June 26, 2012

An Industry Perspective

by Mike Karst, Entira

Over the past few years, we've seen a parade of new or alternative crops getting headlines for their potential as new biofuel sources. From switchgrass to camelina and sweet sorghum to miscanthus, all show promise. However, as the pressure builds to find sustainable solutions to energy issues, the expectations are growing to move these new fuel sources from potential to reality.

Each crop brings its own set of opportunities and challenges and requires a complex combination of genetics, agronomics, mechanics and logistics to move from the seed to the harvested crop to a biofuel product. The current production, handling and processing infrastructure for mainstream crops like corn, soybean and wheat has evolved over decades. The challenge for today's new crops is to develop a system that works just as smoothly, but in a fraction of the time.

It is a classic "chicken-or-the-egg" scenario. Every new crop will be competing for acres that were used for other production purposes. Farmers aren't willing to commit to a new crop until they know there is large, long-term and ongoing demand for it. That means investments in research, equipment, handling and processing infrastructure. At the same time, processors and end-users aren't willing to make that investment until they have a large, consistent base of growers to produce the crop.

At Entira, we've worked with a number of companies dealing with this situation. In our work and research with growers across North America, there are three key areas where farmers have questions about growing a new crop: agronomics and growing practices, equipment and transportation needs, and the investment necessary to begin growing the crop.

In May 2010, I moderated a panel discussion at BIO 2010, the Biotechnology Industry Organization annual convention, in Chicago focused on just these issues. We discussed how alternative crops can be moved into the mainstream, and what companies need to do to make the transition positive and profitable for growers.

It was a great discussion and I've asked the three panelists to provide a summary of their thoughts. Our panelists included:

  • Scott Johnson, president and general manager of Sustainable Oils. Sustainable Oils is the world's leading camelina research and production company, having secured production contracts with the U.S. Navy and Air Force as well as a global coalition of airlines.
  • Kevin Richman, product category manager - Ag. Equipment and Hay & Forage at CNH Global. Kevin is responsible for Product development coordination of CaseIH and New Holland branded application equipment, planting, seeding, tillage and Hay & Forage product lines. He leads the company's efforts to develop biomass/biofuels strategies.
  • F. Howard Halderman, president of Halderman Farm Management Service. Howard is the third generation of family management and ownership of the farm management and real estate group that manages more than 650 farms across the country.

SAR: What factors do growers need to consider when deciding to grow an alternative crop?

Howard Halderman: A grower has a number of factors to consider, including what changes he will need to make to equipment for planting and harvesting, what additional staff or expertise is needed to grow or market the crop, and how it will impact other crops in his rotation.

Switching acres to an alternative crop requires a "manufacturing mentality" paradigm shift for many growers, especially those in traditional commodity crop production areas. For example, farmers have become very good at raising a crop such as corn, but they often don't think about the bigger picture of how to produce ethanol. To successfully grow a new crop for biofuel or biomass production, a grower must think beyond the farm gate and deliver a product that meets end-user specifications.

SAR: Sustainable Oils has been contracting camelina production with growers for three years now ... what have you learned over that time?

Scott Johnson: Communication with growers is critical. When dealing with a new crop, you have to present fact-based and credible information to growers so they have a clear picture of what to expect. The information must also be local. Test plot or research results from across the state, or even 20 miles away, isn't very valuable to a grower who is making a decision about his specific field.

We've also taken the time to learn from the growers who've planted camelina.  We have an extensive research program, but they are learning firsthand what works and what doesn't on a commercial scale. Their experiences have helped us develop an agronomic protocol, equipment recommendations and other insights on growing this new crop.

SAR: What challenges will growers face in securing capital for investments in new equipment or facilities to grow a new crop?

