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Biodiesel The Solution or a Disaster? John Baize John C. Baize and Associates.

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1 Biodiesel The Solution or a Disaster? John Baize John C. Baize and Associates

2 Rising Petroleum Prices The Driver for Biofuels

3 Biodiesel Basics The basic ingredients of biodiesel are a refined fat or oil (~87%), methanol (~12%), and a catalyst (1%). 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 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%). Process creates biodiesel (86%), glycerin (8%), alcohol (4%) and fertilizer (1%). Biodiesel has about the same energy content as petrodiesel Biodiesel has about the same energy content as petrodiesel

4 Thermal Depolymerization Tyson Foods and ConocoPhillips have announced plans to make up to 175 million gallons of “green diesel” with thermal depolymerization process 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 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 Resulting product will qualify for biodiesel subsidy and can be transported by pipelines

5 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 %) 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 %) 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. The tax incentive for using virgin vegoils to make biodiesel is about $302/mt or 13.3¢/pound. This equates to about $42/barrel. This equates to about $42/barrel.

6 Subsidized biodiesel Can Be Exported The biodiesel blenders credit is collected when biodiesel is blended. 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 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. 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 Europe’s biodiesel sector very upset with this “splash and dash” practice

7 Estimated U.S. Biodiesel Production 1999 – 2005 and Estimate for 2006 Source: National Biodiesel Board CY 2006 production equal to about billion pounds

8 USA Soybean Oil Consumption Biodiesel Likely to Drive Up Demand in Future

9 U.S. Industrial Use of Vegoils 2000/01 – 2005/06 and Forecast for 2006/07 Demand surge just beginning

10 Rapidly Rising Capacity National Biodiesel Board (NBB) indicated In January that 92 biodiesel plants with an annual capacity of 738 million gallons are operational 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. 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. 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.

11 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 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. 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. That is equal to 28% of total U.S. vegoil demand in 2005/06. It also is equal to the oil in 705 of soybeans. It also is equal to the oil in 705 million bushels of soybeans.

12 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 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 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 That’s equal to 52% of forecasted U.S. vegoil use this year

13 U.S. Already Has Large and Growing Vegoil Deficit

14 EU-25 Biodiesel Production Source: European Biodiesel Board, Oil World

15 European Union Industrial Use of Vegoils

16 European Union Vegoils Imports, Exports and Deficit

17 Spain’s Planned Biodiesel Expansion Press reports indicate 23 biodiesel plants are scheduled to be built in Spain by end of 2008 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 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) 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 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 The volume of oils/fats Spain will require to operate the plants at full capacity exceeds Brazil’s soyoil exports

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

19 Brazil Also Has Major Biodiesel Program Brazil plans to replace 5% of diesel usage with biodiesel by 2013 – likely to move that up to Brazil plans to replace 5% of diesel usage with biodiesel by 2013 – likely to move that up to It would require 2.4 billion liters of biodiesel to meet 5% goal. 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. 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. Brazil’s total soyoil exports in current year are forecasted at 2.18 mmt.

20 Argentina Has Adopted Biodiesel Mandate Argentina has adopted a 2% biodiesel mandate and will increase it to 5% in a couple of years 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) 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 years. Observers expect capacity to reach 1.5 – 2.0 mmt in years.

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

22 Future Impact of Biodiesel Impact on global diesel supply will be minimal 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 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 All of the world’s vegoils would only make enough biodiesel to supply 57% of U.S. diesel consumption

23 Oil-Meal Balance in Soybean Crush Typically soyoil has contributed 30% – 40% of soybean crush product value. 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 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 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

24 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 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 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 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

25 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 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. 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. 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 Some are expecting soymeal to fall below $135/mt

26 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 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 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. More DDGS also will need to be exported. ProExporter predicts 19.9 mmt of soymeal will be exported by U.S. in 2015/16 ProExporter predicts 19.9 mmt of soymeal will be exported by U.S. in 2015/16

27 Greatest Impact on Oilseed Crushers in Importing Nations More soybeans and other oilseeds likely to be processed in oilseed producing nations More soybeans and other oilseeds likely to be processed in oilseed producing nations Oilseed meal prices will decline Oilseed meal prices will decline More low-priced oilseed meals will have to be exported by oilseed producing nations More low-priced oilseed meals will have to be exported by oilseed producing nations Fewer oilseeds available to importers Fewer oilseeds available to importers

28 Countries With Vulnerable Crushing Sectors Korea – low oil and meal tariffs Korea – low oil and meal tariffs Japan – no tariff on meal Japan – no tariff on meal Mexico – zero tariffs on meal and oil from U.S. Mexico – zero tariffs on meal and oil from U.S. European Union – no tariff on soymeal European Union – no tariff on soymeal Costa Rica & Trinidad Costa Rica & Trinidad Thailand Thailand Middle East Middle East

29 Global Exports of Soybeans Versus Exports of Soymeal and Soyoil China has been main factor behind rising soybean exports Trend likely to change in future.

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

31 Global Vegoil End Stocks To Use Ratio 1996/97 – 2005/06

32 Global Vegoil Production & Consumption

33 Limits to Near-term Increase in Vegoil Supplies Brazil reduced soybean plantings this year by 6% because of low profits 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 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 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 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 Jatropha and castor beans currently only a hope, not reality

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

35 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. 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. 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 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? How big of a political issue will it become?

36 Global Industrial Use of Vegoils Source: USDA

37 Global Industrial Use of Vegoils Versus Vegoil Consumption in India Source: USDA

38 Past & Future Food Use of Vegoil Another 25 MMT Required in a Decade At least 35 mmt of additional vegoil needed for food uses in a decade

39 Past & Future Non-Food Demand for Vegoil Another 25 MMT Required in a Decade At least 23 mmt of additional vegoil needed for industrial uses in a decade

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

41 U.S. Ethanol Production Source: Renewable Fuels Association

42 U.S. Non-Feed Use of Corn 1995/96 – 2005/06 and Forecast for 2006/07

43 Corn Global Production and Consumption Ethanol driving up demand

44 U.S. Forecasted Use of Corn for Ethanol, Other Domestic Uses, and Exports Source: The ProExporter Network

45 Corn Global Ending Stocks Stocks declining because of ethanol

46 China Corn Production, Consumption and Net Exports When will China become big corn importer?

47 US Corn, Cotton, Soybean & Wheat Planted Area 1995 – 2006 and Forecast for 2007

48 Past and Forecasted Future Non-USA Corn Demand Additional 85 mmt of corn required in a decade U.S. may export 30 mmt less corn

49 USA Soybean Production 1980 – 2006 Forecast for 2007

50 Prices of Malaysian Palm Oil and Argentine Soyoil October 2003 – March 2007

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

52 The Big Unknown – Petroleum Prices The major increase in petroleum prices was triggered by hurricanes Katrina and Rita last year 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 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.) 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 Crude oil now blow $60/barrel It is possible there will be a substantial downward correction in petroleum prices It is possible there will be a substantial downward correction in petroleum prices Substantially lower petroleum prices would greatly diminish viability of biofuels Substantially lower petroleum prices would greatly diminish viability of biofuels

53 Questions? John C. Baize John C. Baize and Associates Tel:


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