A CRITICAL U.S. BIOFUELS MARKET JUNCTURE: HOW WILL IT IMPACT YOU?

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1 A CRITICAL U.S. BIOFUELS MARKET JUNCTURE: HOW WILL IT IMPACT YOU? A Multi-Client Study October 2013 Benefit from insights by a team with over 20 years experience analyzing the ethanol market and over a decade analyzing the biodiesel market! Introduction Several major issues for U.S. renewable fuels have been building over the last few years and are now reaching a critical juncture. The Renewable Fuel Standard, originally established in 2005 and expanded in 2007 (now referred to as RFS2), requires increasing usage of several categories of biofuels. However, meeting the Total Advanced Biofuel and Total Renewable Fuel Standards within RFS2 is becoming problematic, as there are challenges to the adoption of fuels containing more than 10% ethanol (E10) and there are doubts as to whether enough biodiesel can realistically be produced (or imported) to fill the gap in RFS2 requirements. Something Has to Give: The fuel/biofuel supply chain has to undergo a rapid transformation over the next months, or the RFS has to change. Both outcomes would have tremendous implications for the agriculture and energy sectors. Renewable Fuel Standard Allocations vs. the Blend Wall * allocations to undifferentiated advanced biofuels (UAB) based on RFS renewable volume obligations as adjusted by the EPA (2013 currently proposed). Future allocations to UAB could change based on annual EPA adjustments.

2 Understanding the Key Issues The cornerstone issue is that the vast majority of retail fuel stations currently offer ethanolblended fuel only at the E10 level that the EPA traditionally allowed for non-flex-fuel vehicles, and current adoption of higher ethanol blends (e.g., E15 and E85) is relatively small. Over the intermediate-to-long term, as vehicle fuel efficiencies increase and gasoline consumption declines, if the blend rate were to remain at 10%, this would imply a declining blend wall (i.e., the limit on how much ethanol can be blended into the U.S. fuel supply), which would make it difficult to meet RFS2 requirements. Obligated parties (refiners and fuel importers) can utilize inventories of Renewable Identification Numbers (RINs) carried over from the previous year to meet their obligations, in place of purchasing physical biofuels. However, even with this mechanism, blend levels must expand beyond 10% for the RFS2 requirements to be met, as RIN inventories likely will be largely depleted at the end of In 2014, the situation could get quite challenging. The U.S. is facing A Critical Biofuels Market Juncture over the next months: the push and pull of expanding the availability of mid- or high-level ethanol blends, and the potential for Congress to reform or even repeal RFS2 or the EPA to issue a waiver. The Consequences This blend wall challenge led to a more than 1000% increase in conventional ethanol (D6) RIN prices from the start of 2013 to midyear, as some obligated parties have been trying to accumulate sufficient RINs to meet 2013 obligations while others have been trying to reduce the depletion of their 2013 RIN stocks in anticipation of an even tighter market in This blend wall issue is also causing ripple effects for compliance with the effective RFS2 allocation to undifferentiated advanced biofuels (UAB). The difficulty in blending sufficient volumes of imported sugarcanebased ethanol has created an opportunity for biodiesel to expand well beyond its original mandate, consequently creating pressure on vegetable oil supplies and other feedstocks used for biodiesel. RIN Prices Reflect Compliance Concerns Conventional Ethanol (D6) RIN Values While there is considerable talk about these issues, this study will provide an organized, fact-based approach to these issues and provide insight into the likely way forward and potential scenarios. Understanding these issues Source: OPIS and the potential ways the biofuel market could unfold over the next couple of years has important ramifications for a wide range of participants in the energy and commodity markets. These include, but not limited to: biofuel producers, petroleum refiners, RIN traders, vegetable oil buyers, livestock 2

