less per gallon. Even if the refiner could pass along the RINs cost to the wholesaler or distributor, and the wholesaler or distributor could pass it along to the retailer, the retailer would have a hard time passing it along to consumers in such a price competitive environment. Thus the cost of the RIN is absorbed along the way, before it ever reaches the consumer. The real reason Big Oil opposes RINs and the RFS is simply an issue of market share. The oil industry wants to maintain its stranglehold on the U.S. economy. The oil industry knows that ethanol is a higher performing, less expensive fuel that reduces our greenhouse gas emissions and keeps our energy production at home. Ethanol revitalizes rural communities and keeps our agricultural industry flourishing. When compared, it is no surprise that the oil industry is using every tactic possible to try to keep ethanol from being a choice for consumers. Author: Jim Miller Chief Economist for Growth Energy 202-545-4000 firstname.lastname@example.org
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Do These Regulations Make My Fuel Look Fat? By Ron Lamberty
So, what’s the deal with E15? Why aren’t more stations putting it in? It’s higher octane and almost always
costs less than “regular” gasoline and E10 and it can be used in about three-quarters of the cars on the road today. Equipmentwise, the cost to add E15 is between zero and not very much, even if your local fire marshall requires an upgrade to make pumps compatible up to E25. That costs a few thousand bucks for small stations. Not insignificant, but a far cry from the $300,000 cost that the oil industry public relation hacks have been using to scare stations away. There is some paperwork required to legally sell E15— station owners just have to send a letter to the U.S. EPA and sign up for a fuel survey—and there are plenty of folks that want to help with that process. Free EPA-required orange labels and “minimum purchase” stickers are available at no charge from several sources and the fuel survey program costs retailers either a hundred bucks a year or nothing. Plus, every station’s fuel will be tested by that organization anyway, whether they sell E15 or not. E15 has one less major hurdle than E10 faced in getting into markets nationwide, ethanol availability. Seven years ago, some fuel marketers who “got it” and loved the idea of lower cost, ethanolenriched, higher-octane gas, couldn’t offer it to their customers because no ethanol was available in their market. With ethanol now stored in pipeline terminals from coast to coast, retailers just have to add a little bit more of the stuff that’s already there to make E10 into E15. Retailers can even make extra money in the renewable identification numbers (RINs) market, even if they’re only getting credits for the extra 5 percent ethanol that goes into E15. The big oil companies have basically banned it from stations that carry their brand, so an independent who adds E15 to his or her product mix can gain a rare advantage by offering a lower cost, higher octane fuel that the big guys won’t be selling for a while. And, then they can sell their RINs to the oil companies and pocket some of the extra cash, while using the rest to lower E15 costs and retail prices.
16 | Ethanol Producer Magazine | JUNE 2014
So, why aren’t more retailers offering E15? Don’t they like us? Don’t they think our fuel is attractive? Well, actually, talking to station owners on the c-store trade show circuit, it seems station owners don’t seem to think E15 is unattractive. But they do think it’s too “high maintenance.” Adding E15 at little or no cost is nice, but it’s a hassle to get permission from regulators who have never said a word when stations switched fuels in the past. EPA’s registration process is simple but not as simple as doing nothing, which is what they had to do to switch to suboctane. Labeling is easy and free but other fuels require no warning labels. Fuel terminals have the components for E15 but won’t set up a product code for it. And, when you make your own E15, the gas and ethanol have to come from companies who say it’s OK to use it for E15 and you have to keep the paperwork to prove it. Imagine if marketers had to do the same when blending No. 1 and No. 2 diesel in the winter. Plus, several marketers say Reid vapor pressure (RVP) regulations are just too big a hassle. Changing the pumps from regular to flex fuel and back every spring and fall is a pain, and frankly, makes no sense to most station owners. “How can it be legal on May 31, and illegal the next day?” one of them asked me. “That’s just dumb.” And that’s the real problem. E15 got its high-maintenance reputation by answering the taunts of the bully fuel in the marketplace, hoping it would leave ethanol alone when it passed their tests. They won’t. Big Oil will keep pushing EPA and Congress to make ethanol meet standards oil never has to meet and the bullying won’t stop until we say “enough.” A punch in the nose might help, too. Author: Ron Lamberty Senior Vice President American Coalition for Ethanol 605-334-3381 email@example.com
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Think Biorefinery By Robert Vierhout
From time to time I go to the plants of ePURE members to get up to speed on the latest developments in the sector I defend and represent. Recently I went to see what I consider a state-of-the-
art production facility in Belgium. The 300,000 cubic meter (77.8 MMgy) plant runs two-thirds on wheat and one-third on the juice from sugar beets (molasses or sugar juice). The plant has a number of characteristics and coproducts that make it very special. The most remarkable element is the way this plant is generating its energy. Unlike most of the U.S. and European Union ethanol plants, it produces about 90 percent of its energy needs itself, in this case, by burning the bran (hard outer layer) of cereal. It is similar to what Brazilian plants do with the bagasse left over from processing sugar cane. Even though a biomass boiler comes with a high capital expenditure it has the big advantage that greenhouse gas emissions savings go up significantly. In the long run it is also increases the operating margin, as the price of energy remains an important cost factor in Europe. Originally, bran was used to generate steam (energy) only. A recent technology investment at the plant now makes it possible to separate bran into digestible and nondigestible parts. The digestible part, which is now used as an animal feed, is being replaced by shredded waste wood. This reduces costs even further and increases revenues. With this new separation technology in place, the plant is now able to produce three streams of feed and food. First, there is the fiber-rich bran. Then we have the well-known wheat yeast concentrate with high-protein content. Both are widely used as ruminant feed. And finally, gluten is produced out of the nonsoluble
18 | Ethanol Producer Magazine | JUNE 2014
protein after milling the branless wheat. It is very popular in the fish feed market and the food industry. But innovation does not stop there. The company wants to go a step further in the bran separation process. The bran that is used as an animal feed still contains some traces of starch. Taking starch out of the bran could increase ethanol yield even further. Another recent innovation is a treatment of the ashes from the biomass boiler. In the early days it was simply waste, but now it is being sold as an organic fertilizer. Remarkably the plant is also a net producer of electricity. The excess electricity generated is sold to the grid as green electricity and also delivers extra revenues. The latest innovation being studied is the extraction of wheat germ oil, which has a high nutritional value and favourable characteristics for human health. The final coproduct that comes out of this plant is CO2, which is captured and sold for the production of carbonated soft drinks. Considering this impressive list of coproducts and knowing their economic value, one could almost joke that ethanol is, in fact, the coproduct. Itâ€™s clear a modern, state-of-the-art ethanol distillery is much more than just a plant producing alcohol. From a simple kernel of grain we can make a panoply of high-value products. Itâ€™s actually a biorefinery. Depending on the raw material used, an impressive list of products can be produced, making ethanol plants the most innovative industrial installations we have. What other industry makes so much out of an agricultural crop while hardly producing any waste? It is time we start promoting the biorefinery concept. Author: Robert Vierhout Secretary-general, ePURE Vierhout@epure.org
BUSINESS BRIEFS The U.S. Grains Council has promoted Erick Erickson to vice president. With more than 30 years of international agriculture experience, he will be given Erickson latitude to redefine the post and concentrate his efforts on the organization’s administrative and financial health, as well as global strategies. Erickson has served in a variety of positions at the USGC, including director of global strategies, executive director for membership, administration and communication, and director of planning and evaluation. USGC also added Nick Lashinsky as its new manager of communications. In this role, he will help develop, implement and manage the council’s online presence, including its website, social media and USGC publications. Lashinsky has more than 13 years of experience in public relations and communications.
People, Partnerships & Deals
Lesaffre has announced the launch of a new business unit. The new unit, Leaf Technologies, will focus on the worldwide sales and market development of value-added fermentation solutions for fuel ethanol and biobased chemical producers. The mission of Leaf Technologies is to reinforce Lesaffre’s current position on the first-generation fuel ethanol market and continue innovating in the field of lignocellulosic ethanol. Arthur Ragauskas has been named the 15th University of Tennessee-Oak Ridge National Laboratory governor’s chair. He will serve as governor’s chair for biorefining, based in UT’s Department of Ragauskas Chemical and Biomolecular Engineering with a complementary appointment in the UT Institute of Agriculture’s Department of Forestry, Wildlife, and Fisheries. He will serve in the U.S. Energy and Environmental Sciences Directorate, Biosciences Division, at ORNL and as a member of the Department of Energy’s BioEnergy Science
Center. Ragauskas begins at UT on June 1. He comes to the new position from the Georgia Institute of Technology, where he is a professor of chemistry and biochemistry and researcher within the Institute of Paper Science and Technology. Superior Industries Inc. has added Roland Duer in the position of international sales and business development manager. He will represent Superior Industries throughout Latin America. Duer has more than Duer 25 years of business experience in building relationships and developing opportunities. He most recently served as product manager and purchasing manager at Condumex Inc. AIMS Inc. has announced a partnership with RINAlliance Inc., a provider of renewable fuel blending compliance software services. The partnership offers AIMS’ clients value-added services that deliver clear solutions designed specifically for a marketer’s business needs.
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20 | Ethanol Producer Magazine | JUNE 2014
Interstates Companies has announced that Scott Peterson, chief financial officer of the company and Harbor Group president, has been promoted to CEO. He will assume the new role Sept. 1. Peterson succeeds Larry Den Herder, who has served as CEO since 2001, Den Herder will remain chairman of the board until the close of 2016. Prior to working at Interstates, Peterson worked for KPMG Peat Marwick and Valero Energy.
Grain Processing Corp. has joined the Renewable Fuels Association. The company produces high-quality ethanol, corn gluten feed, gluten meal and a variety of other products at its plants in Muscatine, Iowa, and Washington, Ind.
Aventine Renewable Energy has appointed Seth King director of coproduct merchandising. He is responsible for merchandising all coproducts, including dried distillers grains, wet distillers grains, King corn gluten feed, corn gluten feed meal, corn gluten germ and corn oil. Kind most recently worked for the U.S. trading arm of COFCO Corp. in Chicago as a trader with responsibility for purchasing grains and other products for export to China. GCube, an underwriter for renewable energy initiatives, has launched a political risk insurance offering in response to a rising number of client enquiries regarding political and credit risk. With these new capabilities, CGube is seeking to target markets in Latin America, Africa, Asia Pacific and Central Asia.
Archer Daniels Midland Co. has named Ian Pinner vice president of corporate strategic and financial planning. He will help develop and drive ADMâ€™s corporate strategic growth plan and its business performance plan. He will also lead the companyâ€™s annual business planning process. Pinner previously served as president of ADMâ€™s grain group. The company has also named Christina McGlone-Hahn director of corporate strategy and competitive analysis. She most recently served as head of agricultural commodities research at Deutsche Bank.
