John M. Urbanchuk Technical Director - Environmental Economics Cardno ENTRIX John.Urbanchuk@cardno.com

1. Biofuels: Situation and Outlook21st EPAC Annual ConferenceAgricultural Biofuel Summitt II and Biodiesel ForumGreat Falls, MT June 7-8, 2011 John M. Urbanchuk Technical Director - Environmental Economics Cardno ENTRIX John.Urbanchuk@cardno.com

2. Who we are • Cardno ENTRIX is a professional environmental consulting company specializing in water resources management, environmental risk management, natural resource economics, natural resources management, and facility permitting & compliance. • Our staff of nearly 900 includes biologists, chemists, geologists, oceanographers, toxicologists, meteorologists, economists, and environmental, chemical, and civil engineers. • Headquartered in Houston, we have 40 offices in the U.S., Canada, Ecuador and Peru.

3. Why Biofuels?

4. U.S. ethanol has come a long way … and will continue to grow. Ethanol from corn capped at 15 BG in 2015

5. Fundamentals for global petroleum growth favor biofuels BRIC Characteristics

6. Oil markets have been buoyed by a very strong period of global oil demand growth. Oil prices are expected to remain high for some time to come. • Supply uncertainty is high due the crisis across the Middle East and North Africa region. • The oil market will have to adapt to the loss of high quality Libyan production. 75% of Libyan oil is exported to the EU. • Speculation is a factor in the markets. Average daily trading activity in “paper” barrels is now nearly twenty times actual physical demand. • Weakness in the U.S. dollar continues to be supportive of crude prices.

7. Biofuels are here to stay. Ethanol production will again double over the next decade with the U.S. and Brazil remaining the largest producers. Source: F.O. Licht; Projection: OECD/FAO

8. Biodiesel production also will grow with the EU well in the lead. Source: OECD/FAO

9. Coarse grains and sugar cane will remain the primary ethanol feedstock, but cellulose (biomass) will grow significantly. Source: OECD/FAO

10. Vegetable oil will remain the primary source of biodiesel but new feedstocks will grow in prominence. Source: OECD/FAO

11. The blend wall is forestalled for the time being. EPA approved 15% ethanol blends for auto models 2001 and later. • Gasoline demand is expected to average 132 billion gallons between 2010 and 2022. • 13.2 billion gals were produced in 2010. • Current nameplate capacity id 14.4 billion gal; operating capacity is 13.9 billion gal; and 587 million gal is under construction. • The E-15 market will expand as the number of eligible autos grows.

12. A weak dollar and speculation appears to be a force behind rising corn prices. Long positions for both futures and options Source: CFTC Updated 5/11/11

13. Crude oil, gasoline, ethanol and corn prices are highly correlated. Makes it difficult to estimate what determines what. Source: USDA, EIA

14. Feedstock diversity is a challenge for biofuel expansion Traditional Agricultural New Feedstocks • Winter barley • Wheat • Sweet sorghum • Sugar cane • Sugar beets • Crop residues • Corn stover • Corn cobs • Bagasse/rice straw • Energy crops/grasses • Forest residues and woody biomass • MSW • Algae

15. Feedstock prices will be a challenge. Most new advanced biofuel feedstocks have no established market prices. Source: IMF Primary Commodities Database

16. Corn prices have shifted upward as ethanol production expands. Source: USDA WASDE May 11, 2011

17. Industry profitability remains positive despite record corn prices. Ag Marketing Resource Center Iowa State Univ. 05/04/2011

18. Expect U.S. corn stocks to rebuild as production expands and provide a guideline for other feedstocks. Source: USDA WASDE 4/8/2011; JMU Forecast

19. World commodity prices are eclipsing 2008 peaks. Source: IMF Updated 5/9/2011

20. Global food prices have reached record levels, exceeding previous 2008 peak. Source: FAO. Updated 050511

21. All categories of food prices are increasing Source: FAO. Updated 050511

22. U.S. Inflation? Not here yet (unless you buy groceries or gasoline). • “Core” inflation remains very low but the trend has reversed. • Energy (gasoline) and food continue to provide the only real near-term concerns for price stability. • Consumer food prices are recovering from the sharp plunge following the 2008 commodity bubble and the trend is up. Source: BLS. Updated 5/13/2011

23. Food prices are volatile! • Corn demand remains strong despite high prices. • Meat prices are increasing because of production decisions made over the past two years. • Severe weather has affected winter fruit and vegetable crops. • Expect 2011 food price pressure to come from meat, poultry, eggs and dairy. Food CPI will increase 4% in 2011. Updated 5/13/2011

24. Agricultural commodities are the basis for consumer foods but their impact on retail prices is overshadowed by other factors. • Corn, wheat, and soybean prices will continue to be affected by area planted and yields, which determine production. • The largest impact from grain and oilseed prices is through meat, dairy, poultry and eggs. Prices for these products will lag changes in crops due to a longer production cycle. • Consumers will remain vulnerable to changes in non-commodity prices, notably energy and fuel. • Aggregate demand, macroeconomic policy and consumer expectations regarding inflation also will affect the ability of marketers to pass along higher costs.

25. Corn as a feedstock provides economically important co-products. Cellulose will provide bagasse that can be used to cogenerate electricity, reducing production costs and generating additional revenue streams. One 56 lb bushel No. 2 Yellow Corn 2.7 gal ethanol 17.5 lbs DDGS 17.5 lbs CO2 90% of U.S. ethanol is produced in a dry mill process

26. How will we produce the 21 billion gallons of non-corn starch biofuels needed to meet RFS2 targets by 2022? • Biofuels policy is uncertain; budget pressures may trump energy needs • VEETC, biodiesel tax credit and secondary tariff expire on 12/31/2011. • Cellulosic tax credit expires in 2012. • Feedstock diversity will provide both challenges and opportunities.

27. More challenges ... • Commercially successful conversion technology is uncertain and will require consistent R&D investments. May include one or all of: • Chemical (acid hydrolysis) • Biochemical (enzyme fermentation) • Thermochemical gassification or pyrolysis • Algae • Capital availability and financing are uncertain and vulnerable to the health of the financial sector. • Permitting and sustainability will be issues for new biorefineries

28. Biggest challenge may be the rate of expansion and availability of construction infrastructure • Producing 15 billion gallons of corn starch ethanol is no problem. • Currently 205 refineries have nameplate capacity of 14.2 billion gallons, or an average capacity of 70 MGY. • Capacity is in place to produce 1 billion gallons of biomass biodiesel. • Cellulosic and advanced biofuels plants are likely to be smaller than dry mill corn ethanol plants. Assuming a 50 MGY capacity 400 new plants will be needed to be built by 2022 (5 per year). • The number of ethanol plants doubled and capacity tripled between 2005 and 2011! • Can this be repeated?

29. 27 Integrated Biorefinery Projects are receiving DOE funding. Representative commercial Advanced Biofuels Projects include: Source: Renewable Fuels Association; DOE Biomass Program May 2011

30. In conclusion … • Biofuels production will expand both in the U.S. and globally but significant challenges remain. • Feedstock and technology choices • Financing and capital availability • Permitting and sustainability • Rate of expansion and availability of resources • Biofuels are a shining star within a declining U.S. manufacturing sector and will continue to provide significant economic, environmental, and energy security benefits.

31. Remember, biofuels aren’t new, only the vehicle in which they are used is.Questions?