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As the international community struggles to address the global food crisis and identify the leading causes for rising food prices, the ethanol industry points to population growth, growing demand, and rising oil prices as the main reasons for rising food costs. During today's OnPoint, Donald Endres, CEO of VeraSun Energy, responds to reports that biofuels are to blame for rising food prices. He explains why he believes ethanol shares have fallen, despite the surging price of oil and addresses the debate over whether the ethanol import tariff should be removed at the end of this year. Endres also discusses his company's production capacity goals for 2008.
Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Don Endres, CEO of VeraSun Energy, one of the world's largest ethanol producers. Don, thanks for coming on the show.
Don Endres: Thanks for having me.
Monica Trauzzi: Don, ethanol shares have plummeted in recent weeks and the industry seems to be taking a hit recently and the hype that we were seeing just two years ago surrounding ethanol is somewhat fading. What is your company doing to help address concerns over the future and viability of biofuels?
Don Endres: Well, first of all, the ethanol industry is alive and well and growing. Today we have about 8.4 billion gallons that's under capacity as an industry, growing by about another 5 billion gallons. So, even though the media cast kind of a dark shadow on our industry, it's growing significantly. We're significantly adding to the fuel stream and, actually, the increased supply is actually reducing the cost to consumers.
Monica Trauzzi: But why are ethanol shares dropping when oil prices are skyrocketing?
Don Endres: Sure. Well, I think there's been concern that the increased corn prices are negatively impacting ethanol producers. Clearly, that is an impact on our financials. But at the same time, ethanol prices have been increasing. So, if you look back in last October, the spread between the cost of corn and the price of ethanol is about $0.35 at the narrowest point. At the end of March it was about $0.80. So, ethanol prices have significantly improved over time, tracking up now near gasoline prices.
Monica Trauzzi: How is your company's merger with U.S. Bioenergy Corp. going to impact your bottom line and production capacity for 2008?
Don Endres: We're very excited about the merger. We just completed, in April one, combined, we will have 1.64 billion gallons of production capacity by the end of the year. This quarter we're bringing up three facilities, another 330 million gallons. So, it's going to significantly increase size and scale. And many times people want to say, well, gosh, you know, you're now the biggest in the world. Where do you go from here? You know, our view is we're still relatively small compared to our customers, oil refiners. We sell a large majority of our product to the eight largest oil refiners. And so we want to become more relevant to our customers, having size and scale and the ability to ship large unit trains of product at one time, really make us more relevant to our customers. At the same time, size and scale allows us to get to lower costs. As we increase our size we reduced our cost on a per gallon basis. We can use best of best operating practices, so there's a number of benefits of the merger. We're very excited. We have it complete and we're working at integration.
Monica Trauzzi: And this is a good time to bring in the dedicated pipeline issue. Would you be able to handle that sort of volume that would come as a result?
Don Endres: Absolutely. Today each of our facilities has the ability to ship a unit train of product, so a hundred cars, rail cars all connected together. They stay connected from the facility all the way to the market, unload, and return. We can send product from the Midwest, in six days be to either coast, unload in one, and return in six days. So we have a virtual pipeline that's in place. It's one of the unique aspects of VeraSun. And what's most important is our customers value the fact that we can deliver it to them in a timely fashion. The old method of transporting product were in what are called single car manifest trains, which are grocery trains where a few of your cars are mixed with other types of cars and then they have to work through the switchyard stalls when they get to your market. Well, today, a unit train bypasses those switchyards, so it's a very efficient method of delivery.
Monica Trauzzi: And world leaders seem to be pointing to biofuels as one of the causes for the rising food prices that we're seeing around the world. How do you respond to the global food crisis and the concerns over rising food prices because biofuels are being blamed here?
