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Betting on Biofuels II June 18th, 2007


Utah Economic Snapshot - Where and What Kind of New Jobs

Economic Notes:

This Weeks Leads:
 

SCORECARD

Betting on biofuels

The industry is still in its infancy but evolving rapidly. Companies that hope to compete must devise their entry strategy now.

Billions of dollars, euros, pounds, and reais are pouring into biofuels. High fuel prices and generous regulatory support have given the industry healthy margins and relatively short investment payback times. Meanwhile, the triumphs of the first movers and dreams of future growth are enticing companies in industries from petroleum and agribusiness to biotechnology, chemicals, engineering, and financial services. And of course, the allure of a greener future has raised the expectations of investors and bystanders who hope that biofuels will help meet the world's energy needs while lowering greenhouse gas emissions.

Continued From Last Week

Placing the right bets to manage risk

Companies that enter the market now can mitigate uncertainty by hedging their bets and forming relationships that may help them reduce volatility and influence regulation.

The argument against waiting

Understandably, some companies will wait for technology to advance and the regulatory landscape to evolve before entering. After all, in commodity industries, early entrants often lose out to latecomers using larger-scale, more modern technologies. Such leapfrogging has occurred time and again-for example, in the steel industry.

Nonetheless, in any complex industry, early entrants can gain a valuable lead in understanding its technologies, operations, and economics, as well as through influencing local regulation. When companies face high levels of uncertainty in variables they can influence, taking steps to shape outcomes can make sense.8 Some companies and investors will enter now to capitalize on today's high prices, but market conditions could easily change before new factories begin operation. Prices of biofuels, unlike those of pure commodities, are greatly influenced by the cost of competing products, such as gasoline and diesel fuel (see sidebar, "Modeling supply and demand in the biofuel industry").

For companies with long-term aspirations in biofuels, the strongest argument against waiting is that certain vital resources are in short supply. Biofuel companies will need partners, for instance, and the best may soon be taken. Similarly, the cultivation of feedstocks, like many agricultural undertakings, is most efficient on large expanses of land. Even in the absence of deforestation, hundreds of thousands of hectares for growing feedstock are available, but large swaths in the choicest areas are not. Land in Brazil's highly developed São Paulo region, for example, is expensive, in part because it is close to urban demand centers. More land is available in the country's untapped, relatively inexpensive northeast and interior, but building an infrastructure to reach it would be pricey.

How to play now

The way companies determine their strategy will depend on the subsector of biofuels where they play. Three distinct segments have emerged.

  • Asset owners (including agribusinesses, petroleum companies, chemical companies, plant operators, and small farmers) are heavily invested in producing and marketing biofuels. They grapple with uncertainties in the long-term attractiveness of geographies, as well as with technological change.
  • Product and service providers (including seed companies, engineering and equipment companies, and biotechnology firms developing enzymes and fermentation organisms) tailor their technologies and processes to the needs of the biofuel industry. Their strategies are mostly not specific to geography, and they face technological and commercial risk.
  • Market participants (including gasoline blenders, farmers, agricultural-equipment companies, suppliers of inputs such as fertilizers, and logistics providers) benefit when the growth of the biofuel industry increases demand in their core businesses.

All of these players, whatever their subsector, need to make smart bets in a few key areas:

Betting on geographies and technologies. Asset owners and, to a lesser degree, market participants have increasingly entered the international biofuel trade, mixing and matching geographies for production and distribution to balance risk and investment. In the United States, for example, demand is all but guaranteed thanks to the world's most ambitious biofuel targets, a well-developed infrastructure, and generous subsidies, but feedstock constraints could continue to put most of the profits in the pockets of farmers or landowners. Undeveloped tropical regions in Africa, Asia, and Central America- especially those that have free-trade agreements with the European Union or the United States-seem appealing, but they pose political and economic risks of their own and require significant investments in infrastructure.

Companies can mitigate some geographic risk (and reduce payback periods) if they acquire producers operating under known conditions. By acquiring older ethanol plants and introducing modern management practices, Cosan, for example, improves its plants' operating performance and recovers its acquisition premiums. Many smaller, undermanaged plants in Brazil and the United States could also flourish under new owners-either large multinational industrials or private-equity firms.

