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The Big Move: The Leap from First-Gen to Next-Gen Biofuels Companies, How Does It Happen?

Submitted by on February 9, 2015 – 2:53 pmNo Comment

by Jim Lane (Biofuels Digest)  How does the biofuels industry move from its roots in first-gen corn starch or cane sugar fermentation towards diversified products, more capacity and distribution, and new inputs like cellulosics?

How are the economics now — and where is the market headed?

Green Plains CEO Todd Becker — in speaking to analysts last week after annoucing record income — gives some clues as to how the future may unfold.

You might be surprised to learn that some among the major ethanol producers are openly discussing with investors and analysts how they might look at a post-RFS world, where ethanol competed head-to-head with fossil gasoline without the benefits of a mandate.

“Long term, corn has to compete at a BTU equivalent price,” Becker said. “It’s not good to have $4.25 corn in this market, but when you see it drop in to $3 something range, now corn prices in as a BTU substitute and even at even money to gasoline, ethanol is still the cheapest oxygenate [refiners can buy]. And the economics we see still offer farmers plenty of good reason to plant corn.”

“We’ve obviously seen an adjustment [in oil prices], but we’re seeing some stability emerge with gasoline now around $1.75 and ethanol at something like a 35 cent discount,” Becker noted.

“Even at even money to gasoline we don’t think [refiners] will back ethanol out of the blend and we are continuing to receive substantial export queries.

“We don’t see E85 as a great driver of volume, though we know that there are companies out there who are passing along the full value of the RIN to consumers and can make money with sub $1.00 E85. But mostly we see E85 priced at only a slight discount to E15, so we see E15 as more of a driver. If the EPA keeps the hammer on obligated parties we’ll see more of the expanded blends.

What about E15’s prospects?

“We’re staring to see the same early movers on E15 that we saw when we went to E10. But right now all of them are looking at a $0.35 discount on ethanol relative to gasoline, and the benefit of a $0.70 RIN, that’s a positive driver.

Can ethanol make money at $1.40?

“The economics we see still offer farmers plenty of good reason to plant corn, and clearly we are reporting record income this quarter.

For now, Becker is confident that the current RIN and RFS system has the potential to drive E15 adoption, and push the blend wall back — and potentially drive some E85 or higher-blend distribution through the substantial discount to gasoline for E85.

Longer-term, the combination of export markets and the strength of cost-competitive ethanol as a gasoline substitute, he thinks, will contimnue to push up ethanol demand over ethanol supply.

Interesting, of course, to see the dynamics of ethaol evolving — that the market for cellulosics that could be provided by E15 and E85 will be primarily driven in the short term by the opportunities that obligated parties see with the combination of low-cost corn ethanol and RINs.

In other words, there might well be a great deal of substance to the idea that first-generation ethanol has not only generated the grower-producer complex that will begin to support cellulosic fuels made from corn stover — it might also drive over the next 2-3 years the creation of a distribution option to get E15- blends of cellulosic fuels into the marketplace.  READ MORE

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