Arkansas Ethanol

1. Arkansas Ethanol Presentation to Arkansas County Farm Bureau September 26, 2006

3. Amylase Yeast • Corn/Sorghum: • Starches • Sugars Glucose Ethanol Ethanol Production: Corn and Sorghum Product Recovery Pretreatment Fermentation

4. Products of Ethanol Production from Corn or Sorghum • Ethanol 2.5-2.8 Gallons/bushel depending on efficiency; 100 mgpy plant uses ~36 million bushels • DDGS Distillers Grains Solubles (“mash”) usually dried (DDGS) for transport to feed mills, but can be pumped wet to adjacent feeding operations. • CO2 usually captured and marketed directly by carbon dioxide marketers.

5. Products from ethanol plant Source: Kansas Geological Survey

7. Wet mill process • Wet mill processing plants produce more valuable by-products than the dry mill process. In addition to the ethanol, wet mill plants produce: • Corn gluten meal (which can be used as a natural herbicide or as a high protein supplement in animal feeds) • Corn gluten feed (also used as animal feed) • Corn germ meal • Corn oil • Carbon dioxide (CO2 for soft drinks or dried ice) and • High fructose corn syrups. • Wet mill plants also cost substantially more to build and have higher operating costs than dry mill processing plants, and hence are usually much bigger than dry mill plants in order to achieve economies of scale.

8. Largely Abandoned Dry Fractionation/Biomass Ethanol Process Feedstock Process Products DDG Ethanol Grain Dry Fractionation Whole Corn, Sorghum, Barley DDG* Ethanol Plant Hi-Pro DDGS Thermal Electrical Biogas “Green” Energy Germ Germ Biomass Energy Conversion Bran Alternate Feedstocks (Wood Waste) * Degermed, Debranned Grain

9. Wet DGS and DDGS • Ethanol plants produce one key product other than ethanol: an ingredient for animal feed known as distillers grains solubles (“mash” or DGS). Cargill in Memphis, Tyson in Pine Bluff, and other poultry, catfish, dairy, and other feed plants prefer DGS to whole grains. • Dried DGS (DDGS) is usually preferred for ease of transportation.

11. Energy use in ethanol production • Two major costs in ethanol production: natural gas and feedstock (usually corn). • Ethanol production requires energy to heat fermentation process. • Drying DGS requires most heat • Dry DGS are in high demand for export. • Wet DGS hard to transport, need feedlot next door

12. Energy sources for ethanol plants • Natural gas • Cheaper to install • Volatile prices • Coal • Adds ~$35 M to cost of plant • Gives cogeneration capacity • Wood waste and other cellulose sources • Can use fluid bed process • Readily available and inexpensive at some sites (e.g. Pine Bluff).

13. Local and State Revenue • University of Texas, Mississippi State, and University of Missouri studies of ethanol plants of 80-100 mgpy capacity • Directly create 50-60 jobs paying more than $37,000 per year (total payroll >$2 million) • Additional 120 jobs throughout the regional economy. • Impact on regional household income would be at least $79 million during construction and $41 million annually from operations. • Contribution to local and state tax revenues will be about $2.4 million during construction and $1.3 million annually.

14. Missouri 2003-2004 campaign resulted in: • State income tax credit • $200,000 grant for seed money • Producer credit up to $3.125 M/year for 5 years • 2005 Missouri legislative session: • By January 1, 2008, all gasoline sold in Missouri must contain at least 10% agriculturally derived ethanol. • RESULT: These incentives have resulted in $1.5 billion in investment in proposed ethanol developments, four plants are up and running.

15. State consumption and incentives -Tax exemptions - Producer payments States with incentives but little production No current state incentives but large mandated oxy-fuel and RFG markets encourage ethanol production States with significant ethanol production but no major state incentives Source: U.S. Department of Transportation, Federal Highway Administration

16. Federal Regulations and Ethanol • Ethanol first started being used as a fuel additive in the late 1970s when EPA began phasing out lead in gasoline. Removing lead from gasoline lowered the octane level of gasoline. Because of its high octane content, ethanol soon established a role as an octane enhancer. • The Clean Air Act Amendments of 1990 established the Oxygenated Fuels Program and the Reformulated Gasoline (RFG) to control carbon monoxide and ground-level ozone problems. Both programs require that certain urban areas in “non-attainment” add oxygen to their gasoline: 2.7 percent by weight for oxygenated fuel and 2.0 percent by weight for RFG. Blending ethanol with gasoline is one way to meet the oxygenation requirements. Methyl tertiary butyl ether (MTBE) was also used to meet the requirements but is now being discontinued.

