Biofuels Production Competitive Landscape The biofuels industry in the US includes about 300 companies with combined annual

revenue of about $19 billion. Major biofuels producers include Abengoa Bioenergy, Archer Daniels Midland, Cargill, Chevron, Green Plains Renewable Energy, and Valero. Demand is driven by federal legislation and regulations that establish a government-mandated market for biofuels. The profitability of biofuel production facilities depends on prices of gasoline and diesel, which fluctuate based on world petroleum demand and domestic refinery utilization. Economies of scale in ethanol production are limited due to the transportation costs associated with gathering feedstocks (corn and other biomasses) and transporting the ethanol to blending sites. As a result, large companies operate multiple production facilities. Small companies can compete effectively by developing business relations with distributors and by delivering consistently. Biofuels is a young industry that has grown rapidly. New entrants join the field constantly and new technology breakthroughs are frequent. Federal and state government subsidies and loan guarantees keep barriers to entry relatively low. Source: First Research: Biofuels Production, Quarterly Update

Risk Factors Economic Viability Depends on Fuel Prices - Extended periods of high oil prices encourage the development of alternative fuels through increased R&D investment and capital outlays to build new production facilities. Despite a drop in oil prices during the recession of the late 2000s, experts believe that prices will rebound as the world economy recovers. However, ethanol's current production cost and reduced fuel economy compared to that of gasoline mean that it's uneconomical unless it retails consistently below the price of gasoline. Biofuels enjoy political and popular support and benefit from government mandates and subsidies; however, for long-term viability, they must become cost competitive with petroleum-based fuels. Dependence on Government Support - The biofuel industry depends on government support to establish itself and grow. Government regulations mandate the use of specific amounts of biofuels as blends of fuel, and the EPA will impose quotas on refiners and importers for biofuel use. In addition, the government is giving tax rebates for biofuel production and sale, equipping retail outlets to handle higher content fuels, and supporting R&D with grants. If petroleum prices drop for a sustained period and supply is plentiful, the government could reassess its priorities and reduce financial support. While the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007 were written with multi-year funding horizons, Congress must fund many of the programs annually. Limited Supply of Crop-based Feedstocks - Mandates to increase biofuels production, and the increase in crop supply needed to meet these mandates, has raised concerns about impacts on agricultural markets and disruptions of food supplies. This competition with food uses of cropbased feedstocks is a major drawback of current ethanol production methods. To become a viable replacement for petroleum-based fuels, the biofuel industry must develop the ability to use alternative feedstocks that dont have value as a food source. As a result, funding has increased significantly for ethanol research at universities, such as Michigan State University, and in the corporate sector. Weather Disrupts Crop Supplies - Disruption of corn production could drive feedstock prices up, making it difficult to sustain profitability even with subsidies. Feedstocks can account for 60 to 70 percent of ethanol and biodiesel production costs. Production could be disrupted by extended drought in crop-producing states, heavy rains and flooding during planting season, or crop diseases. Competition from Other Alternative Energy Sources - A number of potential breakthrough technologies could affect demand for ethanol and biodiesel. Much research has been devoted to hydrogen-powered vehicles over the past 30 years, but a lack of infrastructure, an energyintensive production process, and safety concerns have plagued the industry. More immediate is the potential for mass adoption of plug-in electric vehicles; a few models debuted in 2010, and the 2009 American Recovery and Reinvestment Act set a goal of 1 million electric plug-ins by 2015. Coal is another potential competitor because it is relatively plentiful (US reserves are estimated to be a 200- to 300-year supply) and processes exist for converting coal to a liquid suitable for use in diesel engines. Similar processes can also be used to produce diesel from natural gas. Automaker Reluctance to Certify Biodiesel Blends - Biodiesel is available in blends ranging from B2 (2 percent biodiesel and 98 percent petroleum diesel) to B99, with some fueling stations offering B100 (100 percent biodiesel). However, auto manufacturers have shown some signs of unwillingness to certify the use of any blend higher than B5, citing insufficient information about long-term engine effects. By not certifying it, owners of diesel cars still under warranty risk voiding their warranty if they use higher than a B5 blend. Automaker reluctance could constrain the growth of the biodiesel market until certifications are granted. Source: First Research: Biofuels Production, Quarterly Update

Industry Outlook The average US retail price for diesel and regular gas, which may influence investment into the development of alternative fuels, jumped 31.3 percent and 38.3 percent respectively in the week ending May 16, 2011, compared to the same week in 2010. The spot price of crude oil, which affects the competitive market for biofuels, jumped 31.9 percent in the week ending May 6, 2011, compared to the same week in 2010. Higher Ethanol Blend Meets Resistance - The National Petrochemical & Refiners Association (NPRA) joined forces in January 2011 with the International Liquid Terminals Association (ILTA), and the Western States Petroleum Association (WSPA) to challenge the ethanol blend E15.

The three groups filed a petition in federal court to overturn the EPA's decision to allow 15 percent ethanol in non-flex-fuel vehicles made after 2007. The NPRA has said that approving E15 for some vehicles but not others could lead to consumers using the wrong fuel, which could damage vehicles. Trade groups representing makers of cars, lawn mower engines, and outboard boat motors have also asked a federal court to review the EPA's decision. According to The Wall Street Journal, refiners including Valero, Marathon Oil, and Tesoro have said they will not sell E15 at their retail locations because of potential harm to consumers' vehicles. Source: First Research: Biofuels Production, Quarterly Update