Biodiesel The Solution or a Disaster?

John Baize John C. Baize and Associates

Rising Petroleum Prices The Driver for Biofuels

Biodiesel Basics

    The basic ingredients of biodiesel are a refined fat or oil (~87%), methanol (~12%), and a catalyst (1%).

About 7.5 pounds of oil/fat are required for each gallon of biodiesel produced Process creates biodiesel (86%), glycerin (8%), alcohol (4%) and fertilizer (1%).

Biodiesel has about the same energy content as petrodiesel

Thermal Depolymerization

   Tyson Foods and ConocoPhillips have announced plans to make up to 175 million gallons of “green diesel” with thermal depolymerization process Animal fats will be blended with crude oil and processed in petroleum refineries Resulting product will qualify for biodiesel subsidy and can be transported by pipelines

U.S. Biodiesel Incentives

    Energy act of 2005 provides $1/gallon federal tax incentive (payable to blenders) for biodiesel made from virgin vegetable oils and animal fats (1¢ per %) Tax incentive for biodiesel made from inedible animal fats and used vegetable oils is 50¢/gallon (0.5¢ per %) The tax incentive for using virgin vegoils to make biodiesel is about $302/mt or 13.3¢/pound.

This equates to about $42/barrel.

Subsidized biodiesel Can Be Exported

    The biodiesel blenders credit is collected when biodiesel is blended.

Some firms are blending 0.1% diesel with pure biodiesel, collecting 99.9 cents/gallon, and then exporting the biodiesel to Europe.

Some foreign biodiesel is coming here where it is imported, blended with 0.1% diesel, blenders credit is collected, and then re-exported to Europe. Europe’s biodiesel sector very upset with this “splash and dash” practice

Estimated U.S. Biodiesel Production

1999 – 2005 and Estimate for 2006 200 180 160 140 120 100 80 60 40 20 0

CY 2006 production equal to about billion pounds

0.5

2 5 15 20 25 75 180 1999

Source: National Biodiesel Board

2000 2001 2002 2003 Celendar Year 2004 2005 2006 F.

USA Soybean Oil Consumption

9 8 7 6 5 4 3 2 1 0

Biodiesel Likely to Drive Up Demand in Future

19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 Marketing Year Beginning

U.S. Industrial Use of Vegoils

2000/01 – 2005/06 and Forecast for 2006/07 600 500 400 300 200 100 0

Demand surge just beginning

20 00 /2 00 1 20 01 /2 00 2 20 02 /2 00 3 20 03 /2 00 4 20 04 /2 00 5 20 05 /2 00 6 20 06 /2 00 7 Marketing Year

Rapidly Rising Capacity

   National Biodiesel Board (NBB) indicated In January that 92 biodiesel plants with an annual capacity of 738 million gallons are operational Some use recycled oils/fats and a few others will use animal fat. However, most use vegoil, primarily soyoil. It would take 3.65 billion pounds (1.66 mmt) of oil/fat to supply all of the existing plants at full capacity each year.

Capacity Likely To be Much Greater in 2008

    NBB indicates 47 biodiesel plants either are being built or expanded with an additional annual capacity of 1.06 billion gallons It would take 7.97 billion pounds (3.6 mmt) of oils/fats to produce that much biodiesel. That is equal to 28% of total U.S. vegoil demand in 2005/06. It also is equal to the oil in 705 million bushels of soybeans.

Potential Installed Biodiesel Capacity

   If all of the planned capacity is built the U.S. Will wind up with an annual capacity of 1.8 billion gallons It would take 13.5 billion pounds (6.1 mmt) of oils and fats to operate it at full capacity That’s equal to 52% of forecasted U.S. vegoil use this year

U.S. Already Has Large and Growing Vegoil Deficit

3,000 2,500 2,000 1,500 1,000 500 0 -500 -1,000 -1,500 -2,000 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 Imports Exports Deficit

EU-25 Biodiesel Production

1800 1600 1400 1200 1000 800 600 400 200 0 313 422 568 936 1,617 2002 2003 2004 2005 Est. 2006 F.

