http://www.rurdev.usda.gov/rbs/pub/sep06/ethanol.

htm

Ethanol from Sugar

What are
the
prospects
for U.S.
sugar co-
ops?
By James Jacobs, Ag Economist
USDA Rural Development

ore than half of world ethanol production is

produced from sugar and sugar byproducts,
with Brazil being by far the world leader.
Currently, there is no commercial production
of ethanol from sugarcane or sugar beets in the United
States, where 97 percent of ethanol is produced from
corn.

Technologically, the process of producing ethanol from

sugar is simpler than converting corn into ethanol.
Converting corn into ethanol requires additional
cooking and the application of enzymes, whereas the
conversion of sugar requires only a yeast fermentation
process. The energy requirement for converting sugar
into ethanol is about half that for corn.

However, the technology and direct energy costs are

but one of several factors that determine the feasibility
of ethanol production. Other factors include relative
production costs (including feedstocks), conversion
rates, proximity to processing facilities, alternative
prices and government policies, facility construction and processing costs. As other countries
have shown that it can be economically feasible to produce ethanol from sugar and other new
feedstocks are researched, interest in the United States in ethanol production fr om sugar has
increased.

In response to the growing interest around sugar and ethanol, USDA released a study in July

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2006 titled: “The Economic Feasibility of Ethanol Production from Sugar in the United
States” (on the internet at: www.usda.gov/oce/). The report found that at the current market
prices for ethanol, converting sugarcane, sugar beets and molasses to ethanol would be
profitable. “At this summer’s unusually high price, I can conclude that it’s economically feasible
to produce ethanol from sugarcane and sugar beets,” USDA Chief Economist Keith Collins said.
However, there is not a clear-cut case that U.S. sugar will be commercially converted to
ethanol anytime soon. This article will explore some of the economic and technological factors
for the potential of sugar-based ethanol production for farmer-owned cooperatives.

U.S. sugar industry

Sugar beets are an annual crop grown in 11 states across a variety of climatic conditions, from
the hot climate of the Imperial Valley of California to the colder climates of Montana and North
Dakota. Sugar beet byproducts include beet pulp, which can be sold for animal feed, and
molasses, which is also sold for animal feed or further processed to extract more sugar.

Sugarcane is a perennial tropical crop produced in four states: Florida, Hawaii, Louisiana and
Texas. Byproducts of sugarcane processing include molasses and bagasse, the fibrous material
that remains after sugar is pressed from the sugarcane. Bagasse is often burned as fuel to
help power the sugarcane mills.

Total U.S. sugar production fell by more than 20 percent from 2000 to 2006 due to low prices
and structural changes in the industry. Production declined significantly or ceased altogether in
five states.

Sugar beets have gained a greater share of U.S. sugar production over the past decade, now
accounting for 58.8 percent of the nation’s sugar output while sugarcane fell to 41.2 percent.
Sugar producers and the members of farmer-owned cooperatives are increasingly interested in
new technologies and product markets for their crops, including the growing ethanol market.

Cooperatives in the sugar industry

Producer-owned cooperatives now dominate the
sugar beet and sugarcane processing sectors as
market conditions prompted more farmers to
take ownership of their processing facilities to
ensure a market for their beets or cane.

Sugar beet processing: Beet processing facilities

convert raw sugar beets directly into refined
sugar in a 1-step process. While planted sugar
beet acreage has fallen slightly since the 1990s,
sugar production actually increased due to
investments in new processing equipment, the
adoption of new technologies, improved crop
varieties and enhanced technologies for the

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desugaring of molasses.

Sugar beets are very bulky and relatively expensive to transport and must be processed fairly
quickly before the sucrose deteriorates. Therefore, all sugar beet processing plants are located
in the production areas. During the past decade, there was a steady conversion of sugar beet
processing plants to cooperative ownership. All 23 U.S. sugar beet processing facilities are
now operated by farmer-cooperatives. These include: Michigan, four facilities; Minnesota and
North Dakota (the largest sugar beet producing region) seven facilities; Colorado and
Nebraska, three facilities; Wyoming, two facilities; Idaho, three facilities; Montana, two
facilities; and California, two facilities.

