Biofuels’ Big Picture

What is the outlook for biofuels? We must admit that initially, we were quite guarded about the industry. In addition to a lot of “hot” money chasing it, we felt there were high degrees of both political and economic risk. But after a year of studying the industry further and looking at several opportunities, we’ve become convinced that the bioenergy industry in this country is maturing rapidly and is definitely here to stay. In addition, we believe that it will look far different in five years than it does today.

We feel the drivers of future change in this industry will fall into four primary categories — economic, feedstock, political, and operational.

Economic Drivers. The reality is that any industry whose goal is to replace some portion of a volatile commodity is likely to experience some of the same price volatility itself. Therefore the core economics of oil dramatically impact the economics of biofuels. Over the long term, the economics of oil seem very favorable to the biofuels industry.

The oil crisis in the 1970s was caused by a supply squeeze, and prices inevitably retreated when supplies expanded. This lesson may foretell some challenges in the ethanol space, as very aggressive ethanol capacity expansions over the next few years will inevitably cause ethanol pricing (and production profit) erosion.

Remembering The Key Drivers

But the key driver of today’s higher oil prices is both a demand and a supply squeeze. China and India are rapidly industrializing and their emerging middle classes are buying cars (and gas) at breakneck pace. At the same time, the global oil industry has been challenged to replace depleted oil reserves through new discoveries. It seems very plausible that we are entering a new era where $40 to $70 per barrel, rather than $15 to $40 per barrel, is the norm for oil prices.

Feedstock Drivers. Corn has been the historical feedstock for ethanol plants, and this made great sense when the industry was very small and consumed a limited amount of corn. However, as the industry has exploded, the hypothetical conflict between corn’s use for animal feed and ethanol production is starting to become a real one.

Nowhere will this be more acute that the upper Midwest, where there is a very high concentration of corn production, hog production, and ethanol production. Today hogs are, at best, marginal users of distillers dried grain (DDG), so much work will need to be done to make changes to corn (or hogs) that improve the suitability of ethanol byproducts for feed.

While cellulosic ethanol production may or may not be the primary next generation feedstock, it does seem clear to us that #2 yellow corn will not be the feedstock of the future. While this feedstock transition is still several years away, it will change this industry in very big ways.

Political Drivers. In its infancy, the biofuels industry was heavily dependent on high levels of government subsidies. These subsidies were constantly undermined by low oil prices and spotty political support. On this front, there is reason for long-term optimism. The discussion on global warming is getting louder all the time, and biofuels have a very positive profile. In addition, there seems to be growing awareness about U.S. vulnerability to oil supply disruptions from hostile or unstable global oil suppliers. Lastly, as the “footprint” of biofuels has expanded beyond the Midwest, the base of political support for the industry is also expanding.

Operational Drivers. In the earliest, entrepreneurial phases of its growth, the biofuels industry was supported by fervent believers. However, there seems to be wide variability in the management skills and sophistication of many operators. This will change as the industry matures, and higher levels of professional management and expertise will be required for survival.

Transportation, Production Issues

In addition to day-to-day management, the level of logistics sophistication and downstream linkages will also need to increase dramatically. Getting the biofuels and byproducts delivered to customers will be key, and significant bottlenecks are already beginning to appear. Too many facilities have no clear plan on how they’ll effectively utilize production byproducts.

Finally, many biofuels plants are not as efficient as they need to be. They use too much water, too much energy, and produce too much waste. Much time, effort, and energy in the coming years will be applied to solving these challenges, and operators who neglect to change will be squeezed out as profitability declines.

How will the biofuels industry evolve? Nobody can say for sure. Our assessment is that the future is bright for managers who are aggressive and open-minded and who recognize that the industry’s maturation should be embraced, not avoided.

Topics:

Leave a Reply

Management Stories

StewardshipMichigan Agriculture Leaders On Toledo Water Ban: We Want To Be Part Of The Conversation
August 8, 2014
Leaders of Michigan agricultural organizations said Thursday that the government should not have a “knee-jerk reaction” based on last weekend’s water ban in Toledo due to fertilizer run-off in Lake Erie. Read More
ManagementRussia Bans U.S. And EU Ag Product Imports In Ukraine Sanctions Battle
August 7, 2014
Russian President Vladimir Putin has banned the import of agricultural goods from countries that have imposed sanctions on Russia. Read More
EmployeesAsmark Institute Dedicates New Training Center To Ford West
August 6, 2014
The Asmark Institute plans to recognize the retired industry leader's years of service to the fertilizer industry at the new state-of-the-art facility in Owensboro, KY. Read More
LegislationUSDA: Quick Implementation Of Disaster Assistance Programs A ‘Top Priority’
July 9, 2014
USDA has processed 106,000 payments to farmers in 40 states across the country who suffered livestock and grazing losses between Oct. 2011 and passage of the 2014 Farm Bill. Read More

