Lost In Translation

Given the build-up that went into the 2007 growing season, practically no one was surprised that biofuels growth translated into millions of acres of farmland shifting from crops such as soybeans and cotton to corn. Early on, many market analysts predicted this trend to corn from other crops would continue into 2008 as biofuels continued to expand their market footprint, translating into even higher corn acreage and crop input sales.

However, according to one speaker at the 2007 Mid America CropLife Association (MACA) annual meeting, this translation could be less exact then it first appeared.

“In many ways, there has been irrational exuberance in the nation’s corn fields over ethanol this past year,” said Sano Shimoda, president and founder of BioScience Securities, Inc., an investment banking and industry consulting firm. “Don’t get me wrong. I’m 100% for biofuels, but the strategy behind them is wrong.”

As originally mapped out by its supporters, biofuels were supposed to be the first in a series of energy alternatives to help curb the nation’s dependence on fossil fuel. The goal of this effort was to create new, renewable, low-cost, market-driven, sustainable, non-oil-based energy sources. At first, biofuels — in particular, ethanol — looked like a perfect candidate for this plan, being derived from good old-fashioned American corn.

However, there were bumps in the road, said Shimoda. First, the “market-driven” part of the original plan apparently got lost in the mix. “Public policy towards biofuels, including ethanol, continues to be anchored in farm/rural development policy, not energy policy,” he explained. “There is a subsidy of 51 cents per gallon blender credit for ethanol, which expires in 2010, and the food vs. fuel debate, changing energy politics and reducing ethanol support.”

As evidence of the problems this “support system” created in the marketplace, Shimoda pointed to biodiesel. “Biodiesel capacity was in a rapid expansion phase, driven by renewable fuel demand and its value to meet new diesel standards,” he said. “But higher soybean price pressures, driven by reduced acreage in 2007, and the resulting rise in soybean oil prices, has marginalized production economics. In fact, because of the high cost of feedstock, approximately 40% of the nation’s biodiesel plants today aren’t producing.”

Insufficient Supply

For ethanol, he said, an even bigger problem is the fact that it can’t completely replace oil in the transportation sector — ever. “In 2006, ethanol production was 4.9 billion gallons,” said Shimoda. “Although this was a big number, it represented only 3.5% of the nation’s total transportation consumption of 140 billion gallons. Even if 100% of U.S. corn production was used to produce ethanol, it could still replace only 29% of total fuel consumption.”

Finally, the costs currently associated with biofuels aren’t controlled by market forces alone. “There is presently a price-cost disconnect,” said Shimoda. “Ethanol prices are driven by oil prices and supply/demand parameters. Corn supply/costs are subject to supply variability, especially the risk of a weather-induced or pest/disease-generated ‘short’ corn crop.”

This can’t continue to be the case if biofuels are to succeed, said Shimoda. “Ethanol will be sustainable only if costs are driven to levels that will support market-driven demand, without long-term subsidies,” he said. “Ethanol demand has to be driven by market economics — economic attractiveness as a gasoline blending component, beyond oxygenate/MTBE (methyl tertiary butyl ether) replacement.”

Over the next 12 to 18 months, Shimoda predicts that the ethanol production industry will undergo a “major” ownership shake-up, with facilities consolidating or being scrapped before construction due to higher corn prices, lower oil prices, and lower profit margins. “The bottom line: Ethanol costs must be targeted to be cost competitive with prices as low as $25 to $30 per barrel oil equivalent, without the need for blenders’ credit to incentivize oil refiners,” he said.

The Long-Term View

Despite all these problems, Shimoda said that biofuels do have a future as one of the products to reduce America’s dependence on fossil fuel. “The ability to create a sustainable, market-driven ethanol industry that can compete with potential future oil and ag price volatility will depend on technical innovation — the dramatic reduction in conversion costs and material handling/logistics costs — and business models where world-class economies of scale create a low-cost position. The challenge for corn-based ethanol is the constant focus on reducing costs in order to create this low-cost position.”

To drive this low-cost positioning, Shimoda said that biofuel producers will need to adopt new production technology and energy/process efficiencies through lower production costs. They will also need to develop feedstock sourcing flexibility to minimize availability problems and price risks.

“Biofuels are the right answer — the issue is sustainability,” concluded Shimoda. “Many single facility ethanol plants are strategically and financially vulnerable. Industry consolidators will includes some existing players, as well as conventional and non-conventional world scale global ag and financial players. The survivors will be analogous to Amazon, eBay, and Google in the dot-com world in developing the big ideas that take this industry to the next level.”