To deal with technological risk, asset owners should invest in a number of options. BP, for example, founded the Energy Biosciences Institute (EBI), in California, which hosts leading industry research groups and gave it $500 million in sponsorship funds. In return, the company gains early knowledge of-and the right of first refusal for-much of the intellectual property developed there. Shell, by contrast, has invested in companies researching both lignocellulosic and gasification processes (including BTL) for biomass conversion. While BP's approach gives it broader exposure to breakthroughs in fundamental science and technology, Shell's offers a more intimate relationship with companies closer to the commercial application of technologies.

For product and service providers, mitigating technological risk means commercializing intellectual property. They can partner with major (future) asset owners for access to a sizable captive market (as DuPont did in a joint venture with BP to develop biobutanol) or collaborate with other product and service providers. One biotechnology company, Novozymes, is working with Broin, a leading engineering firm that will use the Novozymes enzymes technology in every new ethanol plant it constructs.

Building relationships. The establishment of young industries often calls for coordinated efforts all along the value chain. Building a biofuel industry in a new geography, for example, requires the simultaneous application of skills in agronomics, feedstock and fuel procurement, storage, distribution, refinery operations, commodities trading, and the influencing of local regulation. No asset owner can claim all these skills, so most companies would benefit from true or virtual integration (for example, through partnerships) along the value chain.

Even in more developed markets, integrating along the value chain can diminish risk and volatility. In the United States from January 2005 to November 2006, for example, changes in some state regulations of fuel-the shift from MTBE (methyl tert-butyl ether) to ethanol as an antiknocking additive-and the increase in prices of gasoline and gasoline components created substantial fluctuations in the demand for and price of corn ethanol. Simultaneously, a shortage of corn and the resulting high prices triggered large swings in the allocation of profits between farmers and asset owners (exhibit). Integrating the cultivation and production of feedstocks removes the latter source of uncertainty.

Biofuel companies must also build relationships with the government agencies that regulate biofuels and the nongovernmental organizations that influence public opinion. Proponents of biofuels can identify potential areas of cooperation and conflict by analyzing these players' concerns (including consumer advocacy, environmental protection, and fair trade) as well as the economic interests of groups such as farmers, petroleum companies, auto manufacturers, and food companies.9

Biofuels have a tremendous potential to give the world efficient and sustainable energy, but much about the industry remains uncertain. Those who enter it today must bet carefully on geographies and technologies and establish the right relationships at critical points along the value chain.

Modeling supply and demand in the biofuel industry

McKinsey recently brought a fact-based perspective to the future of the global biofuel industry. After interviewing more than 80 current and potential industry participants and leading academics, we created a database on the availability and cost of feedstocks, as well as a bioethanol supply-demand model that incorporates the impact of crude oil prices, government regulation, and new technologies.

We make three important assumptions: only land that does not have to be deforested will be available for feedstock production, cellulosic technology and high-density ranching practices will be used extensively, and agricultural products will be devoted to biofuels only after demand for food and animal feed is met. Our model suggests that there is sufficient land to cultivate almost four billion tons (that is, one thousand million tons) of feedstock a year-in theory, enough to produce bioethanol providing more than 50 percent of total transportation fuels by 2020.

The availability of feedstock is critical, but the economic viability of bioethanol also depends on its cost effectiveness vis-à-vis gasoline. The higher the price of crude oil, the wider the gap between gasoline prices and bioethanol production costs. Crude oil at $40 a barrel (our base-case scenario) would provide for the economical production of 70 billion gallons of bioethanol a year by 2020-about seven times current production and 10 percent of the total demand for transportation fuel. At up to $50 a barrel, bioethanol could replace as much as 30 percent of all transportation fuel economically (exhibit). At $70 to $80 a barrel, the replacement of up to 50 percent of all transportation fuel would in theory be economically viable, and the availability of feedstock would limit the industry's further growth. Subsidies, which were not considered in this model, could also trigger higher penetration rates.

Source: McKinsey & Co. 2007

Retail or Roof Tops:

The bell has sounded for another round in the ongoing fight between Taubman Centers and its opponents--including Simon Property Group--over the Bloomfield Hills, Mich-based developer's proposed 750,000-square-foot Mall at Oyster Bay in Syosset, Long Island.

Taubman has been pushing the project now for 13 years, spending $122 million in the process, only to be countered at every turn by local officials and the Cerro Wire Coalition, which includes Simon along with Roseland Development, the Lennar Corp., Marriott Hotels and New York City-based architectural firm, SMWM. (The Coalition instead has pushed for a residential-heavy mixed-use development on the site of the former Cerro Wire and Cable Company factory, rather than a project dominated by retail.)

