[Senate Hearing 110-160]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-160

                    THE NEXT GENERATION OF BIOFUELS:
                         CELLULOSIC ETHANOL AND
                           THE 2007 FARM BILL

=======================================================================

                                HEARING

                               before the

             SUBCOMMITTEE ON ENERGY, SCIENCE AND TECHNOLOGY

                                 of the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE


                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION


                               __________

                             APRIL 4, 2007

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry


  Available via the World Wide Web: http://www.agriculture.senate.gov


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37-885 PDF                 WASHINGTON DC:  2007
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             SUBCOMMITTEE ON ENERGY, SCIENCE AND TECHNOLOGY



                   KENT CONRAD, North Dakota Chairman

E. BENJAMIN NELSON, Nebraska         JOHN THUNE, South Dakota
KEN SALAZAR, Colorado                RICHARD G. LUGAR, Indiana
SHERROD BROWN, Ohio                  LINDSEY GRAHAM, South Carolina
ROBERT P. CASEY, Jr., Pennsylvania   NORM COLEMAN, Minnesota
AMY KLOBUCHAR, Minnesota             CHARLES E. GRASSLEY, Iowa

                Mark Halverson, Majority Staff Director
                      Robert E. Sturm, Chief Clerk
            Martha Scott Poindexter, Minority Staff Director
                Vernie Hubert, Minority General Counsel

                                  (ii)












                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing(s):

The Next Generation of Biofuels: Cellulosic Ethanol and the 2007 
  Farm Bill......................................................     1

                              ----------                              

                        Wednesday, April 4, 2007
                    STATEMENTS PRESENTED BY SENATORS

Thune, Hon. John, a U.S. Senator from South Dakota...............     1
                              ----------                              

                               WITNESSES
                                Panel I

Endres, Don, Chairman and Chief Executive Officer, Verasun Energy     7
Fox, Jeff, Vice President, Legal and Governmental Affairs, Poet 
  Energy.........................................................     9
Jensen, Reid, President, South Dakota Corn Growers...............    11
Kephart, Kevin, Vice President of Research, Dean of the Graduate 
  School, and Director, Sun Grant Initiative for the North 
  Central Region, South Dakota State University..................     4
Nomsen, Dave, Vice President of Government Affairs, Pheasants 
  Forever........................................................    17
Rath, Anna, Director of Business Development, Ceres, Inc.........    14
                              ----------                              

                                APPENDIX

Prepared Statements:
    Endres, Don..................................................    38
    Fox, Jeff....................................................    44
    Jensen, Reid.................................................    54
    Kephart, Kevin...............................................    57
    Nomsen, Dave.................................................    62
    Rath, Anna...................................................    66
Document(s) Submitted for the Record:
    American Coalition for Ethanol, prepared statement...........    74
    Association of Fish and Wildlife Agencies, prepared statement    81
    Dakota Rural Action, prepared statement......................    85
    Ducks Unlimited, Inc., prepared statement....................    87
    Izaak Walton League of America, prepared statement...........    94
    KL Process Design Group, prepared statement..................   100
    Lake Area Technical Institute, prepared statement............   102
    Nebraska Game and Parks Commission, prepared statement.......   104
    Northern Great Plains Working Group, prepared statement......   108
    South Dakota Cattlemen's Association, prepared statement.....   110
    South Dakota Department of Game, Fish and Parks, prepared 
      statement..................................................   111
    South Dakota Farmers Union, prepared statement...............   115
    South Dakota Soybean Association, prepared statement.........   118
    South Dakota Wheat Inc., prepared statement..................   119
``Pump Games: Fill Up With Ethanol? One Obstacle is Big Oil--
  Rules Keep a Key Fuel Out of Some Stations; Car Makers Push 
  Back,'' The Wall Street Journal................................   121























 
                    THE NEXT GENERATION OF BIOFUELS:

                         CELLULOSIC ETHANOL AND

                           THE 2007 FARM BILL

                              ----------                              


                        Wednesday, April 4, 2007

                      United States Senate,
                            Subcommittee on Energy,
                            Science, and Technology
                                  Committee on Agriculture,
                                   Nutrition, and Forestry,
                                                     Washington, DC
    The Subcommittee met, pursuant to notice, at 10:00 a.m., in 
the Volstorff Ballroom, South Dakota State University, 
Brookings, South Dakota, Hon. John Thune presiding.
    Present: Senator Thune.

 STATEMENT OF HON. JOHN THUNE, A U.S. SENATOR FROM SOUTH DAKOTA

    Senator Thune. Good morning, everyone. As the Ranking 
Member of the Senate Agriculture Energy Subcommittee, it is my 
pleasure to call this hearing to order this morning. I want to 
welcome you to spring in South Dakota, the beautiful weather we 
are having. In the spirit of spring and in the spirit of 
renewable energy, I wore my green tie today, so this is a green 
energy day here in South Dakota. But we are delighted to have 
all of you here today, and I want to thank our witnesses for 
being with us here today as well. We look forward to hearing 
from them in just a minute.
    But what I want to do today is focus this hearing on issues 
that have to be addressed in the 2007 farm bill to ensure the 
timely and successful development of commercial cellulosic 
ethanol over the life of this bill and beyond. Today's hearing 
is the first Senate Agriculture Energy Subcommittee hearing, 
and it is the first 2007 farm bill hearing to focus on 
cellulosic ethanol production. During the 2002 farm bill 
debate, I served on the Agriculture Committee in the House of 
Representatives.
    My colleagues and I included for the first time ever an 
energy title in that bill. Since passage and implementation of 
the 2002 farm bill, our agriculture industry has evolved from 
producing food and fiber to producing food, fiber, and fuel. 
Without a doubt in my mind, our expectations for South Dakota's 
farmers and ranchers as they transition to this new frontier of 
growing fuel will be met with the same spirit, resolve, and 
innovation they have shown ever since ranchers began grazing 
our prairies and farmers' plows began turning over South Dakota 
sod in the 1800s.
    South Dakota's farmers and ranchers will rise to the 
challenge of growing fuel on the Plains, and I want to ensure 
that they do it successfully and in a manner that makes 
biofuels production sustainable. Sound public policy must keep 
pace with the innovation of our producers and ethanol industry 
leaders.
    Over the past few months, I worked hard to ensure the 
sustainability of the ethanol industry. Recently I have taken 
several steps to boost the production and consumption of 
ethanol. Last month I contacted the Environmental Protection 
Agency and urged them to make preparations to begin quickly for 
EPA approval of E20, a blend of 20 percent ethanol and 80 
percent gasoline. Our domestic ethanol production will soon 
meet and exceed the demand for E10. Therefore, E20 approval and 
wide spread use is an important stepping stone as we transition 
away from our Nation's dangerous dependence on foreign sources 
of oil.
    In order to lessen U.S. dependence on foreign energy, it is 
critical that our ethanol industry, the auto industry, and the 
Federal Government work together to expand the production and 
acceptance of gasoline with higher blends of ethanol, such as 
E20. The delivery of E20 and E85 is dependent on increased 
alternative fuel infrastructure at the retail level. Again in 
this Congress, I have introduced a bipartisan bill in the 
Senate that would provide gas station owners with financial 
incentives to install alternative fuel pumps, including E85 
pumps.
    Last month I joined a bipartisan group of Senators in 
sending a letter to Underwriter Laboratories requesting the 
approval of ethanol pump components. The lack of such approval 
allows local regulators to block the installation of E85 pumps, 
which has led to a great deal of uncertainty at the retail 
level. I have also spoken out against the administration's 
ethanol compact with Brazil. It is simply bad policy to promote 
foreign ethanol while our domestic ethanol industry is just 
getting off the ground.
    Alan Greenspan, former Chairman of the Federal Reserve, has 
publicly stated that South Dakota may be the next energy czar 
because of our potential for wind energy and renewable fuel 
production. However, South Dakota will never realize this 
potential if our focus is on foreign sources of biofuels.
    Earlier today I had the opportunity to visit a cellulosic 
ethanol lab here on SDSU's campus. This afternoon I will be 
stopping by an established field of switchgrass. Additionally, 
wind farms and ethanol plants are now a common feature of our 
rural landscape. Without question, renewable energy has 
dramatically changed South Dakota's economy, and this is just 
the beginning.
    I envision a future with South Dakota as a net energy 
exporter. In addition to our existing hydropower generating 
capabilities and the potential for increased wind energy 
generation, we have a vibrant and rapidly expanding corn-based 
ethanol industry in eastern South Dakota. Today South Dakota's 
ethanol production is comprised of 12 existing ethanol plants 
with five more under construction or expansion. By the end of 
2008, we will have the capacity to annually produce over 1 
billion gallons of ethanol in South Dakota.
    Cellulosic ethanol, which can be made from prairie grasses, 
crop residue, or wood ships rather than corn, represents the 
next frontier of biofuels production. The successful and 
economic production of cellulosic ethanol will complement our 
Nation's current corn ethanol production to deliver a robust 
and sustainable biofuels industry for generations to come. 
Cellulosic ethanol will potentially yield more gallons of 
ethanol per acre than corn by utilizing commodity crop residues 
as well as crops that are native to particular regions across 
the country. In doing so, ethanol production will extend beyond 
the Corn Belt as fuel sources such as prairie grasses and wood 
chips become viable ethanol feedstocks.
    One such example is provided by the KL Processing and 
Design Group based in Rapid City, South Dakota. KL Processing 
has just begun producing ethanol from woody biomass, with much 
of the research that has made their process successful having 
taken place right here in South Dakota. On behalf of the KL 
Processing and Design Group, I will submit their written 
testimony in the official Committee record.
    [The following information can be found on page 100 in the 
appendix.]
    First on the panel is Kevin Kephart. He is Vice President 
of Research and Dean of the Graduate School at South Dakota 
State University. Kevin also serves as the Chair of the Sun 
Grant Initiative. I worked with my colleagues to secure a 
steady stream of funding for the Sun Grant Initiative as part 
of the 2005 transportation reauthorization bill, and I look 
forward to coordinating with Kevin and his team at SDSU to 
reauthorize and strengthen this program as part of the 2007 
farm bill. I want to thank Kevin for his work and contributions 
to our ethanol industry, and I would like to give special 
thanks to Kevin, his staff, and the South Dakota State 
University for hosting this hearing today.
    Don Endres is the chairman of the board and CEO of VeraSun 
Energy, an exciting company based here in Brookings, South 
Dakota. Don grew up in Watertown, South Dakota, and is an 
alumnus of South Dakota State University. Don has a 
distinguished career in the ethanol industry and is now the 
head of the second largest ethanol production company in the 
United States.
    Jeff Fox is the Vice President of Legal and Governmental 
Affairs for Poet Energy, another South Dakota-based ethanol 
company. The Broin family purchased their first ethanol plant 
located at Scotland, South Dakota, in 1987. Later this year, 
Poet and its partner plants, scattered across the Midwest, will 
have an annualized production capacity of over 1 billion 
gallons.
    Reid Jensen lives near Burbank, South Dakota, where he 
operates a stock cow and calf operation and has raised corn and 
soybeans since 1977. Reid graduated from the University of 
South Dakota with a degree in business administration. In 
addition to being the President of the South Dakota Corn 
Growers, Reid is Vice President of the South Dakota Corn 
Utilization Council and is active on the Clay County Extension 
Board.
    Anna Rath is the Director of Business Development at Ceres, 
Incorporated. Ceres is at the forefront of transgenic 
switchgrass development and the sustainable production of 
energy-dedicated crops. Anna has a master's degree in human 
genetics from the University of Michigan and her law degree 
from Yale University. She has been researching the development 
of cellulosic ethanol and promoting cellulosic ethanol 
production for the past 3 years at Ceres, Incorporated.
    Dave Nomsen is the Vice President of Legislation for 
Pheasants Forever. I have invited Dave here today because I 
recognize the importance of conservation and sustainable 
agriculture as we move into the next generation of biofuels and 
because of the critical contribution wildlife, and especially 
pheasants, make to South Dakota's economy. Dave has lived and 
worked in South Dakota, here at South Dakota State University--
I should say he actually lived and worked here in South Dakota, 
including as a member of the faculty at the Wildlife and 
Fisheries Department here at South Dakota State University. He 
brings considerable knowledge of wildlife and conservation 
issues to this discussion.
    Each panelist has submitted written testimony for the 
public record and will be provided 7 minutes to present their 
summarized statements. After our panelists have presented their 
opening statements, I expect to have some questions for each of 
them, after which we will open up to the floor for questions 
from the audience.
    Before we get to that and open it up to their testimony, 
there are a number of other agricultural organizations and 
ethanol groups in South Dakota that I have invited to submit 
testimony for the official record of this U.S. Senate 
Agriculture Committee hearing, and I am submitting the written 
testimony for the American Coalition for Ethanol--see, we need 
more renewable energy here.
    [Laughter.]
    Senator Thune. American Coalition for Ethanol, and that was 
not your cue, Brian Jennings, to turn out the lights. Lake Area 
Technical Institute, which we visited yesterday and which is 
doing some wonderful research on the effect and wear on engines 
of renewable fuels; South Dakota Wheat, Incorporated; Glacial 
Lakes Energy. Those will all be submitted for the official 
hearing record. And I also have this morning written testimony 
from Ducks Unlimited that will be made a part of the record, 
and I understand as well that South Dakota Farm Bureau has 
submitted testimony. So all that will be included as a part of 
the official record, and the record will remain open until 
Monday, April 9, 2007.
    [The following information can be found on pages 74, 102, 
119, 87 and 115 in the appendix.]
    So, with that, I want to, as we say, yield the floor to our 
panelists. I will start on my right with Kevin Kephart. And as 
I indicated earlier, Kevin will offer some testimony for about 
7 minutes, and most of you at South Dakota State University are 
familiar with him, but he is Vice President of Research and 
Dean of the Graduate School here at South Dakota State 
University. So, Kevin?

