Fertilizer Outlook and Technology Conference, November 16, 2010

Alex GorrellMarket Research Analyst, Intrepid Potash

Biofuels OverviewBiofuels Overview

OutlineOutline

Current US Ethanol policy

Importance of Corn as feedstock

Emerging technologies

Ethanol on the world stage

Industry economics

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Blending LimitBlending Limit

On October 13, the EPA approved E15 for use in cars made after 2007. – It is expected to make a decision for cars made from 2001-06 in

December.– E85 use is inconsequential (only 0.3% of US cars run on E85)

Demand increase will be limited by market, infrastructure and implementation constraints– Gas price, pump certification, labeling, consumer education

*assuming 2007-2010 model years cars use 20% of transport fuel, model year 2001-2006 use 40%, and the US fuel market is 138 bgy (EIA).

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Blend wall* (bgy)

E10 E15 for model years

2007+ 2000+ all cars

13.8 15.9 17.9 20.7

Tax Credits Set to ExpireTax Credits Set to Expire

Expiring at the end of 2010:– $0.45/gal tax credit for blenders (VEETC)– $0.54/gal + 2% ad valorem tariff on Ethanol Imports– $0.10/gal credit for small ethanol producers

Expiring end of 2012:– $1.01/gal credit for cellulosic producers

Expired end of 2009:– $1.00/gal credit for Biodiesel producers

Proposals have been made to either lower the amount of the credit or eliminate it in favor of expanding infrastructure and installing blender pumps

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Environment surrounding tax credit extensionEnvironment surrounding tax credit extension

Tax Credit renewal depends on lame duck session– Arguments for credits/tariff:

– Job creation– Protection from cheap/subsidized imports– Tariff cancels out US subsidizing imports– Needed to stimulate investment in new technology– Reimburses Blenders for compliance with RFS2

– Arguments against:– Redundant with RFS2 minimum volumes– Corn ethanol is a mature industry– Free Trade– Food vs. Fuel– Questionable GHG reduction benefits of Ethanol– Potential cost cutting target (cost $5 billion in 2009)

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Renewable Fuels Standards Ensure Minimum DemandRenewable Fuels Standards Ensure Minimum Demand

Source: Energy Independence and Security Act of 2007

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Million Gallons 2011 2022Corn Ethanol 12,600 15,000 Biodiesel 800 1,000 Cellulosic 5-17* 16,000 Other Advanced 300 4,000

*Originally set at 250 million gallons, EPA will release final revision by Nov. 30

Energy Independence and security act of 2007 (EISA) established RFS2 (replacing RFS1, established in 2005)

Other advanced biofuels can be cellulosic, biodiesel, sugarcane, RDIF, algal, or anything else that meets GHG standards and is not derived from corn starch

0

5

10

15

20

25

30

35

40

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

RFS2  (Billions of Gallons)

Other Advanced Biofuel

Biodiesel

Cellulosic Ethanol

Conventional Corn Ethanol

CAGR: 8.9%Cellulosic CAGR: 52.6%

How RFS2 is Enforced: Renewable Identification Numbers (RINs)How RFS2 is Enforced: Renewable Identification Numbers (RINs)

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Expanding Corn Supply Has Met Ethanol DemandExpanding Corn Supply Has Met Ethanol Demand

Ethanol Demand has driven growth in Corn Use

Other uses have remained relatively flat

Ethanol should level off at around 30-40% of total use

If the US becomes a structural ethanol exporter, use could go up

USDA forecast assumes imports are used to meet mandates; if RFS2 is met entirely with US ethanol, use would be 0.2-0.4 billion bushels more each year, leveling of at 5.3 in 2015*

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*assuming current yield of 2.8 gal/bu

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2,000 

4,000 

6,000 

8,000 

10,000 

12,000 

14,000 

16,000 

Million Bu

shels

USDA Projected US Corn Utilization

ExportsEthanol for fuel FSI except ethanolFeed & residual 

Source: USDA

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1999/00 2004/05 2009/10 2014/15 2019/20Source: USDA

Ethanol

Feed and Residual

Exports

FSI less Ethanol

Improving EfficiencyImproving Efficiency

Current industry average: 2.8 gal/bu (81% efficient)– Max. theoretical yield: 3.47 gal/bu

A 2008 USDA study found that corn ethanol contains about 2.3 BTUs of energy for every 1 BTU of fossil fuel consumed in production, a ratio that has also been improving over time

71%

73%

75%

77%

79%

81%

83%

85%

2.452.52.552.62.652.72.752.82.852.92.95

Gallons/bushel

Efficiency

Ethanol Yields

2008 USDA Ethanol Energy Balance ReportEERE Theoretical yield calculator

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Production Concentrated in MidwestProduction Concentrated in Midwest

Total Capacity: 14 billion Gallons/year– Potential corn use (2.8 gal/bu): 4.8 billion bushels

Sources: Renewable Fuels Association, Ethanol Producer Magazine

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Sources: Renewable Fuels Association, Ethanol Producer Magazine

Corn is Feedstock for Over 95% of Production CapacityCorn is Feedstock for Over 95% of Production Capacity

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Cellulosic capacity falls short of mandatesCellulosic capacity falls short of mandates