JUNE 2014 | Ethanol Producer Magazine | 21
Prices & Market Analyses
Natural Gas Report
Future natural gas prices hang on inventory levels April 18—Natural gas storage inventories ended the traditional heating season at 822 billion cubic feet (Bcf), nearly 1,000 Bcf below the five-year average level of 1,814 Bcf. Although there are interesting long-term storylines in the natural gas market, the short term is rightly dominated by an intense focus on whether inventory levels can be sufficiently replenished before the mercury plunges again. If this summer were to equal the previous record for a single injection season, storage balances would be almost 12 percent below the lowest level of the past five years at 3,367 Bcf vs. 3,816 Bcf. Can injections in 2014 set a new record and will it be enough to stave off elevated prices at the start of the next winter heating season? Injection data will provide the ultimate answer to that question, but looking to recent historical trends in key components of overall natural gas supply and demand can provide a clue as to whether a recovery to reasonable levels is attainable. On the supply side, analysts are calling for a continuation of a multiyear trend of increasing domestic U.S. production, which has been offset over the past two years by declining net imports. Gas prices have dropped in the past
by Ben Straus
five years, creating opportunities for new industrial processes to start up. Over the 214 days of summer, storage injections must deliver an increase of almost 2.5 Bcf per day more than 2013 to get inventory levels back to 3,500 Bcf. 2014 Injection Projection 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 Start of 2013 Injections Production Gain Reduced Power Injections: 822 +2150 +321 Demand +214
Reduced Imports -150
Corn market continues bullish run, volatility expected
by Jason Sagebiel
April 18—The corn market has been on a bullish run since the less, outside of weather, the fund positions and global politics have January report. Fund buyers were active this late winter and spring. changed from what was exhibited this last fall. That will keep volatility Fund length saw a high of 283,000 contracts in early April. This al- in the market. lowed producers to make sales thus the cash market (basis) has eased. 2014 versus 2013 Overall, the USDA left livestock feed and ethanol demand un- 03/31/14 2013 Mar 14 Change +0 US 95,365 91,691 -3,674 changed. However, with poor logistical issues this winter, ethanol +1 +0 -900 production was curbed. Recent early spring moisture and flat price +0 +0 rally in new crop, left producers encouraged. With the firmer price +30 +0 -400 -20 action in new crop one would expect to see an increase in corn acres -15 +0 -60 in June. Price for new crop corn futures at the time of the March in-2 -550 +400 -200 -200 -100 +9 tentions survey was at the mid-$4.70 level. The question will remain, +10 -6 -10 -170 +100 -50 “Did we buy more corn acres?” -30 -80 -60 The driving forces throughout the early summer will first be -70 -15 -30 -280 -10 weather and then demand destruction. The first point is reasonable -280 -30 -140 and affects planting pace and getting the crop off to a good start. The -250 -200 -35 latter is an issue impacting domestic and export demand. Will $5 corn or a stalling China economy aid a lag in exports the balance of the year? Will slow logistics cause cancellations or determine that demand from the ethanol and feed sectors was adversely affected? NonetheChanges in corn plantings from 2013 to 2014. 22 | Ethanol Producer Magazine | JUNE 2014
Regional Ethanol Prices ($/gallon) Front Month Futures (AC) $2.192 Region
Regional Gasoline Prices ($/gallon)
DDGS affected by tangled logistics, by Sean Broderick export increases April 18—Prior to Easter, the weather was abating enough for thoughts of planting in the Midwest. The focus for DDGS prices is still on logistics and the slow movement of both ethanol tankers and hopper cars. There’s still a discount for spot trucks vs. railcars as a result, but barge traffic is starting to temper that spread. The biggest story has been the volume of exports. The January, February amounts increased about 50 percent from 2013 with 80 percent plus increases to South Korea and Vietnam and a 200-plus percent increase to China. Those numbers look to continue well into the second quarter. Empty container supplies are more available and weather issues that slowed
things in the Midwest look to be past. Domestically, local truck buyers are still very “hand to mouth,” as that has netted them the best values throughout the winter. If railcars start to move better this spring, that should change, but both cattle and hogs are profitable in the Midwest, and dairy is very profitable on the West Coast, so buyers are content to wait to see what happens. Most plants have a pretty good book of DDGS sold for the second quarter. Exports, and, in particular, the political and economic dynamics in China, will shape what happens with prices this summer. The corn and meal markets may affect it a bit as well.
Front Month Futures Price (RBOB) $3.055 Region
3.182 SOURCE: DTN
DDGS Prices ($/ton) Location
258 SOURCE: CHS Inc.
Corn Futures Prices
(May Futures, $/bushel) Date
Apr 21, 2014
Mar 21, 2014
Apr 22, 2013
6.23 1/2 SOURCE: FCStone
Cash Sorghum ($/bushel) Location
Supply concerns ease, ethanol prices tumble April 18—April has provided a wild and volatile ride for ethanol markets. Prices moved sharply lower due to supply concerns easing across the country. Those issues had little to do with overall corn availability or plant capacity. Adverse weather through many areas of the country slowed or delayed train traffic. Since most ethanol moves from Midwest production areas to the coasts by train, this limited the amount of ethanol available for blenders to use. Ethanol plants were also affected as they had to throttle back production as they had no place to store additional ethanol. But as
by Rick Kment
winter weather eased, transportation delays slowly worked themselves out and supplies and production levels began to rebuild quickly. As a more normal state returned, ethanol futures posted aggressive losses through the month, falling more than $1.30 per gallon in futures and over $2 per gallon at several terminals. Market volatility seems to have slowed heading into the high demand summer driving season, but additional ripples likely will be seen in the next several weeks due to increasing demand for gasoline and ethanol.
Apr 25, 2013
Mar 21, 2014
Apr 17, 2014
SOURCE: Sorghum Synergies
Natural Gas Prices ($/MMBtu) Location
Apr 25, 2014
Jan 31, 2014
Apr 29, 2013
SOURCE: U.S. Energy Services Inc.
U.S. Ethanol Production (1,000 barrels) Per Day
SOURCE: U.S. Energy Information Administration
JUNE 2014 | Ethanol Producer Magazine | 23
The same DONG Power P ower your old Energy ethanolwho plant ethanol pioneered clean with New Ethanol with power shrinks your production. production. carbon score.
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DISTILLED Glacial Lakes upgrades corn storage, handling at 2 plants Glacial Lakes Energy LLC plans to upgrade and expand corn handling areas at its Watertown, S.D., and Mina, S.D., facilities. The improvements are expected to improve the company’s corn procurement strategy and customer service. The Watertown plant will get a $6.7 million upgrade that includes a new super-sized receiving pit and a 30,000-bushel-per-hour elevation leg on an existing facility that will allow the plant to handle much of the feedstock the plant requires for its daily operations. An existing receiving pit will be expanded and two new 120-foot scales will accommodate trucks delivering corn. The Mina plant will undergo $5.3 million in expansions, adding 1.5 million bushels of corn storage capacity. Two 750,000-bushel steel bins will complement the existing 1.3-million bushel storage and grain receiving system. Brad Shultz, director of commodities and risk management at GLE noted that the improvements will allow his company to purchase more corn when market conditions are favorable and when customers want to sell.
Ethanol News & Trends Top U.S. Ethanol Producers
Valero Energy Poet Biorefining Archer Daniels Midland Co. Green Plains Renewable Energy Flint Hills Total U.S. capacity
Number of plants
11 27 9 12 6
1.31 billion gallons 1.695 billion gallons 1.8 billion gallons* 1.02 billion gallons 0.645 billion gallons 15.258 billion gallons
*ADM data SOURCE: ETHANOL PRODUCER MAGAZINE PLANT MAP
Valero buys 11th plant, will restart in months Valero Renewable Fuels Co. LLC, a wholly owned subsidiary of Valero Energy Corp., has purchased a 110 MMGy ethanol plant located in Mount Vernon, Ind., from Aventine Renewable Energy-Mt. Vernon LLC, a wholly owned subsidiary of Aventine Renewable Energy Holdings Inc. The new plant is the 11th ethanol plant purchased by Valero. The facility has been idle for approximately two years, but Valero plans to begin a restart program and resume production within months.
Some chemical companies focus on this
“We’re looking forward to hiring employees, restarting the plant and producing ethanol,” said Martin Parrish, vice president of alternative energy and development at Valero. “We intend to invest in the Mount Vernon plant to make it competitive with other top-tier ethanol facilities.” The facility is located at the Port of Indiana-Mount Vernon on a location leased from Ports of Indiana, the state port authority. That relationship will continue.
Buckman takes a wider view. Some chemical companies focus only on process. Some focus solely on water treatment. Buckman takes a comprehensive approach and looks at the bigger picture — return on investment and environment. We look at every aspect of your plant’s operation,
© 2014 Buckman Laboratories International, Inc. All rights reserved.
26 | Ethanol Producer Magazine | JUNE 2014
tailoring chemistries to boost production and increase profitability — from evaporator efficiency to corn oil recovery to water treatment issues. To find out more or to schedule a system audit, contact your Buckman representative or email firstname.lastname@example.org.
GSF purchases, retrofits idle Blue Sugars demo facility Colorado-based GeoSynFuels LLC has acquired the cellulosic demonstration facility previously owned and operated by Blue Sugars Corp., the parent company of Western Biomass Energy LLC. Western Biomass filed for bankruptcy in 2012, followed by Blue Sugars in 2013. Todd Harvey, president and CEO of GSF said his company plans to leave the facility in place in Upton, Wyo., and retrofit it to use his companyâ€™s proprietary 5CS ethanol production technology. Unlike many cellulosic technologies that target both 5-carbon and 6-carbon sugars, GSFâ€™s process targets only 5-carbon sugars for ethanol production. As a result, more biomass material is left behind for other purposes, such as combustion. The process is designed to be a bolt-on addition to facilities that already aggregate, process and combust biomass, such as sugar mills, pulp mills and biomass energy facilities. GSF began testing its process at the pilot scale in 2011. The newly purchased demonstration facility is expected to be operational by mid-to late summer.
ADVANCING SCIENCE: Using computer-aided design, the research team built a fully functioning chromosome, which they call synlll, and successfully incorporated it into brewerâ€™s yeast. PHOTO: NYU LANGONE MEDICAL CENTERâ€™S INSTITUTE FOR SYSTEMS GENETICS
Team announces huge step in yeast genetics An international team of scientists has synthesized the first functional chromosome in yeast, an important step in the emerging field of synthetic biology. The achievement could benefit future work to design microorganisms to produce biofuels, medicines and other products. The effort is described as one of the most significant advances in yeast genetics since 1996, when scientists mapped yeastâ€™s entire DNA. The team was led by Jef Boeke, director of NYU Langone Medical Centerâ€™s Institute for Systems Genetics. â€œOur re-
search moves the needle in synthetic biology from theory to reality,â€? he said. â€œThis work represents the biggest step yet in an international effort to construct the full genome of synthetic yeast. It is the most extensively altered chromosome ever built. But the milestone that really counts is integrating it into a living yeast cell. We have shown that yeast cells carrying this synthetic chromosome are remarkably normal. They behave almost identically to wild yeast cells, only they now possess new capabilities and can do things that wild yeast cannot.â€?
Vecoplan builds turnkey systems that process biomass to be used in biorefining applications. Our systems can be used to shred and process corn stover, switchgrass, bagasse, or any other type of biomass. They are used in the production of cellulosic ethanol and other second-generation biofuels. Vecoplan systems provide application specific shredding, stone & metals removal, screening, separation, conveying, loading & unloading, storage, and metered feeding of biomass prior to its conversion to advanced biofuels. Contact us or visit our website today, to learn more about our biomass prep systems.
YHFRSODQOOFFRP JUNE 2014 | Ethanol Producer Magazine | 27
UKâ€™s Vireol to improve, operate Virginia plant Vireol Bio-Energy LLC has announced plans start up the former Appomattox Bio Energy plant in Hopewell, Va. In March, the Hopewell City Council voted to support the project with a $250,000 grant. The 63 MMgy facility was originally constructed by Osage Bio Energy. The plant reached mechanical completion in August 2010, but never reached full production. The facility was put up for sale in May 2011. U.K.-based Vireol purchased the plant last year. The company originally planned to dismantle and ship the facilities to the U.K., but has since decided to take advantage of the more focused legislative environment, more mature market and more cost-efficient operations in the U.S. Vireol plans to improve the facilityâ€™s ethanol production capabilities and expand and construct new valued-added processes at the site, such as those for distillers grains coproduct. The company is also investing in a facility to capture and utilize high-quality carbon dioxide produced during the fermentation process.
U.S. Corn Production 2009 2010 2011 Corn acres planted (millions)
2012 2013 2014
86.38 88.19 91.94 97.16 95.37 91.69
Corn grain acres harvested 79.49 81.45 83.99 87.38 87.67 (millions) Corn grain yield (bushels per acre)
164.7 152.8 147.2 123.4 128.8
SOURCE: USDA NASS
Projected corn planting down, but still high The USDAâ€™s National Agriculture Statistics Service released its Prospective Plantings report on March 31, predicting that U.S. farmers will plant 91.7 million acres of corn this year. If realized, that planting level would represent the lowest planted acreage since 2010, but would still be the fifth highest on record. Corn acreage is expected to increase in Colorado, Idaho, Iowa, Kansas, Maine, Massachusetts and Utah. It is forecast to
drop in 32 states and be maintained at 2013 levels in Connecticut, Michigan, Minnesota, Montana, New Jersey, Oregon, Rhode Island, Washington and Wisconsin. Iowa is expected to remain the state with the highest acreage, with 14 million acres expected to be planted this year, up from 13.6 million last year. If realized, the 380,000 acres expected to be planted in Idaho would set a record high for the state.
