• TABLE OF CONTENTS
HIDE
 Front Cover
 Abstract
 Table of Contents
 List of Tables
 Introduction
 Some basic concepts for the...
 Initial investment costs
 Operating and overhead costs
 Product prices
 Federal and state subsidies and...
 Evaluating the investment
 Grants, loans and other government...
 BATF regulation of alcohol fuel...
 Conclusion
 Reference






Group Title: Economics Report - University of Florida Institute of Food and Agricultural Sciences ; 103
Title: A financial evaluation of a community fuel ethanol distillery design
CITATION THUMBNAILS PAGE IMAGE ZOOMABLE PAGE TEXT
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Permanent Link: http://ufdc.ufl.edu/UF00027486/00001
 Material Information
Title: A financial evaluation of a community fuel ethanol distillery design
Series Title: Economics report
Physical Description: ii, 39 p. : ill. ; 28 cm.
Language: English
Creator: Gressel, J. P
Publisher: Food and Resource Economics Dept., Agricultural Experiment Station and Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville Fla
Publication Date: 1981
 Subjects
Genre: bibliography   ( marcgt )
non-fiction   ( marcgt )
 Notes
Bibliography: Bibliography: p. 39.
Statement of Responsibility: J.P. Gressel, J.W. Milon and F. Le Grand.
Funding: Florida Historical Agriculture and Rural Life
 Record Information
Bibliographic ID: UF00027486
Volume ID: VID00001
Source Institution: Marston Science Library, George A. Smathers Libraries, University of Florida
Holding Location: Florida Agricultural Experiment Station, Florida Cooperative Extension Service, Florida Department of Agriculture and Consumer Services, and the Engineering and Industrial Experiment Station; Institute for Food and Agricultural Services (IFAS), University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: aleph - 002199021
oclc - 07514712
notis - ALD8901

Table of Contents
    Front Cover
        Front Cover
    Abstract
        Abstract
    Table of Contents
        Page i
    List of Tables
        Page ii
    Introduction
        Page 1
        Page 2
    Some basic concepts for the analysis
        Page 3
        Page 4
    Initial investment costs
        Page 5
    Operating and overhead costs
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
    Product prices
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
        Page 21
        Page 22
        Page 23
        Page 24
        Page 25
        Page 26
        Page 27
        Page 28
    Federal and state subsidies and incentives
        Page 29
        Page 30
        Page 31
    Evaluating the investment
        Page 32
        Page 33
        Page 34
    Grants, loans and other government support
        Page 35
        Page 36
    BATF regulation of alcohol fuel distilleries
        Page 37
    Conclusion
        Page 37
        Page 38
    Reference
        Page 39
Full Text
0
March 1981
k-7,
^


Economics Report 103


A Financial Evaluation of a
Community Fuel Ethanol
Distillery Design


Food and Resource Economics Department
Agricultural Experiment Stations and
Cooperative Extension Service
Institute of Food and Agricultural Sciences
University of Florida, Gainesville 32611


Jonathan P. Gressel
J. Walter Milon
Ferdinand le Grand
















A FINANCIAL EVALUATION OF A COMMUNITY

FUEL ETHANOL DISTILLERY DESIGN


ABSTRACT

Production of 190 proof fuel ethanol from corn in a hypothetical

small (120,000 gallon per year) distillery located in North Florida is

discussed. Initial investment costs and annual operating costs for

a firm are reported. Labor and feedstock costs are the dominant elements

of total annual costs for the firm, The values of 190 proof fuel

ethanol and wet distillers' solids are derived. The lack of established

markets for either of these products is emphasized. A breakeven analysis

is used to permit the reader to evaluate the potential profitability of

the distillery firm through the use of price forecasts or subjective

evaluation of future prices of fuel ethanol and corn. The benefits of

federal and state tax incentives are also discussed. The analysis in-

dicates that the distillery would not be profitable at current prices

for corn and ethanol.






KEY WORDS: Fuel Ethanol Distillery, Gasohol, Breakeven Analysis, Feasi-
bility Studies, Florida Agriculture












TABLE OF CONTENTS


LIST OF TABLES. . . . .

INTRODUCTION . . . .

SOME BASIC CONCEPTS FOR THE ANALYSIS .

INITIAL INVESTMENT COSTS . . .

OPERATING AND OVERHEAD COSTS . .

Expected Operating Costs . .
Depreciation . . . .
Budgeted Operating and Overhead Costs..
Working Capital Requirements . .
Interest Expense and Total Annual Costs.

PRODUCT PRICES . . . .

The Value of Fuel Ethanol. . .
Revenues from Wet Distillers' Solids .
Breakeven Analysis . . .
Sensitivity Analysis . . .

FEDERAL AND STATE SUBSIDIES AND INCENTIVES .

EVALUATING THE INVESTMENT . . .

GRANTS, LOANS AND OTHER GOVERNMENT SUPPORT. .

CONCLUSION . . . .


. . ii



3

5

5

7

10
. . 1

. . 3







17
. . 22
. . 2


.... 22
S24
. . .27

. . 29

. 32

. 35

. . .37


REFERENCES












LIST OF TABLES


TABLE Page

1. Initial investment costs for 120,000 gallon
distillery. . . . . 6

2. Operating and overhead costs budgeted for first
year of operation . . . . 9

3. Annual depreciation allowance . . ..10

4. Budgeted operating and overhead costs for the
first three years of operation. . .. ..12

5. Budgeted working capital requirements, first
three years of operation. ... .. 12

6. Interest expenses during the first three years
of operation for a loan of $121,140 and various
interest rates . . . .13

7. Total annual costs by debt/equity ratio and
interest rate for first year of operation ...15

8. Budgeted total annual costs for different in-
terest rates for 40/60 debt/equity ratio, first
three years of operation. . . ..15

9. Budgeted net revenues from wet distillers' solids
first three years of operation. . . ..23

10. Breakeven prices of 190 proof ethanol, first
three years of operation . . .. ..25

11. Breakeven prices of corn, first three years of
operation . . . . . 25

12. Addition to gross profits (losses) from 20%
change in WDS revenues, initial investment costs,
and labor costs for the first year of operations. .28

13. Summary of returns, cost and net returns for
small-scale fuel ethanol production (before tax). .33

14. Government financial assistance . ... .36















A FINANCIAL EVALUATION OF A COMMUNITY

FUEL ETHANOL DISTILLERY DESIGN


J. P. Gressel, J. W. Milon and F. Le Grand



INTRODUCTION

Long lines of cars at the gasoline pump and rising prices for

gasoline created tremendous interest in recent years in finding sub-

stitutes for imported petroleum. One of the most widely discussed al-

ternatives is gasohol, a blend of 90 percent gasoline and 10 percent

ethanol derived from agricultural products. Congress has attempted to

stimulate ethanol production in the United States by providing special

tax exemptions to ethanol producers and gasohol distributors, special

grant and loan programs for ethanol producers, and income tax advantages

for firms producing ethanol. Several states including Florida have also

encouraged ethanol production by granting exemptions from various state

taxes to ethanol producers and distributors.