STATEMENT OF KEVIN KEPHART, VICE PRESIDENT OF RESEARCH, DEAN OF 
THE GRADUATE SCHOOL, AND DIRECTOR, SUN GRANT INITIATIVE FOR THE 
      NORTH CENTRAL REGION, SOUTH DAKOTA STATE UNIVERSITY

    Mr. Kephart. Thank you, Senator Thune. And, first of all, I 
want to begin by thanking you especially for having SDSU be the 
venue for this hearing. I do not think you will find a better 
venue or place of excitement than SDSU for this wonderful 
opportunity that agriculture has before it. I see a lot of my 
colleagues out in the audience here, and just on behalf of them 
as well, I want to thank you for this opportunity that you have 
brought to SDSU, and your support as well.
    This is a university, and a big part of a university is to 
serve in this function as an open venue for logical discussion, 
scientific discussion, economic discussion, on issues that are 
before us. And as a university we need to hear both sides of 
many of the issues, and I think this is what we have before us 
right now.
    My main function here today is to testify on behalf of the 
Sun Grant Initiative. The Sun Grant Initiative calls to 
implement the land grant university system into helping to 
bring forward this totally new industry to the United States 
and to American agriculture. We have heard over and over again 
of the challenges that we have before us. Some of them are in 
regard to national security. We have an excessive dependence on 
imported petroleum in the United States. Approximately 60 
percent day in and day out of our petroleum use is from foreign 
sources, and people are becoming more and more aware of the 
threat, economic threat and security threat, that brings.
    We believe that agriculture is part of the solution. 
Agriculture is not the entire solution to correcting this 
energy imbalance that we have, but agriculture is a big part of 
the solution that we have before us and the challenges that we 
have before us.
    Agriculture in the United States leads the world in terms 
of providing a safe and affordable food supply to not only the 
United States but our friends throughout the world. And we 
believe that agriculture will play a similar role in energy 
production as well, with agriculture being involved.
    We feel that the land grant university system is a 
component of that, and we populate the food production industry 
and the agricultural industry with our graduates. We pursue not 
just short-term needs in research and development but also 
long-term needs that I will touch upon here in a few moments. 
And as I have mentioned, we are a source of education and 
outreach into helping to lead the policy decisions that need to 
take place.
    The land grant university system has been involved in 
agriculture since 1862, and from that we have provided 
opportunities to common people to attend higher education. But 
from that developed one of the world's leading research 
agencies, research development throughout the world. I have 
been to many countries like Bolivia and Russia and throughout 
Europe, and they see that this tripartite mission that the land 
grants have of education, basic research, public research, but 
then extending the results of that knowledge out to the entire 
community is something that the other countries just do not 
have. And we believe that will offer us strength to implement 
these new industries that we have before us.
    The Sun Grant Initiative has been an effort that we have 
been working on since 2001, January of 2001, and the mission of 
the Sun Grant Initiative is to engage agriculture into national 
energy security, but also diversify agriculture through 
biological means and economic means and also produce other 
products that will help displace imported petroleum in 
particular and other fossil fuels in general.
    So with that as being our mission, we will need more than 
the agricultural sciences to be involved in this, but we will 
need engineers and chemical engineers and other disciplines 
that have not been engaged in agriculture before now.
    I want to point out that the Sun Grant Initiative was 
authorized in 2004 as part of--it is Section 9011 of the 
existing farm bill, and through your help, we have also been 
authorized in the highway bill, the SAFETEA-LU bill, and 
actually are implementing the Sun Grant Initiative with funds 
that have been appropriated to us through the Department of 
Transportation with your leadership as well as the leadership 
of Senator Bill Frist from Tennessee.
    The Sun Grant Initiative is a consortium that is led on a 
regional basis by South Dakota State University as being the 
national lead. Other universities are Cornell, the University 
of Tennessee, Oklahoma State University, and Oregon State 
University. And through those land grant universities, we 
engage with all the other land grants in those respective 
regions. We take a regional approach to this because the 
feedstocks, the agricultural systems, the opportunities are 
different between the Northeast and the West, for example, or 
the Upper Midwest and the South Dakota area.
    Some people ask why is South Dakota the lead of this and 
not a bigger school, such as Iowa State. And my answer to that 
is that we have been engaged in this area since the mid-1970s. 
We are national leaders in research in cellulose, whether it be 
through starch or through cellulosic means. We have a feedstock 
breeding program. You see some of the materials up here before 
you. We actually are national leaders in that arena. And, also, 
we have recent investments at the State level on the conversion 
side through Governor Rounds and his support of a new 2010 
center that is jointly led by the South Dakota School of Mines 
and South Dakota State University. So I believe that we have 
national leadership just because of our history and the 
numerous faculty that we have engaged here.
    Now, if the Sun Grant Initiative through the Department of 
Agriculture is to be appropriated and reauthorized, our 
mechanism of sharing those funds is that no more than 25 
percent of the resulting funds will be used here at SDSU or the 
other centers. We are mandated in that the remaining 75 percent 
will be provided to other land grant universities through a 
competitive means, which we will have a leadership role in but 
we, nevertheless, have to award that through our partners.
    So I would say partnership and engagement with other land 
grants and industry, especially the partners that we see here, 
other members of the panel, will be a very important part of 
implementing that.
    Recent accomplishments that we have, we are working with 
the Department of Energy. They have formed a regional feedstock 
partnership effort that is partly Sun Grant Initiative, partly 
Department of Energy and their labs, and the Regional Governors 
Associations, and we have been holding workshops through that 
partnership to gain their input. We have a new Web presences 
that I would like all of you to visit, the Sun Grant Bio Web, 
which is a public resource to help people with policy 
decisions.
    I would like to wrap up by saying what our request is for 
the upcoming farm bill. Our request is that we be reauthorized. 
Currently, the Sun Grant Initiative is authorized through 2010, 
but we want to be in synchrony with the existing farm bill as 
it rolls out. And we would also request that our authorization 
limit be increased from $75 million to $100 million for this 
nationwide effort with the land grant institutions.
    Thank you very much.
    [The prepared statement of Mr. Kephart can be found on page 
57 in the appendix.]
    Senator Thune. Thank you, Kevin.
    Next up is Don Endres, who is chairman of the board of CEO 
of VeraSun Energy. Don, welcome.

STATEMENT OF DON ENDRES, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
                         VERASUN ENERGY

    Mr. Endres. Thank you. Senator Thune, I appreciate the 
opportunity to testify on behalf of VeraSun. Clearly, the 
expansion of the ethanol industry is a success story in terms 
of helping decrease our reliance on foreign oil, reducing 
greenhouse gases, and creating economic development in rural 
America. But this is just the beginning. We believe the ethanol 
industry can and will respond to the President's call for 35 
billion gallons of renewable fuel by 2017. And even though 
cellulose holds great promise, we believe that corn-based 
ethanol will continue to contribute a significant portion to 
satisfy this goal.
    In order to ensure that the industry continues to expand, 
we believe the Federal Government should focus on growing 
demand for renewable fuels. Near-term efforts should be focused 
on increasing ethanol's use as a blend component to support 
this rapid-growing industry, and longer term, we believe we 
need to transition to E85.
    The Federal Government has succeeded in spurring ethanol 
production in the United States through the combination of the 
Renewable Fuels Standard, the Volumetric Ethanol Excise Tax 
Credit, or VEETC. And we believe that maintaining this blender 
tax credit as well as keeping the secondary tariff in place to 
offset VEETC is important for short-term demand. VeraSun also 
believes that a 20-percent blend of ethanol, or an E20, 
provides a catalyst for the transition from ethanol as an 
additive to gasoline to ethanol as an alternative to gasoline. 
E20 provides the near-term driver that will be critical in 
achieving the longer-term objectives of E85 and of robust 
cellulose ethanol production.
    Today less than 3 percent of vehicles on the road are E85 
compatible. In order to for E85 to develop at sufficient pace 
under today's law, significant near-term mandates would need to 
be imposed on automotive companies and fuel retailers. We 
believe this can be more successfully accomplished over a 
longer period of time with incentives rather than mandates if 
there is support for the development of an E20 market. 
Specifically, E20 would double potential demand in the current 
blend market. This change not only would foster our energy 
independence by displacing gasoline, but also would provide 
incentives for the ethanol industry to continue to grow while 
we work to develop a nationwide E85 market.
    By transitioning from E10 to E85 through E20, we will also 
ensure the creation of a vibrant cellulose ethanol industry. 
This new near-term demand in the market would help ensure 
continued investment in research and early-stage development of 
cellulosic ethanol. It is interesting that Brazil currently 
sells blended gasoline at 24-percent ethanol as well as a 100-
percent blend with their flex-fuel vehicles. This is quite 
similar to what I am proposing here today.
    In order to spur the use of E20 in the existing automobile 
fleet, the Federal Government we believe must do two things: 
first, it must fast-track EPA authorization of ethanol blends 
up to E20 as a transportation fuel under the Clean Air Act 
amendments, and we also believe we need to provide assistance 
for automakers in this transition. I would like to thank you, 
Senator Thune, for your letter to the EPA requesting a prompt 
review of the E20 opportunity.
    By helping create new demand for ethanol through the use of 
E20, the Federal Government will provide additional time for 
the E85 market to develop. As one of the largest producers, we 
have worked to ensure a robust E85 market. In the past 24 
months, VeraSun has pursued an aggressive strategy in 
cooperation with Ford and General Motors to increase the 
availability of E85. VeraSun's E85 is available today at over 
80 stations across eight States. We plan to continue to expand 
the number of fueling locations throughout the U.S. in 2007.
    From this experience we have gained significant insight on 
what is necessary to develop E85 in the United States. In order 
to see a robust E85 market by 2017, the Federal Government must 
do the following things: first, we must improve the economics 
of blending E85 through an enhanced E85 blenders' credit; 
create an incentive for the autos to produce ethanol-optimized, 
flexible-fuel vehicles; and then increase pump incentives to 
expand the number of retail stations that offer E85.
    Currently, the market values ethanol more highly for E10 
blending than it does for E85. Allow me to explain. FFVs are 
currently not designed to take advantage of E85's high octane. 
Since refiners are able to take advantage of ethanol's high 
octane to increase refinery output and improve the economics of 
gasoline production, the product is more highly valued as a 
blend component in gasoline. To improve the E85 economics, 
Congress should create an additional blenders' credit for E85 
within the VEETC system. In addition, VEETC, including the E85 
incentive, should be extended. By providing additional credit 
for E85, we will level the playing field and increase the 
supply of E85.
    In addition, the Government should also provide incentives 
for the autos to improve FFV technology. To spur the production 
of more efficient FFVs, Congress should provide tax incentives 
to autos to produce these vehicles. Our experience with VE85 
over the last 2 years also indicates that more must be done to 
help retailers offer E85. To increase the number of retail 
stations offering E85, the current incentives for retailers to 
install the pumps, more specifically blender pumps, should be 
increased.
    I would like to again thank you, Senator Thune, for your 
leadership on E85 pump legislation, cosponsored by Senator 
Salazar. Hopefully we will see this legislation move forward in 
Congress in the very near future. We believe the market must 
see a path toward E85 in order for cellulose ethanol to evolve. 
E10 and perhaps even E20 could largely be served by corn-based 
ethanol. In large part, the Federal Government's focus on 
increasing demand for the use of renewable fuels in the near 
term and the long term will provide confidence to investors to 
aggressively pursue the commercialization of cellulose ethanol. 
And we believe the Federal Government could do a couple of 
things to help support spurring cellulose ethanol: one, 
increase the biomass ethanol research and development program; 
streamline and increase the availability of Federal grants and 
loan guarantees for investment in cellulose facilities; and 
then offer an additional blenders' tax credit for ethanol, 
similar to the Commodity Credit Corporation incentive, for a 
period of time.
    In conclusion, we have worked hard to make ethanol and 
renewable fuels a huge success story here in South Dakota and 
the United States. But no one--not VeraSun nor any one 
producer--deserves credit. Our credit really should be given to 
the American farmers. Our American farmers have provided this 
opportunity today. There is such optimism and hope in our 
industry, both for our communities as well as our country, and 
we look forward to working with you to chart a course forward 
to continue its development.
    Thank you.
    [The prepared statement of Mr. Endres can be found on page 
38 in the appendix.]
    Senator Thune. Thank you very much, Don.
    Next up is Jeff Fox, who is the Vice President of Legal and 
Governmental Affairs for Poet Energy, which is another South 
Dakota-based ethanol company, and in front of him I see a 
number of canisters here of different things. I am sure this 
stuff looks like something that you should eat for breakfast, 
that is very healthy for you. But hopefully it can be converted 
into renewable energy. These are a lot of the byproducts of the 
research that is going on. This is endosperm fractionalization 
process, fiber, germ. These are all the different component 
parts of a kernel of corn that get broken down and made into 
other things. And so it all starts with this, as you all know, 
and it becomes these particular things. The research and the 
technology continue to advance, and they are doing some 
remarkable, wonderful things, which both Don's company and 
Jeff's company are very much a part of.
    So, anyway, we will turn it over to you, Jeff, and we look 
forward to your testimony.