17. Largely due to Government policies, ethanol production grew from about 62 million gallons in 1976 to over 2 billion gallons in 2002 Surface Transportation Assistance Act of 1983 increased ethanol tax exemption to $0.50/gal and the blender’s income tax credit to $0.50/gal Energy Tax Act of 1978 gave ethanol a $0.40/gal credit on the Federal motor fuels tax MTBE discovered in California drinking water in 1998 Regulations under the Clean Air Act Amendments of 1990 started in 1992 RFG begins in 1995 Blender’s Income tax credit of $0.40/gal In 1999 California Governor banned MTBE by 12/03 Tax Reform Act of 1984 increased ethanol tax exemption to $0.60/gal and the blender’s income tax credit to $0.60/gal Energy policy Act of 1992 applied ethanol tax credits to lower blends Source: U.S. Energy Information Administration and USDA, ERS

18. Federal Tax Credit 52 cents/gallon • Blenders credit • E10 .52 X 10% = 5.2 cents/gallon E10 • E85 .52 X 85% = 44.2 cents/gallon E85 • Ethanol plants obtain blenders license readily • Malta Bend, Missouri, plant • Use of blenders license depends on market • MFA objected to Malta Bend use of blenders credit • Arkansas plants exporting to Texas would not conflict with local distributors’ blending credit.

19. Energy Policy Act of 2005 Has Major Effect on Bioenergy Development • Renewable fuel standard – renewable fuel blended with motor fuel must increase from <4 billion gallons in 2005 to 7.5 billion gallons in 2012 • Federal fleets required to increase their use of alternative fuels • MTBE banned in the United States within 4 years and immunity to liability disallowed

20. Estimated Effect of the renewable fuels standard (RFS) on future ethanol production RFS USDA baseline Historical estimates

21. Effect of MTBE ban • California alone is expected to consume 1 billion gallons of ethanol by 2010 to replace MTBE. • Texas (easily accessible by an Arkansas plant) is expected to require the second highest amount of ethanol to replace MTBE. • At least 2 billion gallons more are needed to replace MTBE • Wall Street Journal, 5/5/2006

22. Both Supply and Demand Policies  Increase Ethanol Production • Supply Side Incentives • CCC Bioenergy Program • Energy Tax Incentives Act of 2003 • Energy Policy Act of 2005 • Demand Side Incentive • Renewable Fuels Standard • State Mandates

27. Source: RFA, 2006.

29. Total Current Capacity at 101 ethanol biorefineries 4797.9 • Total Under Construction (32) /Expansions (6) 2047.5 • Total Capacity 6845.4 Updated: June 1, 2006  

30. Northeast Missouri Ethanol Plant 40 mgpy Macon Missouri Built by Broin www.broin.com

31. 50 mgpy ethanol plant in Logan Co, Illinois built by Fagan

34. NREL Projections of Future Ethanol Production

35. Future of ethanol use • 75% of all new Brazilian cars are flex-fuel cars which can run on E85 (85% ethanol) • GM, Ford and Chrysler will produce 900,000 flex-fuel cars in 2007 • Toyota plans to sell E85 cars in U.S. in 2008 • Ethanol is still less than 3% of 140 billion gallons of gasoline sold in the U.S. every year. • Source: Financial Times, 4/19/06

36. ENERGIZING AMERICA: Farmers Fueling Our Energy IndependenceMay 11, 2006 New House Bill • Increase Production of American-made Biofuels • Doubles the percentage of renewable fuels sold in America in six years. • Extends tax credit for ethanol and biodiesel through 2015 and increases tax benefits to small biofuel producers. • Expand the Market for and Distribution of Biofuels • Increases the percentage of “flex-fuel” vehicles that run on ethanol, or gasoline. • In seven years, 75 percent of all cars made in America would be flex-fuel cars. • Increases the number of gas stations offering ethanol (E-85) and biodiesel through new incentives and requirements. • Encourage Local Domestic Ownership • Provides federal incentives to smaller ethanol and biofuel plants, so that independent, locally-owned facilities that produce biofuels can grow and thrive, improving our rural communities.

38. Feedstock is drawback in Delta • Ethanol production in Arkansas faces a current lack of feedstock (corn or sorghum), higher price of grain, and aflatoxin fears. • A feasibility analysis by BBI (www.bbibiofuels.com), shows 36 million bushels of corn can be obtained locally and by rail at Stuttgart for $2.61 per bushel and locally, by rail and barge at Helena for $2.60/bushel. • To maximize benefits to Arkansas, feedstock availability must increase.

