Friday, December 28, 2007

Europe, Biodiesel, and Market Development

There has been "news" that Europe's biodiesel industry is falling on hard times. The combination of higher ag prices, excess capacity of world B100 production, combined with the recent 'food-versus-fuel' and deforestation arguments coming from the EU's environmental circles has caused attitudes to go lukewarm towards biodiesel.

The above is my 'cliff-notes' description of the Wall Street Journal article that came out yesterday. If you are looking for the article it's titled: "Europe's Biodiesel Drive Sputters" by John Miller. (Thanks to Glenn Montgomery for emailing it out to the Biofuels4Oregon listserve)

The problem is that I don't think this argument is the real issue. The media and policy people are misdirected in their concerns. It is market development not market support that is causing the issues in Europe and the US as well.

Don't get me wrong, all the issues reported by the WSJ are real. I just don't feel they are why European biodiesel producers (or American for that matter) are having a hard time. There is a bright-line difference between market forces efficiently allocating resources and individual players making bad decisions industry wide.

The real problem is the inability of biodiesel producers to develop their own markets and customers for their products. Any business model that relies solely on brokers and middlemen to move 100% of their product is going to be doomed to little or no profits.

The EU relied to heavily on subsidies that dropped biodiesel's price artificially low against petroleum. The European producers developed a market which was driven on price not on value. When price was no longer in their favor their market immediately turned harsh. The only reason most of their customers had been inspired to buy biodiesel was because it was cheaper.

To compound European market woes, they were successful enough creating a price driven market to attract other biodiesel producers with competitive advantages in feedsock production and labor regulation enabling much lower cost B100. They had no marketing or brand differentiation to discern superior and sustainable EU biodiesel from a Malaysian or South American competitors. Hence the only signal in the market place is price.

Beyond selling biodiesel as a cheaper fuel they have no focus on developing their own markets at all. That is the problem with agriculture in general. They want the government to protect them and then scoff at niche markets as to risky. CO2 and emission reduction is a market many other technology companies have done well with. Even successfully selling products at above market rates.

Contrast that with selling the value of a product by application as opposed to selling it based solely on price. In the EU and in the US the emphasis has always been on artificially reducing the cost of biofuels as opposed to correctly raising the price of petroleum. Note the success of natural gas in the US. A fuel sold primarily on its clean attributes and therefore becoming the silver bullet solution for any emmission problem.

What this WSJ article says to me is that local biofuel companies need to develop their own markets for their products. That at a certain point the fuel needs to stand on its own with a certain deeply penetrated niche market. There are places, especially in regulated industrial markets, where biodiesel is worth more than petroleum at any price.

Tax help and mandated use might cover fixed costs for a biodiesel producer but in large commodity markets producers tend towards no profits. The producers seem to be relying completely on government help, protection, and mandates to make their markets happen.

That's Europe's problem. Their policy is just focused on creating a guaranteed market to sell into and based on this alone they hope for guaranteed profits. I just don't see it happening. Third world producers with state guided economies and no property rights will be able to dump all profits out of any mandated market. They will dictate the bottom of the feedstock markets regardless of what First World economies try to do (short of protectionism).

That is the future of commodities and is why enforcing verifiable labels like "Fair Trade", "Organic", "Sustainable", and "Made in the US" are so important. Customers seeing a value beyond price is the only place any business including biofuels can ever turn a long term profit.

Sorry for the rant.

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