 STATEMENT OF JEFF FOX, VICE PRESIDENT, LEGAL AND GOVERNMENTAL 
                      AFFAIRS, POET ENERGY

    Mr. Fox. Thank you very much, Senator and guests here 
today. Senator, I just want to thank you for holding this 
hearing. It was said earlier, but it is appropriate that it is 
in Brookings, it is in South Dakota. When you look at the panel 
that you have put together, it is reflective of your knowledge 
of our industry because you have worked helping our industry 
over the years, not just in this ag bill but in past ag bills, 
also with energy bills. Your help with regulatory agencies over 
the years, your staff's help, has been very greatly appreciated 
by the industry. But you have got universities here. You have 
got growers here. You have got ethanol producers, people that 
do research. You have got a host of people here today that 
reflect, I think, not only what needs to be talked about today 
but also your knowledge of the industry.
    With that, Senator, I would like to just briefly go over 
what our file testimony is, and it really digs into financing, 
a lot of it through USDA, of grants and loan guarantees and how 
they can change them to help the energy portion of agriculture, 
which is today corn ethanol, and in the future it is going to 
be cellulose ethanol, because the programs they have--and they 
are very good at administering them--we think need to be 
changed. And you will see kind of our theme throughout our 
testimony that was filed that we think they need to increase 
those to a larger amount. They need to make the grants work a 
little bit different, and also the loan guarantees a little bit 
different.
    I do not want to go into all that detail here with this 
group because I think you hit on something very important. Don 
is right. Corn ethanol is here. It has been the backbone. A lot 
of that has come out of South Dakota. A lot of it has come out 
of the university. And we ought to all be proud of that, as you 
are. And then we would look at the next step. What happens?
    Everybody pretty much agrees that corn ethanol is going to 
top out at 14, 15 billion gallons, maybe more, but that is kind 
of the number everybody is using. So how do we get to the next 
level? And we talk about cellulose. The Senator pulled up some 
of those canisters. What you see there is a result of our 
company's investment in research and technology. We currently 
design/build ethanol plants. We manage them and we also market 
their byproducts. But we also do a lot of research.
    The initial plant that the Senator alluded to earlier in 
Scotland, South Dakota, is our research facility. We do a lot 
of different things down there with a lot of different 
partners. And what you see in the canisters he held up is the 
result of a lot of years--and I mean a lot of years--of 
research that has taken place, assistance from the Government 
in grants. We just got awarded a grant with DOE to put together 
a commercial cellulose facility. And these canisters represent 
the culmination of that process. We call it internally in our 
world ``BPX,'' which is non-cook or raw starch hydrolysis of 
the endosperm, which is--as you said, we break it into three 
different parts. Endosperm is really the starch, and then we 
take the germ, which is the fat, and we can sell that off in 
other products. Obviously, you have your DDGs, which is your 
base product that every ethanol plant has, and then the fiber.
    Now, why is fiber important? We do that with BFRAC. Before 
we run it through the plant now, through our BPX process, we 
take--what we call we ``FRAC'' it. It is not something that is 
brand new, but it is fairly new for the ethanol industry. We 
take that fiber off, and in our commercial-scale plant that we 
proposed to DOE and that we are working through the grant 
process right now, that is going to be part of the fiber we are 
going to turn into ethanol. The other part that we are going to 
take is part of the corn stover of the stock, and the combining 
of those two, we are going to take an existing 50-million-
gallon plant, turn it into a 125-million-gallon plant. We are 
going to expand the corn side of it, but we are also going to 
add the fiber and the stover. And our goal with that size of a 
plant--why did you pick 125 million?--it is a balance of the 
amount of stover that is produced in the area that we can bring 
into the plant almost from the same corn farmer. If we can get 
the corn from the farmer, we would like to get part of the 
stover from the farmer. It provides them another market.
    Why did we pick stover? Why not switchgrass? And I think 
they all have valuable places at the table because it is not 
going to be one product. It is going to be a host of products. 
We picked that because that is what we are most familiar with. 
That is our business. We deal with corn farmers, as does 
everybody. They are our customers. They are our investors. So 
it was a natural for our company to go to stover. Some of the 
other recipients have gone to other different sources of 
cellulose material.
    We think it is very exciting. We think it does open up that 
next level of ethanol production. And, Senator, I know you have 
got a map back there that shows where biomass is produced. If 
you lay that over with corn production, a lot of your biomass 
almost reflects parallels with corn production.
    So the Midwest we think is going to have a huge opportunity 
to be a player in cellulosic ethanol in the future, but it does 
not happen overnight. Our project that we are working on, as 
soon as we can get the contract negotiated--which sometimes 
takes some time--we plan on being in the ground, 30 months 
later have the plant operating. We are going to learn a lot, 
and you do that through research with universities, with grant 
money. And so if it would not be for those types of programs, 
Senator, I do not think corn ethanol would be here where it is 
at today, and I do not think cellulose ethanol would be where 
it is at today. It takes a combination of assistance from the 
Government, from the universities, and then from the people in 
the industry, and obviously, as Don said earlier, corn farmers.
    So we appreciate being here. I look forward to the 
questions. It looks like a great panel. Thank you for having 
us.
    [The prepared statement of Mr. Fox can be found on page 44 
in the appendix.]
    Senator Thune. Thank you, Jeff, and you are absolutely 
right. It does not happen without the growers, and we have got 
representation from the growers today. Reid Jensen, as I said 
earlier, in addition to being a stock cow and calf operator, 
who has raised corn and soybeans on his farm since 1977, also 
serves as President of the South Dakota Corn Growers and Vice 
President of the South Dakota Corn Utilization Council. So, 
Reid, welcome, and we look forward to hearing from you.

 STATEMENT OF REID JENSEN, PRESIDENT, SOUTH DAKOTA CORN GROWERS

    Mr. Jensen. Thank you, Senator. I would like to thank you, 
Senator Thune, for holding this field hearing and for your work 
and commitment on the issues that are important to South 
Dakota, and on behalf of the South Dakota Corn Growers, I thank 
you for your continued commitment and ongoing effort to advance 
ethanol and renewable energy in this country.
    Today South Dakota is at the forefront of an emerging 
biofuels industry. South Dakota boasts 13 ethanol plants, with 
three more plants in development stages, and over 50 E85 pumps 
throughout the State. Percentage-wise, South Dakota consumes 
over half of its corn production for ethanol by using over 250 
million bushels and ranks number four in ethanol production, 
with nearly 1 billion gallons of capacity expected by 2008.
    Additionally, there are more than 14,000 South Dakotans 
invested in some form of ethanol production, making us the 
leading State in farmer ownership and equity. For South Dakota, 
ethanol has created economic investment, rural and community 
development, and unparalleled opportunities in agriculture. For 
me personally, ethanol has been a great hedge. We have had 
cheap corn, and by investing in ethanol, we have been able to 
offset that cheap corn with our returns in our ethanol 
investment. Now we are finding a little higher corn price, 
which is great, and maybe our dividends will not be so good. We 
do not know yet. But so far they have been, but it has been a 
true hedge against low corn prices and also higher energy 
costs.
    South Dakota Corn Growers are here today to advocate for a 
national energy policy that continues to support ethanol 
expansion and development and create increased opportunities 
for South Dakota farmers. As we look toward the future of 
energy development in this country, it is important that 
farmers and agriculture play a key role. From corn-based 
ethanol to the potential of cellulosic fuels, corn will remain 
a viable feedstock in growing our energy independence.
    Currently, nationwide there are 115 ethanol plants in 
operation with nearly 6 billion gallons of capacity and 5 
billion gallons of additional capacity under construction. Our 
current Federal energy policy in part is responsible for the 
growth of this once cottage industry into a $23.1 billion fuels 
market, displacing nearly 5 percent of the petroleum 
consumption and creating over 150,000 jobs in rural America.
    In 2005, Congress passed and signed into law the Energy 
Policy Act of 2005. This legislation established the Renewable 
Fuel Standard, known as RFS, and included several key 
provisions vital to developing our robust renewable fuel 
industry. The establishment of the RFS signaled the market to 
produce more ethanol, grow more corn, and provide a safety net 
for investors. As set in 2005, the RFS incrementally mandates 
ethanol production and consumption from 2006 to 2012, peaking 
at 7.5 billion gallons. Today's ethanol production in this 
country has exceeded the RFS twofold. We are on the verge of 
meeting this 7.5 billion gallons in the next 18 months.
    In addition to the RFS, the Volumetric Ethanol Excise Tax 
Credit, known as VEETC, and the secondary ethanol tariff have 
been extremely critical in the ethanol industry. In 2004, the 
Jobs Creation Act was passed and signed into law. This landmark 
legislation extended the ethanol tax incentive, a blenders' 
credit at 51 cents per gallon, to 2010, as well as creating new 
tax incentives for biodiesel, and improved the small ethanol 
producers' tax credit to allow farmers' cooperatives to pass a 
credit along to its farmer owners. This 51-cent blenders' 
credit means market access for ethanol and brings the fuel to 
the pump. The VEETC stimulates demand and encourages more 
production, which has created a fair market price for 
undervalued commodities.
    As the ethanol industry continues to expand and more 
renewable fuels come online, it is imperative we keep VEETC in 
place and permanent. An offset to the 51-cent tax credit, the 
secondary ethanol import tariff, places a 54-cent duty on 
foreign ethanol imported to the U.S. Removing this 54-cent 
tariff would, in essence, be asking the American taxpayers to 
further subsidize already heavily subsidized ethanol and sugar 
cane production in countries like Brazil. U.S. gasoline 
refiners receive the 51-cent tax incentive for every gallon of 
ethanol they blend into gasoline regardless of the ethanol's 
origin. Brazil has built its ethanol industry through 35 years 
of incentives, production subsidies, mandates, export 
enhancement, infrastructure and development debt forgiveness, 
and currency devaluation. Brazil does not need U.S. tax dollars 
to compete effectively, as evidenced by the fact that over 430 
million gallons were imported last year, and those volumes are 
increasing.
    Together, the ethanol tax credit and the secondary tariff 
are the most critical policies behind ethanol development and 
expansion and will continue to play a vital role as cellulosic 
ethanol comes online.
    Today grain-based ethanol continues to increase its 
capacity and expand its reach, and soon we will see cellulosic 
ethanol enter the fuel market. Together, grain and cellulosic 
feedstocks can displace potentially 20 percent of the Nation's 
petroleum usage and increase our reliance on homegrown fuels. 
However, cellulosic ethanol is still some time away, with 
transportation, storage, and economic obstacles in its path. As 
we wait for cellulosic ethanol to join the market, grain will 
continue to meet the needs of food, feed, and fuel across this 
country. Although we are making great strides in ethanol 
production and advances in cellulosic technologies, 
infrastructure problems could stunt our growth as an industry.
    Currently, 85 percent of the ethanol is shipped via rail, 
and the remaining 15 percent relies on trucks and barges. As we 
increase ethanol capacity over the next 10 to 20 years, we will 
need greater railroad capacity, access, and expansion in order 
to meet the needs of a booming biofuels industry. Combine rail 
and road constraints with the need for more pumps and more 
cars, ethanol could hit a wall. Without these infrastructure 
improvements and addressing head-on these obstacles, ethanol 
will hit a saturation point, a blend wall near 15 billion 
gallons. At 15 billion gallons, yes, we will be blending 10 
percent of all gasoline; however, we cannot pass this law 
without investment in renewable fuel infrastructure as well as 
getting more pumps at the station, more flex-fuel vehicles on 
the road, and higher blends to the market, like E20. We 
appreciate greatly Senator Thune's efforts to get E20 online 
and his work with the EPA on this matter. In the end, these 
limitations could stunt any progress on key issues that need to 
be looked at as we push forward our domestic energy security 
agenda.
    Lastly, South Dakota Corn Growers are extremely proud to 
lead the country in farmer ownership when it comes to ethanol 
plants. We believe farmer investment brings great returns to 
local communities, supports rural development, and creates 
economic growth throughout the country. It is imperative we 
continue to foster farmer ownership throughout the State and 
continue to take ownership of American agriculture. Our future 
is in the farm.
    In conclusion, I would like to thank Senator Thune for his 
fantastic work in Washington and his effort on behalf of the 
great State of South Dakota. He has truly been a leader for 
agriculture and a staunch advocate for the needs of South 
Dakota Corn Growers and the future of renewable energy in this 
country. If I could leave you with one last thing, I want to 
say that good things do come from USD.
    [Laughter.]
    Mr. Jensen. Thank you.
    [The prepared statement of Mr. Jensen can be found on page 
54 in the appendix.]
    Senator Thune. We do not hear too many boos and hisses out 
here.
    [Laughter.]
    Senator Thune. Thank you, Reid.
    Next up is Anna Rath, and as I said, she is the Director of 
Business Development at Ceres, Inc. And I think what is 
important, her company and others like it are doing some 
remarkable things in increasing yields, and a lot of the 
research and technology is yielding some phenomenal results. 
And so, Anna, welcome. It is nice to have you here, and we look 
forward to hearing from you.