FTC proposes new retail labeling requirements for blends higher than E15 In April, the Federal Trade Commission published a proposed rule to adopt and revise rating, certification and labeling requirements for certain ethanol blends. The rule aims to amend the previously finalized Rule for Automotive Fuel Ratings, Certification and Posting. The FTC said in its proposal that new amendments aim to help purchasers identify the correct fuel for their vehicles. The proposed rulemaking would require ethanol blends, with the exception of E15, to be identified with orange labels that contain the message “use only in flex-fuel vehicles/ may harm other engines.” The label would also be required to disclose the percentage of ethanol contained in the fuel, rounded off to the nearest interval of 10. Regarding the decision not to include an octane rating on the required label, the FTC said that requiring octane ratings for ethanol blends might incorrectly suggest those blends are interchangeable with gasoline.
American Viewpoint Poll Results
Government incentives for cellulosic ethanol
Requiring auto manufacturers to build cars that run on fuels other than oil
Tax incentives for oil
SOURCE: RENWEABLE FUELS ASSOCIATION
Poll reveals 65 percent support for RFS A recent poll has found that the number of Americans that support the renewable fuels standard (RFS) is growing. The Renewable Fuels Association announced the poll conducted by American Viewpoint found that 65 percent of adults currently support the RFS, up from 64 percent in 2013 and 61 percent in 2012. Only 26 percent of respondents indicated they oppose the program. “It is telling that support for the RFS continues to grow in spite of the relentless attacks on ethanol and the RFS financed by Big Oil’s deep pockets. Repeatedly Americans have decisively
said they place a premium on energy independence, job creation, and a cleaner environment,” said RFA President and CEO Bob Dinneen. Linda DiVall, president of American Viewpoint, pointed out that the unfavorable rating of oil companies climbed by 5 percentage points, reaching 47 percent. “That rise in negative opinion of oil companies certainly manifests itself in the 66 percent of adults polled who desire a level playing field among fuels and resent the subsidies and special treatment oil companies have held onto at the expense of the American taxpayer,” she said.
JUNE 2014 | Ethanol Producer Magazine | 29
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30 | Ethanol Producer Magazine | JUNE 2014
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Guardian Plants 32 | Ethanol Producer Magazine | JUNE 2014
Collaborative Growth Platform
MMgy Guardian Energy LLC Janesville, Minn.
Guardian Energy’s vision statement speaks to how the farmer-owned philosophy is applied in a maturing industry.
MMgy Guardian Lima LLC Lima, Ohio
By Susanne Retka Schill
Guardian Member Companies 1) Chippewa Valley Ethanol Co. 2) Heartland Corn Products 3) Dakota Ethanol 4) Al-Corn Clean Fuel 5) Golden Grain Energy LLC 6) KAAPA Ethanol LLC
Other RPMG Plants
Guardian Energy intends to keep local ownership a viable part of the ethanol industry, building on the success of the Renewable Products Marketing Group, another collaborative effort of a group of ethanol companies. Guardian's vision: Providing
the platform for collaborative growth in renewable energy. Collaborative is the key word behind the unique business model that Guardian Energy represents. “At the core of each individual company are farmer owners,” explains Guardian Energy Management LLC CEO Mike Jerke, who left Chippewa Valley Ethanol Co. to take over the position April 14. Some Guardian member companies are organized as farmer cooperatives and others are LLCs,
JUNE 2014 | Ethanol Producer Magazine | 33
NEW VISION: Doing business for the farmer-owned ethanol companies calls for a slightly different mindset from CEOs Mike Jerke, left, and Doug Punke. PHOTO: GAMUT ONE STUDIOS
but they share a common understanding of how a farmer and locally owned company does business. Jerke points to RPMG as an example of what that means. As RPMG CEO Doug Punke says,
â€œOur goal is to get the highest netback price that we can get, be it for ethanol, corn oil or DDGS.â€? While on the surface, making a profit for the investor seems the same as for any business, itâ€™s how they go about
34 | Ethanol Producer Magazine | JUNE 2014
it that is different. Punke explains RPMG got its start with two ethanol cooperatives, â€œthat said â€˜letâ€™s combine our volume and do a better job of managing sales and sharing the marketing piece.â€? The two became five that pooled their gallons and received a weighted average price. Pooling had its limitations, though. In 2010, RPMG adjusted its approach to leverage the collective volume while marketing individually for each plant. â€œWe may have six plantsâ€™ production that is going to the same market,â€? Punke explains. â€œMaybe thatâ€™s New York Harbor, maybe thatâ€™s Atlanta or Florida, maybe the Pacific Northwest. We take that collective volume and market those gallons. Every plant gets the weighted average delivery price and we use the freight of each individual plant.â€? Individualizing the netback in that way gets a higher return for plants that invested in unit train loading facilities, for example, by rewarding them for the lower freight costs. Two other things also make RPMG unique, Punke says. â€œOver 95 percent of all the ethanol volume that we do is sold to an end user. To our knowledge, no other marketer does thatâ€”theyâ€™re all trading.â€? Second, RPMG does not have a trading group
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creating a conflict of interest where a trader says: “I should buy this a littler cheaper [from the ethanol producer] because I can sell it for a little more over here, and I get to keep that money.” “We don’t do that,” Punke says. “Our value is proved by getting the best price and getting that back to the producer.” RPMG charges a flat marketing fee and is transparent on sale prices and freight charges. The changes to RPMG’s marketing strategy has brought more plants under its wing, says Punke. The company now markets ethanol for 19 plants, going from under 900 MMgy of ethanol moved before the change, to more than 1.6 billion gallons today. Of the 19, 14 have invested in RPMG to become owners, which includes the Guardian plants in Janesville and Hankinson. Nonowners are treated like owners, he adds. “They’re going to see the prices we’re getting for their ethanol. We’re going to take our marketing fee and they get everything else. That is a very powerful message and proposition to get growth. It’s very tough to beat.” RPMG has become a force in the world of ethanol marketing. Next year it expects to market 1.7 billion gallons, put-
Growing Impact: Starting with two cooperatively owned plants in the mid-1990s, RPMG now markets ethanol for 19 plants. PHOTO: SUSANNE RETKA SCHILL, BBI INTERNATIONAL
ting it in the top three alongside Archer Daniels Midland Co. and Poet LLC. It’s in first or second place alongside Poet for corn oil marketing at more than 200 million pounds, plus it moves more than 2 million
tons of DDGS. The marketing structure has given individual, locally owned ethanol companies a means to achieve economies of scale in marketing their products. Punke adds that it has been rewarding as Guardian CONTINUED ON PAGE 40
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The Genesis of Guardian Energy It is known as the Minnesota model. Value-added agriculture built around cooperative principles. Farmers invest in their local ethanol companies and make commitments to deliver a set number of bushels to the plants with the idea that when corn is cheap, they’ll make their money from the value added through the ethanol plant. When corn prices are high, the farmers get their returns directly from corn, lessening the need for returns from the ethanol plant, in turn insuring the plant survives downturns. Back in 1996, two Minnesota farmerowned cooperative ethanol companies wanted to take that philosophy the next
step and pool their production to improve their position in the ethanol market, creating Renewable Products Marketing Group LLC. Distillers grains marketing soon followed. As the industry grew, a hybrid business model emerged with development groups turning to limited liability corporate structures (LLCs) to allow nonfarmer investments, bringing local business owners into the growing number of ethanol companies. RPMG’s two companies grew to a half a dozen, both farmer-owned cooperatives and locally owned LLCs. Times were good for the industry in the mid-2000s when margins were high and the build-out of the industry was boom-
ing. That came to a screeching halt in 2008 when the U.S. economy entered the long recession. One of the casualties was the 110 MMgy ethanol plant in Janesville, Minn. Completed, but never commissioned, it sat in limbo after its builder, VeraSun, went bankrupt. RPMG members in the region near Janesville saw an opportunity. “These companies had become comfortable with one another,” explains Mike Jerke, who had just started as general manager at one of those, the farmer-owned Chippewa Valley Ethanol Co. in Benson, Minn. “They learned where the commonalities are in their vision.” Guardian Energy LLC was created
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36 | Ethanol Producer Magazine | JUNE 2014
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FORMER OIL ASSET: Guardian Energy’s most recent plant purchase is the 132 MMgy facility in Hankinson, N.D. PHOTO: HANKINSON RENEWABLE ENERGY
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CATALYST: RPMG members made the first plant purchase in 2009, bringing the completed, but never commissioned 110 MMgy Janesville, Minn., plant into production. PHOTO: GUARDIAN ENERGY
to purchase the Janesville plant in 2009, with CVEC investing along with Al-Corn Clean Fuel Cooperative at Claremont and Heartland Corn Products at Winthrop. KAAPA Ethanol LLC, Minden, Neb., and Golden Grain Energy LLC, Mason City, Iowa, joined in the investment as well. (Another original investor, Central Minnesota Ethanol Co-op of Little Falls, Minn., has since pulled out as its members have approved the sale of the ethanol plant to Green Biologics Inc. The transaction is expected to close later this year.) “We began the process of bringing Janesville online,” Jerke says, “and began thinking long term about this company we were now part of, Guardian Energy. What came out of thinking long term was a very clear vision: to provide the platform for collaborative growth in renewable energy.” In 2010, the Guardian group bought a second facility, this time the 54 MMgy plant in Lima, Ohio. CVEC, Heartland 38 | Ethanol Producer Magazine | JUNE 2014
and KAPPA created Guardian Energy Holdings LLC to become majority owners while Paladin Ethanol Acquisition LLC retained a minority stake in Guardian Lima LLC. The Lima plant, like Janesville, was a casualty of the 2008 bust, coming online that year as Greater Ohio Ethanol, but ultimately filing bankruptcy. PEA, an entity backed by Washington, D.C.-based Paladin Capital Group, acquired the facility. Guardian’s third purchase was also part of the 2008 VeraSun meltdown. Murphy Oil had acquired the 132 MMgy former VeraSun plant in Hankinson, N.D., in 2010. In a corporate decision to refocus its assets, Murphy Oil sold Hankinson Renewable Energy LLC to Guardian Hankinson LLC in December. Guardian members participating in this purchase included CVEC, Heartland Corn Products, KAPPA Ethanol and Dakota Ethanol LLC in Wentworth, S.D.
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BUCKEYE PRODUCER: The 54 MMgy ethanol plant in Lima, Ohio, was purchased by the Guardian group in 2010. PHOTO: GUARDIAN ENERGY
The Guardian members, all owners of RPMG, have the flexibility to choose whether to get involved in an investment opportunity, explains Jerke. “And if they choose to be involved, determine how aggressively they want to be involved.” Cash is returned based on ownership levels. With different owners in the three entities, the group created a separate company above the plant level, for the management team, Jerke explains. “You can be a member of any one of the three investment opportunities and you will be a board member of Guardian Energy Management.” Jerke laughs when asked whether these multiple organizations make the accountants happy. “You absolutely know it. We have flowcharts that only a CPA could understand. But,” he continues, “we try to look through the structures. We operate and want the team members to look at themselves as being part of a team, as part of a collective.” One of the advantages, he adds, is that there’s a level of trust that allows finance and plant managers from all the Guardian plants and owner companies to collaborate. “Our benefit is having this broad group to draw from and learn from,” Jerke says. “To get to the point where we’re not making the same mistakes. I’ve heard that comment in our boardroom. ‘We don’t mind the mistakes so much, we just don’t want to have to repeat them.’”
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JUNE 2014 | Ethanol Producer Magazine | 39
'There is a higher level of liquidity to have your investment egg in three different plants versus all in one.'
'We think the ethanol industry is best served by being owned by farmers, by folks in rural America.'
Jerke CONTINUED FROM PAGE 35
purchased new plants and they’ve compared RPMG’s performance with others. “We’ve come in and gotten them a better price than what they were previously getting.”
The group of like-minded ethanol producers involved in RMPG took their collaborative philosophy the next step when they formed Guardian. “It’s allowing them to reinvest in the ethanol business, where they couldn’t necessarily do that at the current facility—they didn’t have the ability to expand locally,” Punke explains. “There is a higher level of liquidity to have your investment egg in three different plants versus all in one.” As outlined in the accompanying story, “The Genesis of Guardian Energy,” the trust built among companies involved in RPMG allowed them to pool their resources and reinvest in the industry and rural America. Returning cash into the hands of the owners, the farmers and local investors, is the focus for all these like-minded companies, says Jerke. “That has been the goal. That thinking has been clearly driven home by the boards that run these companies and to the management that reports to these boards.