The result has been a boom in the construction of ethanol production

facilities. Major U.S. firms such as Archer Daniels Midlands, CPC In-

ternational, and Texaco are investing in ethanol facilities with in-

dividual production capacity as large as 120 million gallons per year,

*J. P. Gressel is a statistician in the Food and Resource Economics
Department, University of Florida; J. W. Milon is an assistant professor
in the Food and Resource Economics Department, University of Florida;
F. Le Grand is.an associate professor in the Agronomy Department,
University of Florida.








nearly double the total amount of ethanol produced in the U.S. in 1979.

Several reports have already evaluated the potential impact of this

ethanol program on the U.S. economy and the agricultural sector [5, 7,

9, 11].

These federal and state incentives have also prompted many business-

men and farmers to consider small scale ethanol production facilities

using local agricultural products. In Florida, the demand for infor-

mation about small scale facilities prompted Ferdinand Le Grand to

publish an engineering design for a community distillery capable of

producing 120,000 gallons of 190 proof ethanol per year [6]. This 're-

port is a supplement to Le Grand's engineering design and it provides an

economic feasibility analysis of operating the proposed facility as a

commercial entity in Florida. In order to develop the detail necessary

for a feasibility study, corn is the only feedstock considered in this

analysis. Although many of the calculations are specific to Florida,

the general methodology and formulas are applicable to other states

and feedstocks.

The reader should be aware that this report constitutes neither an

acceptance nor a rejection of Le Grand's design. Rather this design is

taken as representative of state of the art small-scale distilleries.

Other designs may result in significantly different conclusions from

those reached in this report. The results reported here are for in-

formation purposes only and cannot substitute for a detailed feasibility

analysis of a specific facility.

In addition, the cost and revenue estimates cited in this report

are approximations based on the best available information. Given that

the ethanol market is new and expanding, these estimates may change











rapidly. A detailed engineering study for a specific design and lo-

cation will provide more timely estimates of production and operating

costs. The potential investor in an ethanol production facility should

not base a decision solely on the information in this report.

Recognizing these limitations, the reader will find in these pages

a detailed financial analysis of a representative small scale ethanol

distillery. The initial and recurring costs of operation are reported.

Instead of attempting to estimate prices for 190 proof ethanol, a break-

even analysis is used to indicate relative corn and ethanol prices needed

for the firm to breakdown. Breakeven analysis also permits the reader

to use subjective estimates or forecasts of prices to determine the ex-

pected profitability of the distillery. All relevant tax exemptions and

credits are discussed.

SOME BASIC CONCEPTS FOR THE ANALYSIS
The community distillery designed by Le Grand is intended to pro-

duce 120,000 gallons of 190 proof ethanol per year using corn as a

feedstock. The 190 proof ethanol cannot be mixed with gasoline to pro-

duce gasohol as the water content of the ethanol will separate out in

the presence of gasoline. The presence of water in the fuel system is

harmful to engine performance and in cold weather can cause fuel line

freezeup. The 190 proof ethanol can be used directly, without blending

with gasoline, in properly modified spark ignition engines or it can be

further dehydrated to 200 proof at a distillery equipped with anhydrous

distilling capacity. The community distillery also produces wet dis-

tillers' solids (WDS) as a byproduct. The protein rich WDS can be in-

corporated into livestock feed rations.

For the purpose of this analysis, it is assumed that the community









distillery is set up as a corporation for the sole purpose of producing

and selling 190 proof ethanol and WDS. Capital requirements for the

community distillery consist of the initial investment to purchase equip-

ment and construct the facility and working capital to pay for needed in-

puts while awaiting receipts from sales. The capital needs of the corpor-

ation will be raised through the sale of common stock and by obtaining

long-term loans from local banks. Loan guarantees and direct loans are

available through various programs run by the USDA Farmers' Home Admini-

stration (FmHA). The FmHA programs cover both initial investment costs

and working capital requirements. As small-scale ethanol production is a

relatively new field, it seems likely that most debt capital will be

raised using FmHA loans or loan guarantees.

In order to obtain equity capital the rate of return to equity capi-

tal must be equal to or greater than the rate of return for alternative in-

vestments of a similar degree of risk. Investors may also look at what

rate of return or interest rate they can obtain from risk free invest-

ments such as U.S. Treasury bills and certificates of deposit and compare

that to the rate of return on the risky investment. The expected rate of

return on the risky investment, in this case the community distillery,

must be sufficiently greater than that of the risk free investment to

encourage the purchase of shares in the distillery corporation.1

Debt capital must be repaid with interest. Annual payments vary ac-

cording to the interest rate charged by the bank, the payback period, and

how often the interest is compounded. For the purposes of this analysis

only loans repaid with equal principal payments are considered. A 10


For example, an individual may be able to obtain a 10% rate of return
on a certificate of deposit. If the community distillery has an expected








year payback period with annual compounding and interest rates of 10,

15 and 20 percent are used in calculating annual interest payments and

the total amount of interest paid over the life of the loan.


INITIAL INVESTMENT COSTS

The community distillery requires an initial investment in land,

buildings, and equipment. Land requirements consist of one acre for the

plant and a 3 acre cooling pond. Buildings include not only a building

for the distillery itself, but storage facilities for the corn, the 190

proof ethanol, and wet distiller's solids (WDS). The equipment consists

of the distillery system described in Le Grand's report, a denaturing

unit, a hammermill, and a tank truck to haul the WDS to a nearby livestock

operation. Estimates of the cost of land ($10,000), buildings ($59,500)

and equipment ($165,000) including construction costs total $234,500 and

are shown in Table 1.

It must be emphasized that those are only estimates. The actual costs

can vary depending on site-specific considerations such as the availability

of a silo, the cost of land, or a herd of livestock near the site to allow

the use of a pipeline instead of a tank truck for disposal of stillage.

OPERATING AND OVERHEAD COSTS

The major operating costs are feedstock and labor costs. Other

operating costs include boiler fuel, electricity, enzymes for converting

the starch content of corn to sugar, yeast for fermentation, chemicals,

and fuels and maintenance for the tank truck. Overhead costs are property

taxes, depreciation, and a Federal Bureau of Alcohol, Tobacco and Fire-

arms (BATF) tax bond. All operating and overhead expenses budgeted

rate of return of 20% then the individual may consider that this is a
worthwhile investment in spite of the risk involved, but a 15% rate of
return may not be sufficient. For the same reason, a bank will normally
charge a relatively high interest on loans for the distillery because of
the risk involved.








year payback period with annual compounding and interest rates of 10,

15 and 20 percent are used in calculating annual interest payments and

the total amount of interest paid over the life of the loan.


INITIAL INVESTMENT COSTS

The community distillery requires an initial investment in land,

buildings, and equipment. Land requirements consist of one acre for the

plant and a 3 acre cooling pond. Buildings include not only a building

for the distillery itself, but storage facilities for the corn, the 190

proof ethanol, and wet distiller's solids (WDS). The equipment consists

of the distillery system described in Le Grand's report, a denaturing

unit, a hammermill, and a tank truck to haul the WDS to a nearby livestock

operation. Estimates of the cost of land ($10,000), buildings ($59,500)

and equipment ($165,000) including construction costs total $234,500 and

are shown in Table 1.

It must be emphasized that those are only estimates. The actual costs

can vary depending on site-specific considerations such as the availability

of a silo, the cost of land, or a herd of livestock near the site to allow

the use of a pipeline instead of a tank truck for disposal of stillage.

