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Biodiesel Business Plan Texas

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					Value Added Agriculture Program




                         Biodiesel
                     Industry Overview




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Value Added Agriculture Program




             Diesel Usage by Sector
                                     Commercial Electric Utility
                                        6%            2%        Farm
                    Vessel Bunkering                             6%
                                                                     Industrial
                           4%
                                                                        4%
                    Residential                                     Military
                       11%                                             1%
                    Railroad                                        Off Highway
                       5%                                                4%
                                                                  Oil Company
                                                                       1%

                                    On-Highway
                                       56%




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Value Added Agriculture Program




                Demand Benchmarks
 • Assumptions
      – RFS of 7.5 billion gallons
      – Biodiesel will serve 15% of RFS demand

      • RFS 7.5 billion x .15% = 1.125 BGY of
        biodiesel


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Value Added Agriculture Program



                   Diesel Use by Sector
                                  distillate usage
Energy Sector             %       (mill gall)        B2            B10        B20
On-Highway                56      35784                   715.68    3578.4       7156.8
Residential               11      7029                    140.58     702.9       1405.8
Farm                      6       3834                     76.68     383.4          766.8
Commercial                6       3834                     76.68     383.4          766.8
Railroad                  5       3195                      63.9     319.5           639


TOTAL USAGE (mill gal)            63900               1278.00      6390.00     12780.00



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Value Added Agriculture Program


                                   RFS Projections
                                          Ethanol/Biodiesel Projections
                                             Based on 7.5-BGY RFS

                7000


                6000


                5000


                4000
                                                                                           Biodiesel
          MGY




                                                                                           Ethanol
                3000
                                                                                           Poly. (Biodiesel)
                                                                                           Poly. (Ethanol)
                2000


                1000


                   0
                     99


                             01


                                     03


                                             05


                                                     07


                                                              09


                                                                      11


                                                                              13


                                                                                      15
                  19


                          20


                                  20


                                          20


                                                  20


                                                           20


                                                                   20


                                                                           20


                                                                                   20
                -1000
                                                          Year




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Value Added Agriculture Program




                   U.S. Biodiesel Production
                                    Biodiesel Production MGY

              80
              70
              60
              50
        MGY




              40
              30
              20
              10
              0
                    1999     2000      2001      2002      2003   2004         2005
                                                 Year




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Value Added Agriculture Program



                       Biodiesel Capacities
 • 45 biodiesel plants with dedicated capacity of
   180 MGY
 • Convertible capacity is estimated at 110+ MGY
 • 54 facilities under construction or under
   consideration in 30 states with an additional
   600+ MGY capacity (2005)
 • 200 projects under consideration with over
   2.5 BGY
 • 18 under consideration in Iowa

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                   Biodiesel Capacities   cont.




 • 5 newest mid-western plants add 150
   MGY
 • New plants range in size from 1-60 MGY




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Value Added Agriculture Program




                U.S. Biodiesel Production




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     Balancing Demand and Capacity
                                  Building Capacity

             900
             800
                                                      Proposed
             700
                                                      Capacity
             600
             500                                      Dedicated and
         MGY                                          Convertible
             400                                      Capacity
             300                                      Production
             200
             100
               0
                     1999 2001 2003 2005 2007
                                     Year



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                                  Feedstock
 • Vegetable Oil
      – Seed Crushing
      – 29 Billion Pounds a Year
 • Animal Fat
      – Animal Harvesting
      – 12 Billion Pounds a Year


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                       Feedstock Uses
 • Human Food
 • Baking or Frying
 • Salad or Cooking Oils
 • Margarine oils
 • Confectionary fats
 • Animal feed, Lubricants, Paints, Varnish, Resins,
   Plastic and Soap
 • 38 Billion Pounds a Year
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                 Feedstock Carryover
 • 2.5 Billion Pounds Vegetable Oil
      – 1.8 Billion Pounds Soybean Oil
      – 0.7 Billion Pounds Corn, Palm, Cottonseed &
        Others
 • 0.4 Billion Pounds Animal Fats
      – 0.36 Billion Pounds Inedible Tallow & Yellow
        Grease
      – 0.04 Billion Pounds Edible Tallow & Lard
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              Feedstock to Biodiesel
 •   2.9 Billion Pounds of Oils or Fats
 •   7.65 Pounds of Oils or Fats per Gallon
 •   379 Million Gallons of Biodiesel per Year
 •   1.5 gallons/ bushel of soybeans



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Value Added Agriculture Program
Biodiesel Feestock Cost $


                            $3.75
                                                                                   $3.44
                            $3.25
                                                                          $3.06
         /Gallon




                            $2.75                                $2.68
                            $2.25                        $2.30
                                                 $1.91
                            $1.75
                                       $1.53
                            $1.25
                                    $0.20   $0.25   $0.30   $0.35   $0.40       $0.45
                                               Feedstock Price $ /Pound

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Value Added Agriculture Program


                   Soybean Oil (crude/de-gummed) Central IL
                      Percentage of time in the Price Range
                         from March 2003 to June 2006

     30.0%

     20.0%

     10.0%

      0.0%
                 20-22 22-24 24-26 26-28 28-30 30-32 32-34
                                  Price in Cents per Pound

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Value Added Agriculture Program

                                  U. S. Average B 100 Biodiesel
                              Percentage of Time in the Price Range
                                 from March 2003 to June 2006

       35.0%     32.3%
       30.0%
       25.0%                                                                         19.4%
       20.0%
                               13.5% 12.9% 15.5%
       15.0%
       10.0%                                                              6.5%
        5.0%                                                   0.0%
        0.0%
                    $2.00


