Everything Ethanol -Porter Five Force Model Greg, Greg, Devin, Derek 1
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 transportation To 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 have the option in switching costs for production. 2
A basic gamble for ethanol investors Factors: Weather, competitor pricing (oil), overall demand, and the foresight of poor investment decisions Case in point, VeraSun Expected 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 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. 3
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. 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. 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 price, 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. 4
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 ethanol plants. 5
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 op alliances Relative location to ethanol plants Inelasticity of the input Lack of other options for feedstock Eth l d hl bt li i Ethanol producers help combat supplier prices through: Government credits received by blenders The sale of ethanol byproducts DDGs for animal feedstock 6
Substitutes Biodiesel Hydrogen Methanol Propane Electric BioDiesel Diesel fuel demand is 60 billion gallons in US. Trucking industry 450 gallons of biodiesel produced domestically. 176 plants Soybeans produce 90% of the oil needed in biodiesel production Corn acreage 86.0 million 12 billion bushels 140 bushels/acre Soybean at 74.8 million acreage 3.1 billion bushels 42 bushels/ acre 7
Biodiesel 3.34% higher yields producing corn Biodiesel demands a lot more acreage compared to 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. 63 hydrogen refueling stations nationwide Half in California 8
Hydrogen $100,000+ for new hydrogen powered car Converting 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 Price Consumers need The technology Education for safety 9
Methanol Up to 15% methanol can be added to gasoline cars without adjustment to the engine M 85 85% methanol 15% unleaded gasoline This blend allows for cold weather starting 50% reduction in total toxic air pollutants compared to gasoline. Octane rating of 106 Gasoline s 85 92 Ethanol s 97 105 Fuel economy increased by 5 to 13 percent Acceleration increased up to 7 percent Methanol Issues Ethanol Plants cost less 20% less energy than ethanol Less traveling distance/tank Production of Methanol Creates CO2 Difficult to store Very corrosive Wih Weight Filling Stations 10
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 stations 1200 E 85 stations Compressed Fuel Tank takes up trunk space Holds equivalent of 8 gallons of gasoline Range 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. roads Over 5 million worldwide CNG Natural Gas Production 490.8 billion cu m Consumption 604 billion cu m 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 US Much is off limits to drilling Off shore (East and West coast) Rocky Mountain Area Fossil Fuel Finite supply 11
Electric Only ~2,000 certified on U.S. roads Conversion 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 Issues Charge Time 3 hours Charging availability Workplace Long distance commuters Performance Acceleration Appearance Producing Electricity Creates pollution Safety Lighter Vehicles 12
Ethanol Dominators US 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 other manufacturing industries Current times Harder 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 13
Brand Identity All ethanol plants make the same output Differences occur at the mixing process Differences occur at the mixing process Could create brand identity Implement Gasifiers Use entire corn stalk instead of only the kernel Ableto apply itto to energyinput requirements Market sustainability and efficiency to the public Save money in energy costs Access to Distribution 14
Access to Distribution Tap into existing channels Position distribution around rail Capacity vs mixed trains Potential to be very limited Cellulosic Ethanol Distribution 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 Industries Rely Heavily on the Cost of Corn Energy Inputs 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 trains Coordinating shipping i routes Capital save 2cents per gallon on financing costs Overall save 4-6cents per gallon http://www.newrules.org/de/scalereport.pdf 15
Absolute Cost Advantage Access to Necessary inputs Limited Time Frame Available corn will be maxed out Midwest is currently saturated Prime locations may be critically limited Shallow Learning Curve Process is easily learned 16
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 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 17
Summary Favorable for Entry Easily Learned Process Non Unique Product No Brand Loyalty Low Start Up Costs Minimum Economies of Scale Government Policies Not Favorable for Entry 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. 18
Switching Costs of Suppliers in the Industry There would be no switching costs for a producer 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 createmore substitutes for corn. 19
Supplier Concentration Most of the farms that supply corn to ethanol plants 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 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 ofvolume 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 operateat maximum capacity and rely on the suppliers it gives the suppliers bargaining power. 20
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. 21
Threat of Forward or Backward Integration There is no threat of backward integration by the 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. 22