Howard Halderman: There are inherent challenges in securing financings for new opportunities. Growers may need to look beyond traditional lending situations to find partners that are interested in an alternative crop or new venture. This can be a difficult position for a grower who has been used to working in traditional commodity markets that require little more than a review of the balance sheet and rubber stamp from his lender. He may need to seek capital from non-traditional sources such as private equity or other investors, all of whom will require a higher level of detail and scrutiny than a grower is accustomed to.

We're no longer talking about a farmer asking a lender to extend his financing to cover an additional 80 acres of #2 yellow corn. A new crop without an existing track record of production costs and profits requires additional sales skills for a grower, as well as the ability to analyze the financial opportunity and successfully communicate that analysis to a lender or potential investor.

SAR: What can companies do to support growers and provide incentive to make these investments?

Howard Halderman: The most important tool for both growers and companies looking to contract new crops is the production contract itself. A grower needs a strong contract that clearly outlines the economic and production opportunities for this new crop in order to secure financing approval from his lender. Even more important is that a company honors the contract - not relying on "out clauses" or refusing to take delivery of production if they are in an oversupply situation. It only takes one bad experience with a new crop or company for a farmer to never sign a contract for that crop again.

As far as incentives go, companies need to be willing to offer a contract for more than the market price of production. If a grower can earn $100 per acre on #2 yellow corn, there must be a higher incentive for trying a new crop and investing in additional capital. In some cases, a "cost-plus" contract is an attractive option because it guarantees that a grower will cover his costs with a reasonable profit margin.

SAR: How does a company like Case New Holland approach the equipment needs for a new crop?

Kevin Richman: The primary focus as new crops are identified for mechanical harvesting is to identify the needs of the farmer and the end user. We need to determine how to harvest and package the crop or residue in the way that is most efficient for their particular handling and processing systems. There will be a variety of customers within this crop supply chain and all have unique requirements, i.e., efficient cutting, chopping, baling, hauling. A significant amount of research is being done by University and State Agricultural extension organizations, so we are learning more and more about all of these crops each season.

CNH has an entire fleet of innovative harvesting equipment deployed around the world conducting research and field testing on a variety of crops, including corn stover, switchgrass, miscanthus, energy sorghum, wheat straw, and others.

SAR: What challenges are there in building a supply chain for a new crop?

Scott Johnson: One of the biggest challenges comes with working with new partners that aren't familiar with agricultural production. We're not dealing with an oil well where production can be increased or decreased with a turn of the spigot. It is a long term commitment to contract, grow, harvest, transport and process a crop for biofuel production, and it requires long-term decision making.

It is also important to remember that today's agricultural distribution and handling systems have evolved over time to be very efficient for current commodity production. While we see significant value in new crops such as camelina, the distribution and grain handling system is not going to change overnight to meet our unique needs. Instead, we have to find ways for our new crop to complement the existing systems.

SAR: When we consider the large tonnage of biomass per acre of some of the alternative cellulosic crops, how will farmers and the industry handle the huge volume?

Kevin Richman: The sheer volume of biomass necessary to meet a refinery or plant's energy needs is huge. We know how to harvest a field of hay today, but we are talking about 10 times the amount of biomass coming off the same field. There are a number of ideas that equipment manufacturers are working on, such as increasing the density of bales and different packaging systems. Once the biomass is packaged and delivered to the edge of the field or nearby depot, there will be a significant logistics and transportation challenge. For example, one estimate shows that in order to feed a single proposed bio-refinery with biomass, it would take 31,000 truckloads of biomass, or about 7 trucks an hour. For small towns in rural areas, that will have a tremendous impact on local infrastructure.

The panelists did an outstanding job of reviewing the critical issues in ramping up alternative crop production for biofuels and biomass production. However, the situation for each crop, each company and even each grower can be very different. At Entira, we've helped a number of companies review the market challenges and opportunities for new crops. Contact me at mkarst@entira.net or 901.753.0470 with questions or to talk about your company's opportunities.

This article appeared in the June 2010 issue of Strategic Agribusiness Review.