Dry-Grind Ethanol Production: Economic Sensitivity

Douglas G. Tiffany
Research Fellow University of Minnesota

Todays Discussion

Work arose from Factors Associated with Success of Fuel Ethanol Producers written w/ Vernon Eidman Funding: USDA Rural Development MN Ag. Experiment Station 1) Briefly establish key factors in drygrind ethanol production 2) Demonstrate economic sensitivity of this technology in this market

Dry-Grind Technology

Dry-Grind Plants-- now 67% of U.S. production--simpler process, lower capital costs, but refinements are occurring. Ethanol from corn has a positive energy balance. (1.34 1.51)
USDA, Argonne Lab, Michigan State University, Ag. Canada

Millions of Gallons

1000

1500

2000

2500

3000

3500

500

0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

U.S. Annual Fuel Ethanol Production

Source: U.S. E.I.A. and Renewable Fuels Association

Grind bushel of corn (56 lb.), add water, make mash, cook to kill bacteria, expose starch Add enzymes for flow & to convert starch to sugar Introduce Yeasts in Batch Fermenters---- produce beer---- distill the ethanol Products:
ethanol (2.75 gal.) requires heat to distill DDGS- (18 lbs.) generally requires drying CO2-- ( 18 lbs. ) food grade

Ethanol Dry-Grind

150 bushel corn yields 413 gallons of ethanol per acre, 2700 pounds of DDGS

Cr on

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Project Goals & Methods

Goal: Describe and Quantify Factors of Success in Dry-Grind Ethanol Production Steps in Research Conduct Interviews of Plant Personnel & Bankersto Learn Factor Inputs, etc. Develop Spreadsheets to Measure Plant Profits Interpret Results Advise Farmers/Investors, Bankers Policymakers

E th a n o l D r y M ill S p r e a d s h e e t

b y D o u g la s G . T iffa n y , U n iv e rs ity o f M in n e s o ta

C o st/D e n a t. R a n g e s fo r 3 7/2 3/0 3 20 :3 0 G a l. Eth a n o l C o l u m n C P la n t T o ta ls 4 N a m e p la te Eth a n o l P ro d . (D e n a t. G a l.) ,0 00 ,00 0 40 5 In ve stm e n t p e r N a m e p la te G a llo n $1 .5 00 0 1 .00 - $ 2. 00 $ P la n t C o st$ 60 ,0 00 ,0 0 0 6 F a c to r o f N a m e p la te C a p a c ity 1.2 0 00 0 % - 1 50 % ) (8 7 D e b t-Eq u ity A ssu m p ti o n s 8 F ac to r o f E q u ity 0 .4 0 9 F ac to r o f D e b t 0 .6 0 In itia l D e b$t 36 ,0 00 ,0 0 0 1 0 In te res t R a te C ha rge d on D e b t 0 .0 7 1 1 R ate o f R eturn R e qd . b y Inves to rs on E qu ity 0 .1 2 12 1 3 C o n ve rsio n Efficie n cy A ssu m p tio n s A n n u a l P ro d u c tio n 1 4 A nh y d ro us E th a no l E x tra c t ed (G a l. p er B u.) 2. 75 02 .5 -2.85 g al/bu B u sh e ls G ro u n d D e n a t. G a llo n s 1 5 D D G S pe r B u s h el (lb. pe r B u.) 1 8 1 5 -22 lb./b u 1 6,5 8 1,8 43 4 8,0 0 0,0 00 1 6 C O 2 e x t rac te d p e r B u s he l (lb. pe r B u .) 1 8 1 5 -22 lb./b u 17 P ric e p e r R e v e n u e /B u . R e v e n u e /G a l. 1 8 Esta b lish m e n t o f G ro ss M a rg in U n it G ro u n d D e n a tu re d S o ldP la n t T o ta ls 1 9 E th ano l P ric e (d en atu red pric e) $/ga l. $ 1.15 $ .8 0 to $1 .6 0 $ 3.32 89 1 .1 50 0$ 55 ,2 00 ,0 0 0 2 0 D D G S P ric e $/T $ 80 .00 $ 6 0-$ 12 0 $ 0.72 00 0 .2 48 7$ 11 ,9 38 ,9 2 7 2 1 C O 2 P ric e ($ p er To n liq . C O 2) $ 6.00 $ 2 - $1 2 / liq.To n $ 0.05 40 0 .0 18 7$ 89 5 ,42 0 2 2 M N P rod . S ub s idy /g al.D e na t. E tha no l $ 0.00 $ 0.00 00 0 .0 00 0$ 2 3 F ed eral S m all P rod u c e r S ub s id y $ 2 4 C C C B ioe n erg y C red it $ 2 5 R eve n ue pe r U n it $ 4.10 29 $ 1.41 7 4$ 68 ,0 34 ,3 4 7 2 6 C orn P ric e P a id by P ro c e s s or ($ p er bu .) $ 2.20 $ 1 .70 ---$3 .2 5 $ 2.20 00 $ 0.76 0 0$ 36 ,4 80 ,0 5 5 2 7 G ro s s M arg in $ 1.90 29 $ 0.65 7 4$ 31 ,5 54 ,2 9 2 28