                                 $2.20


                                           $2.40


                                                     $2.60


                                                                $2.80


                                                                           $3.00


                                                                                      $3.20
                     -$2.20


                                  -$2.40


                                            -$2.60


                                                      -$2.80


                                                                 -$3.00


                                                                            -$3.20


                                                                                       -$3.40
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Value Added Agriculture Program


       Biodiesel Pressures Feedstock
                    Price

  • New Demand on Oil & Fats will Increase Feedstock
    Price
  • Which Use will be Priced Out of the Market?
  • Human Uses – Animal Feed – Industrial
  • Or Biodiesel



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Value Added Agriculture Program




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Value Added Agriculture Program




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Value Added Agriculture Program




                  Will supplies adjust?
     •   We won’t run out of vegoil/fats
          – In the short run it may look like we will
          – Extreme volatility with price run-up likely
          – Food end users making plays already
     • Price will ration

     • Oil seed producers will innovate

     • High prices make other feedstock sources feasible

     • Palm is most likely to expand



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                Soy meal Constraint?
 • DDG is huge competitor 12.32 MMT in ’05/’06

 • Domestic soy meal use could drop

 • Meal price will become global competitive (as in very
   cheap)

 • Crush for oil and price meal for clearance
      – Crush margins will eventually suffer


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Value Added Agriculture Program




                    Scenario Planning
         •   Three studies
         •   <$120 meal
         •   $.35 oil
         •   Little impact on bean price
         •   Feed protein glut
         •   New meal volumes must be exported

                         Consider $40 crude petroleum


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              Is US Soy Competitive?

          •   Palm oil yields in Malaysia about 3.9MT/ha
          •   Canola oil yield in EU about 1.34 MT/ha
          •   Soy oil yield in US is about 0.55 MT/ha
          •   Sunoil yield Ukraine is about 0.42 MT/ha




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                        Business Model
      •   Close to Market or Close to Feedstock?
      •   Global, National or Local market?
      •   Strategic partner financial integration?
      •   Back integrated?
      •   Forward integrated?


                    Look for “Platform Plays” to emerge




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Value Added Agriculture Program



      Stand-alone Business Model
     • Refineries never remain stand-alone

     • Business plan built on today’s economics means
       certain death

     • Find ways to integrate key chain functions

     • Must be very strategic on location

     • Roll-up or M&A target strategy?

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                    Virtually Integrated

      • Partnered with REG or other aggregators


      • Vested strategic partners




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                      Full Equity Model

          • Seattle waste grease plant
               – No borrowed money
               – Novel tech
               – Local market




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               Global Business Model

      • Dow Halterman Houston, Texas
           –   Deep water
           –   Toll processor (World Energy)
           –   Produce in EU and US
           –   Source and sell globally




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Value Added Agriculture Program




    Chain Integrated Business Model
      • Dreyfus in Claypool, Indiana
           –   Bean origination
           –   50 mil bushel crush
           –   80 mil gallon biodiesel
           –   Trans/Log issues handled
           –   Long-term off-take agreements
           –   Import/Export capability


   Dreyfus is claiming its position among the ABCD’s by adding Biodiesel into the
   processing mix.

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                   Lender Perspective
• Loads of uncertainty
     – Concentrated feedstock sellers
     – Renewal of the blender’s credit
     – Product demand
• Bundle working capital with term
• They want in but on their terms
     – 7 to 10 year term on 20 year life facility?
     – Cash sweep on operating profits to pay down half the debt in
       three years.


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Value Added Agriculture Program


                     Lender Perspective
                      Working Capital
     • May need ten times ethanol
          – depends on biz model
          – 15 to 40 cents per capacity gallon
     • Some recommend one year debt reserve
          – Shutdown scenarios
     • Consider catastrophic cash flow scenarios
          –   ($40 crude)
          –   $.35 cent vegoil
          –   Supply interruption
          –   Transportation interruption


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        Large Investor Perspective
  •   Very Risky. (need higher baseline IRR)
  •   Hate novel technologies
  •   Few companies working on demand side
  •   Must be a low cost producer
  •   Must have off-take truly tied in
  •   Loss of subsidies would be fatal
  •   Experienced management tough to find

       Tons of people doing projects; very few forming businesses


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                     Risk Management
     • Cross hedges difficult and risky
          – Basis risk is tough
          – ($1.20 basis shift in ethanol vs. Nymex)
     • Risk premiums high in many off take agreements
          – Align for supply…stay nimble on price
          – Know you can get it gone
     • Risk premiums high for feedstock agreements
          – Align for supply…stay nimble on price
          – Know you will have feedstock




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Value Added Agriculture Program



                                  Risk
 •   Few/strong players control feedstock
 •   Massive global growth
 •   US is not (nor will be) least cost
 •   Market drivers are tenuous (sulfur)
 •   Fighting the food market for feedstock (moral dilemma)


  Tons of people wanting to make biodiesel; few are working on demand




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Value Added Agriculture Program



                              Certainty??
 •   Feedstock issues are paramount
 •   Vegoil price will rise
 •   Rail tanker car crunch
 •   New crush requires meal exported
 •   Meal price will drop
 •   Stand-alone refineries will be vulnerable

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Value Added Agriculture Program




                              Contact Us
 For more information:
 ISU Value Added Ag Program
 1111 NSRIC
 Ames, IA 50011
 515-294-0588
 www.iavaap.org
 www.agmrc.org
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Value Added Agriculture Program




  Questions About Technical Issues?
 • www.biodieselbasics.com, or contact
 • Rudy Pruszko
      Center for Industrial Research and Service (CIRAS)
      Iowa State University Extension
      NICC Town Clock Center
      680 Main Street
      Dubuque, Iowa 52001-6818
      Phone: 563-557-8271 ext 251
      rpruszko@iastate.edu
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