   STATEMENT OF ANNA RATH, DIRECTOR OF BUSINESS DEVELOPMENT, 
                          CERES, INC.

    Ms. Rath. Thank you. Good morning, and thank you, Senator 
Thune, for inviting me to testify. As you said, I am here 
representing Ceres. We consider ourselves to be a leading 
developer of dedicated energy crops, so my comments this 
morning will describe some of our efforts towards development 
and commercialization of dedicated energy crops, as well as 
some of what we think are important policy priorities for the 
farm bill in order to help get cellulosic ethanol going.
    We believe that dedicated energy crops, such as switchgrass 
and miscanthus, will be essential to realizing the scale 
currently envisioned for biofuels. For this reason, Ceres is 
rapidly developing and scaling up commercial varieties of 
energy crop species. Over the past 70 years, corn yields have 
improved more than fivefold. This is due to the development of 
a variety of technologies, including marker-assisted breeding 
and creation of hybrids and transgenics. We now have all of 
these same technologies readily available for deployment in 
energy crops and should be able to use them to produce 
multiple-fold increases in energy crop yields within the coming 
decades.
    Ceres is establishing the necessary partnerships and large-
scale breeding programs to accomplish this. In addition, 
improvements in composition and structure of dedicated energy 
crops will enable more gallons of biofuel per ton of biomass 
and bring down the costs of processing. Ceres has a leading 
program in understanding energy crop composition and its 
implications for different processing technologies.
    We also have an extensive field trialing program, including 
trials in conjunction with what will be some of the first 
commercial-scale biorefineries at their plant locations. These 
trials are for the purpose of understanding which are the 
optimal species and varieties to grow at particular locations, 
what growing practices should be employed, and what grower 
economics will be in the particular locations. Ceres 
anticipates that large-scale planting of dedicated energy crops 
to support some of these initial biorefineries will begin in 
2009. We are rapidly scaling up seed of leading energy crop 
varieties to meet this need. At the same time, Ceres is 
developing the next generations of dedicated energy crops using 
marker-assisted breeding and creation of hybrids and 
transgenics. We project that improved varieties from our 
breeding programs will be ready for commercial launch by 2012 
and that the first transgenic varieties of dedicated energy 
crops will be ready for commercial launch by 2015.
    So now I will transition to some of our policy priorities 
aimed at the farm bill.
    Because we see the cellulosic biofuels industry as one that 
is ready for commercialization, our policy priorities are aimed 
at providing the necessary opportunities and incentives to 
enable this commercialization. Some of these are feedstock-
specific policy priorities while some are more general. The 
reason for the feedstock-specific priorities and the reason I 
want to emphasize those today is because within the area of 
commercialization specific policies, we think the feedstock end 
of the value chain has been somewhat overlooked.
    So in the category of feedstock-specific priorities, the 
first is feedstock pilot or demonstration programs. Most 
growers as of today have not had much, if any, experience 
growing dedicated energy crops. Of course, there are some 
notable exceptions here in South Dakota. But for this reason, 
we propose pilot or demonstration scale programs aimed at 
providing farmers with the opportunity to become familiar with 
growing these crops. There are many existing proposals for what 
this kind of program could look like, so we have not chosen to 
put forth yet another; rather, we would simply offer the 
guidance that these programs will be most effective if the 
farmers being given the opportunity to grow dedicated energy 
crops are farmers that are likely to be called on by some of 
the first biorefineries to actually provide feedstock to those 
biorefineries.
    The impact of these programs could also be optimized by 
having enough feedstock grown in a sufficiently concentrated 
area to allow the study of harvest, transport, and storage 
logistics for that area, as these logistics will vary 
substantially by region and by choice of crops. For these 
reasons, we would recommend that these programs be done in 
areas where a biorefinery company has expressed an interest in 
siting a biorefinery.
    The second program I want to mention is something we call 
transitional assistance. For perennial crops such as 
switchgrass and miscanthus, growers will not achieve a full 
yield in their first year of cultivation. Depending on what 
region of the country the grower is located in, the first-year 
yield achieved may or may not be sufficient to warrant 
harvesting. The issue for the grower, therefore, is the year of 
lost revenue on those acres. In order to facilitate adoption of 
dedicated energy crops, we, therefore, propose a program that 
would provide transitional assistance to these growers in the 
form of compensating them for their year of lost revenue. This 
is a program that we would envision existing as the industry is 
getting started. We expect that our breeding programs will 
continuously improve first-year yields so that this opportunity 
cost declines over time.
    The third thing we would recommend is a crop insurance 
pilot program. As the cellulosic biofuels industry develops, we 
believe it is of critical importance that dedicated energy 
crops not be disadvantaged relative to other crops in terms of 
the safety net that the Government provides for these crops. 
This safety net can come in a form similar to existing crop 
programs, or it could be substantially different. The goal must 
be to allow growers to make decisions about which crops to grow 
based on market forces, not based on which crops are or are not 
supported by Government programs. Toward this goal, we suggest 
a pilot program to begin collecting the data that will be 
necessary to enable a program like crop insurance for dedicated 
energy crops. The objective of this pilot program would be that 
by the 2012 farm bill the necessary data will have been 
collected to enable the rollout of a crop insurance program for 
dedicated energy crops.
    So now I will switch over to some of our more general 
policy priorities. The first of these has already been 
mentioned by a couple of the panelists, which are grant 
programs and loan guarantees related to cellulosic 
biorefineries. We are supportive of these programs, and we 
think that they will really help to foster the construction of 
the first commercial-scale biorefineries, and we would hope 
that additional programs of this nature will be forthcoming to 
help hasten the growth of this industry.
    The second thing, which was also referred to earlier, is 
the Commodity Credit Corporation's Bioenergy Program. So we 
support the proposal that was made by the USDA that a program 
similar to the CCC program that existed in the early days of 
the starch ethanol industry be created for the cellulosic 
biofuels industry. As with the starch version, this program 
would help make biorefinery start-up and expansion more 
affordable and easier to finance by covering the cost of 
initial feedstock in the first year of biorefinery operation 
and incremental feedstock used to increase capacity in 
subsequent years.
    The final thing I am going to talk about is one of our most 
unusual ideas for getting this industry going which we call 
``renewable reserves.'' So as was demonstrated by Shell's 
restatement of reserves in 2004 and the resulting decline in 
their share price, the market capitalization of the oil majors 
is determined, at least in part, by their proved reserves, the 
oil that they can show that they have the right to take out of 
the ground. This provides an incentive for these companies to 
continue to invest in exploration because their share price 
should increase with any new fines. As of today, there is no 
equivalent incentive for these companies to invest in 
development of renewable fuels, nor is there a good metric for 
them to be able to measure themselves against one another in 
terms of how aggressively they are pursuing biofuels. We, 
therefore, suggest that the SEC be asked to convene the 
necessary experts and promulgate a definition of ``renewable 
reserves'' which would exist alongside the definition of 
``proved reserves.'' From our perspective, long-term contracts 
with growers around a biorefinery that give the biorefinery the 
right to purchase biomass feedstock from those growers are not 
substantially different from long-term leases that oil 
companies have on oil fields that give them the right to 
extract oil from those fields. Creating this definition would 
have negligible cost and would provide a market-based incentive 
for oil majors to invest significantly in the development of 
this industry.
    Together, we believe that these policy priorities will 
greatly accelerate the growth of the industry, so thank you 
again for providing me with the opportunity to discuss our 
efforts and policy priorities. We look forward to working with 
you to help ensure the rapid and successful development of this 
industry.
    Thank you.
    [The prepared statement of Ms. Rath can be found on page 66 
in the appendix.]
    Senator Thune. Thanks, Anna.
    And last up is Dave Nomsen, and Dave, as I said before, is 
Vice President of Legislation for Pheasants Forever, and this 
afternoon, as part of our sort of Energy Week activities, we 
are going to go out into a switchgrass field. And I told my 
staff when they put that on the agenda this morning that I do 
not walk into a switchgrass field without a 12-gauge in my hand 
in most cases.
    [Laughter.]
    Senator Thune. But one of the reasons that we have so many 
good opportunities at recreation in South Dakota is the good 
work that is done by Pheasants Forever and other organizations 
like Dave's, and they also have an important part and role to 
play in this next farm bill and making sure that we have a 
good, strong conservation title and making sure that the energy 
and the conservation parts of our next farm policy complement 
each other and do not work at odds with each other.
    So, Dave, it is nice to have you here. Welcome.