Sugarcane processing:
Sugarcane is initially processed into raw sugar at mills near the cane fields. Like beets, cane is
bulky and relatively expensive to transport and must be processed as soon as possible to
minimize sucrose deterioration. The raw sugar is then shipped to refineries to produce refined
sugar.

Cooperative ownership of sugarcane mills is not as dominant as with sugar beets. In some
states, there has been a decline in the number of cooperativeowned mills. Hawaii has gone
from 12 mills in 1994 down to two in 2006, none of which are cooperatives. Louisiana has
gone from 20 mills and 10 cooperatives in 1994 to 12 mills and 4 cooperatives in 2006.
However, while Hawaii sugarcane acreage has declined significantly, Louisiana’s acreage
increased slightly as the remaining mills were upgraded and expanded. Florida sugarcane
acreage and mill numbers have remained relatively constant, with one cooperative among the
six mills. The lone mill in Texas is cooperatively owned, and acreage has been fairly stable
over the past decade.

Because all sugar beets and a significant portion of sugarcane is processed at cooperatively
owned facilities, there would be significant cooperative involvement in any future sugar-
toethanol production.

A conveyor transports sugar

beets from stockpiles into the
ACS processing plant in
Moorhead, Minn. USDA

Factors impacting
sugar to ethanol viability
Corn is currently the least-cost
feedstock available for ethanol
production. Ethanol from
sugarcane or sugar beet feedstocks costs twice as much. USDA’s recent sugar/ethanol report
provides these comparative production costs.

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High oil prices have spurred interest in ethanol, to put it mildly. But for how long? (Prices were
dropping at press deadline in September.)

With ethanol prices hovering near $4 a gallon this summer, the USDA report concludes that it
would be profitable to produce ethanol from sugar and sugar byproducts. However, if ethanol
prices were to drop below $2.35 a gallon, it would not be profitable to use raw or refined
sugar as a feedstock. Based on current futures prices, the price of ethanol is expected to drop.

Alternative market
prices for sugar
As can be seen above, it is far more costly to convert U.S. refined sugar to ethanol than to
convert corn. One reason is that recent domestic sugar prices make it more profitable to
convert sugarcane and sugar beets to sugar than to convert it to ethanol. As Jose Alvarez, vice
president of operations for the Sugar Cane Growers Cooperative of Florida, said: “It’s simple
economics. Refined sugar sells at about 18 cents a pound, and the experts tell us ethanol from
sugar would be close to 10 cents.” (Florida Sun-
Sentinel, May 31, 2006.)

U.S. policy has long been to protect domestic producers from unstable world prices, where
sugar is sold below the cost of production for most countries (often called the “dump” price).
Imports are limited to keep domestic prices stable, with the current price support level at 18
cents per pound. Refined sugar is currently a few cents above that, and unlikely to ever fall
much below the support price to avoid forfeitures to the government under the sugar loan
program.

When domestic sugar prices were very low a few years ago and some sugar was forfeited to
the government, alternate uses for surplus sugar were explored. The Minnesota Energy
Cooperative experimented with incorporating beet sugar with corn in a drymilling ethanol
plant. They found some synergy in combining the two into their fermentation tanks —
increasing ethanol production and decreasing the fermentation time, and allowing them to
produce an additional 442,800 gallons of ethanol.

When sugar prices rebounded, the concept of mixing sugar with corn for ethanol was put on
the back burner. However, it demonstrated that when market conditions warrant it, the
technology is there to significantly boost ethanol production by combining sugar with corn.

Ethanol from molasses

Molasses was found to be an ethanol feedstock that was fairly cost competitive with corn.
Molasses is typically sold as food or a livestock-feed ingredient. However, there are limited
supplies to economically support a new ethanol facility.

