Post on 12-Mar-2021
1
Ottawa CFA Luncheon 2011 Agriculture Commodities,
Biofuels & Fertilizer OutlookSam Kanes, CFA, CA
Managing Director, Scotia Capital
2
Agenda
• Agriculture Outlook
• Food-Based Fuels
• Non-Food-Based Fuels
• Fertilizer Stocks
• Conclusions
3
Agriculture Outlook
Income Growth
Biofuels
Improved Diets = More Grains
Limited Arable Land
Urgent Need for Increased Yields
Solution = Increased & Balanced Use of Fertilizer and
Population Growth
• 2005-2008: 33% of incremental global demand
• 99% food-based
• U.S. 2022 targets:•40% food based (15B gal/yr)•60% non-food based (21B gal/yr)
Source: ICL
4
June 30 USDA reports sparks rally in grain prices
70
80
90
100
110
120
130
140
150
12/31/09 2/14/10 3/31/10 5/15/10 6/29/10 8/13/10 9/27/10 11/11/10
June 30 USDA reports sparks rally in grain prices:Corn +64% since
Since June 30, 2010:
Corn +64%
Wheat +47%
Soybeans +32%
Front Month U.S. Corn, Soybeans and Wheat Prices Indexed at January 1, 2010
5
Will food-based fuels decline?
• Dedicated energy crops could be:
• Algae
• Switchgrass
• Miscanthus
• Jatropha
• MSW
• Other
Source: Hydrocarbon Processing
6
How are public biofuels investments doing?
650
750
850
950
1050
1150
1250
Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10
S&
P I
nd
ex
(U
S$
)
35
40
45
50
55
60
65
70
75
Bio
fue
ls D
ige
st
In
de
x (
US
$)
Biofuels Digest Index
S&P 500
Source: Biofuels Digest
7
2009 World Ethanol Production
• 9% of U.S. gasoline, 52% of world
• Canada #6 in ethanol, 3% of world
• Currently importing from the U.S.
• Mostly corn, some wheat/barley
• 5% of Canadian gasoline
Country Millions of Gallons
USA 10171.2Brazil 6577.9European Union 1039.5China 541.6Thailand 435.2Canada 290.6Other 247.3India 91.7Colombia 83.2Australia 56.8Total 19,535.00
Source: Renewable Fuels Association
8
What countries are active in biofuels?
• China - has capped new food-based biofuel
• Others to follow?
• United States by 2012
• India in 2010 (cooking oil only)
Brazil $3,454 millionU.S. $2,010 millionPapua New Guinea $800 millionCanada $589 millionIndia $438 millionRwanda $250 millionPhilippines $197 millionSouth Africa $190 millionEthiopia $84 millionAustralia $75 millionSweden $73 millionKenya $46 millionArgentina $37 millionSouth Korea $18 millionPeru $12 millionMosambique $10 millionPoland $4 million
Total $8,287 million2009 InvestmentsSource: Biofuels Digest
9
U.S. Corn Use for Ethanol
• Spectacular growth in U.S. corn-based ethanol since 2005 (MTBE related)
• Flattening out post 2012 (5B+ corn bushels or 33% of the future U.S. corn crop)
Source: USDA
10
2010 U.S. Corn Prices and Ethanol Margins
• Ethanol at $2.14/gal with $5.25/bu corn price is still profitable
• Record DDG exports to China
• Record U.S. ethanol exports to Canada
• Tightest U.S. ethanol supply- demand since 2005
Source: Price Perceptions
11
Return over Variable Cost ($/gal ethanol)
• High level of interest from fertilizer companies (Mosaic chart)
• U.S. politics let 2005 ethanol price spike to $5/gal, doubled ethanol cap to 15B gallons per year
• Sent fertilizer stocks soaring, led to multiple U.S. ethanol company IPO’s
Source: Mosaic
12
Bioethanol Production Processes
• Non-food based N.A. biofuel capacity rising by 2014 to 3B gal/yr
• Slow 2008-9 and YTD/10 due to credit crisis, commercialization challenges
• Novozymes world enzyme leader
Source: Novozymes
13
Cellulosic Ethanol Leaders
1. DuPont-Poet is leader in corn crop residues
2. Canada’s Iogen could be leader in wheat crop residues
3. Catchlight (switchgrass), Algenol (macroalgae) in cellulosic energy crops
4. Canada’s Enerkem is leader in Municipal Solid Waste to ethanol
5. Canada’s Ensyn (fast pyrolysis oil) and Lignol could be leaders in forest/mill waste to ethanol
Source: General Motors; Coskata
14
U.S. Biodiesel: Production as a % of Operating Capacity
• Wide variation in consumption due to EU anti-dumping, loss of $1.01/gal tax credit
• 10% the size of U.S. ethanol market
• High 2010 bankruptcy rate, only 10% of U.S. capacity utilized (90% soybean- based)
Source: EIA, Scotia Capital
0%5%
10%
15%20%25%30%
35%40%
Janu
aryMarc
hMay Ju
lySep
tembe
rNove
mber
Janu
aryMarc
hMay Ju
lySep
tembe
rNove
mber
2009-201039%
24%
14%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1 2 32008 2009 2010 YTD
15
Biodiesel Feedstock Costs
• Food-based feedstock cost rising again
• Mid-08 spike to $0.40/litre was downfall for U.S. biodiesel
• $1.01/gal U.S. tax credit gone in 2010, gone forever?