29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63

Operating Expenses Per Bushel Natural Gas Price ($ 1,000,000 Btu) LP (Propane) Price ($ per gallon) Factor of Time Operating on Propane BTU's of Heat fr Fuel Req./ Denat. Gal. Combined Heating Cost Electricity Price ($ per kWh) Kilowatt Hours Required per Denat.Gal. Electrical Cost Total BTU's of Fuel and Electricity Total Energy Cost

Enzymes Yeasts Other Proc.Chemicals & Antibiotics Boiler & Cooling Tower Chemicals Water Denaturant Price per Gal. Total Chemical Cost

Price per Cost /Bushel Unit Ground $4.50 ($1.50-$9.00/Dtherm) $0.70 $.55-$.72 / gal. 0.02 0-.12 35,000 28,500-55,000 $0.4623 $0.05 $.025-$.090/kwh 1.090 (.85-1.2 kWh/denat. gal.) $0.1578 45,900 $0.6200 Cost/Denat. Gal. Ethanol $0.0480 $0.1389 $0.0220 $0.0637 $0.0200 $0.0579 $0.0050 $0.0145 $0.0060 $.005-.010 $0.0174 $0.7000 $0.1013 $0.3937 $0.2412 $0.0362 $0.1520 $0.1303 $0.0394 $0.0058 $0.0116 $0.0391 $0.6555 $1.6692 $0.2337 $0.1737 $0.0601 $3,875,971

Cost /Gal. Denatured Sold

Plant Totals

$0.1597 $

7,665,569

$0.0545 $ $0.2142 $

2,616,000 10,281,569

$0.0480 $0.0220 $0.0200 $0.0050 $0.0060 $0.0350 $0.1360 $0.0833 $0.0125 $0.0525 $0.0450 $0.0136 $0.0020 $0.0040 $0.0135 $0.2264 $0.5766 $0.0807 $0.0600 $0.0207

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

2,304,000 1,056,000 960,000 240,000 288,000 1,679,952 6,527,952 4,000,000 600,000 2,520,000 2,160,000 652,800 96,000 192,000 648,000 10,868,800 27,678,321 3,875,971 2,880,000 995,971 3,875,971

Depreciation based on C49 asset life 15 Years Maintenance & Repairs $0.0125 Interest Expense Labor $0.0450 $.04--$.06 Management & Quality Control $0.0136 $.010-$.022 Real Estate Taxes $0.0020 Licenses, Fees& Insurance $0.0040 .0030-.0050 Miscellaneous Expenses $0.0135 $.01-$.03 Total of Other Processing Costs Total Processing Costs Net Margin Achieved Per Unit Farmer-Investor Reqd. Return on Equity 12.00% Increment of Success/ ailure to Meet Required Return F Ethanol Plant Profits for Shareholders and Principal Reduction