3 producers and feed buyers, crop producers and transportation providers. This study will help provide perspective regarding potential impacts of key alternative biofuel pathways. Key Questions to Be Answered by the Study This study will outline many of the key issues that account for the uncertainty in the biofuels markets. The following issues will be addressed: What and when is the critical juncture in the biofuels markets? The blend wall, the RFS2, and issues facing the industry over the next couple of years will be outlined What are potential RFS2 policy outcomes? What policies are being sought, and by whom? Will the RFS2 stay the course, or are there changes coming down the line? If the latter, what might those changes look like? What are the key constraints to the adoption of higher ethanol blends? What will it take to break through the 10% blend wall barrier? Key issues and constraints to greater E15 usage. Key issues and constraints to greater flex-fuel ethanol (E85) usage. To what extent can using RIN stocks help obligated parties meet their biofuel obligations? Current RIN market trends and issues. RIN inventories and their role in helping obligated parties meet their biofuel compliance. RIN inventory projections for 2013 and Can the Total Advanced Biofuel Standard be met? If so, how? Biodiesel production constraints, including feedstocks, will be evaluated. How much of the UAB requirement can biodiesel help meet? Potential annual RFS2 adjustments to the Total Advanced, Cellulosic, and Biomassbased Diesel Standards. What do these adjustments mean for sugarcane-based ethanol imports (and other potential advanced biofuels, such as ethanol from domestic grain sorghum)? Will Brazilian ethanol be used to meet the UAB allocation? How would this affect corn-based ethanol and corn fundamentals? What do the alternative pathways imply for biodiesel and feedstock producers? What are reasonable alternative paths for biofuel consumption over the next months, and in general, how do these alternative paths impact the following markets: Ethanol and biodiesel; Crops, particularly corn and soybeans; Vegetable oils, animal fats and other biodiesel feedstocks; Livestock and poultry; and Liquid transportation fuels. 3

4 While many scenarios can be contemplated and examined, Informa s approach is to define the more likely alternatives and to assess the direction and magnitude of their corresponding impacts on the targeted sectors. Study Deliverables Pre-Study Conference Call. An Internet-based meeting and conference call among subscribers and the Informa study team will be held to review the detailed plans for the study. This conference call will address the major study topics and enable subscribers comments regarding their interests from the study. Comprehensive Study Report and Presentation Materials. All subscribers will receive the full report containing all findings, projections and supporting detail developed during the study. Subscribers also will receive copies of all PowerPoint presentation materials used in reporting study results. (All materials will be provided electronically.) Post-Study Webinar. A concluding webinar will be held for all subscribers as a group to participate with Informa study team in fully reviewing the findings and implications. Who Should Subscribe to This Study? The issues covered in this study apply to a wide range of organizations in the agriculture, food, biofuels, and energy industries, including: Biofuel producers; Feedstock producers and users; Livestock producers and feed buyers; Petroleum refiners and fuel blenders; Fuel users; Transportation providers; Financial institutions; Trade associations; and many more! Study Schedule September/October 2013: Kick-off; pre-study conference and study begins January 2014: Study completed; final report sent to clients. Post-study webinar for the subscriber group. Study Fees The fees for participating in the study are $9,500 for Informa Economics clients and $11,500 for non-clients. The fees include the pre-study conference and the subscriber group review webinar. Individual presentations of the study findings at subscribers offices are available upon request, for an additional flat fee of $2,000 plus travel expenses. 4

