Market Report December 12, 2008

Higher Yields Coupled With A Decrease In Demand Will Keep Corn Prices Lower
And Improve Operating Performance Of Ethanol Producers For 2009
‰ New seed and planting innovations will boost corn yield per acre, driving corn prices
lower, in our opinion. Companies such as Monsanto and DuPont have new, innovative
seeds and technologies in their research and development pipelines. On the horizon are seed
technologies which will resist drought, disease and insect destruction. The hybrids that the
agricultural segments of these corporations are working on will save farmers in excess of $10
billion dollars world-wide and increase yields on average 2% annually, by our estimates. We
have seen a wave of biotechnology released from the R&D pipelines in 2007 and 2008, and
expect further innovations for the 2009 season
‰ Corn exports for 2009 are expected to decline, adding to supply in our view. The USDA
projects corn exports at 2 billion bushels for the 2009 crop year, nearly 18% below the 2008
crop year. Corn will face heavier competition with wheat and coarse grain production in the
upcoming year, according to early USDA forecasts. The European Union (EU) is expected to
produce more wheat in crop year 2009 versus crop year 2008, which translates to less EU
corn imports and a higher supply of corn in the world market.
‰ Hedge funds and commodity sell-offs have recently put downward pressure on the
price of corn and other commodities, and we expect this trend to continue through
2H:09. Speculation is one reason for the mid-summer price spike of corn. The price of corn
reached an all time record of $7.99 per bushel in July, but has since retreated over 60% in less
than four months. Hedge fund managers must share responsibility, as they invest in
commodities to offset other losses. Currently, with the strong downward movement of
commodity prices, we expect hedge fund managers and other speculators to sit on the
sidelines for the foreseeable future, which will continue to keep many commodities, including
corn, at current or lower levels for the next 9 months, in our opinion.

‰ The Fed’s recent Wall Street bailout package could strengthen the US dollar,
maintaining downward pricing pressure on the price of corn, in our opinion. The rise of
the greenback is taking place largely because the rest of the world is looking at slower
economic growth or, in some cases, even recession. The US economy is expected to rebound
quicker than Europe, which also is reflected in the strengthening dollar. Exports of US goods
including corn, which have been strong, will run into head winds if the dollar keeps rising.

