10/31/2008 1 Everything Ethanol -Porter Five Force Model Greg, Greg, Devin, Derek
10/31/2008
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Everything Ethanol
-Porter Five Force Model
Greg, Greg, Devin, Derek
10/31/2008
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There are more farms than ethanol plants, however, farmers form cooperatives which gives them bargaining leverage.
In U.S., at this point there is high demand for corn, which is main feedstock in U.S. ethanol production. Gives supplier pricing power.
Cost of transportationCost of transportationTo make ethanol most profitable, ethanol plants need to pull feedstock from the nearest locations. This gives farmers edge in selling price.
At this point in the U.S., the main input is corn for ethanol production. Even though there are other ways to produce ethanol, whether it be from sugar or from a new form of production such as the cellulosic process which uses other forms of feedstocks, they are not yet a viable source. In other words, ethanol plants do not h h i i i hi fhave the option in switching costs for production.
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A basic gamble for ethanol investorsFactors: Weather, competitor pricing (oil), overall demand, and the foresight of poor investment decisions
Case in point, VeraSunExpected to lose $100 million this quarter
If the ethanol industry continues to expand in the number of plants put up in production, more and more ethanol plants will be owned by industry investors.
In 2000 80% of ethanol plants were owned by farmers. In 2006, it was projected within the next two years that of the ethanol plants coming online, only 20% will be owned by farmersonly 20% will be owned by farmers.
http://minnesota.publicradio.org/display/web/2006/02/08/ethanolbusiness/
Eventually, the bigger industry investors may buy out co‐ops to decrease competition and expand their own company.
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In terms of any specific ethanol brand being publicly recognized, this does not exist.
As soon as ethanol is taken to the blender, all ethanol from other distribution lines are mixed together.
Ethanol, however, has “pulled through” in terms of being a mainstay at this point in fuel usage.of being a mainstay at this point in fuel usage.
Ex: Minnesota’s mandate of E10 and projected future mandate of E20. Also available E85 and mixes in between at some stations.
The elasticity of demand is inelastic in most cases, or atleast until the price of corn rises to the point where ethanol plants would be very unprofitable in production. p
The price is given for the input and they don’t have much choice in refusing because ethanol plants need to run at as close as possible to capacity in order to be most efficient.
In this scenario, ethanol will be passed off at a higher i b t l th th l l t ill t f thprice, but also the ethanol plants will eat some of the
cost in order to stay competitive.
Also, when corn prices are increased, ethanol plants raise the selling price of DDGs to supplement the higher incurred costs.
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As seen in the chart, ethanol producers which are the buyers of corn are experiencing low margins with high volume of production = small profit per gallon produced.
They are a commodity.
Profits would also be lessened if there was not a $.51 incentive credit to blenders who buy from$.5 incentive credit to blenders who buy fromethanol plants.
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At this point, ethanol plants are dependent on a constant supply of corn for their survival in fuel production.
This gives the supplier the ultimate industry power until we achieve alternative feasible sources
Buyer’s purchases of the supply of U.S. corn makes up a significant portion of total purchases of this crop.
25% of total U.S corn production in 2007 was used in ethanol industry.
Overall it appears that corn suppliers have a greater determination in price of corn due to:
Co op alliancesCo‐op alliances
Relative location to ethanol plants
Inelasticity of the input
Lack of other options for feedstock
Eth l d h l b t li iEthanol producers help combat supplier prices through:
Government credits received by blenders
The sale of ethanol byproducts ‐ DDGs for animal feedstock
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Substitutes
Biodiesel
HydrogenHydrogen
Methanol
Propane
Electric
BioDiesel
Diesel fuel demand is 60 billion gallons in US.Trucking industry
450 gallons of biodiesel produced domestically450 gallons of biodiesel produced domestically. 176 plants
Soybeans produce 90% of the oil needed in biodiesel productionCorn acreage 86.0 million
12 billion bushels
140 bushels/acre
Soybean at 74 8 million acreageSoybean at 74.8 million acreage
3.1 billion bushels
42 bushels/ acre
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Biodiesel
3.34% higher yields producing cornBiodiesel demands a lot more acreage compared g pto corn‐based ethanol.
The E‐10 and E‐20 Market is much higher for current fleet of vehicles on the road today.