Marketing Year

Source: European Biodiesel Board, Oil World

European Union Industrial Use of Vegoils

10 8 6 4 2 0 1.9

2000 2.0

2.5

3.3

4.5

6.3

7.8

2001 2002 2003 2004 Marketing Year Beginning 2005 2006

European Union

Vegoils Imports, Exports and Deficit 10 8 6 4 2 0 -2 -4 -6 -8 -10 2000/01 -3.00

2001/02 -3.57

2002/03 -3.85

2003/04 -4.33

2004/05 -5.50

2005/06 -7.04

2006/07 -7.62

Imports Exports Deficit

Spain’s Planned Biodiesel Expansion

     Press reports indicate 23 biodiesel plants are scheduled to be built in Spain by end of 2008 The announced combined annual capacity of the facilities is 2.6 mmt That would require more oils/fats than Spain consumed for all uses in 2005 (2.55 mmt) Spain already is a net importer of over 1.2 mmt of oils/fats and has limited capability to expand its oilseed production, particularly rapeseed The volume of oils/fats Spain will require to operate the plants at full capacity exceeds Brazil’s soyoil exports

French Biodiesel Sector

     France currently has 5 plants with capacity of 700,000 mt Two plants come on stream in 2007 with capacity of 500,000 mt Seven plants have been announced to begin operations in 2008 with a capacity of 1.135 mmt of capacity By the end of 2008 French biodiesel capacity will be about 2.335 mmt France already is a net importer of oils and fats

Brazil Also Has Major Biodiesel Program

    Brazil plans to replace 5% of diesel usage with biodiesel by 2013 – likely to move that up to 2010.

It would require 2.4 billion liters of biodiesel to meet 5% goal. It would take about 2.19 mmt of vegoil to produce 2.4 billion liters of biodiesel.

Brazil’s total soyoil exports in current year are forecasted at 2.18 mmt.

Argentina Has Adopted Biodiesel Mandate

   Argentina has adopted a 2% biodiesel mandate and will increase it to 5% in a couple of years Argentina’s differential exports taxes (DETS) strongly favor exports of biodiesel (24% export tax on vegoil, 5% export tax on biodiesel). The subsidy from DETS equates to about 42.5¢/gallon ($125/mt) Observers expect capacity to reach 1.5 – 2.0 mmt in 2 - 3 years.

Malaysia and Indonesia Building Huge Biodiesel Sectors

     Rather than exporting palm oil to other countries to make biodiesel, Indonesia and Malaysia are building their own biodiesel sector. Malaysia plans to have 4 mmt of biodiesel capacity by end of 2008 Indonesia likely to have equal amount of capacity at end of 2008. They plan to export biodiesel to Europe, the U.S. and elsewhere Large amounts of inexpensive palm oil is unlikely to be available for other countries to make to make biodiesel.

Future Impact of Biodiesel

   Impact on global diesel supply will be minimal All of the vegoil of all types consumed in the U.S. would make only enough biodiesel to supply 5.5% of U.S. diesel consumption – about the same as agriculture uses.

All of the world’s vegoils would only make enough biodiesel to supply 57% of U.S. diesel consumption

Oil-Meal Balance in Soybean Crush

 Typically soyoil has contributed 30% – 40% of soybean crush product value.  Each 1¢/pound increase in soyoil prices equal to ~$4.20 increase in soyoil value from crushing a metric ton of soybeans  Soymeal price can drop by ~$5.40/mt and maintain same crush margin (assuming no change in soybean price) if oil price rises 1¢/pound

If Biodiesel Increases Vegoil Prices

 Greater demand for vegoils to produce biodiesel is almost certain to drive vegoil prices higher and increase crusher return from oil  This will increase crush margins and cause crushers to crush a greater volume assuming the decline in meal returns does not exceed additional gain from vegoil  If soyoil prices rise because of biodiesel demand by 4¢/pound ($88/mt) then margins will not fall (assuming no change in soybean prices) unless soymeal prices fall by more than $21.60/mt

Biofuels to Cause Glut of Protein Meals

    The more ethanol that is produced from corn, the more DDGs (27% Protein) that will be produced The more demand there is for vegoils for biodiesel production the more soymeal, canola meal, and other protein meals that will be produced.

Net result will be an excess supply of protein meals and a likely major decline in protein meal prices.