It is bulky and costly to transport, limiting the feasibility of drawing supplies from multiple
sugar processing facilities.

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Molasses would be most feasible if supplying an ethanol facility already colocated at a sugar
processing plant.

Plant location & capital

costs
For new facilities, capital costs
are estimated to be higher for
those using sugarcane or sugar
beets than for cornbased
ethanol plants. Also, the
economics of plant location is
largely dictated by proximity to
feedstocks for ethanol.

Most ethanol plants are located in the Midwest near corn supplies. Sugarcane and sugar beets
cannot be shipped very far for processing into any product, be it sugar or ethanol. However,
building an ethanol plant onto an existing sugarcane or sugar beet factory would have a much
lower capital expenditure cost and may make it more comparable to corn-based facilities.

In Brazil, nearly all sugar mills have the capacity to produce both ethanol and sugar. One
advantage of co-locating an ethanol processing facility is that sugar producers already bring
their crops to these facilities. Another is that the front end of the milling process is the same
for ethanol as for sugar, where beet and cane juices are extracted for converting into either
ethanol or raw or refined sugar.

Additional fermentation equipment would be needed to make ethanol at existing facilities.

Additional feedstocks needed

USDA’s Economic Research Service (ERS) reported the annual capacity of ethanol plants could
expand from 4.4 billion in 2006 to 7 billion gallons in 2010. ERS also raised a key question:
Where will the corn come from to supply this expansion?

In 2010, the ethanol sector will need at least 85 percent more corn than in 2005. How the
market adapts to this increased demand will likely play a major role in the potential demand
for additional ethanol feedstocks and the incentives for developing new processing
technologies, especially around the cellulosic conversion of biomass into ethanol.

Cellulosic processing technologies:

The ethanol industry has grown almost exclusively from grain processing. In the future,
ethanol will be produced from other feedstocks, such as cellulosic materials. Cellulose is the
most common organic compound on earth. However, it is more difficult to break down
cellulosic materials to convert into usable sugars for ethanol.

Yet, making ethanol from cellulose dramatically expands the types and amount of available

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material for ethanol production, including bagasse and sugarcane trash (stalks and leaves).
Instead of having to first convert the sugarcane to sugar juice, ethanol could be produced by
processing the entire plant material.

Conversion of sugar byproducts and waste via cellulosic technologies would greatly increase
the ethanol yields of sugar feedstocks. Cellulosic ethanol production will augment, not replace,
grain-based ethanol, but ultimately expand potential ethanol supplies exponentially.

Bagasse
EERG Sugarcane bagasse, the material left over after sugar juice is squeezed from a cane
stalk during milling, is another potential feedstock for cellulosic ethanol. Creating fuel from
bagasse and other biomass materials holds promise but will require technology development.
The Audubon Sugar Institute in Louisiana has a sugarcane-to-ethanol research project
underway focusing on bagasse.

Bagasse is currently burned as fuel in sugarcane mills, but researchers hope to increase the
value of what is now considered a waste product. The project received two $500,000 grants
from the U.S. Department of Energy for research on producing value-added products from
bagasse and molasses.

Research shows that one dry ton of sugarcane bagasse can generate 80 gallons of ethanol.
This compares favorably with 98 gallons per ton of corn. Peter Rein, director of the Audubon
Sugar Institute, says “The challenge is economics. We can do it in the lab. The technology is
there, but the economics aren’t there yet to be commercially viable.”

Government policy
The growing ethanol industry in the United States can partially be attributed to government
policies promoting the production and use of ethanol. Incentives such as the motor fuels
excise tax credits, tax credits for small ethanol producers, import duties and state government
initiatives helped make ethanol production more cost effective. Regulations for cleaner air and
increased fuel efficiency significantly increased demand for ethanol.

