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

Management2016 CTIC Cover Crop Survey: 33% Report ROI From Cover Crops
July 28, 2016
Insight from 2,020 farmers from across the country reflected enthusiasm for cover crops and—for the fourth year in a row—found Read More
ManagementNew Rabobank Report Calls for Farmer ROI Focus
July 25, 2016
As U.S. row crop farmers brace themselves for a third year of negative margins, Rabobank believes farmers must lower the Read More
ManagementGROWMARK Meeting Visit, Company Takeover Updates, and RNC Invite
July 22, 2016
Editors Paul Schrimpf and Eric Sfiligoj discuss their recent speaking engagement at GROWMARK’s eastern event, crop protection company merger rumors, Read More
ManagementLand O’Lakes Announces SUSTAIN Business Unit, Other Changes
July 20, 2016
Land O’Lakes, Inc. today announced the formal organization of a new business unit, SUSTAIN, and its leadership. SUSTAIN will focus Read More
Trending Articles
Southeast Farmers Coop - Finished Building
Retail FacilitiesNew Stueve Facilities Offer Ag Retailers Speed, Accuracy
July 9, 2016
Leading the industry in planning and constructing dry fertilizer storage and chemical warehouse solutions, Stueve Construction helped three ag retailers Read More
Heritage Cooperative
Retail FacilitiesKahler Automation Designs State-Of-The-Art Facility For Heritage Cooperative
July 4, 2016
Heritage Cooperative in Marysville, OH, needed an efficient liquid, dry and grain facility to serve the many needs of their Read More
The Andersons Waterloo
ManagementFirst Indiana Facility Certified Under 4R Nutrient Stewardship Certification Program
June 27, 2016
The 4R Nutrient Stewardship Certification Program has announced that The Andersons, Inc.’s Waterloo, IN, facility has been added to its Read More
Food IT
Industry NewsCalifornia Event Will Mix Ag And Tech Professionals To Explore IT Solutions
June 20, 2016
Silicon Valley is hot on agriculture, and an upcoming event in California will bring together the food and tech industries Read More
Monsanto Luling Plant
Eric SfiligojWhat’s Next For Monsanto?
May 31, 2016
For the folks at Monsanto’s headquarters in St. Louis, MO, it has been an eventful few weeks. Back on May Read More
Soybean Plant closeup
Industry NewsMonsanto Rejects Bayer Bid; Open To More Talks
May 25, 2016
Monsanto Co, the world’s largest seed company, turned down Bayer AG’s $62 billion acquisition bid as “incomplete and financially inadequate” Read More
Latest News
FertilizerGypsum Added To List Of Conservation Practices
July 28, 2016
Crop farmers in a growing number of states may be eligible for financial assistance from the USDA’s Natural Resources Conservation Read More
Management2016 CTIC Cover Crop Survey: 33% Report ROI From Cover …
July 28, 2016
Insight from 2,020 farmers from across the country reflected enthusiasm for cover crops and—for the fourth year in a row—found Read More
Palmer pigweed seedhead in cotton
HerbicidesStudy: Fall Weed Controls Can Make Significant Impact O…
July 28, 2016
An article published in the latest issue of the journal Weed Science shows that adopting harvest-time and post-harvest weed controls Read More
InsecticidesSyngenta: Beware Of Early Stinkbug Threat To Soybeans
July 28, 2016
With the record warm temperatures this past winter and confirmations from early entomologist reports, Syngenta encourages growers to monitor stinkbug Read More
Peanut field
Crop InputsVerdesian Introduces New Inoculant For Peanuts
July 28, 2016
As planning begins for the next growing season, Verdesian Life Sciences adds Primo Power CL, a new liquid inoculant, to Read More
Soil Young Corn
Crop InputsSmithsonian: 5 Things to Know About New GMO Labeling Bi…
July 27, 2016
On July 14, the House of Representatives passed a bill requiring large food companies to label products containing genetically modified Read More
Palmer pigweed in soybean stubble
HerbicidesSpecial Issue Of Weed Science Explores Human Aspects Of…
July 27, 2016
Weeds that evolve resistance to herbicides are a serious threat to global agricultural production. In this Special Issue of Weed Science, Read More
CHS Primeland
CropLife 100CHS Businesses In Washington, Idaho Combining For Great…
July 27, 2016
As full-service ag retailers, CHS Primeland and CHS Farmers Co-op collectively serve farmers and other customers in 15 counties in Read More
Storage Tanks at Nachurs
Crop InputsNACHURS Joins Field to Market
July 27, 2016
NACHURS announced today that it has joined Field to Market: The Alliance for Sustainable Agriculture, a leading multi-stakeholder initiative working Read More
Illinois Researchers
FertilizerMeasure Of Age In Soil Nitrogen Could Help Precision Ag…
July 26, 2016
What’s good for crops is not always good for the environment. Nitrogen, a key nutrient for plants, can cause problems Read More
Kochia
Crop InputsNufarm Launches New Herbicide for Resistant Kochia
July 25, 2016
Nufarm introduces Scorch herbicide for U.S. farmers and ranchers combating a broad range of troublesome broadleaf weeds. A unique premix Read More
ManagementNew Rabobank Report Calls for Farmer ROI Focus
July 25, 2016
As U.S. row crop farmers brace themselves for a third year of negative margins, Rabobank believes farmers must lower the Read More
Syngenta Sign
Crop InputsBloomberg: Syngenta-Chem China Deal on Track for Regula…
July 25, 2016
Syngenta AG, which has agreed to be taken over by China National Chemical Corp. for $43 billion, said talks with Read More
ManagementGROWMARK Meeting Visit, Company Takeover Updates, and R…
July 22, 2016
Editors Paul Schrimpf and Eric Sfiligoj discuss their recent speaking engagement at GROWMARK’s eastern event, crop protection company merger rumors, Read More
Crop InputsMonsanto: EU Approves Roundup Ready 2 Xtend Imports
July 22, 2016
Monsanto Co. announced today that the European Commission has granted import approval for Roundup Ready 2 Xtend soybeans. This milestone Read More
Syngenta headquarters in Basel, Switzerland
Crop InputsSyngenta Announces Alfalfa Seed Split Off
July 22, 2016
On September 1, 2016, Syngenta will transfer sales and distribution of alfalfa seed to the NEXGROW branded business that is Read More
Dow DuPont
Crop InputsDuPont, Dow Shareholders Approve Merger
July 21, 2016
DuPont and The Dow Chemical Company announced that, at their respective special meetings of stockholders held today, stockholders of both Read More
ManagementLand O’Lakes Announces SUSTAIN Business Unit, Oth…
July 20, 2016
Land O’Lakes, Inc. today announced the formal organization of a new business unit, SUSTAIN, and its leadership. SUSTAIN will focus Read More