Biodiesel Input Costs (per litre)
$0.00
$0.10
$0.20
$0.30
$0.40
Sep
-05
Feb-
06
Jul-0
6
Dec
-06
May
-07
Oct
-07
Mar
-08
Aug-
08
Jan-
09
Jun-
09
Nov
-09
Apr
-10
Sep-
10
USD
/litr
eCanola Oil*Soybean Oil*Tallow*Palm Oil*
*Assumes a 7.2 lbs/gallon conversion ratio
Source: Bloomberg, Scotia Capital
16
U.S. Biodiesel 100 Price
• Industry cannot survive on sub-$4/gal prices without subsidies
• President Obama – DOE head Chu – 2007 Energy Bill extension
• 40% of U.S. biodiesel capacity in 2011 is now under refinery blending mandate
0
1
2
3
4
5
6
Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10
US
$/ga
l
Source: Bloomberg.
17
Future Outlook for Biodiesel Feedstock (3rd Gen)
• By 2020, multiple new sources
• Algae and jatropha early leaders re: potential
Source: New Biofuels Production, DeSmet Presentation.
18
Algae Biofuel Process Flow Diagram
• Complex economics due to multiple by-products with bio-oil lowest value
• Scalability unproven (Sapphire, Solazyme, Algenol, PetroAlgae to watch, U.S.)
• Canada: • Pond Biofuels potential algae leader in raw cement flue gas use (St Mary’s, Ontario)
• Carbon2Algae potential gas infusion leader in CO2 , NOX , SOX separation from flue gas at a molecular level vs. microbubbles into water
Source: South Australian Research and Development Institute
19
Carbon2Algae: CO2 Flue Gas Solutions
0200400600800
1000120014001600
CO CO2 H2 N2
Carbon DioxideCarbon MonoxideHydrogenNitrogen
Source: Carbon2Algae
• 7,000x more surface area to water
• Less than 1 psi required for CO2 gas infusion
• 400%+ algae cell growth (NRC)
• 95%+ CO2 extraction from simulated flue gas (NRC)
20
Pond Biofuels: Production Validation Facility
• St. Mary’s Cement Plant (2,500 CO2
tonnes/year)
• 150,000 CO2
tonnes/year demonstration next
Source: Pond Biofuels
21
Sapphire Energy – New Mexico Demonstration
• 2011 DOE-approved New Mexico algae project – 400 acres, $100M, 100 bbls/day
• Will consume 56 tons of CO2/day to grow algae
Source: Sapphire Energy
22
PetroAlgae Market CapitalizationPetroAlgae (PALG)
Market Cap = $1.2B (November 15, 2010)
$0
$5
$10
$15
$20
$25
$30
$35
$40
Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10
Stoc
k Pr
ice
Dec 22/08: PALG's parent company PetroTech Holdings Corp. acquired Dover Glen Inc. and transferred its entire ownership interest into PALG. Company name changed to PetroAlgae Inc.
