Talking Point

Sustainable industry or .com exuberance?
By James W. Eiler | June 01, 2006
A decade ago, now retired U.S. Federal Reserve Chairman Alan Greenspan pontificated about the ".com" valuations. He said, "How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions? " Fast forward to early 2006, and ask yourself if the biofuels industries might be in the same situation.

Ethanol and biodiesel equity drives that formerly took weeks are being done in days. Both industries are enjoying a "perfect storm" as input prices remain relatively stable and high oil prices are sustaining. Still, the outlook is uncertain. Our company works with clients seeking institutional capital-private equity funds and strategic investors-for investment in their ethanol and biodiesel plants. Some industry observations and perspectives from these capital sources include:

Market Size
The National Biodiesel Board pegs existing, under construction or expanding, and proposed biodiesel plant production capacity at roughly 1.75 billion gallons. At Cybus, we know of another 500-plus MMgy of planned production, so we're looking at a possible total production capacity of 2 billion to 2.5 billion gallons per year within 18 months. Biodiesel Magazine's own Proposed Biodiesel Plant List (see Projects feature on page 34) represents 1.46 billion gallons of would-be capacity. This capacity is 30 times the 2005 sales volume, and could provide a B6 blend for all on-road diesel vehicles in the country.

The highest estimate we've seen is 500 MMgy from the United States' current excess soybean oil production, plus another 200 MMgy from the yellow grease and tallow sources, for a total of 700 MMgy. To increase biodiesel production above this level, we will need to pull soybean oil from current food uses, import oils (palm, etc.) or significantly increase our other oil-bearing crops such as canola, camelina, sunflower, ethanol-plant-derived corn oil, etc.

If biodiesel is blended at the rack and pushed through the pipelines, then the majority of the product is going to enter the fuel distribution system in places like Houston, San Diego and New Jersey. While local consumption and splash blending will continue, can your plant access alternative feedstocks and ship finished product by truck (at 20 cents per gallon), rail (10 cents), barge (5 cents) or pipeline (2 cents)?

This is the key issue for institutional investors. Do we have the management team that can build a company, a business and not just run a plant? When the perfect storm has passed and the industry consolidation begins, the difference between the buyers and the sellers will be their risk management skills.

Several quality turnkey platforms are available along with a host of individually designed and built smaller producer units. We know the technology will continue to improve, so can today's plant be competitive for five to seven years with operating rates and efficiencies in the top quartile?

Every gallon of biodiesel produces 1.05 pounds of glycerin; adding just 600 MMgy to the nation's production capacity will produce 315,000 additional tons of glycerin annually. Crude glycerin is quickly becoming a waste product with a cost of disposal versus a byproduct with potential revenue. The industry must continue to fund research to develop new commercial uses for glycerin.

The United States imports over 10 million barrels of oil every day, so even when we reach the 7.5-billion-gallon renewable fuel standard, we will be replacing less than 1 percent of our current oil imports. While incrementally important, our renewable fuels from corn and beans are not going to make the United States energy independent. Nevertheless, the replacement of MTBE with ethanol and sulfur with biodiesel, along with other market factors, will continue to significantly increase demand for both renewable fuels.

James W. Eiler is a managing partner at Cybus Capital Markets LLC, a food and agribusiness investment banking firm headquartered in Des Moines, Iowa. Contact Eiler at [email protected] or (515) 471-4661.
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