STATEMENT OF DAVE NOMSEN, VICE PRESIDENT OF GOVERNMENT AFFAIRS, 
                       PHEASANTS FOREVER

    Mr. Nomsen. Thank you, Senator. If you are looking for a 
few extra friends to come along this afternoon, perhaps we 
could join you.
    [Laughter.]
    Mr. Nomsen. But perhaps better yet, perhaps next fall at 
some time.
    Senator Thune. There you go. It would be legal then.
    Mr. Nomsen. Yes, it would. For the record we should point 
that out, yes.
    Senator I am very pleased to be here today representing 
Pheasants Forever, and I thank you so much for your starting 
point where you talked about conservation and wildlife as a 
critical element, as part of the dialogue, as we do move 
forward in this area, as the science behind this points out, of 
biofuels, South Dakota's next frontier.
    A few weeks ago, a group called the Great Plains Institute 
released a report, and let me just read the brief conclusion in 
that. The research outlined in that report, they suggested that 
sustainably produced biomass, particularly native prairie 
grasses, well adapted to the Great Plains, can make a 
significant contribution to our country's energy and material 
needs, and I certainly concur with that recommendation, and we 
look forward to being part of the dialogue as we develop and 
enhance and take a look at the new road that we are going down 
in terms of cellulosic biofuels.
    It all started in perhaps January of 2006 when the 
President said the word ``switchgrass''--and you must have 
great staff because it is close and it is right here, and I 
thought about those roosters that are busting out of this. But 
the President mentioned the word ``switchgrass'' as part of the 
State of the Union address, and a lot of people kind of 
scratched their head and said, ``What is the world is that?'' 
But about 2.5 million pheasant hunters around the country knew 
exactly what he was talking about, and switchgrass is an 
incredible native grass that does have tremendous opportunities 
to produce both wildlife habitat and energy needs. So it is an 
exciting time to move forward here.
    I would like to think that we have gone a little further 
than--Paul Harvey the next day called it ``weeds'' on his 
particular show, but since then we have had great discussion 
about the opportunities, and it is great to see all of the 
different native grasses around the room here this morning.
    I had an opportunity last Friday to present some of the 
conservation priorities to Secretary Johanns while in 
Washington, and I would like to attach a copy of that 
particular letter that we gave him to my testimony for the 
record. There were a number of elements on there. As you might 
suspect, the conservation community is very anxious to 
reauthorize and continue 20 more years of the successful 
Conservation Reserve Program. It has been an incredibly 
successful program, and we certainly want to see that continue 
as one of our top priorities.
    In the area of biofuels and renewable energy, we talk about 
research and development funding and how that should promote 
the next generation of biofuels and renewable energy 
technologies. Based upon sustainable polycultures that are 
consistent with fish wildlife, soil nutrient management, water 
conservation goals, the taxpayer investment in conservation and 
wildlife gains that we have accomplished in the last 20 years 
should not be compromised or sacrificed as we go through this 
process.
    We also talk about a number of elements in our testimony, 
Senator, that talk about things that perhaps the wildlife 
community can offer as we do develop planting and harvest and 
management strategies for these biofuels. If you look to the 
wildlife community, and particularly the State wildlife 
management agencies, groups like Pheasants Forever and Ducks 
Unlimited, groups like that have decades and decades of 
expertise on planting switchgrass and other native grasses, how 
to establish them and how to manage them appropriately for 
wildlife. So we really think we have something to offer at the 
table as we talk about this particular area.
    Native grasses have an incredible deep-root system that can 
protect and enhance soil productivity while protecting and 
improving water quality. Wildlife benefits, of course, are 
going to depend upon the species planted, the different harvest 
and management scenarios that are put in place, and landowners 
can potentially benefit from revenue from the sale of biomass, 
carbon credits, recreational opportunities associated with 
those habitats, seed sales. Certainly entire communities can 
benefit from sustainable next-generation biofuels if wildlife 
objectives are built into those particular programs.
    So on behalf of Pheasants Forever and our entire community, 
I want to thank you again for asking us to join you on this 
panel at this hearing this morning, and we look forward to 
continuing the dialogue so that we can move forward in a 
positive manner that has new generations of biofuels that are 
very much compatible with soil, water, and wildlife objectives.
    Thank you very much.
    [The prepared statement of Mr. Nomsen can be found on page 
62 in the appendix.]
    Senator Thune. Thank you, Dave.
    What I am going to do now is I am going to ask a couple of 
questions of some of our panelists for purposes of building the 
record, and also to get a little discussion going, and then 
what we will do is open it up at some point here to some 
questions and some interaction with those of you in the 
audience that would like to ask questions. And I think they 
have microphones. If not, the room is not all that big. We 
should be able to hear from you. I see we do have microphones 
in the back.
    But let me just start by posing a question that I think I 
can maybe start by directing to Kevin, and then anybody else on 
the panel that would like to respond to it. But you have done a 
lot of research already with the Sun Grant Initiative, and I 
guess I would like to know what is the potential, South 
Dakota's potential, for producing cellulosic ethanol, what are 
the biggest obstacles to reaching that potential, as just sort 
of a general question. And I do not know, maybe this is not a 
fair question to ask at this point, but perhaps Don or Jeff or 
somebody could take a shot at this, too.
     But if current law is unchanged, how much cellulosic 
ethanol would be produced by, say, the year 2012? What is our 
capacity? We talked about corn, sort of the cap is somewhere 
around 15 or so billion gallons annually. We could very quickly 
approach and reach that. Cellulosic we hope is online by then. 
But just generally speaking, I guess, how does South Dakota fit 
into this? What is our capacity? What are the biggest obstacles 
to reaching our potential? And how much is realistic if we look 
down the road another 5 or 6 years? Kevin, do you want to 
start?
    Mr. Kephart. Well, Senator Thune, you have made comments in 
the past that you feel South Dakota is the Saudi Arabia of 
cellulosic energy, and I guess I would agree with that. The 
basis for me to say that is we are in the heart of what was 
once the Tall Grass Prairie. So we talk about these native 
grasses that we have here before us; the greatest production 
potential was exhibited here in eastern South Dakota, western 
Minnesota, much of Iowa, as you move toward the Jim River and 
the Missouri River drainage. So I believe that we are in the 
heart of what the country has as a potential resource for 
feedstock production.
    I do not have an answer for you specifically for South 
Dakota for what our tonnage production might be. A lot of that 
would be just forecasting, because what was once the Tall Grass 
Prairie is largely into small grains, row crops, agricultural 
production now. But a number that has been forecasted by our 
friends in the National Corn Growers Association--they have 
done some forecasting for the region. They feel that from a 
combination of starch, oilseed, and cellulosic feedstocks, in 
the North Central Region alone we have the capability in a few 
years of producing 65 billion gallons of renewable fuel, just 
from our crop resources, our crop residue resources, potential 
for where grasses are grown, and you say switchgrass or 
marginal land, CRP or marginal lands, as well as biodiesel 
production from agriculture.
    So that might be a high-limit potential that we have before 
us from, I would say, Indiana and Illinois, going over to 
Montana, in that area, 65 billion gallons, and it would be 
significantly higher than that as we look at the Southeast and 
the South Central Regions.
    Senator Thune. For those of you who cannot see this, this 
is corn stover ground up, this is switchgrass ground up, and 
this is blue-stem grass ground up. And I guess with reference 
to that, in your research are there any of these particular 
biomass products that work better for cellulose? Do we have 
enough data now to be able to determine which is going to yield 
the biggest result and return?
    Mr. Kephart. Well, as we work on feedstocks, we do not 
believe that any single species is going to be a silver bullet 
or any single resource will be a silver bullet as we help to 
make this industry grow. Certainly some of our strengths are 
going to be on crop residues, particularly from small grains 
such as wheat and from corn stover. Those are going to be 
valuable resources for us to use carefully because as we remove 
those annual residues from the soil base, we have to be mindful 
of the impact that will have on conservation and soil organic 
matter.
    As far as these perennial resources go, if we think about, 
once again, the Tall Grass Prairie and the productivity that 
that resource had, it came from--it evolved as a mixture. I 
believe that mixtures are going to be important for this, 
especially from a sustainability point of view. If we have a 
mixture of grasses out there, much like how the CRP evolved, 
you are going to see years where the switchgrass component is 
going to be dominated in years that are favorable to it. But if 
you do not have that big blue-stem out there to take advantage 
of those years where big blue-stem could dominate, then you are 
losing out in production capability and actually putting the 
industry at risk. So to help minimize risk in the system for 
perennial feedstocks, I believe that mixtures are going to be a 
very important component to that.
    One other component I want to touch upon that we need more 
effort here at SDSU but is being done elsewhere at other land 
grants are trees. There are research programs in hybrid 
poplars, hybrid willows, and with that, we have heard mention 
of a concern that I share of delivery of feedstock to the 
industry. One thing we can do with trees is store them on the 
stump. We can store trees and harvest them as needed and 
deliver to the processing facility year-round and not be 
reliant on a single-year harvest system.
    Senator Thune. Jeff or Don, any comment on your research? I 
know you all are very much into the middle of this as well. And 
then the second question, limitations or barriers that you see 
out there that would limit our ability to take full advantage 
of what cellulosic ethanol might mean for us.
    Mr. Endres. Sure, I will give a shot at the capacity, and 
then, Jeff, we will see how we compare notes.
    I think in the next 24 months we will see successful pilots 
producing cellulosic ethanol, so kind of 2008 and 2009 will be 
piloting years. And then I think we start construction, so I 
think within the next 5 years you will see commercial-scale 
facilities running. I am just estimating today maybe there are 
ten companies that get there, and I think those first plants 
will be--you know, and this is all just guesstimating--25 to 50 
million gallon facilities to start off with, again, thinking 
back the way the ethanol industry has developed. So that gets 
you in the 250 million to 500 million gallons per year 
operating.
    Beyond 2012, though, I think what is most important will be 
the direction, so the number of facilities then that are under 
construction. So we pilot, we build, and once those are built 
and perfected, then I think you are going to see an exponential 
ramp. That is where it gets very interesting. That is where I 
think we could see very large amounts of biomass, ethanol be 
produced. So that is just a guesstimate.
    Jeff?
    Senator Thune. The facilities initially, though, you are 
thinking 25 to 50 million gallon----
    Mr. Endres. Yes, that is kind of where I see it, today at 
least.
    Senator Thune. All right.
    Mr. Fox. Thank you, Senator. It is very interesting because 
I do not think any of us in the corn ethanol business today, 5 
years ago thought we would be where we are at. How quickly it 
develops is going to be very interesting. I agree with Dr. 
Kephart. It is going to be a combination. It is not going to be 
just one feedstock.
    I spoke earlier in my testimony about cellulose from corn 
stover because that is what we are familiar with. There are 
other companies that got the DOE grant, and there are a variety 
of different materials that they are using, which I think is 
good. It is geographically spread out. It is different species 
of biomass that they are going to use.
    I just pulled this. This is an estimate of what is 
available. You will not be able to see this, but, Senator, I 
have got the slides. I will submit them to your staff with the 
testimony.
    Senator Thune. Okay.
    Mr. Fox. But I will just read it to you really quickly. 
Corn stover is 75 percent. This is the biomass from agriculture 
production. I do not think this includes switchgrass, but it is 
everything else you could pull off: wheat straw, 11 percent; 
other small grains, 6; other crop residue, which may be--I do 
not know their definition on that. It says 21 percent. And then 
corn fiber, which we talked a little bit earlier about, taking 
off corn, is another 6 percent.
    It is kind of a pie chart, and then they have another one 
that we have pulled together that shows stover being number 
two, hemp being number one, switchgrass being number three, and 
we will put that into our testimony. It is going to be a 
challenge. Today, right now, and as we refine our techniques 
and other companies are doing the same thing, and universities, 
to get better at it, if you had to make it today, it is not 
competitive. We have got some work to do. We have got to 
increase our efficiencies, and I think we will. I think you see 
that in the corn starch to ethanol production. We have all 
gotten more efficient. Plants have gotten bigger. The 
technology has gotten better. We are just kind of starting--I 
do not want to say we are just starting. I know our company has 
been at it for 7 years. The universities may have been at it 
longer than that in trying to get the breakthrough on 
cellulose. But I think with things like the grant, Senator, 
that you and your staff worked hard on, and others, I think 
with the things that are coming together, ethanol has come of 
age.
    I think there was one that was brought up by Anna, a very 
good point, and we struggle with it and we are still struggling 
with it, and that is, the collection, storage, and delivery, be 