‰ We contend that lower corn prices will help improve operating margins for well-
managed ethanol producers, all other things being equal, and that growth in demand for
ethanol will lead to improved profitability for these producers. The initiative for alternative
fuels has poised the ethanol market to where it is today, 8 billion barrels forecasted for 2008.
We expect ethanol to be the largest demand catalyst for corn through 2009, and anticipate that
this higher demand will be offset by lower demand for corn in non-US markets and through
improvements in yield. We anticipate improved margins for ethanol producers’ in 4Q:08 and
through 2Q:09.
Introduction
The price and supply of corn is dynamic and
influenced by a variety of factors, including
hedge funds, global economies, the strength of
the US dollar, exports and competition with
other grains. The decline in the price of corn
and other commodities since July has been
astounding; oil is down nearly 70%, hovering in
the mid $40’s, while corn and ethanol are down
over 60% to $3.09 and 53% to $1.40,
respectively. The pullbacks have been
exacerbated by a widening global economic
slowdown that has lowered the demand for
commodities such as corn.
ECM’s mission in this Market Report is to
examine the variables that affect corn supply
and demand and to explore corn’s relationship
with these variables. In particular, we want to
assess the catalysts that will help maintain
lower corn prices and the impact of lower corn
prices to an ethanol producer’s bottom line,
and come to a conclusion regarding the future
direction of corn prices and yields.
Catalysts Lowering Corn Prices
Hedge funds and corn speculation have
been a catalyst for corn price increases and
pullbacks. Hedge funds and other speculators
jumped into corn future markets during the
summer on news that bad weather and
flooding would threaten crop yield, and the
investment in corn more than offset losses in
other investments. The exuberance fueled
corn prices to a record high of $7.99 per bushel
by mid-July.
Inexperience is partially to blame for the burst
in the commodities bubble. For the first time,
many hedge fund managers were exposed to a
commodities boom and were not prepared for
the volatility associated with commodities, like
corn. Hedge funds and other big institutional
investors plowed money into commodities as
prices sourced in 1H:08. According to Alaron
Trading Corp., the speculation drove a wedge
between the commodities trading price and the
intrinsic value of the asset as reflected by
actual supply and demand.
Now with the price of corn hovering around
$3.25 per bushel, farmers’ margins are
squeezed given the rising cost of fertilizer,
diesel and rents. As of November 23, roughly
11% of the corn crop has yet to be harvested,
versus 1% at this time in 2007. Farmers’
wishful thinking of $7 per bushel corn is one
reason for a delayed harvest, but late
maturation and wet conditions in October are
also responsible for the harvest set back.
However, the corn must be harvested soon to
prepare the soil for the 2009 planting season.
We expect that farmers will store some of their
grain and wait for favorable pricing, but we do
not expect farmers to leave their corn in the
field or store their corn too long, as the cost of
storage and risk of damage will erode profits.
A stronger US dollar and lower exports are
the result of the Fed’s Wall Street bailout
plan. The action has begun to prop up the
dollar, which will help lower corn prices, as
countries that have imported US corn will
realize favorable economics by importing corn
or alternative grains from other nations.
However, if the $700 billion package reignites
inflation and selling in the dollar, corn may
quickly regain its price loss. We think it is likely
that the US dollar will continue to strengthen
relative to other currencies through 2009. We
contend that the US will recover from the
global recession quicker than Europe and other
nations, also giving the dollar a boost.
Foreign competition with other grains will
fuel corn supply build up. The USDA
projects US corn exports at 2 billion bushels for
crop year 2009, or nearly 18% below exports of
the 2008 crop year, which ended August 31.
Wheat and coarse grain production outside the
US are expected to be record large in crop
year 2009. Feedstock consumption of wheat
outside the US is projected at 3.8 billion
bushels, nearly an 18% increase year over
year.
Foreign wheat production is forecasted at 20.1
billion bushels, roughly 9% larger than the
2008 crops. According to Darrel Good,
University of Illinois marketing specialist, most
of the increase is expected in the European
Union, which translates to a decline in EU corn
imports of 354 million bushels. Mr. Good went
on to say, “Although the US exports virtually no
corn to the EU, the decline in import demand
makes more corn from other sources available
to the world market.”
A weakened global economy will continue
to put downward pressure on corn prices.
As the standard of living increases, people
change their diets. They shift away from a diet
consisting largely of staple food crops (such as
rice and wheat) into a diet that includes more
fish, meat, dairy products, and eggs. A US is used to feed livestock. Some of the
broader economic slowdown has the potential
to temper the increase in world meat demand
for the short term, and therefore the rate of
increase in corn feeding.
A protein-based diet requires the feeding of
livestock. Livestock is fed grass, grain and
protein meal. More grazing land and an
increased production of feed grains will be
About 70% of HFCS is used in soft drink
beverages; most of the HFCS decline is
attributed to reductions in demand for these
beverages. We have not seen a downward
trend in the sweeteners used by food
manufacturers, indicating a greater likelihood
that sugar has been replacing some of the
HFCS.
Other grains are used more widely than
corn kernels for livestock feed. Nearly half
or 95.8 million bushels of barley grown in the
nation’s wheat is planted to a limited extent as
a crop for livestock; also the straw is used for
livestock feed. Soybean husks and soy meal
are used primarily as animal feed. And lastly, a
large part of the diet for horses, cattle and
chicken is comprised of oats.
Planted Area for US Corn, Sorghum, Barley, and Oats
140
120
Acres (millions)

required to meet the escalating demand for the 100

higher-income diet, in the long-term. 80
60
40
US exports of all grain for livestock will retreat 20
Corn Sorghum Barley Oats