The Brazilian ethanol model is often mentioned when the potential for sugar as an ethanol
feedstock in the United States is discussed. In the 1970s, Brazil initiated a program of direct
investments, subsidies and incentives to increase ethanol production from sugarcane and
increase the use of ethanol as a substitute for gasoline.

Brazil is now world’s largest producer of both sugar and ethanol. However, the economics — in
terms of production, facility costs and government policies — are not directly comparable to
those in the United States. Brazil production costs for ethanol from sugar are much lower than
here. It has a much longer growing season than U.S. sugarproducing regions and has higher
yields per acre because of better climate and investment in more-productive strains of sugar
cane.

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Some lawmakers from sugar-producing states have been pushing sugar-toethanol legislation.
The Energy Policy Act of 2005 included $36 million for sugar-ethanol demonstration grants.
The funds will be used to explore commercialization of sugar cane ethanol, particularly for
small producers with outputs of under 30 million gallons per day.

The Act also included federal loan guarantees to build plants to produce ethanol from
cellulosic biomass or cane sugar. Recent proposed legislation to encourage the use of
renewable fuels included a 100-million-gallon mandate for sugar-based ethanol beginning in
2008 and each calendar year thereafter. How this would happen was not stated in the pending
legislation; it is just a mandate for minimum quantities of renewable fuel derived from sugar.

U.S. sugar producers are a little more tempered in the economic prospects for sugar-to-
ethanol. Selling refined sugar is still their primary business and the opportunity costs of
converting it to ethanol are still such that the market for sugar is more profitable. There is a
general sentiment that policies to increase ethanol production from sugar should augment, but
not replace, current U.S. sugar policy.

The American Sugar Alliance, an association of beet and cane sugar producers, has stated that
the government would need to step in to stimulate a sugar-to-ethanol industry. “It would take
a combination of consumption mandates to ensure that the demand would be there, and
conceivably some production incentives to use ethanol.” (CNN.com, June 20, 2006)

USDA’s sugar/ethanol report concludes that corn certainly has a competitive advantage in the
current market environment, and is helped by the current 51-cent-a-gallon federal tax
exemption. Some people have suggested that one way to spur sugar-to-ethanol is to provide
an increased credit for sugar. This was proposed, but not adopted, to compensate for more
sugar imports negotiated in the latest Central American Free Trade Agreement.

Some states are pursuing their own sugar-to-ethanol policies. With unique transportation
circumstances and a declining sugarcane industry, Hawaii is aiming to become the first state
with a sizeable sugar ethanol industry. In 2007, Hawaii state law will require that at least 10
percent of all gasoline sold in the state be blended with ethanol.

Co-ops would play major role

While the recent USDA report concludes that at current prices sugarcaneand sugar beets-to-
ethanol would be profitable in the United States, many factors — especially the domestic price
of sugar and the government’s energy policies — will affect the future commercialization of
sugar-to-ethanol in the U.S. USDA Chief Economist Keith Collins said at the release of the
USDA report: “At some point in the future it may be worthy of commercial development.
Technologically, it’s possible. The question is: is it economically feasible?”

As pointed out by panelists at the recent International Sweetener Symposium, cost is the
major hurdle and new technologies and government investment will be needed to overcome
that barrier. Says Steve Williams, president of the American Sugar Beet Growers Association

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and member of the American Crystal Sugar Co. cooperative: “We’re always open to new uses
of sugar and will look very hard at ethanol. The question is: Will it be economical in the long
term?”

The most promising scenario for sugar-to-ethanol appears to be linked to advances in

cellulosic and “mixed stream” technologies, especially for sugarcane because of its broader
cellulosic properties. In any scenario, it appears to be clear that if ethanol is to be produced
from sugar, the facilities must be located at existing sugarcane or sugar beet plants because
of transit cost limitations. This means that cooperatives will likely have a significant role in any
commercialization of sugar-to-ethanol because of their dominance at the initial processing
stages.

September/October Table of Contents

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