Corn’s Future as a Biofuels Feedstock March 3, 2008 Presented at the 44 th Annual Illinois Corn Breeders School

Topics To Be Covered: Current Usage of Corn as a Biofuels Feedstock The Energy Independence & Security Act and its Impact on Corn Future Prospects for Corn Starch Based Ethanol How Fast Will Cellulosic Ethanol Develop Which Feedstocks Will Be Used to Produce Cellulosic Ethanol Risks to Biofuels Growth

Current Usage of Corn as a Biofuels Feedstock

The Energy Independence & Security Act and its Impact on Corn

Future Prospects for Corn Starch Based Ethanol

How Fast Will Cellulosic Ethanol Develop

Which Feedstocks Will Be Used to Produce Cellulosic Ethanol

Risks to Biofuels Growth

About Context: Consulting firm founded in 1993 Focused on Agribusiness Services include opportunity assessment, strategic planning, market research, competitive intelligence, research targeting and regulatory compliance Publish the “Biotech Traits Commercialized” Outlook Make extensive use of subject matter experts Clients in N. America, Europe and Asia Closely track biofuels to forecast impact to clients

Consulting firm founded in 1993

Focused on Agribusiness

Services include opportunity assessment, strategic planning, market research, competitive intelligence, research targeting and regulatory compliance

Publish the “Biotech Traits Commercialized” Outlook

Make extensive use of subject matter experts

Clients in N. America, Europe and Asia

Closely track biofuels to forecast impact to clients

U.S. Ethanol Demand Source: EIA-819 Monthly Oxygenate Report & Context Est. U.S. Ethanol Demand Reached 6.8 Billion Gallons in 2007. Ethanol still largely an additive (reformulated gasoline & winter oxygenate) Corn provides the lion’s share of feedstocks Sorghum used to produce ~100 million gallons Imports account for ~450 million gallons

Ethanol still largely an additive (reformulated gasoline & winter oxygenate)

Corn provides the lion’s share of feedstocks

Sorghum used to produce ~100 million gallons

Imports account for ~450 million gallons

% of Corn Harvest to Make Ethanol Source: Joseph Glauber, USDA, “2008 Agricultural Economic Outlook” 19% of Corn Consumption in 2007 Was to Make Ethanol Use of corn for ethanol doubled in the last four years. Average price of corn rose 72% over the same period Only a huge increase in acres planted kept supply-demand from becoming completely unbalanced. USDA forecasts 25% of corn will be used in 2008/09 to make ethanol.

Use of corn for ethanol doubled in the last four years.

Average price of corn rose 72% over the same period

Only a huge increase in acres planted kept supply-demand from becoming completely unbalanced.

USDA forecasts 25% of corn will be used in 2008/09 to make ethanol.

U.S. Corn Production Source: Dr. Michael R. Rahm, Mosaic, “The Market Outlook: Revving Up Production Agriculture” ; “Q3 Market Analysis Reports”, Potash Corp; Doane Forecast from “Our View from November 2007” by Dan Greenwell, Terra Industries, Inc.; Informa forecast from Corn Used for Ethanol Is Forecasted to Grow ~75% by 2009/10 8.7 billion gallons 11.5 billion gallons 12.5 billion gallons Forecasts are in close agreement (+/- 5%) All five are factored off of build-out of plants already under construction. Demand for corn for ethanol doubles from 2007 to 2009 2008 EISA requirement won’t be made without imports

Forecasts are in close agreement (+/- 5%)

All five are factored off of build-out of plants already under construction.

Demand for corn for ethanol doubles from 2007 to 2009

2008 EISA requirement won’t be made without imports

The Energy Independence & Security Act of 2007 (EISA) contains a revised RFS and builds on EPAct 2005. Title II covers ethanol, biodiesel and other advanced biofuels including butane and biogas. EISA specifies the amount of biofuels to be blended into motor fuels, not how much is produced. Total volume is to grow from 9 billion gallons in 2008 to 36 billion gallons in 2022 The volumes of biofuels specified are minimums . It does not address the blender's credit (see the energy title of the Farm Bill) Can’t Talk About Corn’s Future Without Talking about EISA EISA Overview EISA is Congress’ script for the biofuels Industry

The Energy Independence & Security Act of 2007 (EISA) contains a revised RFS and builds on EPAct 2005.