Some are expecting soymeal to fall below $135/mt

Potentially Huge Volumes of Protein Meal Will Have To Be Exported

    If an additional 1 mmt of soyoil is needed to supply the biodiesel sector it will mean an additional 4.4 mmt of soymeal that will have to find a home We also are likely to see large amounts of additional canola meal being produced in North America that will compete in feed markets and require more exports More DDGS also will need to be exported. ProExporter predicts 19.9 mmt of soymeal will be exported by U.S. in 2015/16

Greatest Impact on Oilseed Crushers in Importing Nations

    More soybeans and other oilseeds likely to be processed in oilseed producing nations Oilseed meal prices will decline More low-priced oilseed meals will have to be exported by oilseed producing nations Fewer oilseeds available to importers

Countries With Vulnerable Crushing Sectors

       Korea – low oil and meal tariffs Japan – no tariff on meal Mexico – zero tariffs on meal and oil from U.S.

European Union – no tariff on soymeal Costa Rica & Trinidad Thailand Middle East

Global Exports of Soybeans Versus Exports of Soymeal and Soyoil

China has been main factor behind rising soybean exports

75 70 65 60 55 50 45 40

Trend likely to change in future.

2000 2001 2002 2003 2004 Marketing Year Beginning 2005 Soybeans Soymeal + Soyoil 2006

U.S. Vegoil End Stocks To Use Ratio 1996/97 – 2006/07

20% 15% 10% 9.3% 8.9% 9.2% 11.4% 15.2% 11.2% 8.3% 7.9% 10.5% 16.1% 13.7% 5% 0% 1996 1997 1998 1999 2000 2001 2002 2003 Marketing Year Beginning 2004 2005 2006

Global Vegoil End Stocks To Use Ratio 1996/97 – 2005/06 Lowest ratio forecasted for 2006/07 since 1974/75 14% 12% 10% 8% 6% 4% 2% 0% 9.4% 9.0% 9.6% 10.2% 10.1% 9.3% 8.8% 8.1% 8.8% 8.0% 7.1% 1996 1997 1998 1999 2000 2001 2002 2003 Marketing Year Beginning 2004 2005 2006

Global Vegoil Production & Consumption 130 125 120 115 110 105 100 95 90 85 80 90.0

88.7

20 00 /0 1 20 01 92.7

91.8

/0 2 20 02 95.8

95.6

/0 3 20 03 /0 4 Production 111.4

108.1

20 04 /0 5 20 05 /0 6 Consumption 20 06 /0 7

Limits to Near-term Increase in Vegoil Supplies

     Brazil reduced soybean plantings this year by 6% because of low profits Argentina can increase plantings only by 3% or so because of limited land availability U.S. likely to reduce soybean plantings in 2006 by as much as 5 million acres because of high corn and wheat prices It takes 5 years to develop oil palms with profitable production – 8 years o full production Jatropha and castor beans currently only a hope, not reality

When Will Higher Prices Ration Vegoil Demand?

   Current pace of growth in use of vegoils for biodiesel production cannot be sustained for long. Price will have to ration demand.

With all of the mandates and incentives from governments here and abroad at what price will vegoil demand for biodiesel be limited? 35¢? 40¢?

Will demand for food be significantly limited before demand from biodiesel producers?

The Food Versus Fuel Debate of the Future

    It would take about 10.7 mmt of vegoil to supply 5% of U.S. annual diesel consumption. That’s about 86% of India’s total vegoil consumption or about 95% of annual U.S. vegoil consumption.

The European Union already is using more vegoil for biodiesel and other industrial uses than is used annually for all purposes by Indonesia, Vietnam, Thailand, Philippines, and Singapore combined.

How many people worldwide will go hungry so motorists in rich countries can fuel their cars and trucks?

How big of a political issue will it become?

Global Industrial Use of Vegoils 25 20 15 10 5 0 8.7

2000

Source: USDA

9.5

10.9

12.8

15.3

18.6

21.6

2001 2002 2003 2004 Marketing Year Beginning 2005 2006

Global Industrial Use of Vegoils Versus Vegoil Consumption in India 25 20 15 10 5 0 8.7

11.1

9.5

11.0

10.9

10.7

12.8

11.0

15.3

11.8

2000 18.6

12.2

2001 2002 2003 2004 Marketing Year Beginning 2005 Global Industrial Use India

Source: USDA

21.6

12.9

2006

Past & Future Food Use of Vegoil Another 25 MMT Required in a Decade 145 135 125 115 105 95 85 75 20 00 At least 35 mmt of additional vegoil needed for food uses in a decade 20 02 20 04 20 06 20 08 20 Year 10 20 12 20 14 20 16

Past & Future Non-Food Demand for Vegoil Another 25 MMT Required in a Decade 50 40 30 20 10 0 20 00 At least 23 mmt of additional vegoil needed for industrial uses in a decade 20 02 20 04 20 06 20 08 20 Year 10 20 12 20 14 20 16

The Food Versus Fuel Debate of the Future – A Moral Dilemma

 

If there is a global vegoil shortage, who will win out? Drivers in developed countries? Or poor consumers in developing countries?

