1. Economic Principles on the Future of Biofuels
Michael Swanson Ph.D.
Wells Fargo Economics
June 2007
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2. Summary – always a commodity
Biofuels are a commodity
Low cost producer strategy is only viable strategy
Competitive + comparative = advantage
Low cost feedstock trumps everything else
Location economics never change
Mass reducing
Value aggregation
Perish ability or fragility
The “returns to”
Capital
Labor
Management
Intellectual property
On the ground and in the trenches
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3. Determinants of Profitability
Suppliers’ selling power
Users’ buying power
Inter-industry competitiveness
New entrants
Substitutes
* Analysis based on Michael Porter’s framework
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4. The Ethanol Example
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5. Suppliers’ Selling Power
The degree suppliers are able to negotiate away value-added margin from the industry
Input price volatility
Substitutes
Cyclical factors
Seller concentration
Importance of buyers to sellers
Switching costs
Margin information
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6. Purchaser’ Buying Power
The degree buyers are able to negotiate away value-added margin from the industry
Relative size buyer versus seller
Importance of cost relative to other costs
Differentiation
Switching costs
Margin information
Threat of backwards integration
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7. Inter-industry Competitiveness
Brand
Differentiation
Scales of learning
Proprietary technology
Economies of scale
Favorable access to raw materials
Barriers to exit
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8. Barriers to Entry and Exit Impact of margin and volatility
Exit Barriers
Low
High
Low, stable margins
Low, volatile margins
High, stable margins
High, volatile margins
Low
Entry Barriers
High
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9. New Entrants – if you have profits they will come
Above average profitability attracts new entrants
Access to raw materials
Regulatory barriers
Economies of scale
Proprietary technology
Brand/differentiation
Capital costs
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10. Substitutes
Substitution involves the broad functionality of the product not just a narrow replacement
Direct replacement
Relative cost/performance
Uniqueness
Elimination of need
Enhanced usage
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11. Substitutes to Biofuels
Periods of “cheap” petroleum
Improved fuel consumption
New feed stocks
Short-term
Long-term
Foreign suppliers
The “great unknown”
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12. Minnesota has what it takes
Location + IP => Success
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13. Bio-fuels primer and competitive advantage
Input-Output Energy Balance
Biomass
Annual growing days, rainfall, soil …
Cellulosic versus non-cellulosic split
Conversion technology
Rapidly changing and dependent
Output format
Location relative to final usage
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14. The Anna Karenina Principle Rules
Suitability = Soil * Temp * Water not Suitability = Soil + Temp + Water
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15. Suitability for rain-fed crops excluding forest ecosystem
© 2000 COPYRIGHT IIASA and FAO
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16. Suitability for rain-fed crops excluding forest ecosystem
© 2000 COPYRIGHT IIASA and FAO
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17. Positive feedback loops at work
Start with E85
Displace gasoline nationally by using ethanol locally
Priced to make the consumer happy
Iterate and repeat
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