Title II covers ethanol, biodiesel and other advanced biofuels including butane and biogas.

EISA specifies the amount of biofuels to be blended into motor fuels, not how much is produced.

Total volume is to grow from 9 billion gallons in 2008 to 36 billion gallons in 2022

The volumes of biofuels specified are minimums .

It does not address the blender's credit (see the energy title of the Farm Bill)

RFS Volumes per EISA Source: H.R. 6, Energy Independence & Security Act of 2007 ESIA Calls for a Transition from Corn to Cellulose to Make Ethanol EISA scripts industry development over three periods. First priority appears to be total biofuels target No explicit volumes of corn-starch based EtOH. Corn-starch based ethanol gets U.S. to E10, advanced biofuels gets U.S. to E20 Conventional Biofuels Cellulosic Ethanol Other Advanced Biofuels Biodiesel

EISA scripts industry development over three periods.

First priority appears to be total biofuels target

No explicit volumes of corn-starch based EtOH.

Corn-starch based ethanol gets U.S. to E10, advanced biofuels gets U.S. to E20

Reducing energy usage Reduce GHG’s Address concerns about corn-starch based ethanol EISA Has Several “Themes” Corn is considered a first generation biofuel and its use will be limited Impact assessment on the production of feed grains, livestock, food etc. required by mid-2009 New study to improve energy efficiency of biorefineries New corn-starch based ethanol plants must reduce lifecycle GHG emissions by 20% (compared to gasoline)

Reducing energy usage

Reduce GHG’s

Address concerns about corn-starch based ethanol

Impact assessment on the production of feed grains, livestock, food etc. required by mid-2009

New study to improve energy efficiency of biorefineries

New corn-starch based ethanol plants must reduce lifecycle GHG emissions by 20% (compared to gasoline)

Corn production will rise to 14.15 billion bushels Acres planted increase to 91.9 million The price of corn goes up 8.3% Corn-based ethanol production will rise to 14.5 billion gallons Use in ethanol production reaches 5.22 billion bushes and exceeds all other uses except for feed by 2015 EISA’s Impact to Corn: Is this the end of the story? That depends on cellulosic ethanol… According to FAPRI*… * Food and Agricultural Policy Research Institute, “The Energy Independence and Security Act of 2007: Preliminary Evaluation of Selected Provisions”

Corn production will rise to 14.15 billion bushels

Acres planted increase to 91.9 million

The price of corn goes up 8.3%

Corn-based ethanol production will rise to 14.5 billion gallons

Use in ethanol production reaches 5.22 billion bushes and exceeds all other uses except for feed by 2015

Collection & storage logistics Pretreatment costs Improved enzymes to hydrolyze cellulose and hemicellulose Increased conversion rates for both 5 and 6 carbon sugars Increased titers Reduction in capital costs At This Point Cellulosic Ethanol Still Faces Some Big Hurdles Many question whether it is ready for commercialization

Collection & storage logistics

Pretreatment costs

Improved enzymes to hydrolyze cellulose and hemicellulose

Increased conversion rates for both 5 and 6 carbon sugars

Increased titers

Reduction in capital costs

Timing of New Capacity to Produce Cellulosic Ethanol (DOE Funded Projects) Cellulosic Ethanol Production Is Likely to Fall Short of EISA Targets Project development & plant start-up could push full-scale operation out further 2010 EISA Cellulosic Requirement Range Fuels’ project only one started (Nov. 2007) Three projects are phased, full scale production could be delayed or canceled 2011 EISA requirement is 250 million gallons, 2012 requirement is 500 million gallons

Range Fuels’ project only one started (Nov. 2007)

Three projects are phased, full scale production could be delayed or canceled

2011 EISA requirement is 250 million gallons, 2012 requirement is 500 million gallons

The annual cellulosic requirement can be waived if “… the projected volume of cellulosic biofuels production is less than the minimum applicable volume…” per EISA. Any of the EISA specified volumes (total renewable fuels, advanced biofuels, cellulosic biofuels and biodiesel) can be permanently modified for 2016 and after if: Congress Left Several “Escape Hatches” in EISA Shortfalls in cellulosic ethanol production were considered a distinct possibility Waivers and Modification of Annual Volumes volumes waived were at least 20% of the required amount for two consecutive years or… volumes waived were at least 50% for a single year

The annual cellulosic requirement can be waived if “… the projected volume of cellulosic biofuels production is less than the minimum applicable volume…” per EISA.