Don Endres: Well, first, we've, unfortunately, in our world have had starvation even when we had excess grain and very low prices. So, it's really not an issue of availability. It's the ability for those people to afford food and their country's decision on whether they should allocate their country's resource to feeding their people or building roads and infrastructure and other opportunities. So, that's kind of step number one. Corn ethanol is clearly using some additional grain, but it's very small when you look at it on a worldwide basis. The new demand for corn ethanol from last year is only up 2 percent worldwide. We produce about 30 billion bushels. We're only adding about 600 million bushels of new demand, so it's a very small portion. So, I think people miss the fact that, on a world basis, it's still very small. But I also say that the perspective is that we're grinding the corn and making ethanol. We're actually only using the starch in corn. The rest of the product, the nutritious protein, vitamins, minerals, fat, that we're passing onto the feed grain market, which is where most of corn is sold. So, I think when people, again, understand the facts they'll see that we're only using the starch portion. We're actually increasing feed availability and we're lowering feed costs.
Monica Trauzzi: So, what's to blame then for the high food prices?
Don Endres: Well, there's a number of factors, as you can imagine, that are at play. First, if you look at the index funds, these hedge funds, these speculative funds and you map their open interests compared to corn price you'll see a very strong correlation between the two. So, investor interest is part of what's driving this. Now, the speculative funds typically are there to help allow the market to react early on so that the production changes and clearly that was needed at some point. But it sure looks as though we are getting a production response worldwide and eventually the physical product, the physical market, ultimately will drive pricing and futures will reset. So, we think it's a temporary issue that we're dealing with. The world has had a couple of years of shortages from a wheat perspective and we think that will get worked through. There's also been a mentality to now hoard grain, which is exacerbates the problem short term. Long term, again, we see a number of interesting developments around the world where they're using the new genetics, they're using new farming techniques, new farming practices, and we're going to see production worldwide increase and prices will eventually respond.
Monica Trauzzi: But the price of corn has just about tripled in the last couple of years. It's now over six dollars a bushel. You don't think that that's having more of an impact than you are talking about here on the price of food?
Don Endres: Let me put it in perspective. First of all, food prices are really controlled not by costs, but by substitute products and competition in the marketplace. So, if you take a box of corn flakes, there's only five cents worth of corn in a box of corn flakes. Corn flakes sell for about $3.50 per box. So, you could double or triple it, it really is not a meaningful impact on it. A pound of beef steak has about $0.19 for the corn in it. It sells for about six dollars a pound. Again, even though we want to focus on the cost and what it's moved up, the farm value that's in these products is very small and the market price is really not driven based on cost.
Monica Trauzzi: U.S. farmers are expected to decrease corn plantings this year as compared to last year's corn crop. How is this decrease in corn acreage going to impact your company and the production of ethanol?
Don Endres: Well, first we needed to back down the number of acres versus last year because we have about 1.4 billion of excess bushels, surplus bushels that will be carried over to next year's crop up, so we needed to see that backed down. Interestingly enough, after the report came out soybeans backed down, wheat backed down, and, ultimately, farmers have switched some of those acres back. We think there's another million to 2 million acres that will be switched back to corn and that will provide additional corn and there will be plenty of physical product available.
Monica Trauzzi: We have a new biofuels mandate in place that was passed at the end of 2007 and the bar is being set pretty high. But should we be reassessing just how much emphasis we're putting on biofuels in terms of our future energy policy?
Don Endres: Well, I think the answer to that question would be do we have enough biofuels, domestically produced fuels, available or not? And I would submit that we have a long ways to go yet to reduce reliance on foreign oil and at the same time reduce carbon emissions. So, both of those are key issues for our country. Energy is having a large impact in a number of areas, including food. It's twice as impactful as increasing farm values. And so we think that we need to continue down this path and we're just getting started. I would also say this is one of the most, I should say one of the best developments that have happened for years. The fact that the ethanol industry is going to produce 8 percent of the fuel stream at the end of this year is an amazing accomplishment that we should look at from a policy perspective, from a producer perspective, for our country as a great development and we should continue to promote it over time.
Monica Trauzzi: You mentioned emissions; I have to ask about that because biofuels have come under fire in the last couple of months because there are reports out saying that they, in fact, do not reduce emissions. They increase emissions. So, how do you respond to that and are we putting too much of an emphasis on energy security and not enough reducing emissions?
