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

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

Trending Articles

HerbicidesAdjusting To The New Reality Of Weed Control
November 4, 2014
Even with new cropping systems being readied for market introductions, weed control will remain a challenge for many. Read More
StewardshipResponsibleAg Begins Auditor Training
October 31, 2014
ResponsibleAg auditor training is now underway at the Ford B. West Center for Responsible Agriculture in Owensboro, KY. Read More
InsecticidesNew Research Study Shows The Value Of Neonics
October 29, 2014
The study evaluated seed treatment, soil and foliar uses of neonicotinoid insecticides in the U.S. and Canada. Read More
Crop InputsPlatform Specialty Products To Acquire Arysta LifeScience
October 20, 2014
Once the acquisition is complete, Platform Specialty Products will combine Arysta LifeScience with previously acquired companies Agriphar and Chemtura Crop Solutions. Read More
Seed/BiotechMonsanto Offers New Support For Ferguson, Area Communities
October 8, 2014
Monsanto Co. has committed $1 million in new support for several collaborative efforts in Ferguson, MO, and surrounding communities in North St. Louis County. Read More
Seed/BiotechUnapproved Genetically Modified Wheat Found In Montana
October 3, 2014
USDA reports that one year after discovery of Monsanto's unapproved wheat in a single Oregon field disrupted U.S. wheat export sales, the GMO wheat has again been found in Montana. Read More

Latest News

soybean field
Crop InputsABM Patents Microbial R&D Technique
November 25, 2014
Focused Microbial Diversity (FMD) is a newly patented technique employed by Advanced Biological Marketing (ABM) to research and develop microbials that will be used in ABM products Read More
Crop InputsStorage Options Help Grain Growers Go To Market
November 24, 2014
While on-farm storage in a traditional upright storage bin is one possibility for storing grain, it may not be for everyone. Read More
Eric SfiligojGiving Thanks For Another Great Year
November 24, 2014
As Thanksgiving Day 2014 arrives, agriculture has plenty to be thankful for. Read More
Crop InputsSyngenta Cost-Cutting Program To Affect 1,800 Jobs
November 24, 2014
The company's Accelerating Operational Leverage program will result in job reductions and relocations totaling around 1,800 across the company, the majority of which will occur in 2015. Read More
EquipmentAGCO Announces Operator Of The Year Finalists
November 20, 2014
Four custom applicators have been selected by AGCO Application Equipment as finalists for 2014 Operator of the Year, an honor that recognizes them as being among the top professionals in their industry throughout North America. Read More
MicronutrientsH.J. Baker Expands Tiger-Sul Business
November 20, 2014
H.J. Baker has created and filled two strategic positions in business development and sales within its Crop Performance Division. Read More
soybean field
FertilizerGeneral Mills Honors United Suppliers For Nitrogen Opti…
November 19, 2014
United Suppliers winning proposal detailed SUSTAIN, a consulting network that provides customized products and services for farmers using a needs-based system approach. Read More
EmployeesOhio AgriBusiness Association Awards $25,000 In Scholar…
November 19, 2014
Each year, the Ohio AgriBusiness Association Educational Trust scholarship program awards scholarship dollars to students enrolled in an agriculture-related field attending several state colleges. Read More
ManagementServi-Tech Names New CEO
November 17, 2014
Servi-Tech has named Greg Ruehle its new president and CEO. Read More
CropLife 100Pinnacle Ag Acquires Colorado Aerial Application Outlet
November 17, 2014
Ft. Lupton, CO-based Reck Aviation — a full-service chemical application company providing aerial crop applications of fertilizers and crop protection products — will operate as part of Pinnacle's AgOne Application Services brand. Read More
Eric SfiligojMcDonald’s Message: Biotech Crops Scarier Than Cancer
November 17, 2014
Despite their potential health benefits, one of the world’s largest potato users will pass on a new biotech offering. Read More
MicronutrientsWinField Releases 2014 NutriSolutions Results
November 14, 2014
A number of significant regional and national crop deficiency trends emerged from the 2014 WinField NutriSolutions tissue sampling program. Read More
FertilizerH.J. Baker Opens Chinese Production Lines
November 14, 2014
The occasion was the official launch of the Tiger-Sul sulphur Bentonite production line of two much anticipated fertilizer products in China, T90CR sulphur fertilizer and TZinc micronutrient enhanced sulphur fertilizer. Read More
ManagementOhio Certified Crop Adviser Program Accepting Nominatio…
November 14, 2014
The award recognizes an individual who delivers exceptional customer service for farmer clients in nutrient management, soil and water management, integrated pest management and crop production in Ohio. Read More
HerbicidesSyngenta Announces Acuron Trial Plot Results
November 14, 2014
Acuron was tested at 167 trial locations across 35 states. Trials included 95 Syngenta locations, 54 university locations and 18 distributor locations. Read More
Crop InputsVerdesian Expands Sales Force
November 13, 2014
The new sales representatives will work with growers, retail partners and distributors to oversee technical training and product education. Read More
EquipmentAGCO Raises $100K For Wounded Warrior Project
November 13, 2014
AGCO Corp. partnered with local AGCO dealers across the U.S. and Canada to raise nearly $100,000 in support of wounded service veterans. Read More
HerbicidesDow AgroSciences Announces Launch Of Enlist Duo Herbici…
November 12, 2014
It will be launched in conjunction with a stewarded introduction of Enlist corn, and seed production of Enlist soybeans in 2015. Read More