OPERATING AND OVERHEAD COSTS

The major operating costs are feedstock and labor costs. Other

operating costs include boiler fuel, electricity, enzymes for converting

the starch content of corn to sugar, yeast for fermentation, chemicals,

and fuels and maintenance for the tank truck. Overhead costs are property

taxes, depreciation, and a Federal Bureau of Alcohol, Tobacco and Fire-

arms (BATF) tax bond. All operating and overhead expenses budgeted

rate of return of 20% then the individual may consider that this is a
worthwhile investment in spite of the risk involved, but a 15% rate of
return may not be sufficient. For the same reason, a bank will normally
charge a relatively high interest on loans for the distillery because of
the risk involved.








for the first year of operation are presented in Table 2.





Table l.--Initial investment costs for 120,000 gallon distillery


Asset and Description


Cost (1980 dollars)


LAND


4 acres, including a 3 acre pond
@ $2,500 per acre


BUILDINGS


One 3 story 30' x 30' steel beam
construction open-sided building
@ $15 per sq. ft.

One ethanol storage tank, 15,000
gal. capacity, @ $1 per gallon
capacity

One corn silo, 200 tons capacity
@ $10 per ton capacity

One stillage tank, 2000 gal.
capacity, @ $1 per gallon capacity


One 120,000 gal. capacity ethanol
distillery including hammermill and
denaturing unit @ $1.25 per annual
gal. capacity

One tank truck, 1000 gal. capacity


TOTAL INITIAL INVESTMENT


$10,000


40,500


15,000


2,000


2,000


EQUIPMENT


150,000


15,000

$234,500










Expected Operating Costs

Feedstock costs for the community distillery in the initial year of

operation are based on an assumed corn price of $3.00 per bushel. The

distillery converts one bushel of corn into 2.4 gallons of 190 proof

ethanol. The yield may vary, but this estimate is used as a reasonable

figure for accounting purposes. The 120,000 gallon annual production

requires 50,000 bushels of corn. The firm may wish to increase feed-

stock storage capacity, presently set at 200 tons or approximately 7000

bushels, to take advantage of seasonal variation in corn prices. In

the Fall North Florida corn prices are normally equal to the Chicago price

less transportation costs from Florida to Chicago. In the Spring the corn

price is equal to the Chicago price plus transportation costs. This

accentuates the usual seasonal variation of corn prices with low prices

at harvest followed by steadily increasing prices until the next harvest.

Using an average price of $3.00 per bushel, feedstock costs are $150,000

during the first year of operation.2





Assuming North Florida field corn yields of approximately 75 bushels
per acre for unirrigated land and 110 bushels per acre for irrigated land [8],
approximately 667 acres of unirrigated land or 455 acres of irrigated land
would be required to supply the feedstock needs of the distillery.

It should also be noted that the community distillery can make use
of alfatoxin contaminated corn to produce ethanol although in this case the
WDS cannot be fed to livestock. The WDS from alfatoxin contaminated corn must
be disposed of in an environmentally safe manner which will add to the costs
of operation. Compensating for this added cost is the low cost of obtaining
alfatoxin contaminated corn; most likely this would just amount to the cost
of harvesting and hauling. However, a financial analysis cannot be based
upon an uncertain source of supply such as alfatoxin contaminated corn.









The labor requirements of the plant are considered to be 1 skilled

technician, 2 skilled workers, and 3 laborers. Their pay rates are pre-

sented in Table 2. An additional 50% of direct labor costs are in-

cluded to cover labor overhead costs. The plant is operated 24 hours

a day with 2 men, one skilled and one laborer, per eight hour shift.

It is assumed that one laborer from one shift will drive the tank truck

to the farm(s) buying the WDS. Total labor costs in the first year of

operation are estimated to be $97,380.

The community distillery uses wood chips for boiler fuel. Wood

chips can be obtained for about $15.00 per ton delivered in North

Florida. The annual fuel requirements for the community distillery are

600 tons of wood chips with a total cost of $9,000. Wood chips may be-

come more costly and harder to buy as they are increasingly recognized

as a cheap source of energy.

Enzyme, yeast, and chemical expenses have been estimated using

USDA data [10]. These total about nine cents per gallon of ethanol

produced or $10,800 for the 120,000 gallon annual capacity.

Other operating costs are insurance on the plant and its product

($2,500) and fuel and maintenance for the tank truck ($2,500). For

the first year of operation, the total operating costs enumerated in

Table 2 are $273,380.


Depreciation

Depreciation is an accounting technique which is used to set

aside money for the replacement of worn out or obsolete capital equip-

ment and buildings. It has two effects on corporate income. De-

preciation is treated as a part of the overhead costs of the plant.










Table 2.--Operating and overhead costs budgeted for first year of
operation.


Operating and Overhead Expenses Cost (1980 dollars)


OPERATING EXPENSES
Feedstock 50,000 bu. of corn per year
@ $3.00 per bu. $150,000
Labor
Direct labor costs:
One skilled technician 15,000
Two skilled workers @ $6/hr. 24,960
Three laborers @ $5/hr. 24,960
Total labor costs 64,920
Labor overhead @ 50% of
direct labor costs 32,460
Total labor costs 97,380
Boiler fuel 600 tons of wood
chips @ $15/t. 9,000
Electricity 24,000 kwh @ $.05/kwh 1,200
Enzymes 6t per gallon of ethanol
produced 7,200
Supplies chemicals and yeast
@ 3t per gallon of ethanol
produced 7,200
Insurance product liability and fire
and extended coverage @ $.90 per
$100 of sales 2,500
Fuel for tank truck 1000 gal.
@ $1.50/gal. 1,500
Maintenance for tank truck 1,000

SUBTOTAL OPERATING EXPENSES $273,380

OVERHEAD EXPENSES
Property tax @ 20 mill rate on $219,500 4,390
BATF tax bond @ $12.00 per $1,000 tax
value 1,800
Depreciation 19,850
SUBTOTAL OVERHEAD EXPENSES 26,040

TOTAL OPERATING AND OVERHEAD EXPENSES $299,420





-10-


It is also deducted from profits for income tax purposes. The straight-

line method was used to calculate depreciation in this report. This is

found by dividing the cost of the item by its useful economic life. The

result is the yearly depreciation on the item. Other methods can be

used and may offer a tax advantage for a specific situation. Table 3

presents the annual depreciation allowance for each depreciable item.

The total annual depreciation allowance for the community distillery

is $19,850.


a
Table 3.--Annual depreciation allowance



Asset Economic Salvaqe Depreciation
Life Valuec Allowance


Buildings 59,500 20 years 0 2,975

Equipment 150,000 10 years 0 15,000

Tank Truck 15,000 8 years 0 1,875

TOTAL ANNUAL DEPRECIATION ALLOWANCE 19,850



aDepreciation based on straight-line method.
bOther choices of economic life may be available for tax purposes.
CSalvage value may differ from zero in actuality. If greater than
zero, it should be deducted from cost for figuring depreciation.

Budgeted Operating and Overhead Costs
The community distillery must pay state property taxes and the cost

of the BATF bond. These expenses are not considered to be subject to in-

flation. The state property tax is twenty mills on the value of land,

buildings, and equipment. This amounts to $4390 on a total initial value







-11-


of $219,500. The BATF tax bond costs $1800.1 The total overhead cost is

the sum of the depreciation allowrance, the state property tax and the

BATF tax bond, is $26,040.

