Contribution of the Biofuels Industry to the Economy of Iowa Iowa Renewable Fuels Summit January 27,

1
Contribution of the Biofuels Industry to the
Economy of Iowa Iowa Renewable Fuels
SummitJanuary 27, 2009John M.
UrbanchukDirector, LECG LLC
1255 Drummers Lane, Suite 320 Wayne, PA
19087 Tel [phone] E-mail
jurbanchuk_at_lecg.com
2
2008 was a year to forget!

• Housing market crash
• Financial market collapse
• Global recession
• Commodity boom and bust
• Bankruptcies

3
The biofuels industry fell victim to many of the
same problems that affected other industries

• Unavailability of credit
• Overexpansion
• Excessive debt
• Managerial inexperience
• Collapsing oil and gasoline prices
• Iowa hasnt been spared
• Four ethanol plants (305 mgy) and five biodiesel
  plants (106 mgy) have been idled.

4
Oil led the 2008 commodity boom corn followed
Source EIA, USDA Jan 2009 through 1/13/09
5
Oil prices have fallen due in large part to weak
demand from a slowing world economy.
01/16/2009
6
Ethanol prices track gasoline but havent fallen
as far.
Gasoline down 70 from peak Ethanol down 50
Source USDA/AMS EIA.
01/16/2009
7
Biodiesel prices have not declined as much as
petroleum diesel, spread has widened.
Source USDA/AMS EIA.
01/14/2009
8
Biodiesel prices track soybean oil prices very
closely. Both have declined from mid-year peaks.
Source USDA/AMS EIA.
01/14/2009
9
Biofuel profitability has suffered. Ethanol
producers continue to cover variable costs but
margins are shrinking as ethanol prices fall.
Source Iowa State Univ. Jan 2009 month to date
10
The ethanol industry is experiencing a shakeout

• In the last year 23 plants have closed nationwide
  representing nearly 1.7 billion gallons of
  capacity
• A leading producer, VeraSun, filed for Chapter 11
  protection in November and has shuttered 12
  plants with 1.2 billion gallons of capacity
• The remaining 500 million gallons are spread over
  11 other plants
• Four Iowa ethanol plants representing 305 million
  gallons have been idled

11
Weve been here before and survived!
Corn prices 67
Ethanol production -28
12
A closer look
13
Conditions for a recovery in the current
environment parallel those of 1996/97

• The post 95 drought recovery was stimulated by
• Lower corn prices,
• Strong demand caused by Phase II of the RFG
  requirement, and problems with MTBE in
  groundwater.
• This recovery will result from
• Lower corn prices
• Strong demand from the RFS
• Hopefully higher oil prices

14
Nevertheless, biofuels are an important
contributor to the Iowa economy.

• Iowa continues to lead the nation in biofuels
  production
• 34 operating ethanol plants with capacity of 2.76
  billion gallons, 26 of U.S. production.
• Four additional plants representing 305 million
  gallons of capacity have been idled
• 9 operating biodiesel plants with 211 million
  gallons of capacity.
• Five plants representing 107 million gallons of
  capacity have been idled
• 5 new ethanol and 2 new biodiesel plants are
  under construction.

15
Economic Impact of Biofuels

• Ethanol and biodiesel producers are part of a
  manufacturing sector that adds substantial value
  to agricultural commodities produced in Iowa.
• Iowas ethanol industry uses more than one
  billion bushels of corn and produces 7.2 million
  tons of distillers grains, 1.2 million tons of
  corn gluten feed and meal, and 267 million pounds
  of corn oil.
• Biodiesel uses nearly 1.6 million pounds of oil
  and other fats, or the equivalent of 150 million
  bushels of soybeans.

16
Total Economic Impact of the Biofuels Industry
for Iowa 2008
17
Where does the economic impact come from?

• Spending on goods and services for construction
  and annual operations.
• Every dollar spent to build and operate an
  ethanol plant represents the purchase of final
  demand from other industries.
• These dollars circulate through the Iowa economy
  several times.
• The effects are measured by applying Iowa
  specific BEA multipliers for the relevant
  supplying industries.

18
Contribution of the Ethanol Industry to Iowa 2008
19
Contribution of the Biodiesel Industry to Iowa
2008
20
Agriculture faces major questions and challenges
for 2009.

• What impact will the financial crisis have on the
  ability of farmers to get credit for inputs?
• How severe will the shakeout in the ethanol
  industry be?
• Will the financial bailout improve the
  availability of and access to debt capital for
  development of second generation feedstock
  technology?
• How will the financial problems of firms like
  Smithfield and Pilgrim affect feed demand?
• How much will slower world economic growth trim
  export demand?

01/22/2009
21
Look for U.S. corn stocks to slowly build and
prices rationalize at a higher level
Jan 2009 LECG, LLC
22
Going out on a limb

• Look for 88.9 million acres of corn and 71.7
  million acres of soybeans to be planted next
  spring.
• With a corn yield of 155.6 bu/ac, expect a 12.7
  bil bu crop next year!
• Farm level corn prices are projected to average
  3.98/bu for the 08/09 crop and 3.81/bu for
  09/10.
• Net farm cash income will fall 3.2 in 2009 from
  this years record level of 90.7 billion.
• The CPI for food will increase 3.5 - 4 in 2009
  after a nearly 6 increase in 2008.
• Obama will keep the RFS in place and support
  alternative fuels.

01/22/09
23
Conclusion

• Ethanol and biodiesel are part of a manufacturing
  sector that adds substantial value to
  agricultural commodities produced in Iowa.
• Biofuels makes a significant contribution to the
  Iowa economy, expanding the economic base,
  generating income, supporting the creation of new
  jobs, and generating tax revenue.

24
Thank you! Questions?