Leave a Reply

Management Stories

ManagementReviewing MAGIE 2015
September 2, 2015
CropLife Editor Eric Sfiligoj talks what he saw at the recent Midwest AG Industries Exposition (MAGIE) show. Read More
StewardshipBee Buffer Strip Initiative Seeks 100 Ohio Farmers
August 31, 2015
The U.S. Bee Buffer Project, an initiative of the Pollinator Partnership (P2), Burt’s Bees and The Burt’s Bees Greater Good Read More
CPS Morenci receiving its 4R certification
StewardshipCPS Morenci Becomes First Michigan Facility Certified In 4R Nutrient Stewardship
August 31, 2015
The 4R Nutrient Stewardship Certification Program has announced that Crop Production Services, Inc.’s facility located in Morenci, MI, has been Read More
ManagementConsolidation hits and a miss; And a look at China’s challenges
August 28, 2015
As Monsanto suspends its pursuit of Syngenta, consolidation news at the retail and distribution level heats up. CropLife magazine’s Executive Read More
Top 100 Articles
Crop InputsLand ‘O Lakes, United Suppliers Finalize Merger
August 24, 2015
According to a press release on August 24, owners of United Suppliers, Inc. and members of Land O’Lakes, Inc. “have Read More
West Central Cooperative, Jefferson, IA
CropLife 100Iowa Cooperatives To Explore Unification
August 19, 2015
The boards of directors at two of Iowa’s leading farmer-owned cooperatives yesterday signed a letter of intent to study the Read More
CropLife 100Southern States Coop Hosting Drone Flight This Friday
August 3, 2015
Southern States Cooperative — No. 9 on the CropLife 100 — is hosting an FAA-approved drone demonstration at Grandview Farms Read More
CropLife 100Aligned Ag Distributors Adds Four New Owners
July 30, 2015
Aligned Ag Distributors LLC has announced the addition of four new customer/owners to Franklin Holding Co. LLC. They are: The Read More
CropLife 100Pinnacle Purchases California-Based Specialty Crops Retailer
July 20, 2015
Pinnacle Agriculture Holdings has successfully acquired California-based NH3 Service Co.  Operating as part of Pinnacle’s Performance Agriculture brand, the new locations Read More
Asmus Farm Supply liquid fertilizer facility features 20,000 square feet
CropLife 100Slideshow: Asmus Farm Supply Shows Off Its New Liquid Fertilizer Facility
July 15, 2015
Asmus Farm Supply, Rake, IA, recently added a new liquid fertilizer facility to its company operations. The new liquid fertilizer Read More
Latest News
ManagementReviewing MAGIE 2015
September 2, 2015
CropLife Editor Eric Sfiligoj talks what he saw at the recent Midwest AG Industries Exposition (MAGIE) show. Read More
Melissa Olds Dow AgroSciences
Crop InputsDow AgroSciences: Highlighting The Past, Present & …
September 2, 2015
In general, media events held by large agricultural suppliers tend to focus primarily on what plans the company has in Read More
Mobile tablet
OpinionTaking Data Head On
September 2, 2015
As you read this column, I’m hoping that if you picked up the phone and gave me a call, you’d Read More
Young soybean field
Industry NewsArysta LifeScience Announces New Business Unit Head For…
September 1, 2015
Arysta LifeScience North America announces the addition of Rico Christensen, Business Unit Head, North America. Christensen will have responsibility for Read More
Wilbur Ellis Pink Soybean Seed Treatment
Crop InputsWilbur-Ellis Goes Pink With Soybean Seed Treatments For…
September 1, 2015
This past year, proceeds of pink-dyed soybeans treated and sold to Wilbur-Ellis seed customers in Chester, SD, went to two Read More
SprayersNORAC Active Wing Roll Slated For More Sprayers
September 1, 2015
NORAC Systems, a member of the Topcon Positioning Group, announces the release of Active Wing Roll for RoGator, Apache, New Read More
Syngenta Sign
FungicidesSyngenta’s Newest Fungicide Receives EPA Approval
September 1, 2015
Syngenta announced today that its newest succinate dehydrogenase inhibitor (SDHI) fungicide – Solatenol – has received registration from EPA and Read More
Flooded corn in Indiana
Crop InputsDelaying The Fertilizer Decision
September 1, 2015
Comments gathered from several retailers recently evidenced a classic good-news-bad-news scenario. Good news is prices and supplies of nitrogen, phosphate, Read More
StewardshipBee Buffer Strip Initiative Seeks 100 Ohio Farmers
August 31, 2015
The U.S. Bee Buffer Project, an initiative of the Pollinator Partnership (P2), Burt’s Bees and The Burt’s Bees Greater Good Read More
2015 ShowStopper Award, MAGIE
EquipmentA ShowStopper From Case IH: The Patriot 2250
August 31, 2015
For nine years now, visitors to the yearly Midwest AG Industries Exposition (MAGIE) show have been tasked with not only Read More
Crop InputsMonsanto, FMC Expand Roundup Ready PLUS Platform
August 31, 2015
FMC Corp. and Monsanto Co. announced today an expanded agreement to continue their participation in the Roundup Ready PLUS Crop Read More
Deere Nutrient Applicator
Eric SfiligojThe Good & Bad News From MAGIE
August 31, 2015
As I write this column, I’ve just returned from the annual Midwest AG Industries (MAGIE) trade show in Bloomington, IL. Read More
CPS Morenci receiving its 4R certification
StewardshipCPS Morenci Becomes First Michigan Facility Certified I…
August 31, 2015
The 4R Nutrient Stewardship Certification Program has announced that Crop Production Services, Inc.’s facility located in Morenci, MI, has been Read More
EquipmentDeere Announces Soucy Track Distribution Alliance
August 28, 2015
John Deere announces an alliance with Soucy Track to sell and distribute products through the John Deere dealer channel. “This Read More
FertilizerFall-Applied Phosphorus: A Rooted Investment
August 28, 2015
As commodity prices decrease and input prices continue to rise, farmers are seeking more efficient strategies for meeting a high Read More
Monsanto Sign
Crop InputsWhat’s Next For Monsanto, Syngenta?
August 28, 2015
After dropping its $47 billion bid to take over Swiss agribusiness firm Syngenta, Monsanto may be turning its focus to Read More
Golden Harvest Corn stalks
Crop InputsMonsanto: Syngenta Not The Only Horse In Crop Protectio…
August 28, 2015
Monsanto Co, having ditched an audacious $46 billion (£30 billion) offer for Syngenta AG, may downshift to a humbler strategy Read More
ManagementConsolidation hits and a miss; And a look at China’s ch…
August 28, 2015
As Monsanto suspends its pursuit of Syngenta, consolidation news at the retail and distribution level heats up. CropLife magazine’s Executive Read More