‐State Mandates
‐Easier to produce larger amounts of ethanol than bio‐diesel
Hydrogen
Fuel cell vehicle can only travel 150 miles on average before running out of hydrogen.
>1,000 hydrogen‐fueled vehicles in the United States – mostly in California., y g y
63 hydrogen refueling stations nationwide‐ Half in California
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Hydrogen
$100,000+ for new hydrogen‐powered car
Converting to Hydrogen CarConverting to Hydrogen Car
$7,000 to $10,000
Mechanic to install
Hydrogen Issues
• Lack of Fueling Stations
Possible solution is making your own hydrogen‐with a refrigerator sized generator that
works off electricity.
• Need facilities to:• Make Hydrogen
• Storage
• Transportation
• PricePrice
• Consumers need• The technology
• Education for safety
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Methanol
Up to 15% methanol can be added to gasoline cars without adjustment to the engineM‐85
85% methanol 15% unleaded gasolineThis blend allows for cold weather starting50% reduction in total toxic air pollutants compared to gasoline.Octane rating of 106
Gasoline’s 85‐92Ethanol’s 97‐105
Fuel economy increased by 5 to 13 percenty y p
Acceleration increased up to 7 percent
Methanol Issues
Ethanol Plants cost less
20% less energy than ethanolLess traveling distance/tank
Production of MethanolCreates CO2
Difficult to store Very corrosive
W i hWeight
Filling Stations
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CNG
50 Manufacturers producing 150 models of vehicles and engines that run on compressed natural gas.1500 CNG refilling stations in the U.S.
200,000 gas stations1200 E‐85 stationsCompressed Fuel
Tank takes up trunk spaceHolds equivalent of 8 gallons of gasolineRange of 180‐250 miles
GHG emissions same as ethanol ~20%Conversion
$4500
Set up home refilling stations$3500
150,000 NGV’s on U.S. roadsOver 5 million worldwide
CNG
Natural GasProduction‐490.8 billion cu m
Consumption‐604 billion cu m p
Exports‐19.8 billion cu m
Imports‐117.9 billion cu m
Proven U.S. reserves‐5.551 trillion cu m
Huge natural gas supply in USMuch is off‐limits to drilling
Off shore (East and West coast)Rocky Mountain Area
Fossil FuelFinite supply
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Electric
Only ~2,000 certified on U.S. roads
Conversion costs $9,000Conversion costs $9,000
Reduced range of electric cars ~40 miles
Long distances ‐ Interstate ‐‐> 75 mph and 400 miles range.
Daily Commute ‐‐> 55 mph and 35 miles range.
Puttering around town‐‐>35 mph and 20 mile range.
Electric
IssuesCharge Time
3 hours3 hours
Charging availabilityWorkplace
Long distance commutersPerformance
Acceleration
AppearanceProducing Electricity
Creates pollution
SafetyLighter Vehicles
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Ethanol DominatorsUS Bio Energy – 300million gallons with potential for 700million gallons by end of ’08
VeraSun – 340million gallons with potential for1.64 billion gallons by the end of ’08
http://www.greencarcongress.com/2007/07/verasun-energ-1.html
Capital Requirements
Average plant costs $65million to start up
Fairly cheap start up compared to otherFairly cheap start up compared to other manufacturing industries
Current timesHarder to receive capital at this point in time
Will become easier as time goes on
http://www.forbes.com/2005/11/15/energy‐ethanol‐commentary_cx_1116energy_jennings.html
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Brand Identity
All ethanol plants make the same outputDifferences occur at the mixing processDifferences occur at the mixing process
Could create brand identityImplement Gasifiers
Use entire corn stalk instead of only the kernel
Able to apply it to energy input requirementsAble to apply it to energy input requirements
Market sustainability and efficiency to the public
Save money in energy costs
Access to Distribution
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Access to Distribution
Tap into existing channels Position distribution around rail
Capacity vs mixed trains
Potential to be very limited
Cellulosic EthanolDistribution won’t be such a big issue
Midwest will no longer be the Mecca of bio‐fuel resources (access to inputs)
Economies of Scale
Less Than Other Manufacturing IndustriesRely Heavily on the Cost of CornEnergy Inputsgy p
100MGY + Plants
Production – 2-3 cents per gallon for labor and administrative costs
Transportation-1.7 cents saved•Advantage for plants able to fill train to capacity vs mixed trainsC di ti hi i t
http://www.newrules.org/de/scalereport.pdf