40 | Ethanol Producer Magazine | JUNE 2014
Guardian Energy carries that same philosophy. We think the ethanol industry is best served by being owned by farmers, by folks in rural America.” Maintaining local ownership as the industry matures and faces increasing consolidation, is the next challenge, Jerke says. “At gatherings of ethanol industry people, and if there’s a lot of local board representation, you’ll hear conversations about how to provide an equity event, so people don’t feel like their equity is trapped.” In some areas there are farmers ready to step up and buy ownership units, but there are a lot of rules around how those events happen, he explains. “Is there a way, if you have a number of people who are ready to move out of that investment, that they can capitalize on that in a fairly liquid way?” While Guardian’s first investments have been the outright purchase of two plants and partnership with a capital investment group in a third, the group is interested in finding new ways to retain a level of local ownership within future Guardian acquisitions. “To the extent that consolidation is going to happen, these farmer-owned companies, these local investorowned companies are finding a way to get together and compete with entities much larger than them and maintain their focus,” Jerke explains. Jerke relates a conversation with an Iowan who works in a different industry: “He was asking about Guardian and he said ‘Gosh, do people know about this?’ “I said, ‘Look, this is a bunch of ethanol plants that at their core are farmer owned. You don’t have to be around farmers very long to know they’re not very crazy about broadcasting what they’re doing. Having a marketing department is not a priority.’ “He said, ‘When I listen to what I think’s happening in rural Iowa, and the questions about what’s going to happen in the future—what an interesting model to be lifted up as an alternative.’” “We’ve got a great story to tell,” Jerke continues. “We’ve got a lot of learning to do. There’s going to be bumps on the road, but it represents an opportunity for people.” He refers to the consolidators gaining ground in the industry: “I don’t care for some of those entities and the way they are integrating. What is that doing for the local community and the local farmer? I don’t know how to describe the differences exactly. But at the core, our philosophy is so different in how we want to operate and why we exist,” he says. “I get just as tired as the next guy with this us-versus-them-mentality—we’ve got to compete—but there is great benefit if this industry is maintained and owned to a significant degree by the farmer.” Author: Susanne Retka Schill Senior Editor, Ethanol Producer Magazine firstname.lastname@example.org 701-738-4922
JUNE 2014 | Ethanol Producer Magazine | 41
31 42 | Ethanol Producer Magazine | JUNE 2014
‘Iron Sharpens Iron’ Leveraging benchmarking data for a competitive edge. By Holly Jessen
Progressive ethanol producers know that, to be truly at the top of their game, they can’t operate in a vacuum, without comparing their performance to others. Companies interested in how their operational and financial data stacks up against the competition have a variety of options available to them. Poet LLC is one example of a company with multiple production plants that uses plant performance data to help the company, as a whole, to reach for new levels of success. Some producers participate in benchmarking programs facilitated by a third party, such as through Ascendant Partners Inc. or Christianson and Associates PLLP. Whatever the method, producers say participating in a benchmarking program has actual bottom line benefits. Internal company benchmarking is an effective way to continually challenge the 26 Poet plants to improve, says James Moe, president, Poet plant management and Poet design and construction. “Competition promotes creativity in finding new ways to make ethanol production even more efficient,” he says. “Additionally, multiple plants working on the same challenges allow the best solutions to rise to the top. This benefits everyone in the long run.” Ray Baker, general manager of Adkins Energy LLC, says the company joined the benchmarking program facilitated by Ascendant Partners because it believes that “iron sharpens iron.” Early on, the process can be painful, yes, but as trust develops, the participants help each other improve. For the 50 MMgy Illinois plant, the results speak for themselves. Since joining the program, Adkins Energy has improved its ethanol yield, tightened up its operating procedures and seen efficiency gains. Connie Chappell, benchmarking business consultant for Christianson and Associates, says in a time of widely fluctuating margins, management teams need to know more than just whether the company is profitable. Zeroing in on the most cost-effective ways to maximize plant efficiency and
JUNE 2014 | Ethanol Producer Magazine | 43
'Most management teams review how yield, profitability and other factors stack up against their own performance in previous years. But it can be even more enlightening to see how the numbers stack up against other plants.'
'I think we’ve struck a healthy balance among the Poet plants and it has enabled us to realize consistent incremental improvements as a whole every year.' Moe
identifying what new technologies to invest in helps a company stay competitive regionally, nationally and globally. “A plant’s own historical data is informative, of course. Most management teams review how yield, profitability and other factors stack up against their own performance in previous years,” she says. “But it can be even more enlightening to see how the numbers stack up against other plants over time.”
Although all Poet plants strive to be the best, it’s a friendly competition, Moe says. On the one hand, competition can prompt plant improvement. If it’s taken too far, in order to “win,” individual plants may refuse to share helpful information with sister facilities. “I think we’ve struck a healthy balance among the Poet plants and it has enabled us to realize consistent incremental improvements as a whole every year,” he says. The company would definitely lose something, if it wasn’t part of the Poet strategy. “It is easy to become complacent and fall back on doing things ‘The way we’ve always done them,’” he says. The Ascendant Partners program got its start when the management of a few ethanol plants asked that company to facilitate benchmarking for them. The pilot program started up in early 2010. Today, the four original participating plants have been joined by a few more plants, for a total of six companies and seven ethanol plants. Unlike some benchmarking programs, the data isn’t presented anonymously. Each plant opens up its books, delving into the data of more than 100 variables. “We have a very deep set of financial and operational data,” says Scott McDermott, partner and chief operating officer, adding that, rather than being a traditional benchmarking program, it’s more of a “group push for performance and best practices.”
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PERFORMANCE Delayne Johnson, general manager of Quad County Corn Processors, one of the founding companies, said the group spent 18 months, slowly and painfully working to make certain that the data was truly an apples to apples comparison. Timing, for example, affects the result of certain tests, such as ethanol plant yield. So, they settled on specific testing protocol so the data would be as meaningful as possible, with refinements continuing as needed. McDermott confirms that normalizing data collection methods is an area of emphasis. â€œThat has become a really big deal in interpreting the information,â€? he says. The group meets in person once a quarter, with the location rotating among the plants. Typically, it starts the night before with a dinner, as the social aspect is an important part of the participants getting to know and trust each other, McDermott says. Then, nearly a full day is spent at work. About 40 percent of the meeting involves going through the plant performance variables, line by line. Another aspect of the meeting revolves around discussing a specific focal area, such as maintenance, fermentation, risk management or another topic. The company hosting the meeting also gets about 30 minutes to give a presentation about something that they feel is important. As the plants evaluate or implement new technology, the group is kept apprised. â€œIt allows them to benefit from what their peers are looking at, working on,â€? McDermott says. Johnson says he is 100 percent certain the program has meant bottom line improvement for Quad County. Two examples of that are dramatic increases in ethanol
â€˜In my mind, we are all sister plants. Weâ€™re all trying to improve our position as an individual plant.â€™
'Frankly, I see more collaboration in this group of independent companies, than I do within some companies.'
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yield and decreasing distillation energy per gallon produced. “I give part of that credit to our staff, but I also give part of the credit to the benchmarking meetings that we have,” he says, “because we are able to compare the best practices, if you will, to improve the platform for all of us.” Over time, the group has developed trusting relationships thanks to the benchmarking program. Beyond management talking during meetings, it is evolved to the
point where staff from the various plants are able to call each other up to talk about issues they are encountering. For Johnson, that means he can contact another general manager, while the plant manager and operational staff can call someone in the corresponding position at another plant. “In my mind, we are all sister plants,” he says. “We’re all trying to improve our position as an individual plant but because most of us are in different regions, we aren’t compet-
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'We could consider each other competitors but in the end, if we chose to run our business with selfish ambition rather than working together, I don’t think we would be as successful as we are today.' ing for the same corn, for example. We’re not competing for the exact same space, so with that in mind, we’re able to be open and honest about things that work well in our companies and hopefully that is able to help out other facilities that have issues.” The plants have grown such strong relationships that some even have joint purchasing programs. “Frankly, I see more collaboration in this group of independent companies, than I do within some companies,” McDermott says From a purely data standpoint, Adkins Energy gets plenty of value in participating in the Ascendant Partners benchmarking program, Baker says. But the relationship component is what makes it really worthwhile. “We see our employees taking ownership in the program, openly sharing, and building trust between our organizations,” he says. “We could consider each other competitors but in the end, if we chose to run our business with selfish ambition
rather than working together, I donâ€™t think we would be as successful as we are today. From an industry prospective I believe our most successful times have come when we decided to work with each other.â€? Christianson and Associatesâ€™ benchmarking program has more than 60 U.S. and Canadian ethanol plants participating. The company rolled it out in 2003 and now has 11 years of data on the ethanol industry, Chappell says. Using data collected quarterly, the benchmarking program allows producers to see, for example, where they land in a common profitability measure, the grind margin. This correlates ethanol and coproduct netbacks minus a plantâ€™s feedstock and energy costs. The data reveals an overall industry average as well as averages for the leaders in the top 25 percent and the laggards in the bottom 25 percent. â€œSubscribers can also see, at a glance, exactly where their own plant ranks against the entire group each quarter,â€? Chappell says. E Energy Adams LLC has been a Christianson and Associates benchmarking client since the day it started operations, says Jon Cosby, chief financial officer of the Nebraska plant. The program is an essential tool in continuous improvement and has helped the company in its efforts to be a top tier performer, with the goal of being able to make a profit in good and bad times. The main benefit is in helping the company identify areas for improvement. â€œBenchmarking does not necessarily help a company know why they are underperforming or how to fix it,â€? he says. â€œHowever, knowing the â€˜whatâ€™ is already a big step in the right direction.â€? Patty Greteman, controller at Patriot Renewable Fuels LLC, says the company exports the Christianson and Associates benchmarking data to excel and creates graphs for visual representation. â€œOur goal is to be in the top 25th quartile in every category,â€? she says. â€œObviously thatâ€™s going to be a stretch in some areas, but thatâ€™s what we aim for.â€? Beyond financial and operational benchmarking, the Illinois ethanol plant also takes part in Christianson and As-
sociatesâ€™ labor survey, the results of which it uses to gauge whether the companies salary and benefits are in line with what is offered by other companies. In Kentucky, Mick Henderson, general manager of Commonwealth Agri-Energy has recommended the Christianson and Associates benchmarking program to several other ethanol plant managers, most of whom have signed on. â€œFor our business, the bigger the group the better,â€? he says.
â€œWhen there were 20 plants, I wished there were 30. When there were 30, I wished there were 40. So I am going to recommend it because it helps our business directly. But Iâ€™m also going to recommend it to someone I consider a friend in the business.â€? Author: Holly Jessen Managing Editor, Ethanol Producer Magazine 701-738-4946 email@example.com
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PLANT TO PUMP: A fuel customer fills up on E85 at Absolute Energy LLCâ€™s 115 MMgy ethanol plant. The fuel is distributed and sold at local retail gas stations. PHOTO: KATIE KOENIGS, ABSOLUTE ENERGY
50 | Ethanol Producer Magazine | JUNE 2014
On-site RIN Collection Some ethanol producers are capturing renewable identification numbers (RINs) and promoting higher ethanol blends. By Chris Hanson
Recognizing an opportunity to reduce inefficiencies or address a need with a novel approach can lead to a big break in business. In the
case of ethanol production, some are skipping the traditional blending routes and blending ethanol with gasoline on-site to capture RINs and give retail gas stations the opportunity to save on wholesale, higher blended ethanol mixes, such as E85. In the corn growing powerhouse that is Iowa, at least four ethanol plants are currently blending on site as of early April, says Monte Shaw, executive director of the Iowa Renewable Fuels Association, adding, there could be more that haven’t reported to the IRFA. Some may have initially implemented on-site blending to meet demands from local retailers. At times when RIN prices were higher, some ethanol producers felt E85 wholesale prices being offered by blenders were not reflecting that RIN value. “In other words, the blender at the terminal was charging them for the ethanol and the gas,” Shaw explains. “Additionally, the blender was getting the RIN, which in some cases, was 50 to 75 cents, and putting that in their pocket.” Blenders who pocketed the RINs value prompted some to begin on-site blending to capture RINs, creating the opportunity for retailers to pass along the savings. “So [the producers] did what it took to start selling E85 through their channels, and what they would pass along is the vast majority of the RINs to the retailer,” Shaw says, but clarifies that
JUNE 2014 | Ethanol Producer Magazine | 51
RINS was a choice for the producer. “Obviously we hoped the retailer was passing that along to the consumer. What we found was that E85 prices were extremely attractive and sales really went up and set some records last year in Iowa for E85 sales.” In response to the movement, the IRFA began compiling publically available pricing data for wholesale E85 and publishing the information once a week to help gas retailers find the fuel at the most attractive prices for their operations. The IRFA found it helped lower the price of E85 at some nonethanol plant suppliers, Shaw says. “What we did see is that more of the suppliers were saying, ‘we need to keep this market and we’ve got to pass more of those RINs through,’” Shaw says. Additionally, the IRFA released the data to the U.S. EPA to help address the belief that RINs increase consumer gas prices, when in actuality, the RINs had the potential to reduce consumer gas prices as long as there was competition within the market and the values were allowed to pass to the consumer, he adds. “Iowa E85 sales are a great example of that.” According to the IRFA’s Wholesale E85 Price Listing page, the price of E85 blended onsite at an ethanol plant is roughly 20 to 30 cents lower than fuel coming from blending companies. As of April 7, Absolute Energy and The Andersons Denison Ethanol LLC were offering some of the most inexpensive blended fuel at $2.36 and $2.21 per gallon, respectively.