Any of the EISA specified volumes (total renewable fuels, advanced biofuels, cellulosic biofuels and biodiesel) can be permanently modified for 2016 and after if:

volumes waived were at least 20% of the required amount for two consecutive years or…

volumes waived were at least 50% for a single year

U.S. Biofuels Supply – 2008 to 2022 Context is Predicting There Will Be A Shortfall in Cellulosic Ethanol Production will only reach 3 billion gallons by 2015 Technology will take longer to develop than what proponents think. It will be a number of years before one or two emerge as most economical Plant standardization will take a period of years A major constraint will be attracting capital. Shortfall Imports Cellulosic

Technology will take longer to develop than what proponents think.

It will be a number of years before one or two emerge as most economical

Plant standardization will take a period of years

A major constraint will be attracting capital.

U.S. Biofuels Supply – 2008 to 2022 A Shortfall Could Be an Opportunity for Corn Use of corn starch would depend on feed and food prices Additional corn-based ethanol is unlikely to be allowed before 2016. Amount would be limited to some % of incremental volume from annual yield gain. Increases in acres planted could boost corn-starch based ethanol even further.

Additional corn-based ethanol is unlikely to be allowed before 2016.

Amount would be limited to some % of incremental volume from annual yield gain.

Increases in acres planted could boost corn-starch based ethanol even further.

Growth In Cellulosic Ethanol Is Also an Opportunity for Corn A major concern is how much feedstock can be sustainably provided Cellulosic Feedstock Required to Produce 3 Billion Gallons

Multiple Types of Feedstock Are Being Considered Each has its pluses and minuses Forest Residues Energy Crops Municipal Solid Wastes Agricultural Residues

No Single Feedstock Is Most Preferred by Plant Developers Many different ideas on which is best DOE Commercial Biorefinery Grant Recipients Four Different Feedstock Strategies: 1. Multiple Ag residues 2. Single Ag residue 3. Multiple municipal and yard wastes 4. Forest residues

Will One Type of Feedstock Prove More Desirable/Economical? Process technology and location could be major determinants of what is used Feedstock Comparison: Note: Land required is for a single 25 million gallon plant

Corn Stover and Wheat Straw Are the Most Readily Available Ag Residues Corn stover has slightly higher carbohydrate content, greater availability and can be co-located at existing ethanol plants Feedstock Comparison: Note: Land required is for a single 25 million gallon plant

Utilizing Just Corn Cobs Has Advantages (vs. stalks, leaves, husks, etc.) Cobs are twice as dense as stalks – lower transportation costs Wouldn’t have to be baled Harvest could be done the same time as the grain – no contamination from dirt Could remove ~0.5 tons per acre Seed corn producers could provide an initial supply of cobs Projected price is $30-60 per ton Corn cobs would be easier to collect, store and transport

Cobs are twice as dense as stalks – lower transportation costs

Wouldn’t have to be baled

Harvest could be done the same time as the grain – no contamination from dirt

Could remove ~0.5 tons per acre

Seed corn producers could provide an initial supply of cobs

Projected price is $30-60 per ton

Corn Fiber Is Another (Overlooked) Potential Cellulosic Feedstock Corn fiber is ~8% of the weight of the kernel There are no collection, storage or transportation issues Its use would not reduce soil organic matter It has zero cost to both dry and wet mills Wet mills already separate out the fiber – dry mills are beginning to use fractionation It could be processed at existing ethanol plants Its only weakness is that it contains twice as much hemicellulose as cellulose Ethanol plants could increase their output 6-7% using corn fiber

Corn fiber is ~8% of the weight of the kernel

There are no collection, storage or transportation issues

Its use would not reduce soil organic matter

It has zero cost to both dry and wet mills

Wet mills already separate out the fiber – dry mills are beginning to use fractionation

It could be processed at existing ethanol plants

Its only weakness is that it contains twice as much hemicellulose as cellulose

We Project that Corn Will be the Most Common Cellulosic Feedstock Corn Stover 38% Energy Crops 5% Urban Wood Waste 15% Mill Residues 5.0% Logging Residues 10% Corn Fiber 5% Corn Cobs 16% Corn in total will provide 59% of the cellulosic feedstock required in 2022 Wheat Straw 6% 36 million tons of feedstock will be required to produce 3 billion gallons of cellulosic EtOH. Urban wood wastes, mill residues and corn fiber will be exploited first. Corn cobs, wheat straw and corn stover come next. Energy crops are last.