it corn stover or be it switchgrass. That is a huge amount of 
material to even get 25 million gallons produced from a plant.
    So that is going to be a challenge for us. We have been 
working with the likes of John Deere and other manufacturers, 
and I know others are doing it. But I think it is one that not 
only this industry is up to, but if you look at the people who 
helped put this industry together, Senator, with Government, 
with ingenuity of their own, we will figure it out. We think we 
will get there.
    Senator Thune. Let me ask you as a follow-up, because you 
in your testimony had indicated that the Federal Government 
ought to provide like a $50 incentive per dry ton of biomass 
delivered to the gate of a biorefinery. I do not know if there 
was any--how you arrived at that number, why that is 
significant in terms of making this thing go. And you just 
alluded to some of the issues of storage and transportation and 
that sort of thing, but how did your company come up with that 
number?
    Mr. Fox. My title is ``Legal and Governmental Affairs.''
    [Laughter.]
    Mr. Fox. That $50 a ton was the number we came up with 
almost a year ago. Look, we are going to be asking in our 
process--and I am sure in others--corn farmers for the first 
time ever--their fathers did not do it, their grandfathers did 
not do it. We are going to be asking them to do something they 
have never done before at a very, very busy time in their 
farming operation, and that is, handle another material. They 
are going to have to make some investments in equipment. They 
are going to have to make some other investments in storage and 
transportation.
    So we are asking in our plant--and I can only refer to that 
because that is what we have been doing the research on. We are 
asking them to change the way they do some things, add some 
capital investment--to do what? To deliver a material to a 
plant that is the first of its kind. And so how long is that 
investment good for?
    So we suggested in our testimony--and we testified earlier 
in D.C.--$50 a ton. We have looked at that as being $100 total. 
That gets the incentive for the farmer to invest in his 
equipment, invest in the transportation and storage, and make 
the delivery to the plant. They do that better than we do. We 
know how to make ethanol, but we do not know how to deliver 
that material and handle it like they do. They have done it 
their whole life. It is just a different way of doing it.
    We have looked at it since, Senator, and what we are 
looking at is maybe it is a match with a $50 cap. We do not 
think it needs to be there forever. We think once the pioneers, 
those that first do it, get better at it, the cost will come 
down. There will be some stability in the market so that they 
know that if they do make this investment, the plants will be 
there to use it so it does not become a short-term painful 
experience but a long-term beneficial one for both the producer 
and the plant.
    Now, we may be wrong on that, but our numbers showed early 
on it would take $100 a ton to get them to do the investment, 
deliver it, get it there. We have backed off that. We are 
looking maybe at changing our position on the $50 to maybe cap 
it and make it a match with the plant. The plant pays $30, the 
Government would pay $30, for the first couple years, maybe for 
the first few plants, not just corn stover but other plants. 
Once you get through that, you can then assess it after a 
couple years of operation. The reason we looked at this ag bill 
is because it would be for 5 years.
    Senator Thune. Right.
    Mr. Fox. We think we will be up and running in 2 to 3 
years. That will give our client 2 years. We think others are 
going to have some of those same time constraints. So this is a 
good vehicle to do it. And maybe it is a match so that they are 
sharing it with the Government and you are getting the producer 
interested in and introduced to a new system.
    I can get you the number, the breakdown. We have got that. 
It is changing a little. It may be 80, it may be 60.
    Senator Thune. Let me ask, as a farmer, Reid, if Congress 
through this next farm bill were to create a Federal program 
that encourages farmers to transition to energy-dedicated 
crops, what minimum payment rate would it take to ensure 
adequate producer participation? Along the lines of sort of a 
follow-up to the last question, from an on-the-farm perspective 
you want to get people to plant blue-stem or switchgrass or 
even from that standpoint, what is the corn stover worth to you 
and the effort that would be involved with obviously removing 
it from the field, storing it, transporting it, all those sorts 
of things? I know that is probably a hard question to ask, and 
you are probably going to have to ballpark it a little bit, but 
it is clearly an issue as we look at this next farm bill and 
how energy ties into it and making--if we want to go down this 
road to cellulosic ethanol, we have got to make sure that the 
incentives are in place to make that happen. And I guess I am--
from a farmer's standpoint, what is your sort of take on Jeff's 
number?
    Mr. Jensen. Well, Senator, I think Jeff is probably in the 
ballpark pretty close at $100 a ton. If you look at what the 
value of the stover is as far as the fertility value, we have 
seen the numbers around $16 a ton on the stover for the NP&K, 
and then you put baling and transportation on that, pretty soon 
you are up to $50 to $60 a ton pretty quick.
    The concerns we have as far as South Dakota Corn Growers 
are concerned is how much stover are we going to take off. I 
think we are concerned about future generations. We do not want 
to be mining our soils. I think it is going to depend on the 
rotation the farmer is in. If he is in a corn-soybean rotation, 
I do not know if he will take any stover off. If he is in a 
corn-corn rotation where he continues corn, he probably could 
see maybe 40 percent.
    Mr. Fox. Senator, if I could, and it fits with what Reid is 
talking about, our proposal in our plan is to take 25 percent 
of the stover. We kind of got that number from USDA working 
with them and trying to make sure that we did not take 
everything off. They claim if you go corn on corn, you could 
probably take more. But Reid is right. You have got to make 
sure your soil stays stable. In some areas it may be more, in 
some areas it may be less. That is the number we have put into 
our proposal, and we think that is--it will not be maybe a 
universal number, but that is a pretty solid number.
    Mr. Jensen. And fertility, I mean, just because you take 
$16 an acre worth of fertility off or fertilizer off of that in 
the form of stover does not mean you can go back and just put 
$16 worth of NP&K out there and replace it. It is like Kevin 
was talking, it is organic matter that you are concerned about.
    The other thing I would say as far as comparing switchgrass 
versus corn stover, whatever we are doing, I think the market 
has got to dictate what we are doing, not the Government 
payment.
    Senator Thune. How much ethanol can you produce from a dry 
ton of biomass?
    Mr. Kephart. The general rule of thumb when the technology 
matures, it will be 100 gallons per ton.
    Senator Thune. A hundred gallons per ton.
    Mr. Kephart. A dry ton. I do not think we are there quite 
yet, but a lot of that will hinge upon whether we are taking a 
fermentation approach or there are other approaches that are 
being worked on by industry and universities using gasification 
of pyrolysis techniques. The advantage of that is that we can 
utilize the lignin that is part of this, and with fermentation 
we cannot.
    I want to join in on some of this discussion about value of 
the feedstock, and that is dominating a lot of the discussion 
that we are having with the Department of Energy, and I want 
you to be aware of that, Senator Thune. The Department of 
Energy and OMB and the White House, their target figure for 
feedstock value is $35 a ton, and I am not really sure where 
they got the value, but they break that down as $10 of expected 
profit to the producers and then an overhead charge of delivery 
and other overhead costs of $25 as it is delivered to the 
processing gate.
    So their target that they are struggling with to help get 
the industry up and going from their point of view is $35. Then 
after 3 or 4 years----
    Senator Thune. And you said that is USDA?
    Mr. Kephart. Department of Energy.
    Senator Thune. Oh, DOE, okay.
    Mr. Kephart. The Department of Energy's target is $35, and 
after 4 or 5 years of maturation in the industry and creation 
of demand for feedstock, then it will rise from there.
    Senator Thune. One of the questions that--or Dave Nomsen, I 
should say, in his testimony raised the issue of mixed stands 
of grasses, and I think you alluded to this, too, Kevin, or 
someone did, about rather than a monoculture of one type of 
grass, what would be better in terms of benefiting wildlife and 
preventing soil erosion, and I guess the question--and maybe, 
Anna, you could take a stab at this. But when you are producing 
ethanol from a mixture of prairie grasses, is there a concern 
about the quality and the consistency of ethanol produced from 
this type of a feedstock, if you have got those all integrated 
in a typical field like you would find them in their natural 
state in South Dakota.
    Ms. Rath. Sir, once you get to the ultimate fuel molecule, 
that fuel molecule will be the same, regardless of the 
feedstock that it came from. The question is how will you 
affect the conversion efficiency of the process by having a 
mixed feedstock rather than a more homogeneous feedstock.
    And so what we would suggest is that, as with all things in 
cellulosic ethanol, there is not going to be a single answer 
here. On more environmentally sensitive lands where having a 
mixed stand can really provide benefits for the kinds of 
wildlife that inhabit those lands, that may absolutely be the 
right choice. On lands where what you want to do is absolutely 
maximize your yield of biomass tons per acre in order to 
maximize the farmer revenue from that and minimize the 
transport distance around your biorefinery, over time the 
industry will improve some of these crops more than it will 
improve others. And eventually you will see three-, fourfold 
yield in some crops, and it just will not make sense in most 
cases when you are going for this high-intensity cultivation to 
try to mix those very intensively cultivated crops with others.
    Having said that, we do research together with the Noble 
Foundation in Ardmore, Oklahoma, where we look at a number of 
different intercropping strategies, including nurse crops, 
using other crops along with switchgrass to get them started, 
and including intercropping with legumes to provide a little 
bit more nitrogen to switchgrass.
    So there may be some applications, but as a general matter, 
we think you move towards high-yielding, individual dedicated 
energy crops on the highly cultivated lands.
    Senator Thune. And as a sort of follow-up to that, your 
company is currently producing transgenic switchgrass seed that 
would substantially boost the biomass per acre.
    Ms. Rath. Sir, transgenics are a ways away.
    Senator Thune. Okay.
    Ms. Rath. Transgenics are about 10 years away, but we are 
working on increasing yields, initially through breeding, and 
then eventually through transgenics.
    Senator Thune. Through transgenics. What is the potential 
for that kind of an increase in a semiarid area like the 
Northern Great Plains? What you are talking about doing, is 
that--and is that level, if you increase those levels through 
that technology and eventually through transgenics, is that 
sustainable over a long period of time?
    Ms. Rath. It should be sustainable, yes, as long as over 
the course of your breeding program and over the course of your 
transgenic development program you are not using sort of 
nitrogen as your crutch to get to your increased yields. In 
fact, some of the leading traits being developed for second-
generation biotech in corn include things like nitrogen use 
efficiency and drought tolerance, and a lot of these kinds of 
traits are things that Ceres has helped to develop.
    So we expect that as we are improving yields of these 
dedicated energy crops, we are also, in fact, improving some of 
the agronomic traits alongside of that, and so hopefully at 
least maintaining the same kind of environmental footprint, and 
perhaps even improving that footprint.
    In terms of yield potential, I would say the sky is the 
limit, but I think the thing that we can do is look back at the 
history of corn yield improvements where we have seen, since 
the creation of the first hybrids, fivefold improvements in 
corn grain yield over the past 70 years. And so what we see is 
we have now got all of the technology that was used to do that 
ready to apply to these dedicated energy crops, so there is no 
reason why we cannot do similar-fold improvements in yield in 
an even sort of shorter time horizon by deploying these 
technologies that we now have.
    Senator Thune. Let me ask, and, again, this is probably 
just directed at the panel generally, and maybe Dave could take 
the first whack at this, but there has been some discussion--
and I have asked this question at hearings in Washington of 
Department of Energy and USDA officials about the CRP program, 
because the CRP program already we have over 1 million acres in 
South Dakota. We have been as high as 1.8 million. I think we 
are down to about 1.5 million now, and there is a concern that 
people are going to be pulling acres out of CRP and putting 
them into corn production for ethanol because you now have a 
corn price that is pretty favorable for the economics of that.
    But if you have got a CRP program that has been effective 
and working in terms of wildlife production and conservation 
and preventing a lot of the erosion, the environmental benefit 
that comes with it, if you were going to look at harvesting for 
energy production, some of these CRP acres, can the energy 
production objective of that complement or coincide with the 
conservation benefit? Can you accomplish both of those so that 
a lot of the--and I guess what I am thinking is, you know, you 
want to keep a certain amount of base acres in that CRP program 
for wildlife production and all the other things. There is a 
lot of land in South Dakota that should be in CRP and probably 
should not be in production. But would either upping that and 
providing a farmer who perhaps maybe does not have land in CRP 
today, increasing the acreage limit on CRP, to put into CRP to 
increase their overall tonnage that could then be used for--
certainly some of it would be used for harvest. Do you still 
get the conservation benefit from that? And I know it is always 
when you get into increasing CRP acreage, it cuts both ways 
here in South Dakota. A lot of your small-town Main Street 
businesses do not like talking about additional CRP acres. I 
understand that. But I guess I am trying to ask this in sort of 
a macro sense about that program and its application to the 
growth in cellulosic ethanol and how those might interact.