$3,875,971 $

Dry Grind Revenue Categories (5 yr.)* Ethanol Sales DDGS Sales CO2 MN Subsidy Total

80% 19% 1% -0100%

Revenues and Expenses for 40MM Dry Mill Plant at Baseline Conditions
Miscellaneous Taxes, Lic. Fees & Insur. Management & Q.A. Labor Interest Maint. & Repair Depreciation Denaturant Water Other Chem. & Antibiotics Yeasts Enzymes Electricity Natural Gas & Propane Cost of Corn Expense Total CO2 Sales DDGS Sales Ethanol Sales Revenue Total

10

20

30

40

50

60

70

80

Millions of Dollars per Year

Five Key Factors & Baseline Levels

Corn Price---- $2.20 per bushel Ethanol Price---- $1.15 per gallon Nat. Gas Price----$4.50 per dekatherm Ethanol Yield---- 2.75 gal.(anhyd)/bushel Capacity Factor of Nameplate----1.20

Dollars per Bushel 0 .5 1 2 3 4 1 .5 2 .5 3 .5 4 .5 0 Jan-93 May-93 Sep-93 Jan-94 May-94 Sep-94 Jan-95 May-95 Sep-95 Jan-96 May-96 Sep-96 Jan-97 May-97 Sep-97 Jan-98 May-98 Sep-98 Jan-99 May-99 Sep-99 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02

C o r n P r ic e s : M in n e s o t a F a r m - L e v e l ( 1 9 9

40 MM Gal. Dry-Grind Profits Sensitivity to Corn Price

$15,000,000 $10,000,000 $5,000,000 Plant Profits $0 $1.50 ($5,000,000) ($10,000,000) ($15,000,000) Corn Price (Dollars per Bushel)

$1.70

$1.90

$2.10

$2.30

$2.50

$2.70

$2.90

$3.10

$/G a .
1 .9 0 1 .8 0 1 .7 0 1 .6 0 1 .5 0 1 .4 0 1 .3 0 1 .2 0 1 .1 0 1 .0 0 0 .9 0 0 .8 0 0 .7 0 0 .6 0 0 .5 0

P r ic e T re n d o f F u e l E t h a n o l in M in n e s o ta ( 1 9 8 7 -2 0 0 2 )
1 98 7-20 0 2 Av e r ag e = $ 1.2 7 P e rs ia n G u lf W a r $ 5 . 0 0 -b u s h e l c o rn H ig h g a s p ric e of 2 0 0 0/0 1

c89

c91

92

c95

96

c97

98

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De

De

De

De

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De

De

De

De

De

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02

87

88

90

93

94

99

00

40 MM Gal. Dry-Grind Profits Sensitivity to Ethanol Price

$20,000,000 $15,000,000 $10,000,000 Plant Profits $5,000,000 $0 $0.80 -$5,000,000 -$10,000,000 -$15,000,000 Ethanol Price per Gallon

$0.90

$1.00

$1.10

$1.20

$1.30

$1.40

Dollars per DekaTherm 1 0 .0 0 1 2 .0 0 1 4 .0 0 2 .0 0 4 .0 0 6 .0 0 8 .0 0 Ja n-9 Ju 3 l Ja -93 n-9 Ju 4 lJa 9 4 n-9 Ju 5 l Ja -95 n-9 Ju 6 lJa 96 n-9 Ju 7 l Ja -97 n-9 Ju 8 lJa 98 n-9 Ju 9 l Ja -99 n-0 Ju 0 lJa 00 n-0 Ju 1 l Ja -01 n-0 Ju 2 l-0 2

N a tu r a l G a s P r ic e s fo r In d u s tr ia l U s e r s in M in n e s o t

40MM Gal. Dry-Grind Profits Sensitivity to Natural Gas Prices

$8,000,000 $6,000,000 $4,000,000 Plant Profits $2,000,000 $0 $2.00 ($2,000,000) ($4,000,000) ($6,000,000)