•Coordinating shipping routes
Capital – save 2cents per gallon on financing costs
Overall save 4-6cents per gallon
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Absolute Cost Advantage
Access to Necessary inputsLimited Time Frame
Available corn will be maxed out
Midwest is currently saturated Prime locations may be critically limited
Shallow Learning CurveProcess is easily learned
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Switching Costs
2008 E85 vehicles
$20,500 ‐ $45,900
E‐85 Conversion Kits$400
Filling Station Locations
http://www.consumerreports.org/cro/cars/new‐cars/news/2006/2007‐e85‐ready‐flexible‐fuel‐vehicles‐9‐06/overview/2007‐e85‐ready‐flexible‐fuel‐vehicles_ov.htm
http://www.thegreenmotorist.com/index.php/convert‐your‐vehicle‐to‐run‐on‐e85‐for‐400/
Government •Brazil currently produces sugar cane ethanol cheaper than US corn ethanol
•US has a $0.54 tariff on Brazilian Ethanol
•Protects farmers, producers, economy
If T iff i d th•If Tariff is removed then:
•Blenders will purchase substantially more Brazilian ethanol
•Blenders will demand less US ethanol
•Corn Supply causing prices assuming all plants are operating at capacity
•Attractive to new entrants
•New entrants will cause corn prices to come back to equilibrium
*Only feasible if new blenders enter the market
But
The new blenders could continue to purchase Brazilian
Or
New blenders could create Brand Identity
http://www.foodnavigator-usa.com/Financial-Industry/Bernanke-suggests-ethanol-tariff-cut-to-help-food-prices
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Summary
Favorable for EntryEasily Learned Process
N U i P d t
Not Favorable for Entry
•Limited Amount of InputsNon‐Unique Product
No Brand Loyalty
Low Start Up Costs
Minimum Economies of Scale
Government Policies
Limited Amount of Inputs
•Access to Inputs
•High Switching Costs
•Cellulosic Ethanol
Differentiation of Inputs
There really is no way for the suppliers to create a product that the consumer will like more then another.
Ethanol is Ethanol is Ethanol.
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Switching Costs of Suppliers in the Industry There would be no switching costs for a producer that switches its selling marketproducer that switches its selling market.
If they sell their corn to bio‐plastics they will actually get more money.
If suppliers switch crops there is little to no cost involved.
The same equipment can be used to grow other feedstock's for ethanol.
Substitute Inputs
The price of other feedstock’s for ethanol could affect the suppliers of corn for ethanol.
If the tariff on Brazil’s sugar cane is taken away, it could make a huge impact on the American corn producing farms.
If cellulosic ethanol became feasible it would create more substitutes for corn.create more substitutes for corn.
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Supplier Concentration
Most of the farms that supply corn to ethanol plants grow corn as their major crop/source ofplants grow corn as their major crop/source of income.
If the price of corn all of a sudden drops, it’s very difficult to all of a sudden switch your crop.
There are about the same amount of suppliers There are about the same amount of suppliers as firms, but suppliers have the bargaining power since there is a threat of forward integration.
Importance of Volume to Supplier
With a commodity like corn with small margins, the importance of volume is highthe importance of volume is high.
In ’07 25% or corn produced in the U.S. was used to produce ethanol.
Also the fact that ethanol producers need to operate at maximum capacity and rely on theoperate at maximum capacity and rely on the suppliers it gives the suppliers bargaining power.
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Importance of Volume to Supplier
http://aede.osu.edu/people/roberts.628/extension/presentations/ethanolinservice_dgood.pdf
Impact of Inputs on Cost or Differentiation
At this point it is economically viable to use corn instead of other feedstock's because you get the most ethanol out of corn, but if price skyrockets, the idea of importing or growing different feedstock's becomes more appealing.
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Threat of Forward or Backward Integration There is no threat of backward integration by th fithe firms.
The reason is that if the firms try to buy the farmers land the farmers either wont sell or will create a co‐op.
There is a threat of suppliers forward integrating.
Farmers create cooperatives and in turn create ethanol producing plants.