For budgeting purposes, all operating costs are considered to be sub-

ject to an inflation rate of 10% per year (see column 2 of Table 4).

Labor costs are considered to increase by 8% per year reflecting the

general decrease in real wages (see column 1 of Table 4). Total op-

erating costs are budgeted to increase Trom $273,380 in the first year of

operation to $326,540 in the third year (see column 3 of Table 4). Over-

head costs are assumed to remain constant through the first three years of

operation (see column 4 of Table 4). The sum of budgeted operating

and overhead costs are presented in column 5 of Table 4 and are expected

to increase from $299,420 in the first year of operation to $352,580 in

the third year.


Working Capital Requirements

Working capital is required to cover the period between payments

for inputs, such as labor and corn, and the receipts from sales of

ethanol and WDS. Working capital requirements are considered to be 3

months operating costs. In the first year of operation, $68,350 are

required for working capital. Table 5 shows working capital requirements

for the first three years of operation.


1The BATF tax bond is based on a $10.50 per 100 proof gallon tax rate
on 15 days;production. The community distillery produced 14,250
100 proof gallon equivalents in 15 days which has a tax value of $150,000.
The tax bond can be purchased for $12.00 per $1000 tax value or, in this
case, $1800.






-12-


Table 4,--Budgeted operating and overhead costs for the first three
years of operation,



Year of (1) (2) (3.) (4) (5)
Operation Labor Other Total Overhead Total Operating
costs operating operating Cost and overhead
costs costs costs
(1)+(2)=(3) (3)+(4)=(5)


First $ 97,380 $176,000 $273,380. $26,040 $299,420

Second, 105,170 193,600 298,770 26,040, 324,810

Third 113,580 21,2,960 326,540 26,04,0 352,580


aLabor costs have been. inflated by 8% per year,


bOther operating costs have been inflated by 10%


per year.


Table 5.--Budgeted working capital requirements, first three years of
operations



First Year Second Year Third. Year

Working Capital $68,350 $74,690 $81,640


aWorking capital requirements are considered to be 3 months op-
erating costs. Therefore Working Capital is found by multiplying column
3 of Table 4 by 1/4.







-13-


Interest Expense and Total Annual Costs

Total annual costs for income accounting purposes are considered

to be the sum of operating and overhead expenses and the interest

expense, the interest portion of annual mortgage payments. The in-

terest expense for a given initial capital requirement will vary

directly with the debt/equity ratio and the interest rate. The dis-
tillery firm has an initial capital requirement, the sum of initial

investment cost and working capital, of $302,850 ($234,500 + $68,350 =

$302,850 from Tables 1 and 5). Table 6 presents the interest expense

for the firm with a 40/60 debt/equity ratio at various interest rates,

during the first three years of operation.

Table 6,--Interest expenses during the first three years of operation
for a loan of $121,140 and various interest rates.a


Year of Interest Payment for given interest rate
Operation 10% 15% 20%



First $12,120 $18,160 $24,240

Second 10,920 16,360 21,800

Third 9,680 14,520 19,400



aBased on a 10 year loan with equal annual principal payments and
interest on the outstanding balance.






-14-


Interest costs for other debt/equity ratios can be found by

using the following formula.
D
Interest Cost = 4 C
40

where:

D Debt capital as a percentage of initial capital
investment

C The interest cost from Table 6
With i representing the interest rate
and j the year of operation

For example, if the firm had a 50/50 debt/equity ratio, the interest

cost in the first year of operation would be $15,150 [(50/40) X'$12,120

$15,150].

Total annual costs for income accounting purposes are the sum of

annual operating and overhead expenses '(from Table 4) and interest

expenses. Table 7 presents total annual costs for various debt/equity

ratios and interest rates. Due to the effect of interest expenses, total

annual costs vary directly with the debt/equity ratios and interest

rates. Total annual costs budgeted for the first three years of

operation for a firm with a 40/60 debt/equity ratio are shown irn

Table 8. For example, a firm with a 40/60 debt/equity ratio and with a

10% interest rate on debt capital can expect total annual costs to rise

from $307,590 in the first year of operation to $358,310 in the third

year.







-15-


Table 7.--Total annual costs by debt/equity ratio and interest rate
for first year of operation.



Debt/ Total annual costs for given interest rate
Equity
ratio 10% 15% 20%



50/50 $310,620 $318,170 $325,770

40/60 307,590 313,630 319,710

30/70 304,560 309,090 313,650

20/80 301.530 304,550 307,590

10/90 298,500 300,010 301,530

0/100 295,470 295,470 295,470


aTotal annual costs are the sum of annual operating
costs and interest costs for the year of operation.


and overhead


Table 8.--Budgeted total annual costs for different interest rates for
40/60 debt/equity ratio, first three years of operation.


Year of
Operation


Budgeted total annual cost for given interest rate

10% 15% 20%


First $307,590 $313,630 $319,710

Second 331,780 337,220 342,660

Third 358,310 363,150 368,030


aTotal annual costs are calculated by summing expected operating
and overhead costs from Table 4 and interest costs from Table 6 for a
40/60 debt/equity ratio.






-16-


PRODUCT PRICES


The community distillery produces 190 proof fuel ethanol and

wet distillers' solids (WDS). Neither of these products have esta-

blished markets. Anhydrous (200 proof) ethanol is an ingredient of

gasohol and thus derives its value from the price of gasohol. The

190 proof ethanol must be dehydrated to 200 proof to be sold as an

ingredient of gasohol. At the present time there are no firms in

the Southeast which purchase low proof ethanol for dehydration to an-

hydrous alcohol. American Agrifuels of Rockport, Missouri had been

purchasing low proof ethanol for dehydration, but shut down their

operations in January 1981 because of a lack of supply of low proof

ethanol [2]. It does not appear likely that a market for low proof

ethanol for dehydration to 200 proof will develop in the near future.

A local market may develop for low proof ethanol for direct use as

a, motor fuel. A price for straight 190 proof ethanol motor fuel is
derived below. A breakeven analysis will be used to show the price

for 190 proof ethanol that will allow the firm to breakeven at different

prices for the corn feedstock. An ethanol price above the breakeven

price results in gross profits, while one below the breakeven price

results in a loss.

The price received by the community distillery for WDS is dependent

upon the price of other protein sources, such as corn and soybean meal.

There are nopublished data on the feeding of WDS which is 60-65% solids

by weight. Feeding trials have been reported which indicate that simi-

lar products, dried distillers' grains (DDG) [12] and wet distillers'











grains (WDG) [4], have a value equal to that of soybean meal as a protein

source and equivalent to flaked corn as an energy source. It will be

difficult for livestock owners to place a value on WDS without similar

experimentation. While an expected price for WDS is used in this

analysis, the effect of changes in this price on the firm's profitability

is also analyzed.

The Value of Fuel Ethanol

The 190 proof fuel ethanol produced by the community distillery

has two possible uses. It can be used directly as a motor fuel in

suitably modified spark ignition engines or it can be further dehydrated

to anhydrous (200 proof) alcohol for blending with gasoline to make

gasohol.

The value of 190 proof ethanol will depend upon its final use.