5 Study Team Scott Richman, Senior Vice President in Informa's management consulting group, will coordinate the overall project and serve as Project Lead and Overall Project Reviewer based on his extensive experience conducting studies of the ethanol market. Juan Sacoto, Senior Vice President and head of Informa s consulting group, will lead research tasks related to the biodiesel industry and impacts on vegetable oil markets, based his expertise within this market. Crystal Carpenter, Senior Consultant, serve as Research Director and will participate extensively in the analyses based on her experience analyzing the biofuels and feedstock markets. Ben Warolin, Senior Analyst Tropical Products, will be directly involved in the research efforts related to assessing Brazilian sugarcane-based ethanol potential. Additional team members will participate in the analytic efforts for different sections of the study based on their previous experience and skills, including: Jim Wiesemeyer, Senior Vice President (policy analysis); Chris Eggerman, Senior Commodity Analyst (oilseeds, protein meals and vegetable oils); Kip Butts, Director of Energy Services (conventional energy). Other specialists from within Informa may be brought into the project on an as-needed basis. About the Informa Economics Group Informa is the world leader in broad-based agribusiness, energy and transportation consulting and commodity market analysis. Founded in 1977, the company now serves hundreds of firms and institutions worldwide. In December 2003, the company was acquired by Informa plc, a global business information group. The Informa Economics Group now encompasses Agra CEAS Consulting, Informa Economics FNP Brazil and Washington Policy & Analysis, creating an international network of services and clients with offices in the U.S., Canada, the United Kingdom, Belgium and Brazil, and employing roughly 225 people. Informa offers several broad categories of services: Management consulting for agribusinesses, energy companies, renewable fuels companies, transportation service providers/users, related trade associations and government agencies; Agricultural and energy commodity market analysis; Risk management strategies; Education and training; and Newsletters and other publications. Our Mission: "To be a vital force in the success of agriculture, food, energy and transportation interests around the world." Commodity Market Analysis Informa offers a comprehensive package of well-respected, timely and highly detailed commodity market information. Informa constructs estimates and forecasts of U.S., Canadian and world crop and livestock/meat supply and demand fundamentals and prices. Additionally, Informa analyzes energy markets, transportation, government policies and long-term sector trends. The scope of this work covers the following areas: All major grains, oilseeds and products, cotton and fibers; Livestock, meat, poultry and dairy; Soft commodities, including sugar; 5

6 Specialty vegetable oils; Energy; Transportation services; Weather services; and Long-term forecasting. Informa has developed a global framework for conducting long-term forecasts of supply/demand balances of crops (primarily grains and oilseeds) and livestock, meat and poultry for major countries and world regions. In addition to forecasting global supply/demand balances, prices are forecast for major commodities traded in North America. While Informa s ongoing shortterm commodity market analysis is contained in its standard reports for clients, the long-term forecasting service is provided on a project basis and can be customized to each client s needs. Consulting Services Informa s Consulting Group provides management and economic consulting services to organizations in the agriculture, renewable fuels, food processing, foodservice and conventional energy sectors. Clients include corporations, cooperatives, trade associations and government agencies in the U.S., Canada and overseas. Informa advises clients on a broad range of economic, market, risk management, financial, strategic and regulatory issues. In order to meet client objectives, Informa utilizes a variety of methods, including: Business plan development; Strategic planning; Financial projections and feasibility determination; Site selection studies; Market research; Economic impact analysis; Econometric analysis; and Risk management strategies. In addition to business- and market-related services, Informa s Consulting Group conducts analyses of government policies and regulations. Informa consults with government agencies, non-government organizations, agribusinesses and trade associations regarding the impacts of policies and regulations on the agricultural and energy markets and industries. Additionally, Informa provides expert testimony for legal cases and government hearings. Renewable Fuels Services Feasibility studies (market and financial); Business plans; Independent market consultant's reports (in connection with project finance); Due diligence reviews; Strategy development; Market analyses and price forecasts (short and long term); Transportation assessments; Risk management plans, audits and system design, and Ongoing commodity and risk management advisory services; and Policy analysis. 6

7 ENROLLMENT FORM p Yes, I want to participate in the special multiclient study A Critical U.S. Biofuels Market Juncture: How Will It Impact You? The cost of the study is $9,500 for current Informa Economics clients and $11,500 for non-clients. One half will be billed upon initiation of the study and the remaining one half upon my receipt of the final written report. Please Return This Form to Informa Economics, Inc. Via Fax to (901) or Via to an Address Listed Below p Please have someone contact me to provide further information. Name: Signature: Title: Company: Street Address: City, State, ZIP: Telephone: Fax: Address: Please feel free to contact us with questions: Juan Sacoto Scott Richman Senior Vice President Senior Vice President Informa Economics, Inc. Informa Economics, Inc. 775 Ridge Lake Blvd., Suite Ridge Lake Blvd., Suite 400 Memphis, TN Memphis, TN Phone: Phone: Fax: Fax: juan.sacoto@informaecon.com scott.richman@informaecon.com 7