    Mr. Nomsen. Senator, let me start by just saying that we 
think CRP is part of the solution--it is not part of the 
problem--to all of this. For example, as I listened to some of 
my colleagues talk about removing corn stover and raising 
concerns about protecting soil productivity, in my mind I was 
thinking about, Gee, I wonder what it would look like if we had 
a native grass buffer around each of those fields and grass 
waterways, and that we were doing things that perhaps could be 
very strong for water quality but also potentially provide a 
biofuel.
    The challenge that we have is to do it, if you are going to 
do this within the CRP program, I think very strongly that you 
have to protect the soil, water, and wildlife objectives of the 
program.
    Now, having said that, we do try and do mid-contract 
management on CRP acres, and CRP acres, like any other crop out 
there, need to be managed to effectively maintain its 
productivity.
    But my main answer to your question is we do not know yet, 
and we need to take a look at where the possibilities are for 
compatibility here and additional benefits into the program.
    Let me finish. I would like to build upon a comment that 
Dr. Kephart mentioned when he talked about mixtures and 
encouraged moving toward mixtures of grasses. That is exciting 
to the wildlife community when we hear that type of statement 
because not only do we think it can potentially provide a more 
stable, sustainable system for the grower, the minute you move 
to a more mixed-grass stand of grasses and perhaps flowers, 
different forms that are in there, all of a sudden you are 
talking about much better wildlife habitat than you would with 
any type of a monoculture.
    Senator Thune. Okay. I want to--go ahead.
    Ms. Rath. Could I just build on that? As it relates to the 
CRP program, two things. First is we want to make sure that 
everybody thinks of the CRP program as a possible piece of the 
answer to where we get all this biomass from and not as the 
answer to where we get all this biomass from, because if you 
are out to build a biorefinery, what you want to do is put it 
in the location where you are going to be able to get as much 
biomass as possible within as small a radius as possible. And 
so it is very unlikely that that is going to turn out to be an 
entirely CRP area, right? You are probably going to want some 
very productive land in mind to get some very high biomass 
yields for your biorefinery.
    Having said that, we have actually submitted an earmark 
proposal together with Ducks Unlimited this season to try to do 
a large-scale, a large-acreage switchgrass study in North and 
South Dakota to look at whether, in fact, you can sort of have 
your cake and eat it, too, whether it is possible to harvest 
biomass for biorefineries, but still maintain wildlife benefits 
and carbon sequestration benefits. And so as part of that we 
would look at different harvesting practices and measure all of 
these, measure the wildlife impact and measure the carbon 
sequestration impact to try to actually come up with a good 
understanding of how this should all look.
    Senator Thune. Well, if you hire SDSU to do it, then we 
will support that grant request.
    [Laughter.]
    Senator Thune. This would be, I suppose, probably--I know 
that the corn growers and both VeraSun and Poet have submitted 
a lot of policy--actually, everybody on the panel I think has 
submitted policy suggestions for the 2007 farm bill. But I 
guess I would like to ask this question, and, again, I know 
that this is probably a fairly difficult question to answer 
because there are a lot of things that tie into successful 
policy initiatives that lead to further advancement and growth 
of the ethanol industry. But if you could rank or prioritize 
what is the most important thing to see this industry really 
continue to grow--because we have talked--there are lot of 
things that have been mentioned today--E20, maybe E30. I mean, 
we went to Watertown yesterday, and they have got E20 and E30. 
We filled up with E30 at the station up there in Watertown. 
And, actually, some of the work that has been done by Lake Area 
Tech shows that you get better fuel efficiency at a higher 
blend than you do at E10. And they have done a lot of analysis 
of that, which I found fascinating yesterday.
    I guess, you know, going to E20 is one thing. Increasing 
the Renewable Fuel Standard has been talked about as another 
thing, and the President talked about 35 billion gallons of 
alternative energy as a goal; of course, the tax credit, tax 
incentives that are currently in law, the tariff on foreign 
imports, that sort of thing. So, again, it is not entirely--I 
would think it is a difficult question to answer, but I guess 
if you could sort of narrow that down, Don and Jeff, as to what 
you see as the most important policy priority for the Congress, 
for people in Washington who want to see this industry continue 
to take off and explode to that next level, your thoughts about 
what we ought to be doing?
    Mr. Endres. Sure. Well, we think about this a lot. In fact, 
we are convinced that increasing the blend is the most 
important thing we need to accomplish. As you look--and this is 
important for cellulose; it is important for corn-based 
ethanol. With 6 billion gallons under construction, with 5.6 to 
6 in operation, that gets you to 12; with the 10-percent blend, 
140 billion gallons of gasoline, you can see very quickly 
within a couple of years we are going to satisfy that demand. 
So changing that blend allowance is very big, and, in fact, it 
is not even a legislative function. We find it is really a 
regulatory function of the EPA, and the EPA, with obviously 
thorough analysis on emissions, we think the data will be on 
our side, with the thorough analysis of the safety systems and 
the fuel management system, and the vapor pressures, I think as 
we analyze this, we will find that the EPA really with the 
stroke of a pen can, in fact, allow for a larger blend, whether 
it be 15 or 20 or 30.
    Then I think the free market takes hold here, and the 
market will help drive this. As we see in Watertown, a 
significant number of consumers are willing to fuel with a 
higher blend, and obviously we believe that over the long haul 
we would see an economic advantage for refiners because they 
can produce a sub-octane, even a lower-octane fuel blend, a 
higher rate of ethanol, that will get them to finished-grade 
gasoline. That dilutes some of the lower-value blend components 
that they have, so refiners actually are embracing this higher-
blend concept.
    So we think if there is one thing we could change, if we 
only had one opportunity for legislative change--and, in fact, 
this is more a regulatory change--it would be to figure out how 
to increase the allowable blend.
    Senator Thune. Okay. Jeff?
    Mr. Fox. We would probably encourage the VEETC credit being 
made permanent. Some of us have worked in ethanol since we were 
very young. Tax credits, tax policy for any energy source, be 
it ethanol, be it wind, be it oil, has always been the 
backbone. And you can attract financing. You can help fund to 
do the things we need to do if you have tax credit in place or 
tax policy in place that supports that type of energy source.
    Sometimes I think we get a little apologetic and we say, 
well, you know, we have got a tax credit, like that is a bad 
thing. That is your Government's direction of what they want to 
see developed, be it wind, be it ethanol. That is how oil got 
started.
    So I do not think we need to be apologetic about it, but if 
we had to pick one thing in our industry from our company's 
standpoint, it would be making that tax credit--extend it, make 
it permanent, because we can build off everything else if we 
have solid tax policies.
    Senator Thune. Reid, do you have the Corn Growers' thought 
on that?
    Mr. Jensen. I would agree with what Don and Jeff said. I 
think what would do more for agriculture would be being able to 
go to the 20-percent blend and creating more demand. One thing 
we have as a position, whether it be cellulosic ethanol or 
grain-based ethanol, is keeping that blenders' credit the same 
for either one of those, because we just want to consider 
ethanol as ethanol and not give one an advantage over the other 
one.
    Senator Thune. Well, one of the things that I have always--
you talk about the tax incentive and people who complain about 
that. You are absolutely right. I mean, the oil industry 
benefited enormously from those types of incentives and has 
over time. And I also think that, you know, when you talk 
about--is it important as a national priority to become energy 
independent or isn't it? And if it is, we need to steer our 
policies in the direction that will develop homegrown energy 
sources. And to me, when you pay $60 or $70 a barrel for oil to 
a country like Iran or Saudi Arabia or Venezuela, you are 
essentially paying a terrorism tax, because they can make money 
at $30 a barrel. And so we send them an inflated rate for our 
energy so that they can fund organizations that turn around and 
attack us. That to me makes absolutely no sense, and so I do 
not think we have to be apologetic at all for the things that 
we are trying to do to promote and advance the growth of an 
industry that will make South Dakota and America more energy 
independent.
    So what I would like to do right now is open it up to those 
audience members who perhaps have questions or comments. If you 
would, I would like to try and make sure there is a question 
there, and I know that there are folks here who probably have 
strong opinions, and we welcome those two. But we would like 
to, if we can, get some questions for our panel of experts 
here.
    Mr. Jensen. Could I just say one more thing?
    Senator Thune. Yes. Hold one. One comment before we do 
that.
    Mr. Jensen. One other thing we have not talked about is 
identity theft in the Midwest, and we all know you have been 
working to help get the DM&E Railroad through, and we all talk 
about energy independence in this country. But we need that 
railroad infrastructure to help that come to pass, and we want 
to thank you for the work you have done on that, and hopefully 
that will get done sometime.
    Senator Thune. Thank you, and I am sure that is a statement 
which meets with a mixed reaction in this room.
    [Laughter.]
    Senator Thune. Nevertheless, infrastructure is important. 
It is important to ethanol because ethanol moves on rail, and 
so you are absolutely right.
    Right here.
    Mr. Jones. Thank you. I am Owen Jones from Britton, South 
Dakota. We are the home of one of the first blended pumps put 
into use.
    Senator Thune. That is right.
    Mr. Jones. We have been in operation for 12 months. I would 
just like to share, before I ask a question, we have 12 months 
of a spread sheet of the ethanol sales that we have made. The 
consumer that has a choice prefers 30 percent. That is being 
documented. And there is a good indication that he may, in 
fact, like a higher blend. We are selling 40 percent now. We 
have been in operation for 12 full months. We have sold an 
additional 24,000 gallons of ethanol by having that blended 
pump in place.
    I think that the blender pumps in the E85 distribution 
system that will be in the current farm bill need to play a 
role in that distribution system. And I would urge that 
Congress give tax credits to get those blender pumps in place.
    My question would be: Why do we need to stop at 20 percent? 
Why not go for a little higher? Or do we need to do this in a 
step-by-step process?
    Senator Thune. Good question.
    Mr. Jones. But the distribution system has to be in place 
to move our ethanol. Thank you.
    Senator Thune. Well, thank you for sharing your experience. 
I am familiar with your--I know you guys were the first ones up 
there in Britton, and it is interesting to get the evidence and 
the documentation about what people's preferences are and how 
it is working, so thank you.
    Would you want to answer that?
    Mr. Endres. Yes, I would just comment first of all to say I 
applaud you in your efforts. I think it is leading edge to move 
forward and do courageous things, and we are going to have 
great data back. Anecdotally, at least, we are finding that 
consumers love it and they want more of it. Whether or not 
there are issues longer term, we are going to find out. 
Anecdotally, again, we do not see anything, at least on the 
horizon.
    The reason that 20 percent has been kind of the number that 
has been most talked about is there is actually data that will 
become available fairly soon from work going on with the State 
of Minnesota. The Renewable Fuels Association, with the 
University of Minnesota, and North Dakota State University have 
been working on research to provide data to the EPA to show 
that the emissions are okay--or actually, we believe now they 
will be improved; that vapor pressure is not a problem. So we 
need the data, and we have data at the 20-percent blend. We 
probably should initiate research to look at these higher 
blends almost immediately. In fact, the industry is working on 
kicking one off fairly soon that would go to these higher 
blends as well. But we need data in order--the EPA will need 
that information in order to make a fact-based decision versus 
kind of a ``shoot from the hip.'' But we believe you are on 
track, that we probably could go to higher levels.
    Mr. Fox. Very quickly, Owen, thanks for your documentation. 
I think now you have been a proponent of that. I think you are 
on the right track. Blender pumps make sense, because when this 
issue got looked at--and the American Coalition for Ethanol is 
doing a study on 10, 20, 30, and then also on flex-fuel 
vehicles to see which blend works best so maybe we do not lose 
that mileage in the current engines. This is going to be a 
combination of working with automobile manufacturers. We have 
got to get their warranties up. So I think the blender pump 
makes a huge amount of sense.
    When we started looking at this back when Governor Pawlenty 
brought up 20-percent blends for Minnesota, we started looking 
for their data for 10 and 85. There wasn't any. So look what we 
have done as an industry without data backing those two types 
of fuel up from the inception. If we have got studies like Don 
has talked about over in Minnesota or ACE's study that is being 
done up in, I think, North Dakota, if we get data behind it, 
where the bill today says 20, or we can switch to 30 or 
something in between, like Don said, the higher blends, that is 
a number you can change in the bill. I think the fact that the 
efforts being made to get EPA to start looking at higher blends 
is just a start, and I think we are going to get there. But I 
think these studies Don talked about are important. We may have 
to do more.
    That is part of what we get when our industry builds itself 
and gets strong, because nobody else is doing this. And as we 
get better at what we do and we bring more people into industry 
and we make more of our product, we can help fund some of that. 
The Government can help you so much, but you sometimes have got 