Expect this issue to rise to the forefront in late 2007 or in 2008

U.S. Ethanol Production 1990 - 2006

4 3 2 6 5 1 0 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 Calendar Year

Source: Renewable Fuels Association

U.S. Non-Feed Use of Corn

1995/96 – 2005/06 and Forecast for 2006/07 100 90 80 70 60 50 40 30 20 10 0 41.4 43.5

45.8 46.9 48.6

49.7 52.0

59.4

64.4 68.2

75.6

89.9

19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 Marketing Year Beginning 20 05 20 06

Corn Global Production and Consumption

750 700 650 600 550 500

Ethanol driving up demand

1996 1997 1998 1999 2000 2001 2002 2003 Marketing Year Beginning 2004 2005 2006 Production Consumption

U.S. Forecasted Use of Corn for Ethanol, Other Domestic Uses, and Exports 250 200 150 100 50 0 2005 2006 2007 2008 2009 2010 2011 2012 Marketing Year Beginning 2013 2014 2015 Use for Ethanol Feed & Other Use Exports

Source: The ProExporter Network

Corn Global Ending Stocks

300 250 200 150 100 50 0

Stocks declining because of ethanol

165.2 165.7

190.4 192.9

173.1

149.6

125.7

103.6

131.3 124.2

91.8

1996 1997 1998 1999 2000 2001 2002 2003 Marketing Year Beginning 2004 2005 2006

China

Corn Production, Consumption and Net Exports 150 100 50

When will China become big corn importer?

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Marketing Year Beginning Production Net Exports Consumption

US Corn, Cotton, Soybean & Wheat Planted Area 1995 – 2006 and Forecast for 2007 110 90 70 50 30 10 1995 1996 1997 1998 1999 2000 2001 2002 Year of Harvest 2003 2004 2005 2006 2007 Corn Cotton Soybeans Wheat

Past and Forecasted Future Non-USA Corn Demand 600 550

Additional 85 mmt of corn required in a decade U.S. may export 30 mmt less corn

500 450 400 350 300 1995 2000 2005 2010 2015

USA Soybean Production 1980 – 2006 Forecast for 2007 100 90 80 70 60 50 40 30 20 10 0 1980 1984 1988 1992 Year 1996 2000 2004

Prices of Malaysian Palm Oil and Argentine Soyoil October 2003 – March 2007 $700 $650 $600 $550 $500 $450 $400 $350 $300 Oc to be De r ce m be Fe r br ua ry Ap ril Ju ne Au gu st Oc to be De r ce m be r Fe br ua ry Ap ril Ju ne Au gu st Oc to be De r ce m be r Fe br ua ry Ap ril Ju ne Au gu st Oc to be De r ce m be r Fe br ua ry Palm Oil Argentine Soyoil

Key Points

      Pace of biodiesel expansion is unsustainable Biofuels likely to cause glut of protein meals in the future which will lead to lower prices There will be a shakeout of biodiesel facilities worldwide Crushing sectors of several countries will go out of business Availability of U.S. corn for export likely to decline sharply Oilseeds will have tough time competing for land with corn and wheat in the U.S. and Canada

The Big Unknown – Petroleum Prices

      The major increase in petroleum prices was triggered by hurricanes Katrina and Rita last year The supply disruptions caused by the hurricanes now have been fixed The main forces that drove petroleum prices higher were hedge funds, speculators, and political risks (Iran, Iraq, Nigeria, Venezuela, etc.) Crude oil now blow $60/barrel It is possible there will be a substantial downward correction in petroleum prices Substantially lower petroleum prices would greatly diminish viability of biofuels

Questions?

John C. Baize John C. Baize and Associates Tel: 703-698-5908 Email: [email protected]