36 million tons of feedstock will be required to produce 3 billion gallons of cellulosic EtOH.

Urban wood wastes, mill residues and corn fiber will be exploited first.

Corn cobs, wheat straw and corn stover come next.

Energy crops are last.

Cellulosic Ethanol Will Develop Where the Cheapest Feedstocks Are At. State incentives could play a large role Cellulosic ethanol technology will allow development outside of the Midwest. Development near population centers would mitigate transportation issues. Midwest still figures prominently

Cellulosic ethanol technology will allow development outside of the Midwest.

Development near population centers would mitigate transportation issues.

Midwest still figures prominently

Risks to Corn’s Future as a Biofuels Feedstock Economics are the primary risk Discontinuation of the blenders credits State regulations on ethanol blends Corn isn’t “green” enough Distribution bottlenecks Competition (Coal-to-Liquids) EISA impact assessment Elimination of the import tariff Slow adoption of DDGS in monogastric rations Corn prices

Discontinuation of the blenders credits

State regulations on ethanol blends

Corn isn’t “green” enough

Distribution bottlenecks

Competition (Coal-to-Liquids)

EISA impact assessment

Elimination of the import tariff

Slow adoption of DDGS in monogastric rations

Corn prices

Summary: Near term forecasts have already pegged usage of corn in ethanol at 4.5 billion gallons by 2009/10 (before EISA was passed). Over the near term ethanol from corn will fall somewhat short of targets but imports will take up the slack. Corn-based ethanol will meet the 2015 EISA target of 15 billion gallons by 2015. Cellulosic ethanol will not develop fast enough to meet EISA targets. Our projection is that production will reach 3 billion gallons by 2022. The shortfall will open up opportunities for corn-starch based ethanol. We project EPA will allow corn to fill a portion of the shortfall (1.5-2.0 billion gallons by 2022. Many different feedstocks will be used to make cellulosic ethanol. Ag residues will provide 65% of cellulosic feedstock in 2022.

Near term forecasts have already pegged usage of corn in ethanol at 4.5 billion gallons by 2009/10 (before EISA was passed).

Over the near term ethanol from corn will fall somewhat short of targets but imports will take up the slack.

Corn-based ethanol will meet the 2015 EISA target of 15 billion gallons by 2015.

Cellulosic ethanol will not develop fast enough to meet EISA targets. Our projection is that production will reach 3 billion gallons by 2022.

The shortfall will open up opportunities for corn-starch based ethanol. We project EPA will allow corn to fill a portion of the shortfall (1.5-2.0 billion gallons by 2022.

Many different feedstocks will be used to make cellulosic ethanol. Ag residues will provide 65% of cellulosic feedstock in 2022.

Summary: Corn will be the bridge between first and second generation fuels. Corn residues will be the most widely used Ag residue because of their availability and the opportunity to co-locate production at existing ethanol plants. Readily available feedstocks, already being collected will be the first utilized. Corn fiber will have a niche. Corn cobs will be utilized extensively before plants turn to corn stover. Corn will lead all other commercially produced feedstocks in ethanol per acre for at least another 8-10 years Continued improvement in corn yields offer long term possibilities The biggest risks to corn’s future are the potential elimination of the import tariff, greater DDGS utilization and corn prices

Corn residues will be the most widely used Ag residue because of their availability and the opportunity to co-locate production at existing ethanol plants.

Readily available feedstocks, already being collected will be the first utilized. Corn fiber will have a niche.

Corn cobs will be utilized extensively before plants turn to corn stover.

Corn will lead all other commercially produced feedstocks in ethanol per acre for at least another 8-10 years

Continued improvement in corn yields offer long term possibilities

The biggest risks to corn’s future are the potential elimination of the import tariff, greater DDGS utilization and corn prices

For more information contact: Jim Murphy, The Context Network (515) 225-2204 (office) (515) 468-1956 (cell) [email_address] www.contextnet.com Thank you for your time