Don Endres: Well, first of all, biofuels, corn specifically, can consume a lot of CO2 and let me give you some facts. Last year the 90 billion acres actually consumed about 1.4 billion tons of CO2. The U.S. auto fleet, the gasoline vehicles, emitted about 1.6 billion tons. So the corn crop alone almost consumed all of the CO2 that was emitted. So that's kind of fact number one. The issue that has been raised as of late is that additional acres may be needed for biofuel and we submit that's not the case, that with the yield increases over time we don't think you need additional acres. But the study that a lot of people are referencing now in Science magazine said if you need another acre and if it were a rainforest acre or a grassland acre and if you burned the material on the top of the soil and then if you plowed, disc dug, used 1970 farming practices, you'd create a carbon debt and we agree. That would not be a good thing. We believe yields over time will significantly increase the availability of grain and you won't need those additional acres. The USDA projects by 2015 we'll move from 151 bushel yield last year to 178 bushel yield in 2015. Monsanto is out with a projection that shows by 2030 we'll be at 300 bushels per acre. And that's for U.S. farming. We're going to see yield increases worldwide and, unfortunately, we're going to again see agriculture over supply the marketplace.
Monica Trauzzi: It has been suggested that the ethanol import tariff be removed at the end of this year. How do you think this should be handled and what would it mean for your business if the tariff was, in fact, removed?
Don Endres: Well, you need to understand, the tariff is actually a credit offset for the blender's credit that's in place. So the blender's credit, at one point, was $0.54 per gallon, that's what the tariff is and it was put in place basically so that the U.S. taxpayer was not subsidizing foreign fuel production. It was put in place to incent domestic fuel production. So it's in place so we don't subsidize foreign fuel. It's interesting. It's been a great investment for our country to keep those dollars here. That fifty cents per gallon roughly that's paid to oil companies represent about $3.2 billion last year, but the general fund receives $4.4 billion from tax revenues directly and indirectly from ethanol production, increased corn prices. So, it's been a great investment. The tariff belongs in place. It's something that just is there so that we can recoup the dollars that are being used to incent new production.
Monica Trauzzi: Is the ethanol industry close to being able to stand on its own and not needing the tariff?
Don Endres: Well, the ethanol industry, for the last year, has really not been receiving the blender's credit, again, the principal subsidy that's in place and still it's been viable, still producing profit. But the question is, does the country wants more of it and do we need it? And I think the answer is yes and at the same time we're subsidizing domestic production of oil. We have royalty relief. We have tax credits, tax breaks for the oil industry and I don't think that's wrong. I think our country needs all the fuel it can get. So, I think the point in time when we consider adjusting either the tariff or the subsidy would be the point in time, again, we only say we have enough of our own fuel.
Monica Trauzzi: All right, final question here on cellulosic ethanol. A lot of people are looking to that as the solution to many of the problems we're seeing right now with biofuels and with ethanol. How far away are we from that and what is your company doing to get us to that point where we are using cellulosic?
Don Endres: Absolutely. Well, we are optimistic. We see a good development over time. There's a number of companies that are working on cellulosic technology. VeraSun invested in one company called Sun Ethanol. They have a unique bug that actually directly consumes cellulose and produces ethanol. They're working to increase yield and prove it out over time. There are other companies with different techniques. You know, our belief is that it will play out. There's a large opportunity, a lot of biomass that's out there that can be converted to fuel. And we see this as an add-on to the existing facility. Our facilities are out in Midwest agricultural areas where biomass is produced and once the technology is developed we see it as a natural add-on to our existing facilities so we can leverage the infrastructure, like the rail yard and the tank farm, to ship the product to the market. So we're optimistic. We think it may take in the range of three to five years before we see significant commercial production and we'll be ready to implement it when it's available.
Monica Trauzzi: Okay, we'll end it right there on that note. Thanks for coming on the show.
Don Endres: Thanks Monica.
Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.
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