As mentioned above, the market for 190 proof ethanol to be dehydrated

to 200 proof is not well established. A recent (March 1980) USDA

study has estimated the cost of dehydrating 190 proof ethanol to 200

proof to be $.17 per gallon, There is also a 5% loss in volume due

to shrinkage [10]. At the present time there are no major buyers of

low proof ethanol for dehydration to 200 proof in the Southeast.

Therefore, the community distillery would have to sell its product as

a straight motor fuel.

The price received for 190 proof ethanol depends upon the price

of gasoline, the amount of federal and state subsidies which apply to

the final use, and other factors. The price of 190 proof ethanol used

directly as a motor fuel depends mainly on it's value as a substitute

for gasoline, the cost of modifying the engine, and the federal






-18-


tax subsidy for alcohol fuels.

A gallon of 190 proof ethanol burned in a properly modified spark

ignition engine provides 58% of the energy contained in a gallon of

regular gasoline [10]. The 190 proof ethanol therefore has roughly

58% of the value of gasoline. The fuel ethanol user must amortize the

cost of modifying the engine and fuel system of the vehicle over the

expected purchases of ethanol through the useful life of the engine.

The rational consumer will deduct the per gallon amortized modification

cost from the value of the energy content of ethanol. The amortized

modification cost per gallon can be figured using the following

formula:


PGAMC = Cost X (1 + r)T
T X GPY

where:

PGAMC per gallon amortized modification cost

Cost the modification cost

r rate of return

T expected life of the engine in years

GPY gallons of ethanol per year

For example, given a modification cost of $300, the expected life

of the engine is five years, 1000 gallons of ethanol will be used per

year, and a 10% rate of return could be earned otherwise with the $300,

the per gallon amortized modification cost would be approximately $.08.


The modifications required for an engine to use either gasoline
or ethanol are a hot manifold, an adjustable carburetor, easily ad-
justable ignition timing, and a fuel system that will not be damaged
by the ethanol.







-19-


PGAMC = $300 X (1 + .10)5 = $.08/gal.
5 years X 1000 GPY


Therefore, if gasoline costs $1.50 per gallon, the fuel ethanol user

would be willing to pay 58% of the price of gasoline less the $.08

amortized modification cost or $.79 per gallon of 190 proof ethanol.

While the ethanol retailer would receive only $.79 per gallon

of 190 proof ethanol, the actual price received by the community

distillery may be greater than this. This is due to the federal

tax subsidy which the retailer can receive. The tax subsidy con-

sists of a $.04 per gallon motor fuel excise tax exemption and the

income bracket of the retailer (see FEDERAL AND STATE TAX SUBSIDIES

below). The price received by the distillery will also be reduced by

the retailer's markup. The net price to the distillery can be found

using the following formula:


PE = .58PG PGAMC RETAIL MARKUP + SUBSIDY t


where:

PE net price of 190 proof ethanol to the distillery

PG retail price of gasoline

PGAMC per gallon amortized modification cost

t transportation cost from distillery to retailer






-20-


The retailer will have to take into account the per gallon amortized

modification cost in setting the retail price of ethanol although

this cost will vary a great deal. It can be seen that the ethanol

price received by the distillery will increase at the same rate as

gasoline prices and will generally be less than the retail price of

gasoline.

For example, if the retail price of gasoline is $1.50 per gallon,

the PGAMC is $.08, the retail markup is $.17, the subsidy amounts to

$.32 and the transportation cost is $.02,then the net price to the di-

stillery is $.92 per gallon of 190 proof ethanol [PE = .87 .08 .17 +

.32 .02 = $.92]. This net price of $.92 will be used for calculating

the profitability of the firm

The community distillery could retail 190 proof ethanol directly.

The price it could charge would be approximately 58% of the retail price

of gasoline less a per gallon amortized modification cost. It would

qualify for the federal tax subsidy, but the income tax credit would

be of value only if the distillery was profitable. The distillery

can also take a $.40 per gallon tax credit on any fuel ethanol used in

its operations.

There are few, if any, retail outlets for straight ethanol motor

fuel in the United States. Most low proof fuel ethanol is used by

ethanol producers in their own stationary engines or farm vehicles.








-21-


Some is sold to neighboring farms at a price reflecting its energy value,

58% that of gasoline. In order for a straight fuel ethanol market to

develop not only must supplies be available, but individuals must be en-

couraged to make the necessary engine modifications. There is some

movement underway to import ethanol fueled engines from Brazil. The

availability of these engines may create local markets for straight

ethanol motor fuel.

A small scale distillery may also be able to market its product as

industrial ethanol. Modifications to the distillery process would be

necessary to bring the:190 proof ethanol up to industrial grade.

Marketing channels would have to be developed to sell industrial

ethanol. An individual small-scale distillery probably would not

be able to enter this market. A number of such distilleries would be

necessary to either cooperatively market industrial ethanol or to

encourage middlemen to market it for them.

Industrial ethanol sells for approximately $1.65 per gallon in

tank car lots [1]. Most industrial ethanol is currently derived from

petroleum and natural gas feedstocks. Industrial ethanol prices would

therefore vary directly with the prices of petroleum and natural gas.

Industrial ethanol does not qualify for the Federal income tax credit

for fuel ethanol. The distillery itself would probably qualify for a

Federal energy investment tax credit as corn replaces the petroleum

and natural gas feedstocks normally used to produce industrial ethanol.






-22-


Revenues from Wet Distillers' Solids

The protein-rich wet distillers' solids (WDS) can be sold to

local livestock operations. It is important to obtain firm purchase

commitments for the WDS because it can be an important source of revenue

and it is difficult to dispose of WDS in an environmentally safe manner.

There have been reports of bloating of livestock fed with stillage that

is 8-12% solids (8-12 brix), This should not be as great a problem with

the WDS as it is 60-650 brix. In order for it's nutrient value to be

maintained, the WDS must be fed within 24 hours or refrigerated. Live-

stock must acquire a taste for WDS and it must be a consistent part of

the ration to maintain palatability [10].

There have been no published feeding trials undertaken using WDS as a

part of a livestock feed ration. Research has been reported on wet

distillers grains (WDG) which is stillage centrifuged or pressed to

20-35% solids by weight [4]. These feeding trials indicate the best use

for WDG is as a protein source for growing young beef calves. As a

protein source WDG has a value equal to that of soybean meal (SBM)

on a dry matter basis, If WDG is fed in excess of protein requirements

it would be used as energy and therefore have a value equal to that

of corn on a dry matter basis. For this report, it is assumed that

WDS is equivalent in composition and value to WDG on a dry matter

basis. Also, it is assumed that all WDS will be used as a protein

source and is equal in value to SBM.

The Chicago price of SBM varied between $125 and $285 per ton

during the period Jan. 1975 to Feb. 1980 [3]. This indicates a price

per pound of SBM of between 6.2 and 14.2U. The price of WDS will be







-23-


conservatively set at 5t per pound of dry solids. A low price

will encourage livestock operations to undertake the experimentation

and the construction of facilities needed to feed WDS.

The community distillery produces 180 Ibs. of dry solids per

hour. With a 20 hour operating day and a 240 day production year,

864,000 lbs. of solids will be produced per year at 5t a pound;

revenues in the first year from WDS will be $43,200. Net revenues

for the first three years of operation are presented in Table 10.