Feedstocks: crop residues, municipal solid waste (MSW), Wood waste, “energy crops” e.g. Switchgrass, Miscanthus

EISA calls for cellulosic to generate most of production growth– RFS2 calls for 1 billion gallons by 2013,16 billion gal by 2022

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2009 2010 2011 2012 2013 2014 2015

‐

500 

1,000 

1,500 

2,000 

2,500 

3,000 

World Cellulosic Ethanol CapacityMillions of Gallons

RFS2 Cellulosic mandate

ROW Capacity

US Capacity

Source: Biofuels Digest Advanced Biofuels tracking database, EISA

Impact of Cellulosic Production on Fertilizer UseImpact of Cellulosic Production on Fertilizer Use

Feedstocks (switchgrass, corn stover, wood waste etc.) contain large amounts of nutrients, especially K, which would be removed from fields– It is uncertain how much of the K is recoverable and how much would

have to come from fertilizer– Switchgrass replaces some N through fixation– One byproduct of cellulosic is biochar ash, which contains P,K and S

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‐5 

10 15 20 25 30 35 40 45 50 

Nutrient Removal (Lbs/ton harvested)

N P2O5 K2O

University of Minnesota Bio-Ash Fertilizer StudyUniversity of Minnesota Bio-Ash Fertilizer Study

No measurable agronomic benefit to char ash– K and other nutrients not available to plants as fertilizer

Ash also contained sulfur – 5.7 % in FB, 1.6% in CF, 0.03% in Biochar

In addition to P, K and S in the other ashes also contributed to yield response

Ash FB CF Biochar Potash TSP Control

Source Burning Distiller Solubles

Burning Turkey Manure

Pyrolysis of wood chips and corn cobs N/A N/A N/A

Nutrient Content 0‐13.5‐9.9 0‐17.6‐16.2 0‐0.1‐0.9 0‐0‐60 0‐44‐0 0‐0‐0

Lb/acre of K2Oapplied 221 118 121 120 0 0

Yield (bu/A) 221 218 194 208 219 192Source: Agricultural Utilization Research Institute, University of Minnesota

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World Fuel Ethanol ProductionWorld Fuel Ethanol Production

World leaders: US (corn), Brazil (Sugarcane)

Brazilian domestic market more mature than US, better suited to being a structural exporter

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US as a Potential Net ExporterUS as a Potential Net Exporter

US: Net imports of only 9.3 mg in first 7 months of 2010, on pace for 16 mg

RFS2 advanced biofuel requirement could mean more imported sugarcane ethanol from Brazil

Allowing VEETC to expire will harm future exports– Lifting tariff would hurt US trade balance by making imports cheaper

Source: US Energy Information Administration16

Biodiesel operating at 20% capacityBiodiesel operating at 20% capacity

Primary feedstock: soybean oil

Tax Break lapse and EU Import restrictions have hurt industry

Production expected to be no higher than RFS mandated 800 million gal in 2011

Primary export market: EU

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 2011*

0

500000

1000000

1500000

2000000

2500000

3000000

US Biodiesel MarketThousand Gallons

Production Capacity

Net Exports

Consumption

Production

Sources: US Energy Information Administration, National Biodiesel Board

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Biodiesel margins are small or negativeBiodiesel margins are small or negative

7.6 lbs of soy oil are needed to produce 1 gallon of Biodiesel

Soy Oil feedstock is by far the largest cost component

Loss of $1/gal credit, high feedstock prices and EU import restrictions are detrimental to the industry

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European BiodieselEuropean Biodiesel

Primary feedstock: Rapeseed oil

Import biodiesel from US, Argentina, Malaysia– Cheaper to import than

produce– Feedstock (esp. palm

oil) from Asia

Some producers switching to bioethanol, citing profitability

Some concerns over sustainability of Palm oil as a feedstock

Total Production

Total Capacity

0

5000

10000

15000

20000

25000

2003 2004 2005 2006 2007 2008 2009 2010*

European Biodiesel Production and Capacity'000 Metric tons

Italy

France

Spain

Germany

Others

Total Production

Total Capacity

*assuming 43% utilization rate

Source: European Biodiesel Board

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Prices tend to stay in balance long termPrices tend to stay in balance long term

Ethanol correlated to both gasoline and corn prices

Source: Bloomberg

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$/Bu

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$/Ga

llon

Ethanol, corn, and gasoline prices

US Regular Gasoline Rack Prices

US average Ethanol rack price

Iowa Yellow Corn Price ($/bu)

MarginsMargins

The largest and most variable input cost in ethanol production is Corn– Other large components are Natural Gas and Electricity– For US Biodiesel it is Soybean Oil, followed distantly

by methanol

Despite current high corn prices, Ethanol margins have been strong– Of 4 major margin components, 3 are favorable

+ High ethanol price+ High Dry Distiller’s Grains price+ Low Natural Gas cost- High Corn cost

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Ethanol MarginsEthanol Margins

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ConclusionsConclusions

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Pace of growth in corn as a feedstock is slowing

If cellulosic takes off as expected, it will have significant implications for nutrient use

We are currently at a pivotal point as far as policy is concerned

Contact:

Alex.gorrell@intrepidpotash.com