The notion of on-site gasoline blending is certainly not a onestate show. In the heart of the automobile industry territory, Carbon Green BioEnergy at Lake Odessa, Mich, has been blending E85 and capturing RINs since 2011. "I have been involved with E85 blending since I was the plant manager of Chippewa Valley Ethanol," says Mitch Miller, CEO of Carbon Green BioEnergy and Energetix LLC. "We bought this plant in 2009 and we had plans from right at the
FRESH BLENDED: Carbon Green BioEnergy at Lake Odessa, Mich., installed a blender pump at its plant and sells about 1,000 gallons of ethanol blended fuel daily. PHOTO: CARBON GREEN BIOENERGY
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CHOICE AT THE PUMP: The Michigan ethanol plant offers E10, E15, E30 and E85, which, at the time this photo was taken, ranged in price from $3.34 for E10 to $1.85 for E85. The price for E85 at Absoluteâ€™s blender pump was $2.36 at press time in early April. PHOTO: CARBON GREEN BIOENERGY
start to supply the E85 market, and from July 2009 to early 2011, we focused on debottlenecking the plant and internal maintenance items. So that came up on the list, as far as a priority, and we installed it." The main incentive to install the blending equipment was to serve the 125 E85 stations within the area. At the time, ethanol plants were not supplying the retail stores and prices were high due to blends with unleaded gasoline, Miller explains. "We vetted with other station owners about E15 coming down the line and E85,"
he says. "Their biggest concern was that it was too expensive and lack of consumers." The expiration of the U.S. Volumetric Ethanol Excise Tax Credit in 2011 was another motivation to get the E85 blending equipment online and smooth the transition into a post-VEETC market in order to get the lowest E85 price onto the market, Miller says. The plant invested roughly $100,000 to implement the blending technology and convert both its truck and railcar load outs to blend the fuel.
For more information: Call: 316.416.4188 or 316.927.4260 Email: firstname.lastname@example.org Visit: www.rinsurancellc.com JUNE 2014 | Ethanol Producer Magazine | 53
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REACHING OUT TO RETAILERS: Carbon Green BioEnergy and the Bennet Pump Company connected with stations at a trade show and recruited more stations to the Yellow Hose campaign. PHOTO: CARBON GREEN BIOENERGY
By becoming a blender, the plant was able to sell a portion of its ethanol close to the production facility. "We credit the RIN to the product to lower the cost," Miller says. "We see it as a long term, market share opportunity for our location, because ethanol is going to be more expensive to come into our area than it is to produce right here. We believe we can develop this market and supply it long term." Generating a critical number of RINs is one of the big challenges in being a blender. Carbon Green BioEnergy generates at least 100,000 RINs per month in order to sell them in units of 100,000. "That's probably one of the largest
challenges, because you can't do that off one station," Miller explains. "We are supplying about 50 stations." To build the crucial well of E85 customers the plant draws upon, Carbon Green BioEnergy started its Yellow Hose campaign in order to reach out to E85 consumers by using the YellowHose.com landing page, billboards, radio commercials, television spots and even sending postcards to flex-fuel vehicle owners to let them know where they can get E85 fuel for $1 less per gallon than the price of regular gasoline. "Our station's volumes are way up year over year," Miller says. "And the sales are increasing. We're getting steady percentage
RINS OPPORTUNIST: Absolute Energy, located near the Minnesota-Iowa border, has been blending ethanol on site since April 2013. PHOTO: ABSOLUTE ENERGY
increases each month at each location. It's been a very successful campaign." In addition to attracting more consumption of E85, Carbon Green BioEnergy and Bennett Pump Company recently reconnected with other stations at a trade show and were able to speak with station owners about higher blends of ethanol fuel. "Currently, we have nine new locations in the pipeline that are going to install higher-level blends in 2014," Miller says. "The 26 Yellow Hose stations that are currently in the program are averaging more than 500 percent increases, year over year. Last year, we also installed a flex-fuel pump at the plant and it sits right across from our scales. It's open 24 hours a day and we sell E10, E15, E30 and E85. We put the two tanks above ground behind them so the general public can see we're blending E85 and how simple it is. We are selling about 1,000 gallons a day of all blends. We didn't anticipate this at all.”
Absolute Energy LLC’s 115 MMgy ethanol plant near the Minnesota-Iowa border has been blending E85 on site since April 2013. “We knew that ethanol had a
significant price advantage to gasoline and there was a potential to lower the price at the pump,” explains Rick Schwarck, president and CEO of Absolute Energy. “But nothing was happening.” After trying to convince blenders to make ethanol blends more cost effective for retailers, Absolute took the ball back to its home court. “We were making no headway, so we said, ‘If you don’t do it, we will,’ and we did,” Schwarck recalls. The first step in incorporating the blending technology, as with almost any new industrial process, lies in securing the proper permits. In the case of Absolute Energy, it had to obtain a 637M Blenders permit from the U.S. Internal Revenue Service, proper air permits for a storage tank to include undenatured ethanol storage and E85 requires 3475 placards. For the state of Iowa, Absolute Energy had to register with the Iowa Department of Natural Resources for 6B blending regulations and comply with those regulations as a bulk terminal. “I don’t think it’s so much a hurdle, but a necessary step—permitting and making sure you understand the taxes and reporting requirements—you don’t want to enter into this lightly because there
JUNE 2014 | Ethanol Producer Magazine | 55
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are rules to follow,” Schwarck explains. “There is a process and you can do it. You just have to be committed to it.” Similar to Carbon Green BioEnergy, the biggest challenge in the process wasn’t with the plant, but with the stations. Some retailers have branded contracts that require the station to purchase fuel from specific venues, Schwarck says. Spreading the word to retailers, figuring out the logistics of getting the product to independent retailers and creating a business account is one of the big challenges, he adds. “It’s pretty much common sense, but that might not be readily apparent at first glance.” Absolute offers two options to retailers for wholesale E85, with or without the RINs. The most popular choice is the fuel without the RINs, Schwarck says. “If the retailers can get the price without having to go through the hassle themselves, they like that. We will sell the E85 to the retailer and then we will mark the price appropriately with the RINs value, and then we will sell the RINs ourselves.” “The savings on the RINs were not getting out to the consumer,” Schwarck says. “They were being eaten up in the distribution chain. If the savings doesn’t get to the retail level, he doesn’t have a chance to pass it on to the consumer. We want to make sure that, at a minimum, the retailer has the opportunity to pass that savings on.” For plants determining whether to implement blending equipment, they should examine their market situation and communicate with other plants to make the best, individual business decision. “Every plant needs to assess the sales opportunities for this type of situation and what it would take them, in terms of
7+(/$7(67,1 &251352'8&7,21 7(&+12/2*< :KHQ 0RQGD\-XQHWK :KHUH ,QGLDQD&RQYHQWLRQ&HQWHU ,QGLDQDSROLV,1 staff and equipment, to implement it,â€? Shaw says. â€œI have no doubt there are a few more places in Iowa where upon looking at that, people would say, â€˜this makes sense.â€™ But I also have no doubt that itâ€™s probably not applicable to every plant in Iowa.â€? By becoming a blender, a plant may become more in-tune with its local market. â€œYou learn more about the distribution channel when you are selling it directly out of the plant,â€? Schwarck says. â€œThis is part of increasing the downstream acceptance of E85, and ultimately E30. If we can get it to the consumer at a good price, more gallons will be consumed.â€? Miller encourages all ethanol producers to become blenders. â€œWe need to supply this market, and we need to go around the blenders,â€? he says. â€œSkip the terminal and go direct to the market. We need to support and engage the retailers and do the marketing of our product on their behalf. If we sell to the retailer and donâ€™t support them at all, youâ€™re going to get mediocre results.â€? Author: Chris Hanson Staff Writer, Ethanol Producer Magazine firstname.lastname@example.org 701-738-4970
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Regulation Meets Its Match Jeff Hove, vice president of RINAlliance, talks about the complex world of RFS compliance and RIN management. INTERVIEW BY RON KOTRBA From his office in Urbandale, Iowa, just outside of Des Moines, RINAlliance Vice President Jeff Hove forecasts stable renewable identification number (RIN) prices through the rest of 2014. “The extended RVO (renewable volume obligations) deadline for 2013, the great unknown for the 2014 RVOs and delays in the biodiesel blenders credit appear to have everyone very comfortable,” Hove tells EPM. “If, however, we continue to see the ethanol/gasoline price inversions, we may see more clear gasoline being marketed than in previous years. This may create a need for D6 (conventional) ethanol RINs to jump somewhat so that unbranded supply gets blended.” This, Hove says, may be more of a logistical rail situation rather than an RVO issue. Hove knows the federal system of regulation and how rules, policies and laws impact industry. After graduating from the University of Wisconsin’s Stevens Point College of Natural Resources with a degree in hydrogeology and contaminant transport, he worked for firms serving various major federal government departments and private companies requiring environmental assessments and cleanups. The work provided a solid foundation and understanding of state and federal Clean Air Act and Clean Water Act laws. Moreover, Hove gained intimate knowledge of the machine that is federal regulation. In 2005, Hove joined the Petroleum Marketers and Convenience Stores of Iowa and became immersed in the marketers’ day-today regulatory struggles. “Once the renewable fuel standard (RFS) was implemented in 2007, we saw a need for our marketers to continue blending under some very onerous and complex rules,” Hove says. “For this, we designed the RINAlliance program to provide turnkey compliance solutions for our blenders and marketers. The program quickly grew outside of Iowa and is currently nationwide.” Following the formidable RIN fraud episodes 60 | Ethanol Producer Magazine | JUNE 2014
in the biodiesel industry, RINAlliance partnered with EcoEngineers to keep the biodiesel program moving forward.
On your website, it appears that most of your renewable fuel customers are biodiesel-related. Why doesn’t RINAlliance have more ethanol customers, and what is the company doing to increase its market share in the ethanol space? RINAlliance does not directly serve the renewable fuel production industry. The 2 million RINs managed in our system per day are equally split, 50/50, between ethanol and biodiesel, and they are brought into our program via our blenders. We have had a significant focus on biodiesel since the major fraud instances, and we believe that many of our clients enjoy blending with biodiesel. With that said, the issue of noncompliant RINs virtually shut down that part of the RFS. Our goal was to work with legitimate biodiesel producers so that our blenders could continue buying product from those facilities and to keep the biodiesel industry moving forward. We established biodiesel facility vetting protocols that were favorable to our key RIN buyers— these later morphed into U.S. EPA’s Quality Assurance Plan rules to a great extent— and we were subsequently able to continue marketing our biodiesel RINs.
What are the biggest challenges to the RIN market and compliance today, and how does RINAlliance ease customers’ minds with respect to these challenges? Competition within the marketing industry is always a challenge. More often than not, renewable fuels with RINs can keep costs down, which means the marketer can be more competitive. We are seeing
the value of the RIN getting worked into pricing at the pump across the country. Our system was designed to generate profits while making RFS compliance quick and easy. Both are needed if we truly want to incentivize renewable fuel blending in the U.S. We have a fantastic staff capable of tackling any RFS, EMTS [EPA Moderated Transaction System] and CDX [Central Data Exchange] question. We also have in-depth knowledge of IRS, fuel quality, and equipment compatibility issues that plague our industry. Our program responds to market conditions very quickly. Whether we are taking steps to avoid fraudulent and/or noncompliant RINs—blocking more than 35 RIN generators—or monetizing the RIN expeditiously, we see those industry needs and we fill the gaps. Any size blender can cost-effectively blend and manage RINs in our program. We have companies that handle less than 50,000 gallons per year and others that are well over 300 MMgy. We are able to monetize all RINs within seven days under our RIN sale contracts. This means that even our smallest blenders can see the benefit of RINs quickly, and at top-tier pricing.