The 3600 Ibs. of solids produced per day by the community dis-

tillery can feed between 300 and 500 head of beef cattle depending on

feed ration formulation. It should be recognized that due to the

five day operating week for the distillery, the livestock operation

must have refrigeration or airtight storage facilities for the WDS

so that it can be fed during the weekend. This will preserve the

palatability of the WDS to the animals and also maintain nutrient

levels.


Table 9,--Budgeted net revenues from wet distillers' solids, first
three years of operation.a



1st Year 2nd Year 3rd Year


Revenues $43,200 $47,520 $52,270


aNet revenue of WDS delivered to buyer. Revenues have been in-
flated 10% per year.







-24-


Breakeven Analysis

The breakeven analysis shows the price of ethanol required at

different prices for the corn feedstock so that the firm covers its

costs. Those costs consist of operating and overhead expenses and the

interest cost of debt capital (see Table 8). There is no return im-

puted to equity capital since there are no profits at the breakeven

price of ethanol. Table 10 presents the breakeven price of ethanol

given the price of corn while Table 11 indicates the breakeven price

of corn required given the price of ethanol, Figure 1 illustrates

the breakeven corn and 190 proof ethanol prices for the first three

years of operation. It can be seen that the breakeven price of

ethanol for a given price of corn tends to increase with time. This

occurs because the increase in costs due to inflation is greater than

the decrease in interest costs from the declining principal balance

on the loan. In order to simplify the analysis, WDS revenues have

been held constant even though the price of WDS would vary directly

with the price of corn.

Gross profits or losses can be calculated using the breakeven

analysis by taking the difference between the actual price and the

breakeven price and then multiplying by a constant as in the following

equations.

(1) Gross profits = $120,000 (Pe BP )

(2) Gross profits = $ 50,000 (BPc- P,)

where:

BPe breakeven price of ethanol

BPc breakeven pric" of corn

P actual price or ethanol
P actual price of corn
cj






-25-


Table 10.--Breakeven prices of 190 proof ethanol, first three
years of operation.



Price of Breakeven price of ethanol for year of operation
corn
1st Year 2nd Year 3rd Year



$2.00 $1.81 $1.85 $1.90

2.50 2.02 2.06 2.11

3.00 2.23 2.27 2.32

3.50 2.44 2.48 2.53

4.00 2.65 2.69 2.74


aBreakeven prices have been calculated using
ratio and a 10% interest rate.


a 40/60 debt/equity


Table ll.--Breakeven prices of corn, first three years of operation.


Breakeven price of corn for year of operation

1st Year 2nd Year 3rd Year


$ .65

1.25

1.84

2.44

3.03

3.63


.56

1.15

1.75

2.34

2.94

3.53


.45

1.04

1.64

2.23

2.83

3.43


aBreakeven prices have been
ratio and a 10% interest rate.


calculated using a 40/60 debt/equity


Price of
190 proof
ethanol


$1.25

1.50

1.75

2.00

2.25

2.50





-26-


190 Proof
ethanol 2,80
(dollars !Year 3
per gal.) Year 2
'Year 1
2.60 "

2.40


2.20-


2.00-

1.80-



2.00 3,00 4.00 orn
Corn
(dollarsper bushel)

Figure 1.--Breakeven corn and ethanol prices for small-scale ethanol
production for the first three years of operation.



In Table 10, using equation (1), for each $.10 above (below) the break-

even price of ethanol, a profit (loss) of $12,000 is made. -For example,

if the price of corn is $3.00 per bushel and the price of 190,proof fuel

ethanol is $2.00 per gallon then the community distillery would incur a

loss of $27,600. Similarly, using the information from Table 11 in

equation (2), when the price of corn exceeds the breakeven price of

corn for a given price of ethanol then the firm loses money. For each

$.10 below (above) the breakeven price of corn, the community distillery

gains $5,000 in gross profits (losses), For example, if the firm re-

ceived $1.75 per gallon of ethanol it can only afford to pay $1.84 per

bushel for corn. If the firm must pay $3.00 per bushel then it would lose

$58,000.







-27-


The profitability of the community distillery can be examined

using the breakeven analysis and current prices for corn and 190 proof

ethanol, North Florida corn prices are approximately $3.50 per

bushel (March 1981). American Agrifuels had been paying $1.33 per

190 proof gallon delivered to their plant in Rockport, Missouri for

dehydration to 200 proof [2]. Given the above prices, the community

distillery would lose $133,200 in the first year of operation. This

loss would be increased by the cost of transportation. If the product

of the community distillery could be sold as industrial ethanol it would

be worth approximately $1.65 per gallon [1]. The firm would lose $94,800

in the first year of operation, if the distillery were modified to produce

industrial ethanol. The firm would suffer the greatest loss if its pro-

duct was marketed as a straight motor fuel through a gasoline station.

The firm could expect to receive approximately $.92 per gallon. A loss

of $182,400 would be incurred in the first year of operation.

Sensitivity Analysis

Changes in various assumptions made in the analysis may have an effect

upon the profitability of the firm. Sensitivity analysis is a technique

used to illustrate the effect of changes in assumptions. For example,

it has been assumed in the analysis that the firm will net 54 per pound

for WDS. Yet, the actual price received may be more or less than this

amount. The actual price received for WDS will affect the revenues of

the firm. Initial investment costs in plant and equipment may be dif-

ferent from that assumed in the analysis. This will not only affect costs

by changing debt payments, but also will affect the amount of equity

capital required. If labor costs differ from those assumed then operating





-28-


costs will change and working capital requirements will be different.

All of these changes affect the profitability of the firm and the

return on equity capital. Table 13 shows the change in gross profits

(losses) brought about by changes in the above mentioned assumptions.

It should be recognized that changes in assumptions possibly will not

occur in isolation from each other. For example, increased automation

of the distillation process may lower labor costs, but also raise

initial investment costs.


Table 12.--Addition to gross profits (losses) from 20% change in WDS
revenues, initial investment costs, and labor costs for
the first year of operation.



Item 20% increase 20% decrease


WDS revenues 8640 (8640)

Initial investment costs (6570) 6570

Labor costs (19670) 19670



aA 40/60 debt/equity ratio and 10% interest rate are assumed.

bChanges in initial investment in plant and equipment affect not
only interest costs, but depreciation,

Changes in labor costs affect operating expenses and interest costs
due to the changes in Working Capital requirements.






-29-


The additions to profits brought about by a 20% change in any of

these assumptions will not make the firm profitable, The losses in-

curred by the community distillery vary between $94,800 and $182,400 de-

pending upon the price of ethanol ($1.65 for industrial ethanol and

$.92 for straight motor fuel). A 20% decrease in labor costs would not

make the firm profitable, even though labor is the second largest

cost component after feedstock.



FEDERAL AND STATE SUBSIDIES AND INCENTIVES

The Federal government and the State of Florida provide the sub-

sidies on fuel ethanol sales and incentives for investment in ethanol

production facilities. The Federal government subsidizes fuel ethanol

sales through an exemption from the Federal motor fuels excise tax

and through an income tax credit to ethanol retailers. The State of

Florida subsidy applies only to gasohol and, while it is discussed

here, this subsidy will be of no benefit to the community distillery

because its product cannot be blended to make gasohol. The Federal

government provides an energy investment tax credit on ethanol pro-

duction facilities. Florida has a gasohol development tax incentive

in the form of a corporate income tax credit.

