What Biofuels Can Learn From Turkeys…and 8 Ways to Return Biofuels to Integrated End-to-End Control

December 07, 2021

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by Bob Kozak (Atlantic Biomass/Advanced Biofuels USA/Biofuels Digest) As we enjoy this contemplative, introspective, thanks giving time of year, it’s time to think what can be done to revive a stagnant US biofuel industry. The Thanksgiving Turkey is a good place to start.

I hope everyone had a good Thanksgiving and while the cost of turkeys went up some this year, I hope everyone noticed that they still cost considerably less per pound than a comparable piece of beef or fish. And what does that have to do with the cost of fuel? A lot.

The reason poultry is so inexpensive in the US is that Perdue, Tyson, et al. have control of feedstock prices. You’ve probably seen their large poultry houses with highly regulated and automated life system controls and thought that was the secret to their success. They’re helpful to their profit margin, but the real secret to their financial success selling low-cost protein is integrating feedstock production into bird production.

US poultry production uses regional hubs that are centered on company controlled feedstock production. Take for example the Delmarva Peninsula. Perdue maintains control of feedstock costs through annual contracts with growers (who often also have contracts for running poultry operations) for specific grains at prices set every year in December or January. Since this tri-state area is fairly isolated and has poor rail service, grain buyer competition is virtually non-existent. The large poultry producers have turned this lack of competition into an end-to-end system that sustainably puts chickens and turkeys on the plates and into pots of people living throughout Mid-Atlantic and Northeast at probably the lowest consumer protein cost in the world. Yes, this system is an oligopoly and the money paid to those working in the system keep much of the Delmarva at or below the poverty level. But, have the people eating low-cost chicken done much to change the system? No, and the answer is obvious. Ending this system would have chicken prices not only much higher but also less predictable.

Now do you see the lesson of poultry for fuels?

End-to-end integration is the way to sustainably produce fuel at a fair price, no matter its source, petroleum or biomass. But getting there and making it sustainable is a problem.

It was rightfully given a bad name by the business practices of John D. Rockefeller. Ida Tarbell’s monumental and wonderful to read The History of the Standard Oil Company (required reading for anyone reading Biofuels Digest) not only details his often criminal actions, but also clearly shows how by failing to work together through thick and thin independent oil drillers managed to create situations that Rockefeller could easily exploit. Very successful sovereign oil companies/countries still use integrated end-to-end production to achieve their goals. Note how Saudi Arabia and friends destroyed the profitability of the US fracking industry in 2014 by increasing the supply of their much cheaper to produce oil. (Bethany McLean’s Saudi America will bring you up to speed on this in a quick and brilliant 131 pages.)

And so, back to biofuels. Has integrated end-to-end ownership ever existed? Could it ever happen again?

In the beginning, 2000-2005, of large scale fuel ethanol production in the US, Midwestern corn farmers generally owned integrated operations. They grew the corn on their fields and converted it to ethanol at plants owned by their co-ops. Corn to ethanol fuel production grew out of growers efforts to find new markets for the greatly increased yields produced by genetic improvements to corn. Initially, this meant surplus, low-value corn could be used for ethanol feedstock without having to buy market rated corn. Fuel ethanol remained a sideline income source. But once US EPA banned MTBE from gasoline because it was a persistent carcinogen that poisoned water supplies, ethanol demand soared. The early co-ops were able to quickly respond to this demand in large part because they owned the entire process, from planting seed to pumping fuel.

However, as production really took off with all US urban areas required to use E10 to fight ozone pollution, ownership of end-to-end production disappeared. Farm land, largely owned by non-ethanol co-op growers, was converted to corn fields to meet this demand. Ethanol production came to consume about 28 percent of US corn harvests meaning ethanol producing co-ops were forced to buy corn on the open market in competition with other uses. Corn feedstocks costs came to represent over 40 percent of the total wholesale selling price of fuel ethanol. On the ethanol production side, co-ops also faced competition from large petroleum entities including Koch Industries and Valero who entered the business.

This led to fragmented ownership of the entire end-to-end system. Coordinated efforts to increase ethanol demand, E-30 for example, were defeated because without integrated system ownership, each player in the supply chain was looking out for their own interests rather than that of the industry as a whole. The Renewable Fuel Standard (RFS) is a prime result of how this fragmentation led to favoring the interests of one segment which caused industry stagnation. The value set by Congress for corn ethanol production in the RFS equaled about 100% of E10 sales. This quickly removed financial incentives for “advanced biofuels” not using corn. Investments both private and governmental needed to develop new enzymes, fermentation bacteria, hardware advancements, and low-lignin feedstocks quickly fell-off.

This fragmentation has also left many corn growers uninterested in fuel ethanol. They are finding more profit in selling corn products as exports at over $5.00/bushel which is a price that makes $2.20/gallon ethanol unprofitable. Koch Industries has moved on as well, selling their ethanol plants to POET, a family owned LLC that was there at the beginning.

Biofuel production had lost its “Darling of Wall Street” status. Simply stated, being caught between uncontrolled feedstock costs and fluctuating oil pricing is not a way to produce valuations that make investment bankers have sugarplum dreams about SPACs and IPOs.

Is there a way back? I think so. We need to return to integrated end-to-end control/ownership to make biofuels relevant again. How should we start when we don’t have Wall Street’s ear?

First: Keep your eye on the prize. Always think integrated process leads to integrated control.

Second: Find a low-value feedstock that your proprietary system can cheaply convert to ethanol or another bioproduct with an existing value.

Third: Sell your end-to-end system as a way to bring order and stability to the biomass market you’re entering. Potential long-term funders such as the Farm Credit Administration want stability and back-stop sales contracts (even at low-value) for new crops such as hemp biomass.

Fourth: Develop joint financial ownership/control systems for the feedstocks. While the Perdue model might be the most immediately profitable, think long term. Think Ford River Rouge. Think co-ops and unions. Don’t think John D. Rockefeller. Please! I know its seductive, but think about your soul as well as your profits as Ida Tarbell said

Fifth: Use state government grants and loans for R&D whenever possible. State economic agencies and land-grant universities should be close partners from the beginning. They also are easier to deal with than US DOE.

Sixth: Market your bioproduct as a key ingredient for higher priced end-products as well as a motor vehicle fuel. (I know. I probably stole this one from Jim Lane!)

Seventh: Build coalitions with new partners. Think HBCUs, county economic authorities, mayors, car enthusiasts, community colleges with automotive training.

Eighth: Don’t get anxious. Elon Musk funded Tesla in 2003. It didn’t become the highly valued company it is for over 12 years. For biofuelers, POET was founded in 1986.

I think if we start focusing on end-to-end biofuel production and forget narrowing in on improving obscure aspects of existing technical processes to gain 1-2% improvements we, as an industry have a future. It will be one where Senators and Presidents will come calling and asking what we think the future should be.

That’s all for now. I have plenty of work to do with my new feedstock. I hope you do too!

Side Note: Atlantic Biomass is currently working with University of Maryland Eastern Shore, the Ohio State University, and Hood College on a biomass-to-biofuel project using hemp biomass as a feedstock. READ MORE