How many obligated party and renewable fuel customers does RINAlliance have, and what services does RINAlliance make available to each type of client? RINAlliance has almost 200 blenders and only a handful of obligated parties. The obligated parties in our group mainly consist of refined fuel importers—diesel from Canada—and even they are primarily marketers that are blending renewable fuels. We provide 100 percent of EPA compliance reporting and attest engagements for all of our clients. We trade RINs on behalf of any blender that wishes to take advantage of our RIN sale contracts. This is not a requirement for membership but approximately 95 percent
Q&A of our clients use our RIN sale contract to monetize their RINs. RINAlliance only markets RINs that have been separated within our system of record. We view our program as a service to strict obligated parties as well. As a RIN aggregator of scrutinized RINs, we are capable of marketing RINs via one company as opposed to hundreds.
What are some of the more common, major red flags that you encounter in RIN compliance/ reporting, and how do you address those with your clients or prospective customers? Nonmarketable RINs are a common issue. Our clients stay in close contact with our office to determine which producers are generating marketable RINs versus those that have not yet enlisted a QAP (quality assurance) program or are otherwise nonmarketable. We review all of the RINs coming into our program and place blocks on those that have less than top-tier market value. Another red flag is transaction timing. Suppliers often desire immediate RIN transfer confirmation. The transaction must be completed within five business days. Timely confirmation is necessary but the buyer must weigh this out against other internal practices. If, for instance, the buyer wishes to complete fuel quality testing on the renewable fuel prior to accepting the RINs, then the transaction may have to be reissued following confirmation testing. We suggest that such protocols be spelled out in any supply agreement. If the product does not meet ASTM standards, then the RIN is invalid and the product must be shipped back to the supplier. Also, EMTS is time-consuming and cumbersome. Our clients do not complete transactions within the EMTS program but rather their secure RINAlliance account. They are able to confirm more than 100 transactions with one click or
PHOTO: JONES IMAGE DESIGN
integrate our system with their back-office system. It is also difficult to discern which producer’s RINs you’re getting in EMTS. Our program solicits the necessary reports for quick viewing of RIN generators. We track 100 percent of buy, sell, separate and retire transactions within our system of record and store data on backup servers for multiple years. Our program has exportable reports that can be queried by supplier, RIN generator, date, fuel type, year and more. RINAlliance also tracks wet volumes with RINs, which assists in managing compliance ratios and maximizing RIN profits. We do not assume that EPA data is always correct. We have had situations where EPA generated quarterly reports that were incorrect due to EMTS glitches. At the end of each quarter, we compare our system data against the reports generated by the EPA. Like any other industry, staffing turnover is inevitable. When a company loses a key RIN manager or compliance person, mistakes happen and it is very easy to fall out of compliance. RINAlliance creates a stable system staffed by professionals that are keenly aware of what our blenders must be doing daily, quarterly and annually. The loss of an employee may result in failure to submit quarterly reports and/or annual attest engagements. We work with you on getting your company back on track and moving forward. Nobody likes the thought of accidently stepping out of line and ending up with an EPA or IRS full-blown audit—but it does happen. For clients doing large-volume, downstream transactions with attached and unattached RINs, we provide a data field duplicate check against their entire history of transactions. Allowing our clients the ability to perform duplicate transaction checks prior to an EMTS submission creates a higher level of due diligence, ultimately decreasing failed transactions that must be redone ASAP. We are an EMTS on steroids and reduce internal labor costs by 75 percent.
JUNE 2014 | Ethanol Producer Magazine | 61
FARMER ADVOCATE: Parrent, the new biofuels director at ICMC, grew up on a farm in Michigan and has worked in agriculture all his life. PHOTO: JOHN WRIGHT, MEDIAWRIGHT PHOTOGRAPHY
62 | Ethanol Producer Magazine | JUNE 2014
Voice in Indiana A closer look at the organizations that speak for Hoosier corn growers in Indiana. By Jim Dukart
As the industry gears up for the 30th anniversary International Fuel Ethanol Workshop & Expo, set for June 9 - 12 in Indianapolis, Ethanol Producer Magazine dug into the details of the host stateâ€™s biggest corn organizations. We include some fast facts about corn farming and ethanol production in the state and feature two staff members and two farmer directors. The Indiana Corn Marketing Council and the Indiana Corn Growers Association share both office space and staff in Indianapolis. The IGCA is the stateâ€™s clearinghouse for its corn check-off program, which works to expand markets for Indiana corn. The Indiana corn checkoff is administered by ICMC and was first set up in 2001, with updates by the Indiana General Assembly in 2007 and 2012. It helps state corn farmers invest in programs that enhance the value of the product they grow. Half a cent is collected for each bushel of corn that is marketed in Indiana. ICMC developed a five-year strategic plan and roadmap to advance its vision for Indiana agriculture. The organization is working on market development, education and research in the following areas: ethanol, livestock, grain marketing, JUNE 2014 | Ethanol Producer Magazine | 63
PROFILE production and research, environmental programs, new uses and communication and public affairs. The organization is made up of 17 voting farmer-directors, responsible for overseeing the effective and efficient investment of corn checkoff funds. Two more voting ex-officio members come from Indiana Farm Bureau and Purdue University. Another seven ex-officio members are representatives from state
government, the Indiana State Department of Agriculture and Purdue University. In August, an election will be held to fill five open farmerdirector seats. As of December, Indiana ranked fifth nationally in nameplate ethanol production capacity and sixth in operating production. The state has 13 ethanol plants, 11 of which are currently in operation, turning about 300 million bushels of corn into more than 1 billion
gallons of ethanol per year. Ethanol plants in Indiana account for some 600 jobs, with an additional 4.9 jobs created for every job at an ethanol plant. The industry has pumped $1.5 billion in direct capital into the state since 2006, contributing to a $520 million increase in gross state product, along with $47 million in taxes paid into state coffers.
Ken Parrent 'The last numbers I saw indicate there are over 200 locations that retail E85 in the state of Indiana. I get the sense that E85, despite all the negative publicity it has had, is catching on. Where it is priced competitively, the consumer has been willing to step up and buy it.'
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Ken Parrent, biofuels director at the ICMC, has only been on staff since January but comes to the organization with a long background in the ethanol and agricultural commodities industries. Parrent grew up on a farm in Michigan and says he has been involved in agriculture all his life, including five years as commodities manager at a couple of Indiana ethanol plants and 17 years in the grain industry, focused on price and risk management. “We support Indiana corn producers in whatever way we can,” Parrent says of ICMC, noting that last year the state grew an estimated 1 billion bushels of corn, nearly one-third of which was used to produce ethanol and its coproduct, distillers grains. “My responsibility is on the ethanol side,” he adds. “We do everything from research into new markets and opportunities to keeping farmers up to date on developments within the industry.” A key initiative has been working on fuel infrastructure issues and encouraging retailers to distribute ethanol-blended fuels. “The last numbers I saw indicate there are over 200 locations that retail E85 in the state of Indiana,” Parrent says, adding that retailers are looking to expand E85 offerings and some are considering E15. “I get the sense that E85, despite all the negative publicity it has had, is catching on. Where it is priced competitively, the consumer has been willing to step up and buy it.” He also sees promise in the dual challenge automakers face, meeting fuel economy standards and greenhouse gas emissions standards set by the U.S. EPA. “I think they are or will be amenable to looking at whatever fuels can accomplish both tasks,” Parrent says, citing ethanol as a fuel that can. As to the Big Oil argument that gasoline usage and overall miles driven has been declining, Parrent observes wryly that in an economic downturn such as the past several years, a $50 tank of gasoline became a purchase many consumers started thinking about for perhaps the first time, changing their driving habits to fit
Greg Noble 'It’s been a tremendous success in promoting ethanol in a positive light. NASCAR has a huge following, and American Ethanol is winning all the races. Recent research shows that fans support E15. NASCAR drivers like it and talk about it.'
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the new economy. An economy on the mend, Parrent contends, could well lead to more miles driven and greater fuel consumption. “The mileage outlook has been perking up quite a bit,” he says. “Maybe we have seen the bottom of that trend.”
Racing to Acceptance
Greg Noble is chief operating officer of both the ICMC and ICGA. Noble, who joined both organizations about three and a half years ago, is originally from neighboring Ohio. He spent many years in the agricultural cooperatives sector, followed by a stint at ethanol producer Archer Daniels Midland Co. in Illinois. His role at both organizations is to manage the rollout of all marketing and research programs. One that he has been closely involved with is the American Ethanol partnership with NASCAR.
That affiliation, launched in the 2011 NASCAR season by Growth Energy and the National Corn Growers Association, seeks to broaden consumer awareness of the environmental and performance benefits of using E15. Beginning with NASCAR’s Daytona 500 kick-off race, the NASCAR Green Flag has been branded with American Ethanol, and every lap of the NASCAR Camping World Truck Series, NASCAR Nationwide Series and NASCAR Sprint Cup Series has been fueled by Sunoco Green E15. He estimates that, to date, E15 has fueled some 5 million NASCAR miles, with another million miles to come this year. “It’s been a tremendous success in promoting ethanol in a positive light,” Noble says. “NASCAR has a huge following, and American Ethanol is winning all the races. Recent research shows that fans support
ON CAMERA: Noble speaks during the 2012 Indiana Ethanol Forum. The former ADM employee has worked with ICMC and ICGA for more than three years. PHOTO: INDIANA CORN MARKETING COUNCIL
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E15. NASCAR drivers like it and talk about it.” Noble is on the activation committee for the state of Indiana regarding the NASCAR partnership, but his ethanol marketing and research interests run beyond the racing oval. ICMC also works to increase the demand for ethanol by promoting the use of check-off funds for retail blender pump placement, and the conversion and promotion of distillers grains in animal nutrition. Noble also has his eye on the use of corn stover for next generation biofuels, and the organizations also support the Indiana livestock industry. “We provide an excellent feedstock for the animals,” he says. “Their success is good for Indiana agriculture as well.”
David Howell calls himself the “chairman of the demand side” of the ICMC. A long-time corn farmer from northeastern Indiana near Muncie, Howell tends near-
David Howell 'The big obstacle is still Big Petroleum, which does things like try not to allow us under the canopy [at a fueling station]. They are still like big bullies on the playground trying to push us around.'
ly 8,000 acres, and has been active in the ICMC for 12 or more years. â€œI was here at the beginning,â€? Howell says of Indianaâ€™s corn checkoff program, â€œand Iâ€™ve always felt that it is a very important thing for Indiana.â€? Howell estimates that ICMCâ€™s and the IGCAâ€™s work has added an additional 50 cents to the price Indiana farmers get paid for corn. Howell has been active in ICMCâ€™s Flex Fuel Pump Grant Program, which offers selected fueling stations up to 50 percent or $20,000 (whichever is less) toward the purchase and installation of ethanol blender pumps, hardware and storage tanks, or for the conversion of existing pumps to handle ethanol blends. It has been successful in converting several Indiana stations, but Howell is well aware that challenges remain. Among them, is independent fueling stationsâ€™ lack of familiarity with what he calls the â€œoverly complicatedâ€? renewable identification number (RIN) process. â€œWeâ€™ve had some success, but the big obstacle is still Big Petroleum, which does things like try not to allow us under the canopy [at a fueling station],â€? Howell
notes. â€œThey are still like big bullies on the playground trying to push us around.â€? Bullying or not, Howell is optimistic about Indiana ethanol prospects overall. He thinks the industry should focus on export markets, citing both Mexico and China as examples of opportunities for growth. â€œAny place that has a lot of pollution, and can use a cleaner-burning fuel, we should be very popular there,â€? Howell says. ICMC, also funds research into new vertical markets for ethanol, he adds, noting in particular research with Purdue and other area Indiana universities to develop grain and or cellulosic ethanol for use as jet fuel for the aviation industry. Howell is also a big proponent of distillers grains, and serves on the U.S. Grains Council, where he sees strong export demand for grains. â€œWe get a third of the quality of the bushel back in a higher-protein product than the original corn,â€? Howell says. â€œDistillers
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9,6,786$7)(:%227+ JUNE 2014 | Ethanol Producer Magazine | 67
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68 | Ethanol Producer Magazine | JUNE 2014
SPEAKING OUT: Howell, a promoter of corn and distillers grains, also serves on the U.S. Grains Council. PHOTO: INDIANA CORN MARKETING COUNCIL
grains are gaining huge acceptance. Huge amounts have been going into China.” He has an interesting vantage point on exports as his two sons run a corn farming operation in Brazil. He points to the fact that U.S. ethanol is exported to Brazil while Brazilian sugarcane ethanol is imported to the U.S. “The practice doesn’t
make a lot of sense, but is driven by pricing and production support,” he says. “It’s government at its best and at its worst.”