for the short-term, if a global recession 0

continues, in our view. In the likelihood of a
4

0
8

9E
3

6
/9

/9

/0
/8

/9

/0

/0

/0
93

96

99
87

90

02

05
global recession, the trend will change and

08
19

19

20

importing nations will shift to starch based diets
that are native to the respective countries
versus importing grain and livestock.
Competition for sweeteners and livestock
feed will lower demand for corn, in our
view. According to the USDA, the US is the
largest consumer of sweeteners, including high
fructose corn syrup (HFCS), and one of the
largest importers of sugar, making the US
sweetener market the largest and most diverse
in the world. Recent increases in sugar
demand have been offset by decreases in
demand for high fructose corn syrup.
HFCS, sugar for industrial uses, and
direct consum ption im ports
15000
10000 4228 4660
5000
7272 7218
0
2004/ 05 2005/ 06 2006/ 07
Source: USDA HFCS Ref ined Sugar
20
Corn for livestock feed use in the US is
relatively static as a demand driver because of
the growing availability of distillers grains as an
alternative feedstock. This translates to lower
corn prices on softer demand.
Catalysts Increasing Corn Supply
Biotech will increase corn yields
New seed and planting development will
add to an increase in the supply of corn in
crop years 2009 and 2010. Companies such
as Monsanto Co. (NYSE: MON) and EI DuPont
de Nemours & Co (DuPont) (NYSE: DD)
develop agricultural seeds that are modified to
4723 4961 enhance yield. In the pipeline of both
7017 6807 organizations are advancements in
2007/ 08
biotechnology that will address the following:
1) Drought tolerant corn. Drought
causes world wide losses in excess of
$8 billion. Reducing the need for
irrigation will save growers time and
money and increase yield. The product
is in stage III of development at
Monsanto; we expect a launch in about
2 years.
2) Corn that will combat rootworms,
corn borers and other leaf or ear
feeding insects. Globally, these
insects combined are responsible for
losses over $4 billion. A prelaunch is
scheduled for 2009 and full
commercialization is intended for 2010.
3) The most common disease found in
corn fields worldwide is stalk rot,
which is creating estimated yield losses
of more than 263 million bushels in
North and South America alone.
DuPont expects the launch of the new
disease-resistant seed for the 2009
growing season.
4) According to Dupont, US growers
apply an average of 138 pounds of
nitrogen per acre of corn, which
translates to a cost of nearly $90 per
acre. DuPont envisions a hybrid that
will require less nitrogen, lowering the
grower’s input costs. The reduced
nitrogen corn is still in the first stage of
development at DuPont; we do not
expect commercialization before 2015.
5) More than 1.6 billion bushels of corn
annually are used to produce ethanol,
corn sweeteners and a variety of food
and industrial starch products. Some
hybrids in the development pipeline
have the potential to produce more
starch, decreasing the aggregate
amount of corn needed for these
productions. These products have
recently been commercialized.
6) An exciting hybrid in the pipeline is a
corn that will increase the value of
ethanol co-products. DuPont reported
that its hybrid will increase the levels of
fermentable starch, improve corn oil
characteristics and enhance protein
content in feed co-products. We expect
commercialization of this hybrid in 3-5
years, as it is in stage II of development.
New technologies and planting methods
will also increase crop yields. New
technology will improve performance
predictability, reduce yield variability and
accelerate the pace of yield enhancement.
Gene sequencing and shuffling, laser and
marker assisted seed selection and seed
development technology all have the capability
to boost yields.
Farmers are using technologies like GPS,
onboard computerized yield monitors and
satellite imagery to ensure the most efficient
use of fertilizers and chemicals. Also, today’s
tractors and combines use state-of-the-art
propulsion systems that more efficiently use
diesel fuel.
In the past 10 years, annual per acre yield
production has grown more than in the
previous 50 years. Biotechnology is
responsible for an increase in yields from 1.5%
per year for 1944-1994 to 2% per year since
1996, which translates to a 15 billion bushel
corn crop by 2020.
For 2008, the USDA estimates a yield of 154
bushels per acre grown on 86.9 million acres,
compared to the 2007 harvest year of 151.1
bushels per acre grown on 93.6 million acres.
We look for the average US corn yield to grow
2% for crop year 2009 to 157.1 bushels of corn
per acre. We attribute the growth in yield
partially to breakthrough technology.
Impact of corn price on the US
ethanol industry
Factors determining profitability
The two most significant variables that drive
the profitability of ethanol production are the
cost of a bushel of corn and the selling price of
a gallon of ethanol. As long as the change in
the cost of a bushel of corn and the change in
the price of a gallon of ethanol retain a 3 to 1
relationship, profitability remains the same, all
other costs being equal. Since 2006,
increased demand for corn, including demand
for ethanol production, resulted in temporary
increases in price of corn; however, we think
that corn prices will continue to adjust to near
historic averages in the long run, given current
and expected corn production levels.
Increasing yield potential, along with the
growth and segmentation of both new and
old corn markets, will keep the corn market
balanced. Ethanol’s presence in the corn
market is necessary to stabilize corn price.
According to the Ethanol Promotion and
Information Council, corn markets have not
seen significant growth in the past 10 years,
with the exception of ethanol, and it is likely
that without the increasing market for ethanol,
corn prices would have decreased to near
historic lows and acres would have transitioned
into other crops such as soybeans and wheat.
Corn used for ethanol will not significantly
affect the price of corn, provided that ethanol
production and corn yields increase at
adequate rates.
There is a distinct correlation between the
cost of corn, the price of ethanol and the price
of oil. As the price per barrel of oil peaked at
$147, the price of ethanol spiked at $2.96, and
the price of corn jumped to $7.99.
If we examine the oil and ethanol relationship,
we can conclude that higher oil prices helped
fuel the demand for corn-based ethanol, which
is the only commercially viable alternative fuel
for cars and trucks in the US today. Ethanol is
blended with gasoline in the US to lower the
price of fuel and improve environmental quality.
The rapid increase in the price of oil slowed
demand and reduced consumption, which in
turn contributed to the decrease in the price of
oil. As the economic conditions continued to
deteriorate, both the demand for and price of
gasoline and ethanol fell.
Continued Importance of Ethanol
Ethanol is added to 70% of the total US
gasoline inventory at levels up to 85% (E85).
We expect 100% of the US gasoline inventory
to be blended with ethanol under President-
Elect Obama. We estimate that an additional 5
billion gallons of ethanol would be required to
bring E10 to areas in the US that are not using
E10. The number of vehicles that can operate
on ethanol mixtures as high as 85% ethanol
(E85) are on the rise; we expect that all new
cars made in the US will be able to run on
blends of E85 by 2013. According to the
Energy Information Administration, the US
production of 585,000 barrels of ethanol a day
is reducing the US oil imports by roughly
500,000 barrels per day. In the short term, with
a global recession looming, the price of oil has
dropped considerably from its all time high of
over $147 a barrel to roughly $45, or nearly
70%, in 5 short months.
We cannot discount the nearly 750 million
automobiles on the road world-wide that
require fuel. We expect that the worldwide
growth in new automobiles and demand for
gasoline and ethanol will ease in reaction to a
global recession. However, when economies
do recover, the demand for automobiles,
gasoline and ethanol will also strengthen.
Emerging nations, such as China and India,
will be the last to recover and restore demand,
in our opinion.
We are confident that the demand and price
of oil will surpass record 2008 levels when
the global economy recovers, high levels of
manufacturing commence, emerging nations
continue to develop, and an increased number
of automobiles are on the road in more
counties. We expect, within a year, the price of
ethanol to rebound as supply of oil is limited
and ethanol fills in the supply gap.
 Conclusion
US Ethanol Production
A decline in corn prices will reduce the cost of
Billions of gallons