Dec 24/08: PALG raised $10M by selling 3.2M common shares to two existing investors.
March 2009: Sign license agreement with GTB Power for 10 algae facilities in China.PALG's licensing fees during construction are near $100M and annual royalties thereafter are more than $10M.
June 4/09: PALG hires 9 senior international sales executives as the company approaches commercialization.
June 29/09: Dow & Algenol partner to build pilot algae-based integrated biorefinery.
Oct 27/09: PALG's technology passed tests by Indonesian Ministry of Agriculture concluding PALG's protein is suitable for use as a raw material in animal feed in Indonesia. Licenses are expected to follow.
Summer 2009: PALG in news as being the algae company with the potential to be first to commercialize algae production.
July 14/09: ExxonMobil announces $600M investment in algae biofuels with Synthetics Genomics.
April 14/10: PALG signed an MOU with Asesorias e Inversiones Quilicura to license PALG's technology for the development of green fuels in Chile.
Aug 11/10: PALG files $200M IPO.
Source: Bloomberg, Scotia Capital
23
Strong Correlation Between Fertilizer Stocks & Grains
100
200
300
400
500
600
700
800
10/11/1990 10/10/1992 10/10/1994 10/9/1996 10/9/1998 10/8/2000 10/8/2002 10/7/2004 10/7/2006 10/6/2008 10/6/20100
50
100
150
200
250
Correlation Between POT and U.S. Corn Prices
R-squared:Trailing 20 yrs = 0.67Trailing 10 yrs = 0.86Trailing 5 yrs = 0.81
24
North American Fertilizer Stock Performance Since the Start of Recent Grain Price Rally
90
110
130
150
170
190
210
6/29/2
010
7/13/2
010
7/27/2
010
8/10/2
010
8/24/2
010
9/7/20
109/2
1/201
010
/5/20
1010
/19/20
1011
/2/20
1011
/16/20
10
CF = +96%
AGU = +63%
MOS = +75%
POT = +59%
Sparked by Bullish June 30 USDA WASDE Report
25
North American Fertilizer Stock Performance Since BHP-POT Bid Announcement
100
110
120
130
140
150
8/16/2010 8/29/2010 9/11/2010 9/24/2010 10/7/2010 10/20/2010 11/2/2010 11/15/2010
CF = +43%
AGU = +29%
MOS = +39%
POT = +27%
Subsequent Day Trading:POT +28%MOS +9%AGU +5%CF +5%
S&P 500 Materials Index +3%
26
AGU & POT Target Price P/E Multiple Breakdown
2011E / 2012E % P/E P/E % % P/E P/E %
Potash 85% 16.0 13.6 12% 14.0 1.7 Phosphate 6% 13.0 0.8 5% 13.0 0.7 Nitrogen 9% 11.0 1.0 25% 11.0 2.8
Retail 0% 16.0 - 55% 16.0 8.8 Specialty 0% 15.0 - 3% 15.0 0.5
100% 15.4 100% 14.4 Actual 15.5 14.5
AgriumPotash Corp
27
AGU Forward P/E Multiple
2
4
6
8
10
12
14
16
18
Nov
-05
Mar
-06
Jul-0
6
Nov
-06
Mar
-07
Jul-0
7
Nov
-07
Mar
-08
Jul-0
8
Nov
-08
Mar
-09
Jul-0
9
Nov
-09
Mar
-10
Jul-1
0
Nov
-10
AGU Forward P/E = 12.2x5yr Avg = 11.5xMin = 2.3xMax = 18.8x
28
POT Forward P/E Multiple
2468
1012141618202224262830
Nov
-05
Mar
-06
Jul-0
6
Nov
-06
Mar
-07
Jul-0
7
Nov
-07
Mar
-08
Jul-0
8
Nov
-08
Mar
-09
Jul-0
9
Nov
-09
Mar
-10
Jul-1
0
Nov
-10
POT Forward P/E = 17.0x5yr Avg = 16.4xMin = 3.2xMax = 29.9x
29
Conclusions
• Global Agriculture Market firm
• Biofuels not going away but:
• Second generation cellulosic ethanol coming
• Third generation biodiesel coming
• Fertilizer stocks still appealing, prefer Agrium over Potash Corp
Thank You