Trips to Capital Hill
Mike Nichols is a farmer director on the ICMC, vice president of the ICGA and serves on the ethanol action team for
Mike Nichols 'We do see ethanol playing a role in increasing fuel mileage without increasing the body weight or chassis design, and it also burns cleaner.'
PROFILE the National Corn Growers Association. Like Howell, Nichols says he works on the demand side in promoting corn ethanol in Indiana. In all, he has held Indiana corn council committee memberships for 10 years. Nichols grows corn, soybeans and hay on 1,500 acres near Evansville, about three and a half hours southwest of Indianapolis. He says his location means he focuses more on national than state ethanol issues and finds himself in Washington, D.C., around four times per year, in meetings with legislators, USDA and U.S. DOE officials, among others. He’s been involved in engine testing and fuel economy issues at a national level, as well as greenhouse gas, climate change and carbon tax debates. Ethanol, deserves a place at the table in discussing future automotive design, Nichols says. “We do see ethanol playing a role in increasing fuel mileage without increasing the body weight or chassis design, and it also burns cleaner.” Among the things he likes best about the ICMC and IGCA are that the organizations have remained a calm, rational voice among the clamor he sees around renewable fuels debates. “We feel like we have successfully represented ourselves,” Nichols says. “With all the confusion, the ICGA and NCGA have done an excellent job of presenting the facts, not getting emotional and hyper, and being that calming voice of reason.” Nichols is also bullish on ethanol’s future, both in Indiana and nationwide. “From the reports I am seeing, plants are starting to reopen,” he says “We are seeing a future, and the potential for ethanol as a larger share of the fuel market. There are opportunities both in the U.S. and in export markets. We can expand into other markets.”
APPETITE FOR LEARNING: Nichols, far right, back row, and Howell, center, back row, stand with an international group touring Howell farms. PHOTO: INDIANA CORN MARKETING COUNCIL
Author: Jim Dukart freelance writer email@example.com 952-944-7070
JUNE 2014 | Ethanol Producer Magazine | 69
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LAB WORKHORSE: The HPLC is a familiar tool for testing in ethanol labs around the country. An experimenter describes his work with the equipment to develop a new design of experiments. PHOTO: SUSANNE RETKA SCHILL, BBI INTERNATIONAL
Design of Experiments Validates Corn Ethanol Measurement Technology An inside look at solving the challenge of stabilizing samples and developing a new test methodology. By Ron Stites The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reflect the views of Ethanol Producer Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s).
72 | Ethanol Producer Magazine | JUNE 2014
LABORATORY An industrial equipment supplier wanted to sell an existing product, which, anecdotally was found to increase ethanol yield. Before putting
the device on the market, the company wanted to find the best operating conditions and determine what performance its product could deliver for ethanol producers. The first step was finding the right measurement method and a way to preserve samples so they would not deteriorate during shipment from plant to lab. After an accurate measurement method had been identified, the next step was running a number of tests to get an idea of which factors affected sample preservation. Finally, a design of experiments (DOE) was performed that quantified the effects of these factors, singly and in combination, on sample preservation. My company, Stites & Associates LLC, is a technology development and improvement company working in a wide variety of energy applications. The main activities include setting up labs and experiments, evaluating data, evaluating lab operations, and evaluating and improving technologies. SALLC operates a research laboratory in Brighton, Colo., that performs gas chromatography/ mass spectroscopy (GC/MS), cyclic voltammetry and optical microscopy. I have found that by combining excellent analytical work with diligent research and outside-the-box thinking, it is possible to not only evaluate existing technology but to gain insight into the best ways to try to improve a technology. Often, this combination
results in learning how to make nonobvious improvements that can result in real breakthroughs. In the application discussed here, the supplier contracted with SALLC to develop a method for measuring how well its product performed. In the ethanol process, the breakdown of starch to glucose takes place in two steps, from starch to maltrodextrins and then from maltodextrins to glucose. The equipment supplier hypothesized that its product could speed up the breakdown of starch to glucose while using fewer enzymes in the preceding liquefaction and saccharification steps. The goal was also to minimize â€œburning,â€? a phenomena that occurs when shorter-chain sugars react together and with proteins to form polymers that yeast cannot digest. In fact, some are even toxic to yeast. This process is monitored by analysis of the degree of polymerization (DP) of the maltodextrins, a measurement that can be challenging. The main difficulty is that the analysis requires specialized techniques that are not available in most ethanol plants, so samples must be sent to a lab. The samples are not stable, however, so the breakdown of starch continues during transport. We needed to find a way to stop the reaction for 72 hours while the sample was shipped for testing. Even samples from the actual production process were too inconsistent to use for developing the sample preservation process. I found that spray-dried maltodextrin provides a consistent starting material to evaluate methods of stopping the reaction. I researched the enzymes and found they did not work well at low pH and low temperatures, so I lowered the pH
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JUNE 2014 | Ethanol Producer Magazine | 73
LABORATORY Figure 1
by adding sulfuric acid, cooled the samples and held them for simulated shipping times of 24 to 72 hours before testing. A pH of 2 appeared to prevent the enzymes from working. I reviewed published literature and found a new method based on high performance liquid chromatography (HPLC) that could accurately measure maltodextrins. After setting up equipment in the SALLC lab, we confirmed the HPLC method easily detected changes in sugar concentration (see Figure 1). With this preliminary work out of the way, the actual DOE was relatively simple. I was familiar with Design-Expert software from Stat-Ease Inc., Minneapolis,
Minn., having been director of research for Range Fuels, but I am an experimenter not a statistician. Design-Expert fits my needs because it is designed for use by subject matter experts who are not necessarily experts in statistical methods. The software walks users through the process of designing and running the experiment and evaluating the results. StatEase also provides very good support. I contact them not only for questions about using the software, but also to check out my statistical thinking and they have always been very helpful. The factors, runs and results for the DOE are shown in Table 1. The Response
Table 1: DOE used to explore sample preservation methods
LABORATORY Figure 2
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1 column, “%<DP9,” shows the sample at the start of the experiment at 25 percent and increasing during the experiment. The results show that pH is the most important factor and that the other factors all had minimal effects, although incubation at 60 degrees Celsius made things slightly worse by speeding up the reaction. The best results were provided by pH adjustment to 2.0 and storage at 3 C with the DP increasing to only 25.04 percent after 48 hours. This is less than the standard deviation of the HPLC method and this method can be easily performed in the field. Next, I addressed the question of whether these results are significant or could have been achieved by chance. Factorial design analysis uses the halfnormal plot to identify significant effects. The orange and blue rectangles on the half-normal plot in Figure 2 show the effects, positive and negative respectively, and the position of these rectangles reflect the relative size. The further the factor effects are from the line near zero, the more likely they are to be significant. In this case, the factor effects of variable A, which is pH, are much greater than the variation between the insignificant effects, demonstrating the statistical significance of the experiment.
The method for Run 6 was selected and worked very well from the beginning for samples from the slurry and liquefaction steps. Some strange results were seen with fermentation samples— most of the carbohydrates were gone. It was discovered that the sulfuric acid was interfering with the HPLC measurements. The method was modified to remove the sulfuric acid before analysis by treatment with barium hydroxide and filtering. Since this modification was made, the method has worked with samples from all three process steps. Hundreds of samples were shipped from ethanol plants around the Midwest and used to evaluate the performance of the new product. Some plants found significantly better results and others did not see significant improvements. The product is still under development and the jury is still out. However, the DOE was clearly successful in its ability to identify and validate a measurement method that has enabled us to accurately evaluate the performance of the new product in a large number of plants under a wide range of operating conditions. Author: Ron Stites, Managing Member, Stites & Associates LLC 912-247-6120 firstname.lastname@example.org
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Commodity-Based Fluctuations Require Proper Accounting in Financial Statements Decisions are better informed and more reliable when volatility is accounted for in a consistent, documented manner. By Sara DeRoo
Looking at quarterly financial statements of SEC reporting companies shows a wide disparity of financial performance for companies in the same industry, operating in the same geographic area, with the same capacity. Such similar companies would seem to have the same operating economics. So why is there such a disparity in financial performance? Certainly, each plant
has a different risk management philosophy and other variables that separate one plant from another. But reading these financial statements more closely, are other potential differences more related to adaptations of their accounting policies? To address these questions, we will examine how facilities with the same general economics can report a vastly different financial performance, when intuition would suggest their financial performance should be relatively consistent.
The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reflect the views of Ethanol Producer Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s).
76 | Ethanol Producer Magazine | JUNE 2014
FINANCE Let’s look at a common example of a plant that considers itself a basis trader. The management practice is to enter into forward contracts for a significant portion of commodity inputs and outputs, including feedstocks, ethanol and coproducts. At the same time, the company uses board positions to offset the risk of market price fluctuations, which effectively locks in a margin on its production. The company’s goal in this situation is to maintain a minimal balance between long and short positions. In a hedge’s most basic form, during periods of market price fluctuations, the change in value of inventories, including forward contracts, is offset by a net change in the short board positions, with the net bottom line effect of these price fluctuations only attributable to basis changes. If forward contracts are not brought to market, however, and if physical inventory is carried at cost, the financial statements will reflect the full variability of the market value changes in the board positions. As a result of this volatility in net income, which may not be reflective of the economics of the market price fluctuations, companies have considered changing their methods of reporting forward contacts and inventory to better reflect the economics of the hedging relationship. Typical manufacturing businesses encounter minimal fluctuation in monthto-month financial reporting. Businesses that rely heavily on commodity pricing are a different story, whether commodities factor in on the cost side or the revenue side of the profitability equation. Renewable fuels producers encounter highly volatile prices for feedstock and energy purchases as well as product sales, so a true picture of real-time or monthly financial performance requires understanding of a fairly complex picture. That picture encompasses not only commodity pricing for completed purchases and sales, but also must include
consistent means of accounting for such factors as forward contracts, inventory valuation and hedging positions. It’s certainly possible to keep relatively simple account of these factors affecting commodity pricing, of course, since volatility in monthly statements can be explained and annotated as needed, but when it’s desirable to consistently document a comprehensive picture of a plant’s finances at any point in time, three major areas can be reviewed for possible modifications to accounting strategy: contract valuation, inventory valuation and revenue recognition.
Contracts Marked to Market
Forward purchase and sale contracts an ethanol plant enters into with a third party are by definition derivative instruments. Under generally accepted accounting principles (GAAP), derivative instruments must be recorded at fair value in the plant’s balance sheet. However, certain contracts may be exempted from this reporting as “normal purchases and sales.” Normal purchases and sales are those that provide for the purchase or sale of something, other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold by the reporting entity over a reasonable period of time in the normal course of business. In many cases, forward purchase and sales contracts fall into this exemption. Analysis should be performed at the inception of each contract to determine whether it meets the criteria for normal purchases and sales. Contracts exempted as normal purchases and sales are not recorded on the balance sheet and no gain or loss is recognized on the income statement until the contract is fulfilled. Contracts not meeting the normal purchases and sales exemption, or which the company elects to consider derivative instruments, are
JUNE 2014 | Ethanol Producer Magazine | 77
measured at fair value on the company’s balance sheet, and any gain or loss on the contracts could be recognized in the company’s income statement. Because a company may elect to consider a contract a derivative instrument even when an exemption applies, some flexibility exists in the way a company handles contract valuation. It’s important to note, however, that once a company has made a determination on the recording of a contract (which is typically done at the inception of the contract), the company is not permitted to change that election at a later date.