15 goods sold and result in improved gross

10 margins. Although we anticipate two or three
5 quarters of earning’s pressure as the selling
0 price of ethanol is lower than the price in

2008E
2009E
2010E
2011E
2012E
2000
2001
2002
2003
2004
2005
2006
2007
3Q:08, we do expect lower corn prices to help
mitigate the impact of a decline in revenue.
We do expect pressure on ethanol
producers’ bottom-line for the short-term. We expect the price of corn to remain
The squeeze will be attributed to the selling substantially lower than mid-summer prices,
price of ethanol, in our opinion. We think that hovering in the range of $2.30-$3.50 based on
the cost of goods (primarily corn) for ethanol our estimates through 2010. Lower prices will
producers will be favorable longer than the be the result of increased supply and lower
selling price of ethanol is unfavorable, from an demand. Higher corn supply and lower price
ethanol producer’s perspective. will be attributed to:

We expect quarterly earnings for ethanol ƒ A stronger US dollar, reducing US

producers to reflect the lower corn costs, exports.
beginning with 4Q:08. ƒ Corn’s increased competition with other
grains for livestock feed.
We think that in 1Q:09, ethanol producers ƒ Emerging countries possible dietary
might feel top-line pressure as the demand for shift, substituting local starches for
oil and price of ethanol continue to retreat, but meats.
a likely upswing in oil and ethanol prices during ƒ Global recession lowering the demand
2Q:09 will improve margins as the economy for gasoline and ethanol.
begins to mend and summer travel ƒ New seed technology and farming
commences, increasing gasoline consumption. innovations that will increase yield.
ƒ Hedge fund and commodity speculator
investment easing.

Disclaimer
This document and any attachments are for communication purposes only and are not intended to be a balanced view of investing in
ethanol biorefineries. This information and any attachments neither constitute an offer to sell nor a solicitation of an offer to buy any
security or other financial instrument including any limited partnership or LLC interest. The information may be inadvertently incorrect
and is subject to change without notice. Care was taken in the production of this document and any attachments to obtain accurate
information from reliable sources. However, Ethanol Capital Management LLC does not attest to the accuracy of any piece of
information contained in this document or any attachments. In addition, some of the material in this document or in the attachments
may contain opinions of the writer or of Ethanol Capital Management LLC and projections of future events made by the writer or by
Ethanol Capital Management LLC. The opinions, projections and conclusions of the writer or of Ethanol Capital Management LLC may
not be accurate