The Federal tax subsidy, as applied to retail sales of straight

190 proof fuel ethanol, consists of an exemption from the four cents

per gallon motor fuel excise tax and an income tax credit of $.36 for

the retailer. The income tax credit is nonrefundableand taxable. Non-

refundable means that if the credit is greater than the firm's tax

liability the difference will not be refunded. The tax credit can be





-30-


carried forward for the seen tax years following the yepr in which

the credit is originally earned. The tax credit is taxable in that it is

added to taxable income, then the tax owed s calculated ,on.that in-

come, and the credit is deducted from the tax owed, Since.the tax

credit is taxable the actual value of the tax credit to the taxpayer is

less than the amount of the credit.

The actual value of the.$.36 tax credit;depends upon the rate at

which the ethanol retailer's additional income is taxed as shown in

the following formula:

REAL TAX CREDIT = (1-t) X TAX.CREDIT

where;

t tax rate

Assuming that the tax credit is being received by a corporation then

the actual value of the tax credit per gallon of.ethanol varies between

$.19 [(1 .48) x $.36 = $.19] and $.28 [(1 ,22) x $.36 = $.28] de-

pending on the tax bracket in which the additional income falls. The

real tax subsidy per gallon of 190 proof ethanol is the sum of the four

cent motor fuel excise tax exemption and the real value of.the income

tax credit. For a corporation retailing ethanol the real tax subsidy will

vary between $.23 [.04 + .19 = $,23] and $.32 [,04 + ,28 =,$..32] depending

upon the tax bracket,


The corporate income tax rate is 22 percent of gross operating pro-
fit for income below $25,000 and 48% for income greater than or equal .to
$25,000.






-31-


The Federal ggyernment also subsidizes fuel ethanol used by the

distillery firm in its operations, This subsidy is a $.40 nonrefund-

able and taxable income tax credit. The real value of this tax

credit can be calculated using the above formula. For example, for a

corporation with a 22% tax rate the real value of the tax credit would

be $.312. As the community distillery is unprofitable and therefore

pays no income tax this tax credit would be of no value to the firm.

The State of Florida subsidy consists of an exemption from part

of the state gasoline tax for gasoline/alcohol blends. The ethanol

must be at least 198 proof. During the period July 1, 1980 to July

1, 1983 gasohol is exempt from five cents per gallon of the state gaso-

line tax. This exemption decreases to four cents from July 1, 1983

to July 1, 1985 and to two cents from July 1, 1985 to July 1, 1987.

After July 1, 1987 gasohol is no longer exempt from the state gaso-

line tax. For a 10% blend of ethanol, the tax subsidy is multiplied

by 10 to find the subsidy to the price of a gallon of ethanol. The

tax subsidy does not apply to the product of the community distillery

as this ethanol is only 190 proof. Thus the state tax subsidy has no

effect on the revenues of the distillery.

The Federal government provides an incentive to investment in

ethanol production facilities through a 10% energy investment tax

credit on all equipment used to convert biomass, in this case corn,

into a synthetic liquid fuel. The energy investment tax credit would

apply to the $150,000 equipment investment. In addition, the firm

receives the usual 10% investment tax credit on the whole initial in-

vestment. These tax credits are nonrefundable and have a seven year






-32-


carry-forward provision. These tax credits are of no value to an

unprofitable firm.

The State of Florida has a gasohol development tax incentive credit.

This is a state corporate income tax credit which is equal to the

amount of property tax paid on the land, plant, and equipment involved

in the distillation of fuel ethanol. The tax credit is nonrefundable

and has a seven year carry-forward.
The tax credits and taxable income deductions do not aid a firm

which is not profitable. If the community distillery was part of a

diversified firm which was making profits on its other operations,

these tax credits and deductions might be of use to the corporation.
It is best to consult a tax accountant oh such matters,


EVALUATING THE INVESTMENT

It is apparent from the breakeven analysis and the discussion of

product prices that the firm will not be profitable given the assumptions

made in this report. Table 13 presents the costs and returns on a

per gallon of ethanol basis for the community distillery. It is assumed

that the ethanol is marketed as a straight motor fuel through a retail
outlet. The firm loses $1.47 per gallon of ethanol produced, Since
the firm's sole purpose is to sell ethanol and WDS, there are no tax

benefits from incurring this Toss. Also, the energy and business in-

vestment tax credits are of no benefit to the firm' f r the same reason.

If the distillery was a part of a profit-making firm the loss would

have some benefit as an indirect tax savings and the inVestment tax

credits would be a direct tax savings.

1The Florida corporate income tax rate is 5%.






-33-


Table 13.--Summary of returns, cost and net returns for small-scale
fuel ethanol production (before tax)


Dollars per
gallon of ethanol


RETURN

Ethanola
WDS


COSTS

Fixedb
Variablec
Feedstockd
J


$ .92
.36
$1 .28


.27
1.08
1.40
2.75

(1 .47)


NET RETURNS (BEFORE TAX)


aThe 190 proof ethanol is marketed through a retail outlet as
a straight motor fuel.
Fixed costs are depreciation and interest.

CVariable costs are all expenses except depreciation, interest,
and feedstock costs.
Feedstock is corn at $3.50 per bushel.






-34-


If the firm were able tq generate aftertax profits then a framework

would be needed to evaluate the investment in the distillery.

One such method is to calculate the net present value (NPV) of the

investment. NPV compares the sum of discounted future aftertax pro-

fits over the life of the project to the initial investment cost, as

indicated below:
n Rt
NPV = -C + z
t=l (1 + i)t


where:

C the initial investment cost

Rt- the aftertax profit in year t

i the interest rate on capital

If the NPV is positive (the sum of the discounted future aftertax pro-

fits exceeds the initial investment cost) then the investment may be

made. The NPV of a project is not the sole criteria for evaluating

an investment. The severe drain on cash caused by losses in the first

few years of operation may prevent a firm which does not have other

profitable operations from making an investment in a project with

a positive NPV. This would dictate against a small farmer or group

of small farmers making an investment in a project like the community

distillery which would probably suffer large losses in the early years

of operation. Small farmers most likely would not have the resources

to make up these losses and thereby permit continued operation of the

distillery.








-35-


GRANTS, LOANS AND OTHER GOVERNMENT SUPPORT


Various federal government agencies have set up programs to spur

the development of ethanol production facilities in the United States.

For the most part, in terms of financial aid, these programs involve

direct loans and loan guarantees (see Table 14). Direct loans

and loan guarantees permit the firm to borrow at lower than normal

market interest rates, It must be emphasized that in order to qualify

for these programs the firm must show evidence of being able to pay

back the loan. The community distillery would not be able to do so

under the assumptions made in this analysis. The Farmers Home Ad-

ministration is presently consolidating its programs into a single pro-

gram under Business and Industrial Loans, Under the guidelines of the

Energy Security Act the USDA will provide loans, loan guarantees,purchase

agreements, and price guarantees for distilleries of less than 15 million

gallons capacity, The Economic Development Administration provides

loans and loan guarantees generally for a $500,000 minimum investment.

The Department of Energy also has a grant program for innovative small

scale technologies for the production of fuels from renewable resources.

The community distillery design does not appear to be innovative enough

to qualify, Various federal and state agencies also have programs of

technical advice and information for prospective ethanol producers.