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

Natural Gas Price per DekaTherm

4 0 M M D ry -G rin d P la n t P ro fits S e n s itiv ity to E th a n o l Y ie ld P e r B u s h e l

6 ,0 0 0 ,0 0 0 5 ,0 0 0 ,0 0 0 4 ,0 0 0 ,0 0 0 3 ,0 0 0 ,0 0 0 Plant Profits 2 ,0 0 0 ,0 0 0 1 ,0 0 0 ,0 0 0 0 2 .2 -1 ,0 0 0 ,0 0 0 0 -2 ,0 0 0 ,0 0 0 -3 ,0 0 0 ,0 0 0 G a llo n s o f E th a n o l p e r B u s h e l 2 .3 0 2 .4 0 2 .5 0 2 .6 0 2 .7 0 2 .8 0 2 .9 0 3 .0 0

Model Predicts Addl. Value of Higher Total Fermentables in Corn

Increase Total Fermentables by 4%

Equals $909,450 for typical dry-grind plant;

or $.067 per bushel ground.

Increase Total Fermentables by 6%

Equals $1,338,436 for typical dry-grind plant; or $.086 per bushel ground.

4 0 M M G a l. D r y -G r in d P r o fits S e n s itiv ity to C a p a c ity N a m e p la te

6 ,0 0 0 ,0 0 0 5 ,0 0 0 ,0 0 0 4 ,0 0 0 ,0 0 0 Plant Profits 3 ,0 0 0 ,0 0 0 2 ,0 0 0 ,0 0 0 1 ,0 0 0 ,0 0 0 0 0 .6 0

0 .7 0

0 .8 0

0 .9 0

1 .0 0

1 .1 0

1 .2 0

1 .3 0

1 .4 0

1 .5 0

C a p a c ity F a c to r o f N a m e p la te

Factors of Lesser Importance & Their Baseline Conditions

Capital Costs ----------$1.50/gallon denatured Percentage of Debt----60% of Cap. Cost Interest Rate------------7.0% DDGS Price------------$80.00 per Ton Electrical Price---------$.06 per kWh Fed., State, or Local Subs/Incent.----0-

Net Margins of 40 MM Gal./Yr. Dry-Grind Plant for Corn Price-Ethanol Price Combinations
$25,000,000
ETOH@1.00

$20,000,000 $15,000,000 $10,000,000

ETOH@1.15 ETOH@1.30

Plant Profits

$5,000,000 $-

$1.35 $1.55 $1.75 $1.95 $2.15 $2.35 $2.55 $2.75 $2.95 $3.15
$(5,000,000) $(10,000,000) $(15,000,000) $(20,000,000)

Corn Price (Dollars per Bushel)

Net Margins of 40 MM Gal./Yr. Dry-Grind Plant for Corn Price-Ethanol Price Combinations
$25,000,000
ETOH@1.00

$20,000,000 $15,000,000 $10,000,000

ETOH@1.15 ETOH@1.30

Plant Profits

$5,000,000 $-

$1.35 $1.55 $1.75 $1.95 $2.15 $2.35 $2.55 $2.75 $2.95 $3.15
$(5,000,000) $(10,000,000) $(15,000,000) $(20,000,000)

Corn Price (Dollars per Bushel)

Net Margins of 40 MM Gal./Yr. Dry-Grind Plant for Corn Price-Ethanol Price Combinations
$25,000,000
ETOH@1.00

$20,000,000 $15,000,000 $10,000,000

ETOH@1.15 ETOH@1.30

Plant Profits

$5,000,000 $-

$1.35 $1.55 $1.75 $1.95 $2.15 $2.35 $2.55 $2.75 $2.95 $3.15
$(5,000,000) $(10,000,000) $(15,000,000) $(20,000,000)

Corn Price (Dollars per Bushel)

Dry-Grind Net Margins for Various Corn Prices Shift as Natural Gas Rises to $5.50 , $6.50 from $4.50 per Dekatherm; Ethanol @ $1.15/Gal.

