Diversification of the Corn Wet Milling Industry

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Diversification of the Corn Wet Milling Industry

• Presented by Craig Ruffolo
• McKeany-Flavell Company
• February 2005

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Growth of the Corn Wet Milling Industry

• 1974 - World sugar prices top out at .70/lb.
• 1979 - World oil prices top out at 40/barrel
• Both of these events created umbrellas allowing
  the introduction of two vital products from the
  corn wet milling industry
• HFCS
• Gasohol

/ Ethanol
Image sources California Dept. of Energy,
Philographikon
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The U.S. Corn Wet Milling Industry
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Corn Sweetener Demand Effects On Wet Millers
Carbonated Soft Drink Consumption
Carbonated Soft Drink Industry
Volume Growth
U.S. Gallons Per Capita
Estimate
Source Beverage Digest

• Early 1990s soft drink demand drove HFCS growth
• Today, new issues give the wet millers the
  opportunity to re-invent themselves
• Mexican soft drink tax
• Dietary trends Low-carb diets/obesity
  concerns/Type II diabetes
• Alternatives to regular soft drinks Bottled
  water, mid-calorie product introductions

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Changes in U.S. Dietary Habits
Sweetener Criticisms Excessive consumption of
refined sugars leads to obesity and increased
risk of Type II diabetes.
Consumer Perceptions of Sugar Around 74 of
Americans who use sugar or artificial sweetener
believe that sugar consumption leads to weight
gain (up from 69 in 2002) -Mintel
International Group
The Diet vs. Exercise Debate Low carbohydrate
diets conflict with decades of solid scientific
research Restricting carbohydrates stresses
vital organs while offering no advantages in
terms of either fat loss or long-term weight
control. -Barbara J. Moore, Ph.D.,
president/CEO of Shape Up America!
The Industry Responds HFCS is virtually identical
compositionally to table sugar HFCS and table
sugar are indistinguishable to the human
body HFCS is a natural sweetener made from
corn HFCS is safe to consume and can be part of a
healthy, balanced diet -Corn Refiners
Association
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Demographics Impact on HFCS Consumption
Selected demographic profiles Hispanic Young,
increasing affluence, may favor nutritive
sweeteners Asian Second-oldest of racial
categories, increasing affluence, may favor
non-nutritive sweeteners
Sources Beverage Digest, U.S. Census Bureau,
McKeany-Flavell Estimates
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Re-inventing the Industry
Ethanol
Corn-based plastics
Polyols
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Focus on Ethanol

• The current state of the industry
• Ethanol plant locations
• Dry milling vs. wet milling
• Corn utilization
• Comparison between HFCS and ethanol
• Government Support
• Implications for taxpayers
• Effects on profitability

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Current State of the Ethanol Industry

• Current ethanol production capacity 3.6 billion
  gallons/year
• Total capacity under construction 754 million
  gallons/year
• 10 farmer cooperative facilities are under
  construction, for a total of 355 million gallons
  of annual capacity
• 1.4 billion bushels of corn are used in producing
  ethanol, making up about 12 of crop

Sources Renewable Fuels Association, trade
sources
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Corn Use for Sweeteners and Ethanol
Million Bushels
12 of corn crop
6.5 of corn crop
Estimate
From trade sources
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Estimated Ethanol Supply/Demand Capacity
Utilization
Source McKeany-Flavell
Assumes Renewable Fuels Standard is adopted
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Ethanol Prices, Production Costs, and
Profitability

• Federal excise tax exemption was 0.54 per gallon
  from 1993-2001, 0.53 per gallon in 2002, and
  will be 0.52 per gallon from 2003 to 2007
• 2004 average dry mill ethanol production costs
• Feedstock costs 0.56/gallon
• Operating costs 0.43/gallon
• Depreciation 0.10/gallon

Source OxyFuel News, McKeany-Flavell estimates
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Impact of Renewable Fuels Standard on Government
Payments and Farm Income
Billion Dollars
Net Cash Income
Government Payments
Source LECG
RFS Renewable Fuels Standard
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Caution for Expanding Domestic Corn-based Ethanol
Capacity

• Impact of corn price on ethanol profitability
• Competition from foreign ethanol producers
• New enzyme technologies that make alternative
  feedstocks more competitive

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Impact of Ethanol On Corn Demand
Demand for corn utilized in ethanol production
has doubled over the last three years
Estimates
Sources USDA, Renewable Fuels Association
Any crop disruption or draw-down in stocks will
lead to increased price volatility
Farm Price per bushel
Stocks-to-use
Source USDA
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Competition from Foreign Producers

• Potential sources of foreign ethanol
• Brazil production cost .48/gallon
• Caribbean Basin Initiative (CBI) Countries
  exempt from .52/gallon import duty

Brazilian Ethanol Production and Exports
Billion liters
Estimated
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New Technology

• New enzymes are being introduced that lower the
  cost of other feedstocks
• Sugar cane bagasse
• Grass clippings
• Rice straw
• Waste from paper production

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Ethanol Input Cost Comparison

• Bagasse
• Distillers Dried Grains Solubles (DDGS)

Ethanol yield for sugar is calculated from
NYBOT ethanol contract specifications one
ethanol contract (7,750 US gallons) uses the same
amount of sugar as one 11 or 14 sugar futures
contract (112,000 lbs.)
Sources NYBOT, McKeany-Flavell Estimates
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One Word to Describe the Wet Milling Industry
Resilient!

• Diversification of corn grind
• Creation of Gasohol/Ethanol industry from scratch
• Joint ventures to create corn-based plastics
• Creation of new outlets for corn
• Promoting alternative fuels

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Diversification of the Corn Wet Milling Industry

• Presented by Craig Ruffolo
• McKeany-Flavell Company
• February 2005