Overview
The U.S. has invested heavily in Ethanol as a strategy to insulate the national economy from shocks and political threats that continue to make reliance on foreign oil a risky proposition. While use of ethanol as a fuel additive and substitute has existed for some time, the turn of the century marked the beginning of an era of explosive growth.
The biofuels industry, in general, and the ethanol segment in particular, continues to enjoy widespread legislative support from the U.S. government. Federal subsidies of 51 cents per gallon of ethanol fuel introduced to the marketplace create an artificial subsidy to keep the price of the fuel competitive with petroleum based alternatives. To federal and state governments, this means billions of dollars of subsidy outlay. Until petroleum prices demonstrate that they will not retreat from their current high levels, the financial subsidy of the industry will likely continue. Regulations mandating ethanol blended fuels for clean-air initiatives have also helped increase demand, spurring investment in new plants and permits for plants to be constructed in the future.
The industry is not without its critics, however. Ethanol fuels face strong opposition from critics who believe it does not provide an effective solution to U.S. energy independence. A ripple effect of an increase in ethanol and other bio-fuel production has been an increase in the demand for corn, grain sorghum, soybeans, and other traditional food and feed crops. This not only increases the cost of a gallon of ethanol, but has had an overall impact of the cost of food and feed products.
While the rapid escalation of corn and other feedstock prices have shaved producer margins tempering the boom in the last year, the outlook for the industry continues to be good in the short to intermediate term. Initiatives to spur the development of alternative ethanol production technologies are well underway. Mandates for cellulosic ethanol production, using non-food biomass as a feedstock, will eventually render existing dry mill ethanol plants obsolete, but many of these technologies are years away from being a viable, high volume production alternative. Despite its impact on the balance of the economy through its never ending appetite for food and feed grains, the ethanol market promises continued growth in the coming year.
Industry Condition – Good
Key Industry Indicators
Commodity Tracker
Factors Influencing Value & Marketability
- Continued federal subsidies and mandates
- Age, condition, productivity, and layout
- Cost and access to corn and other feedstock supplies
- Conversion efficiency
- Natural gas and other fuel source costs
- Labor costs
Overview
Dry mill ethanol plants, currently the predominant technology employed for production, are composed of two parts: a grain milling and preparation section, utilizing equipment similar to what would be found at most agricultural grain storage and milling operations, and a continuous chemical process operation entailing fermentation, distillation, and evaporation functions.
Like their other chemical brethren, the fermentation, distillation, and evaporation processes are typically installation intensive manufacturing operations. These installations are very difficult to relocate and typically realize poor sales proceeds when dismantled for piecemeal disposition. The method of disposition that maximizes sales returns for these plants is to sell them to other users who would operate them in place as installed.
Given the preferred method of sale, companies and lenders should first consider the value of the assets under in place valuation premises. Income approach methodology can usually be successfully applied in these situations, due to the fungible nature of fuel grade ethanol. Performing a business valuation overlay allows potential lenders and borrowers to best understand the earning potential of these facilities as prospective in place buyers will likely first look to such methodology when determining the contributory value of the underlying business assets, like machinery and real estate.
If a plant cannot be sold to remain in its current location, remarketing the asset becomes difficult as the secondary market for used equipment is very limited. The next best strategy is to attempt to find buyers interested in purchasing the entire plant to be moved in its entirety and rebuilt in a new location. While such sales have occurred, they are very rare since efforts to properly reassemble these facilities have met with mixed results, making this a riskier course of action for the buyer. If such a buyer can be found, sellers could expect to realize a substantial premium over piecemeal equipment pricing.
Piecemeal dispositions of ethanol facilities typically result in net proceeds that are a very small fraction of the new cost of the facility. Sometimes operators of other processing facilities will have the need for certain component parts with universal applications, like distillation towers, movable tanks, heat exchangers, compressors, and centrifuges. These assets will sell for a premium over older or site specific equipment, which is typically salable for its scrap value, if it proves salable at all.
Used Equipment Values – Poor
- Supply of used equipment – Decreasing
- Demand for used equipment – Decreasing
Factors Influencing Value & Marketability
- Installation intensive nature of plant
- High cost of dismantlement
- Limited demand for equipment components
- Environmental considerations
- Emergence of competing biofuel technologies
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Abengoa Bioenergy
LifeLine Foods
Exxon Mobil
BP Amoco
CITGO Petroleum Corporation