Market Opportunities and Risks

Grain Procurement

Homeland Energy Solutions LLC processes 37 million bushels of corn annually which constitutes approximately 65% of the input costs for the production of ethanol and DDGS. Homeland Energy Solutions, LLC has engaged the services of FC Stone and ProExporter to determine corn availability in the area.

Iowa has seen significant increases in the corn crop since 2000. The amount of bushels being produced has increased from 1.728 billion bushels in 2000 to 2.162 bushels produced in 2005. The average production for these six years is over 1.933 billion bushels per year. Of this total, the greatest percentage is produced in the north-central and north-eastern portion of the state. Seven of the twelve counties that produce over 25 million bushels of corn annually are located within 100 miles of the plant. In the eight counties immediately surrounding the site, annual production of over 157.5 million bushels of corn can be documented in 2005.

The acres planted during this time frame ranged from 11.4 million acres to 12.5 million, with an average farm price of $2.01 per bushel.

The 2004 corn crop was the largest corn crop on record with national production at approximately 11.8 billion bushels and Iowa production at approximately 2.24 billion bushels. The USDA stated the 2005 corn crop to be approximately 11.1 billion bushels, which is a 5.9 % decrease from the previous year’s corn crop. The USDA is expecting a 2.4 billion bushel carryout, which would leave a 22% stocks to use ratio.

US Production Outlook for Ethanol and DDGS with the Corn Requirements




Market Analysis

On August 8, 2005, President George W. Bush signed into law the Energy Policy Act of 2005. The Act contains numerous provisions that are expected to favorably impact the ethanol industry by enhancing both the production and use of ethanol. Most notably, the Act created a 7.5 billion gallon renewable fuels standard (RFS). The RFS will begin at 4 billion gallons in 2006, increasing to 7.5 billion gallons by 2012.

Energy Efficiency

The net energy balance (NEB) of a fuel can be expressed as a ratio of the energy produced from a production process relative to the energy used in the production process. An output/input ratio of 1.0 implies that energy output equals energy input. The critical factors underlying ethanol’s energy efficiency or NEB include:

• Corn yields;
• The energy efficiency of corn production, including the energy embodied in inputs such as fertilizers, pesticides, seed corn, and cultivation practices;
• The energy efficiency of the corn-to-ethanol production process – about 55% of the corn used for ethanol is processed by “dry” milling (a grinding process); 45% is processed by “wet” milling plants (a chemical extraction process); and
• The energy value of corn by-products

Over the past decade technical improvements in the production of agricultural inputs (particularly nitrogen fertilizer) and ethanol, coupled with higher corn yields per acre and stable or lower input needs, appear to have raised ethanol’s NEB. In 2004, USDA economists reported that, assuming “best production practices and state of the art processing technology,” the NEB of corn-ethanol (based on 2001 data) was a positive 1.67 – that is 67% more energy was returned from a gallon of ethanol than was used in it production. This compares with an NEB of 0.81 for gasoline – that is, 19% less energy is returned from a gallon of gasoline than is used in its life cycle form source to user. The above information: Economic Efficiency, Energy Efficiency & Government Support were obtained from “CRC Report for Congress Order Code RL32712”.

Ethanol Market Overview

The primary market drivers for fuel ethanol in the U.S. are octane requirements and oxygen requirements as well as toxic air reductions. In addition, record high crude oil prices have made ethanol an attractive octane blend component.

Increasingly states are taking steps to promote the rural economic environmental energy benefits of renewable fuels. Ethanol is less expensive than other oxygenates. The ethanol industry has a proven track record of cost-effectively replacing MTBE and increasing gasoline supplies. The ethanol industry continues to grow and will assist any state confronting water quality issues or high gasoline prices.

CURRENT STATE MTBE BANS

Source: Renewable Fuels Association, January 2005

In a recent study “Ethanol and Gasoline Prices,” conducted by LECG, LLC, May 2004; if ethanol were removed from the current market, the shortfall would have to be made up with expensive imports. The study concluded:

• gasoline prices would increase 14.6% in the short term (29.2cents per gallon if gas was $2.00 per gallon,
• gasoline prices would increase 3.7% in the long term even after refiners build new capacity or secure alternative sources of supply (7.4 cents if gas was $2.00 per gallon and,
• refiners would be forced to import more than 217,000 barrels per day of high-octane, clean burning gasoline blending components.

Source: U.S. Energy Information Administration/Renewable Fuels Association