The best source of information on these or other programs is the

National Alcohol Fuels Information Center (telephone: (800) 525-5555).

The Institute of Food and Agricultural Sciences and the Cooperative

Extension Service can also provide information and assistance.








Table 14.--Government financial assistance.


Type of Assistance


Government Agency


Program


Direct
loans


Loan
guarantees grants


USDA/FmHA




USDA/FmHA




Small Business
Administration


Economic Development
Administration (EDA)


Department of Energy


Business and
Industrial (B&I)


Coops
Private
Investors

Farmers,
Farm Coops


Operating and
Farm Ownership
Loans


Small Business
Energy Loan Act


Small Bus-
inesses
Including
Farmers and
Coops

Business
Enterprises,


Business
Development
Assistance

Small Scale
Technology
Program


Director of B&I Loans
USDA/FmHA
Wash., D.C. 20250
(202) 447-7595
Director of Farm and
Family Programs
USDA/FmHA
Wash., D.C. 20250
(202) 447-4671

Technology Assistance Div.
Small Business Admin.
Wash., D.C. 20416
(202) 653-6586


EDA Office of Public
Affairs


Including Coops (202) 337-5113


Individuals
X and Small
Institutions


DOE Regional Office


Eligible
parties


Contact


___






-37-


BATF REGULATION OF ALCOHOL FUEL DISTILLERIES

The community distillery qualifies for a medium size Alcohol Fuel

Producer (AFP) permit. This permits the sale of fuel ethanol. Re-

quirements to obtain an AFP permit are fairly simple. It is necessary

to denature any ethanol sold or used off the plant premises. A bond

must be filed on the tax value of the ethanol produced. Detailed re-

cords must be maintained on the production, processing, use and di-

stribution of the fuel ethanol. Permit applications are available from

the BATF Regional Office. The office for the southeast region which in-

cludes Florida is:

Regional Regulatory Administrator
Bureau of Alcohol, Tobacco, and Firearms
P. 0. Box 2994
Atlanta, GA 30301
Phone: (404) 455-2670



CONCLUSION

A corporation utilizing the community distillery design described

by Le Grand [6] would not be profitable given the assumptions made in

this analysis. Production costs average $2.75 per gallon of 190 proof

ethanol less a $.36 per gallon byproduct credit for the WDS. Budgeted

losses would be $182,400 in the first year of operations on an invest-

ment of $234,500 if the 190 proof ethanol is sold as a straight motor fuel

at $.92 per gallon. If industrial ethanol at $1.65 per gallon could

be produced and marketed by the corporation, first year losses would be

$94,800. At this time, there are no established markets for low proof

fuel ethanol on WDS, Therefore, there is no certainty that there would






-37-


BATF REGULATION OF ALCOHOL FUEL DISTILLERIES

The community distillery qualifies for a medium size Alcohol Fuel

Producer (AFP) permit. This permits the sale of fuel ethanol. Re-

quirements to obtain an AFP permit are fairly simple. It is necessary

to denature any ethanol sold or used off the plant premises. A bond

must be filed on the tax value of the ethanol produced. Detailed re-

cords must be maintained on the production, processing, use and di-

stribution of the fuel ethanol. Permit applications are available from

the BATF Regional Office. The office for the southeast region which in-

cludes Florida is:

Regional Regulatory Administrator
Bureau of Alcohol, Tobacco, and Firearms
P. 0. Box 2994
Atlanta, GA 30301
Phone: (404) 455-2670



CONCLUSION

A corporation utilizing the community distillery design described

by Le Grand [6] would not be profitable given the assumptions made in

this analysis. Production costs average $2.75 per gallon of 190 proof

ethanol less a $.36 per gallon byproduct credit for the WDS. Budgeted

losses would be $182,400 in the first year of operations on an invest-

ment of $234,500 if the 190 proof ethanol is sold as a straight motor fuel

at $.92 per gallon. If industrial ethanol at $1.65 per gallon could

be produced and marketed by the corporation, first year losses would be

$94,800. At this time, there are no established markets for low proof

fuel ethanol on WDS, Therefore, there is no certainty that there would





-38-


be buyers for the products of the corporation,

The design faces possible obsolescence as new distillery

technology is being developed. The high labor costs involved in the

operation of the plant indicate thatdesigns which emphasize labor saving

technology such as microprocessor controls should be considered. Larger

scale operations, on the order of 300,000 gallons or more per year,

may permit lower per unit labor costs. Another possible problem

with the community distillery design is the short (5 day) operating

week. As there will not be a continuous supply of WDS to the livestock

operation this will force them to undertake fairly expensive investments

in refrigerated storage facilities so that the WDS can be fed throughout

the week.

The community distillery does have the ability to turn relatively

worthless diseased and distressed corn into a valuable commodity. Yet

the unreliability of such sources of supply adds a great deal of risk

to the operations of the firm. The community distillery could be profit-

able in the case of severe petroleum supply shortages when the price of

gasoline would increase greatly, Yet, in the near term, these supply

shortages are likely to be temporary in nature, Once again it is not

advisable to make an investment decision on such an uncertain prospect.

The decision to set up a fuel ethanol operation demands a great deal of

study on the part of the investor. While Florida needs new sources of

liquid transportation fuels, there must be sufficient incentive to in-

vest in production facilities. On the basis of this analysis it does

not appear that the community distillery would be a profitable investment

in Florida.











REFERENCES


[1] Chemical Marketing Reporter. "Current Prices of Chemicals and
Related Materials," Schnoll Publishing Co., New York, February 9,
1981.

[2] Clawson, J. of American Agrifuels Inc., personal communications,
July 1980, December 1980, February 1981.

[3] Emery, Walter J., editor, Commodity Yearbook 1980, Commodity
Research Bureau, N.Y., 1980.


[4] Hentges,
Cattle,"
Florida,


James, "Distillers and Brewers By-products for Feedlot
unpublished paper, Animal Science Dept., University of
1980.


[5] Hertzmark, D. et al., The Agricultural Sector Impacts of Making
Ethanol from Grain, National Technical Information Service,
Springfield, VA, 1980.

[6] LeGrand, F., A Flow-Diagram Design for Ethanol Production as a
Fuel by a Community Distillery, Agronomy Dept., Univ. of Florida,
Gainesville, FL 1980.


[7] Office of Technology Assessment, Gasohol, A Technical
Government Printing Office, Washington, D.C., 1979.


Memorandum,


[8] Prevatt, J.W. et al., Budgets for Selected Field Crop, Forage
and Beef Cattle Enterprises in North and West Florida, 1977,
Food and Resource Economic Information Report 121, Univ. of
Florida, Gainesville, FL, 1979.

[9] Meekhof, R. et al., Gasohol: Prospects and Implications, USDA,
Agri. Econ. Report No. 458, Washington, D.C.,1980.

[10] USDA, Small-Scale Fuel Alchol Production, Washington, D.C., 1980.

[11] U.S. National Alcohol Fuels Commission, Ethanol: Farm and Fuel
Issues, Washington, D.C., 1980.

[12] Ward, G.M. and Matsushima, J.K., Feeding Value of Dried Distillers'
Grains (DDG) in Beef Feedlot Rations, National Technical Information
Service, Springfield, VA, 1980.


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