to step up to the plate, as you know, and put some money in and 
help. I think it has been a great complement of what we are 
working on as an industry.
    Senator Thune. I would just add to that sometimes, in 
Washington especially, things kind of happen incrementally, and 
I agree with you. I think we ought to shoot for as high a blend 
as we can get. EPA and the car companies, the auto 
manufacturers, are pushing back a little bit against it. And 
Don is right about the clean air. I think that we will find 
that is not going to be an issue.
    The car companies are concerned about warranties and 
liability, but the more data we present them that demonstrates 
that the wear on an engine from a higher blend is minimal or 
perhaps even better than it is on a traditional, I think we are 
going to win that argument. But I know that they are--we have 
been pushing EPA to go to 20. Minnesota is going to make a 
request for a waiver, and we want to build on that. But I do 
not think we need to stop there. No question about that.
    Yes, over here in the corner.
    Mr. Mitchell. My name is John Mitchell, and our big problem 
is getting the oil companies to accept E85.
    Senator Thune. Right.
    Mr. Mitchell. And I do not know what you can do, but that 
is where a big problem is, and this is to Kevin Kephart. Can 
you hear me? South Dakota State out at the research farm has 
got to do more research on developing corn that can grow west 
of Highway 281. That is what we can do something about.
    Mr. Kephart. Well, I can happily say that we are going to 
be doing exactly that. Actually, we got a phone call last year 
from Governor Rounds in the height of our drought here saying 
SDSU needs to focus more on drought. And Governor Rounds, 
working with the College of Agriculture and Biological 
Sciences, is setting up a new 2010 center on drought research, 
working with companies such as Monsanto and other biotech 
companies, to marry our knowledge of agricultural production 
and their tools and techniques and biotechnology to do just 
that. Actually, the dean of the College of Agriculture is in 
here, and he can elaborate. We are headed exactly in that 
direction.
    Senator Thune. We need an ethanol plant in Murdo, so I am 
working on that.
    [Laughter.]
    Senator Thune. But your first point is right, and I want to 
come back, and if you have not seen this Wall Street Journal 
story--this is, I guess, Monday's issue--you ought to take a 
look at this. This is what the oil companies are doing to block 
the installation of E85 pumps at gas stations across this 
country. Contractually, they are preventing fuel retailers from 
doing it. They have all kinds of leverage that they apply, and 
this is part of our problem right here.
    Mr. Kephart. I met with a Vice President of Chevron a 
couple weeks ago at a meeting I was at, and we talked quite a 
bit about this. At least in that visit, he was saying he was 
favorable to moving E10 across the country, but that they were 
resistant to higher blends.
    I have a Ford F150, a 1997, so it is not flexible-fuel, and 
I am running about 35 percent ethanol in it right now. It has 
100,000 miles. He did not seem to be interested in that. He 
just wanted to go E10 across the country.
    Mr. Endres. I would comment on where the oil companies are 
at. Clearly, the integrated oil companies are going to have a 
tough time with E85. It is 85 percent not their product. If you 
put yourself in their shoes, it would be pretty hard for you to 
support a product like that. But I believe they will support 
this bridge concept of higher blends because they actually can 
benefit the refineries. So I think we get to the blender pumps 
out there. They will benefit because they get better production 
through the refineries with using sub-octane gasoline, and the 
ethanol industry benefits because we give the consumer the 
option. So I think we will get there.
    By the way, the independent gasoline marketers are a great 
opportunity for our industry. We probably will not go sell E85 
to the integrates, but we can sell it to the independent 
marketers out there because they are just selling fuel and they 
just want to make money, and they work for us.
    Senator Thune. We have Orrie and Bill, a couple here, right 
here and then a couple there.
    Audience Member. I would hope that we do not get into 
debates of E20 or E30. I think we need to----
    Senator Thune. Orrie, why don't you use that microphone?
    Audience Member. I think we need to agree that a blender 
pump infrastructure has to be in place to deliver whatever that 
higher blend is. And if it is just E20--because E10 is not 
going to go away. And no retailer is going to put in an extra 
pump to sell E20.
    Senator Craig has legislation--Senator Craig and Senator 
Dorgan have legislation to increase the incentive for E85 pumps 
if they are blender pumps. And that incents getting the new E85 
structure everybody wants to be blender pumps. And that will be 
more key to getting cellulosic ethanol into the marketplace 
than anything, because it will allow the free market to work.
    Mr. Endres. Orrie, I could not agree more, and what we are 
finding is it is a great synergy, actually a lower-cost method 
for rolling out multiple blends, because if you put a blender 
pump in place, you can use the existing tanks, and the majority 
of the costs to convert a station is on the tank side, because 
most of these stations have two gasoline tanks, so what you do 
is you dedicate one to ethanol, E95, if you will, and the other 
to 87 octane gasoline. And then you can blend any blend. You 
can sell a premium. You know, there are a number of blends all 
with multiple buttons.
    So we think that is a lower-cost approach, and we think 
that incentive should be only for blender pumps.
    Audience Member. Yes. I think that is what I am saying.
    [Laughter.]
    Mr. Endres. I am agreeing. I am agreeing.
    Senator Thune. Orrie, I think you may want to sit down 
while he still agrees with you.
    Bill, right here, the front row.
    Audience Member. Thank you for hosting this, Senator. It is 
a great time for agriculture right now. My question relating to 
cellulosic ethanol is related to what anticipated byproducts 
will be generated from that process. And what are some of the 
uses that could add value to reduce the cost of the ethanol 
produced by it?
    Mr. Fox. A great question. I will indicate what we have at 
liberty, and then maybe let Dr. Kephart speak to it. We are 
going to take in our plant--and, you know, this is our first 
commercial. We have done it out in Scotland, but this will be 
our first commercial. We look at using 84 percent less natural 
gas. We are going to take the lignin that is left over from the 
cellulose process, put some stover with it, and burn it in a 
solid fuel burner. We are using anaerobic digesters. We will 
use about 24 percent less water. So we think those two things 
will be a big plus.
    From that process of taking the fiber off the corn and 
taking the stover off, you will increase your yield about 11 
percent of ethanol per bushel by taking fiber and use it. Right 
now fiber is a pass through. It becomes an environmental 
footprint because it does not get digested an it moves on.
    So we think those will be some of the things that we see as 
a benefit in our process. Different byproducts, a little bit 
different dried distiller's grain when you go through a 
fractionation. We call it--what do we call it?--critical HP, 
which is high protein, because you have taken a lot of things 
out of it, you leave more protein in it, in your end product. 
There will be others. There are people working on polymers and 
some other things that you can do. Oil, taking oil off with it. 
It is at the front of the process or at the back. So there are 
a number of things I think you are going to see out of it. I do 
not think it is all done yet.
    Mr. Kephart. I think that we are at the very beginning of 
an evolution that is going to entail different types of 
conversion processes, and, of course, that impacts the answer 
to your question. Right now, clearly, the emphasis is going 
down a fermentation track, so if we think about that track and 
you look at materials such as this, what you are after in this 
material, as the title of our session entails, is cellulose. 
The three main fractions that you have to work with here are 
lignin, which is wood, and that is not fermentable. Those of 
you that are cattle producers have been in the cellulose 
fermentation industry for centuries. And the hemicellulose is 
another one that also has limited fermentation characteristics.
    So a liability in this whole thing, and as a co-product 
that will be coming off, is lignin. There is a well-renowned 
scientist at Michigan State University, Bruce Dale, and he says 
you can make anything out of lignin except money.
    [Laughter.]
    Mr. Kephart. So I view lignin as a liability in a 
fermentation track, although you can take advantage of it by 
combusting it to try to capture heat and use that heat or that 
energy to power other segments of your fermentation process.
    As we look down the road, however, as I mentioned earlier, 
there are processes that are called gasification or fast 
pyrolysis. Fast pyrolysis will take material such as this, or 
rubber tires or other organic material such as that--it shot 
timber there--and it creates a liquid. And I am excited about 
that because we could have--if we can develop these 
liquification facilities across the landscape at low cost, low 
capital cost, actually we can be transporting that liquid to 
biorefineries, high-capital, more centralized biorefineries, 
rather than transporting just large round bales or big square 
bales of biomass to those facilities.
    So a liquid approach takes care of two things: it captures 
value out of the lignin fraction, and it helps with this huge, 
huge transportation issue that we have to deal with to get this 
industry going.
    From that point, we can make all kinds of things, just like 
we can make all kinds of things out of petroleum right now. 
There is some of that liquid that is fermentable. Some of it we 
could be making plastics out of or lubricants, the whole host 
of things that we can do with petroleum right now. And that is 
much further down the road, but I am especially excited about 
that as an approach.
    Ms. Rath. Can I just mention that, in addition to the co-
products that can come out of the process themselves, since 
Ceres was the recipient of two of the 17 joint DOE-USDA biomass 
R&D grants this year, one of those was simply to double 
switchgrass yields, but the other one was a grant that we 
submitted together with one of the major specialty chemical 
companies to actually work on producing one of their major 
monomers directly in switchgrass as something that could be 
extracted at the beginning of the process in order to improve 
the overall economics.
    So I think you will see co-products that are generated both 
from the process, from fermenting to other molecules or from 
refining to other molecules, and also the engineering of some 
co-products right into the plant material itself.
    Mr. Endres. I would just say one of the benefits of the 
thermochemical route, which is this gasification approach, is 
this will literally break down material to its very basic 
components, carbon monoxide and hydrogen, and then you can 
reform that into all kinds of different chemicals, including 
fuels.
    So I think there are a number of tracks even within the 
biological approach and thermochemical approach and we are just 
too early. What we need to do is evaluate what the best 
economic paths are, best returns on investment. And we just do 
not know. We do not know yet. We have to run some models, do 
some tests before we know what the right product mix should be.
    Senator Thune. Okay. Maybe one more question. Back here, 
yes?
    Audience Member. Thanks very much for having Brookings as 
your venue.
    Anna, I was interested in the testimony that you provided 
on extending the oil reserve credit to renewable fuels, and I 
was wondering if you could maybe just talk a little bit about 
how that might affect the politics of the situation with 
biofuels and bioenergy.
    Ms. Rath. Well, the hope is that what you would do is turn 
ethanol into something that is, in fact, a product of the oil 
majors rather than something that is not their product, and by 
doing so put them on the right side of the battle of promoting 
ethanol. And so the idea here is that you would--you know, they 
have an incentive to invest in fossil fuel resources because 
they have this thing called proved reserves and they get credit 
for that in the form of their stock price. The idea would be to 
give them an equivalent incentive to invest in renewable 
reserves. And so the concept here is if you have a contract 
with the growers around your biorefinery that lets you take the 
biomass from--buy, let's you purchase the biomass from those 
growers and bring it to your biorefinery, from our perspective 
that is not very different from having a lease on an oil field 
that lets you take the oil out of the ground. So we see no 
reason, especially in the world that we are in today, where 
people are thinking about expanding the definition of proved 
reserves to include non-traditional fossil fuel sources, like 
tar sands and oil shale, we see no reason why we should be, you 
know, expanding the incentive for the oil majors to invest in 
fossil fuels but not creating an equivalent incentive to invest 
in renewable resources. So that is the concept.
    Senator Thune. I really like that idea. Another 20 or 30 
years, we will probably get it through Congress.
    [Laughter.]
    Senator Thune. Well, I want to thank you all for attending, 
and I appreciate your participation, your input, and your 
leadership on this issue. I particularly want to thank our 
panelists and South Dakota State University and Dr. Kephart and 
his team for allowing us to be here today.
    As you can see, there is, I think, a lot of interest and a 
lot of opportunity for South Dakota in the renewable energy 
area. We did not even talk about wind today, but there are some 
good things happening with wind technologies as well. But the 
folks up here are very much at the forefront of what is 
happening nationally, and like you said before, this is good 
for South Dakota, but it is good for America. It is the right 
thing to do for our country and our national interest, our 
national security interests, our energy security interest.
    And so if you have additional comments or input that you 
would like to provide, feel free to do that. As I said before, 
we have received testimony from organizations that are not up 
here in front today but, nevertheless, want to have their 
statements on the record as we begin deliberations on the 2007 
farm bill. But we welcome all that input, and we will keep the 
hearing record open until April 9th of 2007.
    With that, this hearing of the Energy Subcommittee is 
adjourned. Thanks.
    [Applause.]
    [Whereupon, at 11:57 a.m., the Subcommittee was adjourned.]
      
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