Trending Articles

ManagementExpert To Discuss Farmland Value, Rent At Farm Science Review
August 18, 2014
While cropland values in Ohio increased in the past two years, they have remained flat in 2014, declining in some cases, according to an Ohio State University agricultural economist. Read More
EquipmentAdvance Your Technology IQ At MAGIE
August 13, 2014
The Midwest AG Industries Exposition (August 20-21) is the place you need to be to see, study and evaluate how new advances in the equipment, operations, crop protection and fertility sectors can help your business prosper. Read More
HerbicidesScouting Key To Next Season’s Soybean Herbicide Program
August 12, 2014
When growing soybeans, growers need to think ahead to stay one step ahead of weeds. That means examining weed threats and evaluating which herbicides work best. Read More
StewardshipMichigan Agriculture Leaders On Toledo Water Ban: We Want To Be Part Of The Conversation
August 8, 2014
Leaders of Michigan agricultural organizations said Thursday that the government should not have a “knee-jerk reaction” based on last weekend’s water ban in Toledo due to fertilizer run-off in Lake Erie. Read More
CropLife 100BRANDT Acquires Lemon Ag Services
August 4, 2014
The acquisition of Lemon Ag fits BRANDT’s aggressive corporate strategy of providing superior agronomic advice and services for customers in central Illinois. Read More
Eric SfiligojThe Resurgence Of Crop Protection
August 4, 2014
Plenty of new offerings over the next few years should see a rebirth for the crop protection products category in terms of market share. Read More

Latest News

Crop InputsBASF Is Betting On A Bright Agricultural Future
September 1, 2014
The crop protection products giant is gearing up for a busy time in agriculture by investing in both product production and development over the next couple of years. Read More
Eric SfiligojAn Erie Feeling For Ag
September 1, 2014
Plenty of water issues have been in the news lately, including the continuing drought in California. Read More
CropLife 100Pinnacle Acquires California-Based Retailer
August 29, 2014
Pinnacle Agriculture Holdings will acquire Kerman Ag Resources, Inc., which will operate under Pinnacle's Performance Agriculture brand. Read More
Allied Cooperative Grain Plant
ManagementArcadia Co-op To Merge With Allied Cooperative
August 28, 2014
Allied Cooperative has announced that members of Arcadia Co-op voted in favor of a merger with Allied Cooperative, paving the way for the consolidation which will be effective on December 1, 2014. Read More
InsecticidesBioinsecticide VENERATE Now Registered In California
August 27, 2014
Marrone Bio Innovations' VENERATE is a new tool to help California growers control crop-damaging insect pests, fight the development of insect resistance and reduce pesticide residues on fruits and vegetables. Read More
CropLife 100Two Iowa-Based Ag Co-ops To Merge
August 27, 2014
The Board of Directors and management of United Western Coop, Missouri Valley, IA has completed a merger with Heartland Co-op, West Des Moines, IA, effective September 1, 2014. Read More
FertilizerKoch Expands AGROTAIN Nitrogen Stabilizer Portfolio
August 26, 2014
Koch Agronomic Services, LLC has added two new innovative nitrogen stabilizers to the AGROTAIN product family – AGROTAIN ADVANCED and AGROTAIN DRI-­MAXX. Read More
Seed/BiotechDuPont To Build Two Seed Treatment Centers
August 26, 2014
DuPont has announced construction on two state-of-the-art centers dedicated to developing and testing seed treatment formulations, applications and seed handling techniques in an important step toward bringing new solutions to growers. Read More
Seed/BiotechLoveland Products Acquires A Controlling Interest In Ag…
August 26, 2014
Loveland Products, a subsidiary of Agrium , has announced the company has acquired a controlling interest in Agricen, a Dallas-area agricultural biotechnology company delivering biochemical-based products for efficient and sustainable plant nutrition. Read More
StewardshipUp Close Look At The 2014 Environmental Respect Award W…
August 25, 2014
The 2014 Environmental Respect Award winners were honored recently at the 24th annual event in Wilmington, DE. Read More
Eric SfiligojAg Science Rejection Carries Consequences
August 25, 2014
As innuendo and fear dog the regulatory process, agriculture can’t get the new tools it needs to combat world hunger. Read More
LegislationFarmers Dismayed As New Farm Bill Dumps Direct Payments
August 25, 2014
The threatened end of cash subsidies to the nation’s row crop farmers dates back through at least the last two iterations of national agriculture policy legislation. Read More
MAGIE 2014 ShowStopper
EquipmentJohn Deere Again Wins MAGIE ShowStopper Award
August 25, 2014
For the second consecutive year, John Deere was honored at the Midwest AG Industries Exposition (MAGIE) for its new R4045 sprayer. Read More
CropLife 100GROWMARK CEO To Retire
August 22, 2014
GROWMARK chief executive officer Jeff Solberg has announced his retirement effective September 15, 2014. Read More
InsecticidesDuPont’s Prevathon Approved For Dry Beans
August 22, 2014
DuPont Prevathon insect control powered by Rynaxypyr has received EPA registration for foliar use on dry bean crops, including dried shelled peas and beans. Read More
ManagementNCGA DuPont New Leaders Program Enters Sophmore Season
August 20, 2014
The National Corn Growers Association and DuPont are pleased to announce the second year of the NCGA DuPont New Leaders Program. Read More
FungicidesVerdesian Links Up With Mitsui, Hokusan
August 20, 2014
Mitsui Chemicals Agro, Inc., and Hokusan Co., announced the signing of an exclusive licensing agreement allowing Verdesian Life Sciences global access to its patented technology for suppressing mycotoxin contamination in wheat and barley. Read More
SprayersUniversity Of Illinois Introduces New Spray App
August 18, 2014
University of Illinois Extension has released a new smartphone app for making sprayer-related calculations. Pesticide Spray Calculator, or Spray Calc, Read More