Inventory at Net Realizable Value
When commodity inventories are recorded at the lower of cost or market, the market price fluctuations of this inventory are not recognized in the financial statements; however, the offsetting board position protecting the physical inventory on hand is recorded at market, thus resulting in a net change to the income statement as market prices fluctuate. Valuing inventory at net realizable value (versus the lower of cost or market), is yet another important strategy to consider in
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78 | Ethanol Producer Magazine | JUNE 2014
creating a less volatile short-term financial picture. A number of important factors must be kept in mind when considering an inventory valuation change. First, a switch to net realizable value (NRV) is considered a change in accounting principle. Changes in accounting principle are permitted only if a company justifies the use of an alternative acceptable accounting principle on the basis that it is preferable. Rationale for such a justification can be summed up as follows: during periods of market price fluctuations, change in market value of physical inventory is not reflected in the income statement. However, the offsetting board position protecting the physical inventory on hand is recorded as market values change, resulting in swings to the income statement as market prices fluctuate; thus, such an income statement fails to show the true economics of the commodities purchase and production process. A second consideration is that NRV must be determined to be an acceptable method of accounting for inventory. It is generally recognized that income accrues only at the time of sale and that gains may not be anticipated by reflecting
assets at current sales prices. However, only in exceptional cases may inventories properly be stated above cost, and must be justifiable by all of the following three items: 1) inability to determine appropriate approximate costs (whether such an inability truly exists typically needs to be discussed and analyzed in detail between company management and their auditor); 2) immediate marketability at quoted market price; 3) the characteristic of unit interchangeability. When such inventories meet these three tests, they should be reduced by disposal costs. Last, a change in accounting principle should be reported through retrospective application to all prior periods, unless it is impracticable to do so. Retrospective application is the application of a different accounting principle to previously issued financial statements (or to the opening balances of the current statement of financial position) as if the different principle had always been used.
One final area to consider is to analyze how revenue recognition might affect reported income volatility. Even if shipped, ethanol and coproducts may
not be recognized in the current monthâ€™s income statement and may be required to be recognized in the following month. Certainly, we are not suggesting that contract terms are dictated by accounting rules and those terms need to be changed, but we still need to understand that contract terms could have a material effect on reported net income. In order for revenue to be recognized, it has to be both realized and realizable. To be recognized, it has to be realized when goods or services are exchanged for cash or claims to cash. Revenue and gains are realizable when assets are readily convertible to cash. In order for the revenue to be realizable, the pricing must be fixed or determinable at that time. To determine whether promised pricing (revenue) is fixed or determinable (thus whether revenue should be recognized), first look at each factor that can affect pricing. Next, evaluate who controls these factors that could alter price. Finally, evaluate if a future event affecting any those factors could increase or decrease price. Revenue being earned must also be reviewed. The earnings process includes delivering or producing goods, rendering services or other activities that constitute an entityâ€™s major operations. The earnings process is complete when an entity has accomplished what it needs to do to be entitled to benefits of revenues. Itâ€™s important to analyze contracts to determine whether revenue recognition criteria has been met. Revenue recognition standards will change in 2017, when revenue recognition will be based on fulfilling performance obligations. Keep this in mind for long-range planning, as it will be important to reevaluate current contracts to determine whether any changes are present compared to the current revenue recognition process. Over time, of course, commoditybased fluctuations in profitability will smooth out regardless of accounting
methodology, as long as those methods follow GAAP and are applied consistently, but it can be useful for a variety of reasons to employ record-keeping practices that provide a true, complete picture of commodity prices as they affect the final bottom line. Executive-level and board decisions can become better informed and more reliable when volatility is accounted for in a consistent, documented manner on monthly statements, and buyers and
hedging managers can confidently review the results of their coordinated efforts to execute optimal risk management strategy. Author: Sara DeRoo, CPA Assurance and Advisory Services Manager, Christianson & Associates PLLP firstname.lastname@example.org 320-235-5937
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Renewable Fuels | Ethanol Group JUNE 2014 | Ethanol Producer Magazine | 79
PHOTO: US ENERGY SERVICES
What Natural Gas Customers Need to Know About Curtailment Knowing how the supply and cost of natural gas will affect a companyâ€™s operations is key to planning and weathering curtailment. By Joe Cooney
The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reflect the views of Ethanol Producer Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s).
80 | Ethanol Producer Magazine | JUNE 2014
ENERGY This winter hit the U.S. hard, with record-low temperatures affecting major cities everywhere east of the Rockies. During the intense cold snaps,
many natural gas customers, whose service is classified as interruptible, experienced curtailment, or the reduction of gas delivery due to a shortage of supply or because the demand for service exceeded a pipeline's capacity. With the cold so widespread geographically, natural gas demand was extremely high. Houses, hospitals and schools needed extra natural gas just to keep indoor temperatures and systems running properly. Interruptible customers were curtailed for hours, even days at a time, in the Midwest. Some were prepared, with emergency plans in place and access to alternative fuels; others were not. Climatologists say the more volatile, severe weather experienced this winter is likely to continue. With the increase in severe cold comes an increase in the potential for curtailment. It’s hard to plan when extreme cold will hit, the level of severity and how long the cold snap will last, so forecasting curtailments and the duration of these natural gas reductions proves difficult. Plants and facilities relying upon natural gas need to prepare for curtailment and know the necessary steps to take should one occur, rather than be caught off guard when curtailment happens. In typical years, the excess natural gas collected and stored during warmer months is depleted during the winter. Normally, there are chances to increase this local inventory as the country experiences warmer days over the course of the winter season. This winter, however, was especially bad due to the duration of each cold snap and the large geographic area it affected. There was never an opportune time to refill storage, resulting in higher probability of curtailment.
When facing the potential for curtailment, plants have to consider more than simply losing their natural gas supply—they must also consider the cost of natural gas. Extreme cold snaps can cause the demand for natural gas to increase significantly, resulting in prices of natural gas sky rocketing alongside demand before a curtailment event happens. Knowing how the supply and cost of natural gas will affect a company’s operations is key to planning and weathering curtailment. Curtailment periods can upset a company’s operations and ultimately the bottom line for both firm and interruptible customers. For maximum peace of mind and minimum economic loss, companies should consider the following key points: • Remember that curtailment can happen, even if it has never happened before, whether for a couple of hours or for days at a time. Rare force majeure (act of God) events can occur. Events such as the Trans-Canada pipeline rupture can affect even firm natural gas customers. • Having access to accurate and clear weather forecasts, including how long a cold snap is predicted to last and the severity of the weather event, will allow a company to make decisions before curtailment hits. • Curtailment can be expensive but, if a company chooses to continue operations during curtailment, fines can be extremely high. Make sure to weigh the costs of stopping or halting operations against continuing operations with a penalty. This means conferring with the pipeline, utility or energy management services provider to fully understand whether continuing to run is even possible, and if so, at what cost. Figuring out how much it will cost to shut down operations completely or rely on an alternative fuel source due to curtailment will allow a company to make informed decisions based on cost-benefit analysis. • Many ethanol producers lean toward buying natural gas monthly or daily to take advantage of price fluctuations, weighing the cost-benefit analysis of hedging a portion of their natural gas
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JUNE 2014 | Ethanol Producer Magazine | 81
Be Prepared Know the price of curtailment. Stay on top of weather. Hedge to avoid high prices. Test back-up sources. Determine if firm service is right for you. Communicate during curtailment.
needs for next winter as opportunities are presented. Since volatile weather, and numerous other factors, can raise natural gas prices significantly, hedging both basis and the underlying commodity should be considered. • Ensuring that any alternative fuel system is ready to perform is part of a good back-up plan; for example, will the operational system that brings the back-up fuel run without access to natural gas? Is the back-up fuel source still usable or has it become too viscous in the years it’s been sitting in the tank? Testing back-up fuel storage is crucial, and so is knowing it can be relied on if, and when, needed. Testing should happen at the beginning of each winter, or more often, to ensure back-up fuel sources are ready to perform. • If a company faced curtailment last winter, it should determine if it makes more sense financially to sign up for firm services for at least part of, or possibly the entire, year. The pipeline, of course, must have available capacity. Although companies will pay more per unit, firm service gives a company the same legal rights as schools, hospitals, government centers and homes when curtailment happens. Another option is to contract service with a natural gas
82 | Ethanol Producer Magazine | JUNE 2014
supplier that can supply a company’s firm services for a portion or all of the year. • When probable curtailment is imminent, communication is key. Make sure to communicate with the pipeline, an energy management service provider and/or the utility to remain informed at all times. Knowing how long a curtailment is projected to last, the fees/penalties associated with the curtailment and knowing when the curtailment is over will keep any company from paying excessive fees. If a company examines previous experiences with volatile weather and projects how the geographical region will be affected by upcoming severe weather, they will have a better understanding whether curtailment can happen to them. Ultimately, curtailment is always a possibility with a force majeure. With this knowledge, companies can make decisions that best affect the bottom line with minimal operational disruption should curtailment happens. Author: Joe Cooney Account Manager, U.S. Energy Services 402-614-6219 JCooney@usenergyservices.com
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JUNE 2014 | Ethanol Producer Magazine | 83
VISION WE CLARIFY YOUR VISION AND HELP CREATE WHAT IS INVISIBLE TO OTHERS.
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Financial Performance: Accounting, RINs and Margin Management By Donna Funk
As I write this in April, margins are good and those who work in biofuels are reminded of good times from the past. I trust everyone still remembers what happened after the last period of “good times.”
We must remind ourselves of those best practices learned and that we can’t become relaxed now but rather anticipate the next batch of hard times in order to be even more prepared for it. In today’s environment it seems comical to talk about margin management. Risk management, production efficiencies and overall good business monitoring including revenue maximization and expense control should be followed just as diligently during times of large profits versus lean months of no income. Continuing to use the same metrics will afford you the opportunity to know quickly when something is outside the set parameters and allow you to take corrective action. Let’s mention renewable identification numbers (RINs). Everyone’s got them but who wants them? RINs can be your best friend or your worst nightmare. At their best, they add value to every gallon of ethanol you produce and sell. At their worst they can lead to legal battles you don’t need or want. It can, however, be easy to keep RINs from being a nightmare. Along with the proposed rules to govern RINs, there are several quality assurance programs (QAP) available to RIN generators, transmitters and buyers to help ensure what you are buying or selling is indeed real. Keep in mind participating in a voluntary QAP program can set you apart and make your RINs more valuable. Margin management should always be important. For the most part, management doesn’t have to stress over generating a profit right now, it’s just happening. And though this is a breath of fresh air, acknowledging that things are good and that it’s an easy time to make money certainly doesn’t mean throwing good management practices out the window. Managers must run the business efficiently and make decisions as if you still had to work to make money. When margins do skinny up again, be prepared. In early April, the Senate Finance Committee passed a tax extenders package with several provisions that, if left alone, would provide great benefits to the ethanol industry. These include extension of bonus depreciation, enhancements to the research and
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development credit, as well as extension of several biodiesel and renewable diesel credits. There is a long process yet to be completed before any of the provisions in the extenders package can be relied on. Other accounting changes on the horizon either in final or proposed form deal with revenue recognition, amortization of intangibles and accounting for leases. The committee-approved package would retroactively extend tax credits for cellulosic biofuel and biodiesel for two years. The package also aims to extend more than 40 incentives that expired at the end of 2013, including the $1.01-per-gallon cellulosic biofuel tax credit, the $1-per-gallon biodiesel and renewable diesel tax credit and the 30 percent investment tax credit for alternative vehicle refueling property. It would also extend the 50 percent cellulosic biofuels bonus depreciation and 50-cent-per-gallon incentive for alternative fuel and alternative fuel mixtures, all through the end of 2015. This sends a clear signal to the marketplace that Congress is making progress on extending its support for one of the most innovative, low-carbon industries in the world. These extenders send a signal to the advanced and cellulosic industry and to the markets regarding sustained support at the federal level with a two-year extension. At this time we do not know when the tax extenders package will be taken up by the full Senate. Another somewhat recent and significant change in tax regulations deal with how to determine if an item is capitalized as a fixed asset or is expensed as a repair. What used to be a simple analysis is now much more complicated and the answer changes depending at what point in the life cycle of the plant or component you are in when modifying or replacing equipment. The bottom line is to be mindful of strategies that continue to keep your margins at their best, appreciate the natural income from RINs by utilizing a voluntary QAP program and be aware of tax extenders that could eventually be passed into law. And, let out that big sigh of relief for today’s ethanol industry. Author: Donna Funk, CPA Attorney, Kennedy and Coe LLP 800-303-3241 email@example.com
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