Friday, June 25, 2010

USDA Regional Roadmap

USDA Regional Roadmap

The USDA published a report this week entitled “Regional Roadmap to Meeting the Biofuels Goals of the
Renewable Fuels Standard by 2022”.  The report makes several assertions that raised our eyebrows.  As we have reported in earlier reoprts, after the startup of the last set of ethanol plants scheduled for this year, we calculate 14.3 billion gallons of available nameplate capacity.  Recently, the industry has been operating in the 90%-95% range of capacity.  After this last surge of plant startups, there are no further significant plant expansions on the horizon.  It appears the USDA thinks that there are 1.2 billion gallons of new plant capacity coming on line that will push total industry capacity to 14.7 billion gallons.  In order for the ethanol industry to produce 15 billion gallons per year of ethanol, a minimum of 15.8 billion gallons of capacity is needed, based on historical operating rates.  From our estimates, a minimum of another 1.5 billion gallons of new capacity needs to be built by 2015 to meet the mandate.  In today’s low margin ethanol market, characterized by frozen capital markets and an uncertain regulatory environment, it will be interesting see when and where this additional capacity will materialize from.  Imports may be the solution.

The other assertion by the USDA that is silly is that cellulosic ethanol capacity will be built at an installed capital cost of $8 per gallon of capacity.  This is opposed to capital costs for a corn starch ethanol plant of $1.50 per gallon of capacity.  Where is the risk capital going to come from to build these plants that have at least a $1.50-per-gallon cost of production disadvantage, let alone a 5 to 1 capital cost disadvantage, and must rely on government tax credits (like biodiesel) and mandates to survive?

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