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
ManagementMACA 2014: The State Of The Agricultural Industry, And Then Some
October 9, 2014
The trade association’s annual gathering featured speakers from across agriculture and beyond. Read More
StewardshipA Multi-Layered Approach To Water Quality
October 6, 2014
Illinois event highlights research and technology designed to better monitor and improve water quality — and the benefits of cooperative, coordinated effort. 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
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
Top 100 Articles
CropLife 100The Andersons Acquires South Dakota Plant Nutrient Manufacturer Kay-Flo
May 20, 2015
The Andersons, Inc., ranked No. 22 on the CropLife 100, has purchased Kay Flo Industries of North Sioux City, SD. “This Read More
CropLife 100North Central Farmers Elevator, Wheat Growers Unification Approved By Board, Still Awaits Member Approval
May 13, 2015
The Boards of Directors for North Central Farmers Elevator (NCFE) and Wheat Growers (WG) have voted to approve the Unification Read More
CropLife 100AgGateway’s Barcoding Initiative Progressing Nicely
May 8, 2015
According to legend (or Wikipedia), the first step towards modern bar codes came back in 1948, when Bernard Silver, a Read More
CropLife 100Pinnacle Agriculture Acquires Minnesota Retailer
April 14, 2015
Pinnacle Agriculture Holdings, LLC, ranked No. 6 on the CropLife 100,  has successfully acquired Liebl Ag, LLC in Ada, MN.  Read More
CropLife 100CHS, Aurora Cooperative Complete Fertilizer Storage, Grain Shuttle Loading Facility
April 13, 2015
CHS Inc., the nation’s leading cooperative and ranked No. 5 on the CropLife 100, and Aurora Cooperative (ranked No. 21) Read More
CropLife 100GROWMARK Acquires Missouri Refined Fuels Terminal
April 2, 2015
Bloomington, IL-based GROWMARK and Magellan Pipeline Co. have entered into an agreement in which GROWMARK will acquire the refined fuels Read More
Latest News
ManagementA New Sprayer Company & UAV Research In The Spotlig…
May 21, 2015
CropLife’s Paul Schrimpf and Eric Sfiligoj talk about a Dutch sprayer manufacturer entering the U.S. with a super-sized entry and Read More
HerbicidesFirst U.S. Sale Of Enlist Duo Herbicide Made By Dow Agr…
May 21, 2015
Dow AgroSciences has recorded the first U.S. sale of Enlist Duo herbicide with Colex-D Technology. This marks the first commercial Read More
CropLife 100The Andersons Acquires South Dakota Plant Nutrient Manu…
May 20, 2015
The Andersons, Inc., ranked No. 22 on the CropLife 100, has purchased Kay Flo Industries of North Sioux City, SD. “This Read More
EquipmentNORAC Options Coming To TerraGator
May 19, 2015
Utilizing NORAC’s Standard Control technology, boom height control is now available for TerraGators with Airmax Precision 2 and Benson Booms. This Read More
Crop InputsHelena Introduces New Soil Health Product
May 19, 2015
Helena Chemical Co. is helping agricultural producers maximize yields and efficiency with the introduction of Liquid Chisel, a new product Read More
Stewardship4R Nutrient Management Planning Certification Now Avail…
May 19, 2015
The American Society of Agronomy (ASA) and the International Certified Crop Adviser (ICCA) program announce a new specialty certification in Read More
Environmental Defense Fund logo
Paul SchrimpfEnvironmental Defense Fund: Appreciating Partners
May 19, 2015
I WAS deep in the throes of preparation for the Commodity Classic meeting that took place this past February, trying Read More
WebinarsUpcoming Webinars
May 19, 2015
Register for one of our upcoming Webinars or access our archive of past Webinars to view recordings of presentations that may be of interest to you. Read More
Syngenta Sign
Seed/BiotechSyngenta Responds To Lawyer’s Victory Claim In Vi…
May 18, 2015
A plaintiff’s lawyer has issued a public statement claiming that damages have been awarded in the Agrisure Viptera corn lawsuits Read More
StewardshipCould Australian Water Trading Approach Fit In Californ…
May 18, 2015
Ten years of drought isn’t a good thing. It doesn’t help the bottom line of farmers or the health of Read More
SpreadersDutch Sprayer Manufacturer To Enter U.S. Market
May 18, 2015
Dutch self-propelled sprayer manufacturer Agrifac Machinery has announced intentions to enter the U.S. market with two models of sprayers available Read More
FertilizerTFI Weighs In On Fertilizer Rail Transport Bill
May 14, 2015
With today’s House Committee on Transportation and Infrastructure as a backdrop, The Fertilizer Institute (TFI) registered its support for policies Read More
ManagementA Visit To The 2015 Environmental Respect Spirit Award …
May 14, 2015
CropLife’s Paul Schrimpf and Eric Sfiligoj talk about a recent visit to the CPS Spirit winner in St. Stephen’s Church, Read More
StewardshipBayer Entomologist Issues Statement On Annual Honeybee …
May 13, 2015
Richard (Dick) Rogers, Principal Scientist / Entomologist, Bayer Bee Care Center for Bayer CropScience LP, today issued the following statement Read More
Crop InputsKansas State Researchers Announce Resistant Kochia Brea…
May 13, 2015
Kansas State University researchers say new research helps explain why an invasive weed is developing resistance to a well-known herbicide, Read More
RR2X soybeans surround untreated check (center)
HerbicidesUSDA Study: Glyphosate Application More Prevalent In So…
May 13, 2015
Glyphosate—known by many trade names, including Roundup—has been the most widely used pesticide in the United States since 2001. It Read More
AdjuvantsHelena Chemical Introduces New Drift Control Adjuvant J…
May 13, 2015
Helena Chemical Co. introduces Justified, an innovative drift control agent designed to improve the performance and precision of spray applications Read More
CropLife 100North Central Farmers Elevator, Wheat Growers Unificati…
May 13, 2015
The Boards of Directors for North Central Farmers Elevator (NCFE) and Wheat Growers (WG) have voted to approve the Unification Read More