39. Corn in the Delta • Corn is excellent rotation crop for cotton • If the 250,000 acres decrease in rice acres projected early this year in Arkansas had all gone into corn production, the 36 million bushels needed for a 100 mgpy plant could be achieved. • Besides price increase, what will help farmers decide to grow corn? Ownership.

40. Farmers pledge delivery of corn bushels to gain equity in plant. • Benefits • Plant has more secure and local supply. • Arkansas’ economic benefits increase. • Farmers gain ownership in plant. • Local commitment to plant increases. • Drawbacks • Expected yields may not materialize and thus farmers may not deliver as promised.

41. Historic Return on Investment • Even small (20 mgpy) plants and a replay of the lowest historical prices of ethanol, DDGS, and CO2 would result in at least a 12% return on investment 83.3% of the time. • A study of five ethanol facilities in Iowa found an average return on investment of 35% for the period 1998-2003

42. Bootheel Agri-Energy LLC • SIKESTON, MO, April 5, 2006 (AP) - An ethanol plant that's planned for southeast Missouri will provide up to 65 jobs.  Construction of the $205 million plant in Sikeston is expected to start in November. • Bootheel Agri-Energy says it will buy 160 acres in an industrial park for a plant that will produce 100 million gallons a year.  Once completed, it will be the largest ethanol plant in the state and one of the largest in the country. • The plant will use about 35 million bushels of corn a year.  Company officials announced the plant in November officials when they had narrowed the list to three sites in Sikeston and Scott City.

43. Return on investment today • Bootheel Agri-Energy LLC in Sikeston, Missouri expects 100% return on investment at current prices. • Not on river, will bring in corn by rail & truck • Coal-fired, not natural gas • At $1.46/gal, 30-40% ROI is projected depending on plant size and fuel source.

44. Gross margins • At $1.86/gallon value of ethanol and 24 cents/gallon for DDGS, value of ethanol is $2.10. • Subtracting corn at 70 cents/gallon and natural gas at 33 cents record gross margin of $1.07. • 100 mgpy plant has gross margin of $107,000,000. • Source: FAPRI, University of Missouri

45. Current prices • Most ethanol is sold on flat price 6 month contracts which are currently over $2.50 per gallon. • Ethanol sold on spot market has reached above $3/gallon.

46. State Average Fuel Ethanol Rack Pricesprovided by Axxis Petroleum, www.axxispetro.com • Date: Thursday, May 11, 2006Iowa: 2.9519 Illinois: 2.9005 Kansas: 3.0019 Michigan: 2.8500 Minnesota: 2.9032 Missouri: 2.9739 North Dakota: 2.9652 Nebraska: 2.9492 South Dakota: 2.9809 Wisconsin: 2.7906

47. ENERGY OVERVIEW • U.S. currently uses approximately • 138 billion gallons of gas • 35 billion gallons of diesel • 8 billion gallons of ethanol will be needed just to replace MTBE.

48. Investing in Ethanol • Share prices of ethanol producing companies are rapidly increasing. The largest U.S. ethanol producer ADM has seen its share price climb 85% so far this year. • May 10, 2006, ADM announced plans to increase annual production 50% in next 2 years to 1.575 billion gallons. • Pacific Ethanol, plant under construction, Bill Gates invested $85 million for next 4 plants. • Sikeston plant raised $70 million in 5 months.

49. Ethanol IPOs • Most ethanol plants privately held by farmers. • 2nd largest ethanol producer, Verasun, raised $419.8m in an IPO. Shares closed >30% above the offer price. Financial Times, 6/15/06. • Hawkeye Holdings and US Bioenergy will have IPOs this week and in October (respectively). • Private placement is quicker due to less SEC regulation, but must limit number of investors.

50. Arkansas has advantages over Midwest • Whether return on investment will be higher or lower at a Delta plant than at plants in the Upper Midwest will be influenced by demand from Texas for ethanol to replace MTBE.  Some analysts contend Texas will require the second highest amount of ethanol to replace MTBE of any state.  • Demand for co-products of ethanol production (DDGS) by feedmills in Memphis (Cargill), Mississippi (poultry and catfish feed plants), and Arkansas (poultry and catfish) could also make return on investment higher from a Delta plant than from Midwestern plants.