A Biofuels Farm to Fuel Opportunity
By: Bill Mott
Project Characteristics
Our model is unique in its simultaneous emphasis on three key attributes: vertical integration, cost linkage and-end product diversification. Within these important elements:
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We focus on the low cost feedstocks and state-of-the-art processing to insure that the integrated system is a low cost producer at each step in the process and overall. This means a project starts at the farm and ends with the fuel.
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Tropical climates produce the lowest cost feedstock for biofuels:
- Sugar cane for sugar and ethanol
- Palm oil or Jathropa oil for biodiesel
- Concessionary financing and subsidies are often available in developing economies.
- The tropical cost differences are structural and profound, meaning that in the long term tropical countries will likely become the lowest cost producers of biofuels and the drivers of the biofuels markets.
- We are able to link agricultural production to the value of processing plant output by producing a diverse plant output, thereby insuring stable agricultural and plant income through competing commodity price cycles.
- We focus on projects which enjoy strong political support, either through direct involvement of politically experienced national partners and/or the presence of supporting policies for biofuels development
Drivers
The impetus for promoting biofuels comes from four key market drivers:
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Petroleum market.
The rise in the market price of petroleum products is not viewed as a brief price spike. The 10 Year Forward market price of crude oil remains near $70/barrel, or FOB $1.66 per unrefined gallon. This translates into a refined product cost at $1.75 to $2.00 at wholesale, without considering any subsidies or incentives that may be available. The high cost of petroleum provides a new economic target for alternative fuels. Our goal is to develop only projects that can retain profitability at prices much closer to petroleum's historic average.
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Technology.
Important strides have been made in both the improvement of cultivars and yields of key crops such as sugar cane and palm and Jatropha oil coupled with new biofuel processing technologies. This provides the basis for abundant and low cost raw material for conversion to biofuel.
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Government Policies.
Governments are becoming more aggressive in promoting alternative fuels, driven by policy objectives such as price stabilization of transportation fuels, reduced reliance on imported oil, the need to promote agricultural production (i.e., for job creation and rural development), and reducing pollution through cleaner fuels. These policy goals create an environment favorable to the development of alternative energies.
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Capital Markets.
Alternative fuels have been accepted as a long-term investment opportunity based on prior experience and long-term sales contracts. This favorable investment climate results in domestic and international business opportunities for companies working within the alternative fuel sector.
Economics
Biofuels derived from the tropical crops such as sugar cane and palm oil are far more cost-effective than biofuels from other feedstocks, including the target prices for cellulosic ethanol. Brazil is the lowest-cost ethanol producer in the world, at 90 cents per gallon, or less for vertically integrated projects. Profitability can be enhanced at the plant level by incorporating complementary products such as electricity cogeneration, yeast, and CO2. By comparison, U.S. corn-based ethanol costs from stand-alone ethanol plants is currently between $1.70 and $2.00 depending on the underlying cost of corn, which has recently exceeded $3.00 per bushel, or $1.10/gallon of ethanol.
Similarly, the fully amortized cost per gallon to produce biodiesel from vertically integrated Palm and Jathropa oil production and processing projects is estimated to be $1.25 per gallon. This is in contrast to the raw cost of the primary US biodiesel feedstock, soybean oil, which is currently in the range of $2/gallon.
By focusing on farm-to-fuel projects that reflect the key three elements of location, price linking and processing diversification we are building a portfolio of candidate projects that offer both short and long term profitability, even if petroleum prices fall to closer to their historic averages. To insure our ability to accurately and efficiently pursue and develop these projects the Agland Investment Services team has built and utilizes proprietary financial and engineering models to evaluate the economic and technical feasibility of proposed new biofuel projects.
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