$20,000,000
NG Shift to $6.50 NG Shift to $5.50

$15,000,000

$10,000,000 Plant Profits

ETOH at $1.15, NG at $4.50

$5,000,000
Schedule Shift to Higher NG Prices

$0 $1.40 ($5,000,000)

$1.65

$1.90

$2.15

$2.40

$2.65

$2.90

$3.15

($10,000,000)

($15,000,000) Corn Price (Dollars per Bushel)

Effect of Interest Rates on 40MM Gal./Yr. Dry Mill Profits for Plants of Various Debt Percentages under Baseline Conditons $7,000,000

$6,000,000

$5,000,000 Plant Profits

$4,000,000

$3,000,000
0% Debt 20% Debt 40% Debt 60% Debt

$2,000,000

$1,000,000

$0

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

Interest Rate

Conclusions: Sensitivities

Favorable economics with low corn prices, high gasoline prices, low natural gas prices, low interest rates. Corn Price--- Zero profits above $2.43 per bu. Ethanol Price--- @$1.15--- profits of $.15/ bu.,

bu.

@$1.35--- profits of $.56/

Natural Gas Price rise to ($6.85) from baseline levels of $4.50/ dekatherm wipes-out profits. Ethanol Yield per Bushel very important

2.75 gal./bu (typical today)

Re trospe ctiv e Ethanol Gross M argins, O pe rating Ex pe nse s, and 12% R OE of 40M M Dry -G rind Plant from 1/93-12/02 $4.50 $4.00 Dollars Per Bushel Processed $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $Jan-96 Jan-02 Jan-93 Jan-94 Jan-95 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01

D ry Mill Gross Margin D ry Mill Total Exp. D ry Mill Total Exp.+ 12% R OE

Plant Manager Observations--Technical

Faster fermentation times - 45-50 hours possible 60%-40% split in Yeast Propagation Strategies - 60% continuous yeast propagators - many batches in same tank; antibiotics used - 40% batch yeast, make fresh batches from purchased yeast Expect to process most of fiber in corn kernel with improved cellulases in the future

Improved Enzymes and Yeast in last two years Tolerance to Alcohol % (13.5%-now 19.7%), Tolerance to Higher Temps (can tolerate 100 degrees F. for 2-3 hours and still recover)

Research Topics: Derive More Revenue or Cut Costs of Stillage

DDGS
Improvement in DDGS Attributes Efforts to Brand and Standardize DDGS Educate Users, Develop Markets Development of Yeast Extract Products to Reduce Antibiotic Use in Livestock

Utilization of Liquid Stillage or Syrup Utilization of DDGS as Biomass Fuel Better Storage, Utilization of Wet DDGS

Technology Changes Pending

Quick-Germ Technology uses more enzymes, depends on favorable sale of corn oil (Univ. of Illinois) Quick-Fiber Technologyoffers opportunity for greater through-put, but altered DDGS product characteristics ( Univ. of Illinois) Continuous vs. Batch Fermentation with stripping of ethanol--- USDA, ARS Pervaporationuse of membranes to filter ethanol from broth (USDA, ARS)

Conclusions: Dry-Mill Production

Found Sensitivity of Dry Mill Ethanol Production to Various Factors; Historical Volatility of Returns High Volume, often low margin business; however, some times of excellent returns have been modeled and also reported Processing business demanding superior management of sensitive microbes, quality control Major efforts to conserve energy in operations Expect this technology to evolve and improve further until major improvements in ligno-cellulosic processes are able to make that technology more competitive.

Contact Information

dtiffany@dept.agecon.umn.edu (612) 625-6715

Spreadsheet: http://www.agmrc.org/energy/info/ ethanolsuccess.xls Original paper: www.apec.umn.edu/staff/dtiffany/ staffpaperp03-7.pdf