In the most recent development in the fight, on Monday New York State Supreme Court Justice Jeffrey Spinner told the Town of Oyster Bay it had 90 days to take "proper action" on the proposal to build an upscale regional mall--a decision that Taubman hailed.

Source: Retail Traffic Online, 2007

Greetings!

  • Betting on Biofuels - Final
  • Taubman - Retail or Roof Tops
  • Economic notes
  • Where is the Job Growth and What Kind of Jobs are they
  • Eating out leads II

    Bob Springmeyer

    Bonneville Research


  • Utah Economic Snapshot - Where and What Kind of New Jobs
    		•

    Utah Labor Market Indicators - May 2007 (Apr 07)

    • Employment Growth: 4.5% (4.5%)
    • Employment Increase: 54,000 (52,400)
    • Unemployment Rate: 2.5 %(2.7%)

    United States Labor Market Indicators - May 2007 (Apr 07)

    • Employment Growth: 1.4% (1.6%)
    • Unemployment Rate: 4.5%(4.6%)

    Source: Utah Dept of Workforce Services, 6/12/07 ________________________________________

    Where the Jobs Are - May 2007

    • Salt Lake County - 24,907 +4.3%
    • Utah County - 9,363 +5.4%
    • Davis County - 4,310 +4.2%
    • Washington County - 2,735 +5.3%
    • Weber County - 2,693 +2.9%

    What kinds of Jobs - May 2007

    • Specialty Trade Contractors - 10,400 +63.8%
    • Professional, Scientific, and Technical Services - 6,000 +9.9%
    • Health Services and Social Assistance - 3,900 +3.8%
    • Construction of Buildings - 3,000 +14.3%
    • Accommodation and Food Services - 2,800 +3.0%

    Source: Utah Dept of Workforce Services, 6/12/07

  • Economic Notes:
    		•

    • International Trade (FT900)
    • The nominal U.S. trade deficit in goods and services narrowed by 6.2% in April. The U.S. trade deficit came in at $58.5 billion, $3.9 billion less than March's $62.4 billion, according to the Bureau of Economic Analysis. In April, exports increased and imports decreased. The goods deficit with China, however, widened 12.3% to $19.4 billion. Crude oil prices increased in April, which in return increased the nation's total import bill for energy-related petroleum products to $24.2 billion.
    • Import and Export Prices
    • The U.S. Import Price Index increased 0.9% in May. The increase followed (a revised) 1.4% rise in April and was led by a 2.7% increase in petroleum prices. Export prices rose 0.1% in May, after increasing by 0.3% in the previous month.
    • Consumer Comfort Index
    • After falling for four consecutive weeks, consumer confidence took a break this week. The ABC News/Washington Post consumer comfort index rose two points to -13 in the week ending June 10. The details were decent with a four-point gain in the economic component leading the overall charge higher.
    • Treasury Budget
    • The unified deficit for May was $67.7 billion, slightly below the CBO's preliminary estimate of a $71 billion deficit. The federal government has run a deficit of $148.5 billion through the first eight months of FY2007; this is 35% smaller than the deficit at the same point in FY2006. The federal government continues to see strong revenue growth, which is reducing the deficit.
    • PPI
    • Producer prices for finished goods rose somewhat faster than expected in May, rising sharply (0.9%) for the fourth consecutive month. Inflation among finished goods was primarily due to large price increases among energy products. Prices for energy products rose sharply at all levels of processing. Excluding food and energy, prices for finished goods rose by 0.2%. Core inflation remained stronger among intermediate goods, with prices rising by 0.4% on the month.
    • Business Inventories (MTIS)
    • Total business inventories increased by 0.4%, in line with expectations. Inventories at retailers were up 0.3% for the month. Total business sales increased by 0.7%. The total I/S ratio dropped to 1.27.
    • Manpower Employment Outlook Survey
    • According to the Manpower Employment Outlook Survey, employers in all of the 27 countries surveyed expect to add staff in the third quarter of 2007. Hiring intentions remain solid in the U.S., with the net employment outlook indicating that 22% (not seasonally adjusted) of employers expect to increase hiring, compared to 21% in the previous quarter. Positive hiring activity is also anticipated in the euro area, with Germany and Norway reporting their most optimistic employment outlooks since the survey began. In the Asia Pacific, hiring activity will ease across the region, except in India where job prospects are expected to improve.
    • Job Openings and Labor Turnover Survey
    • Both hires and separations fell in April; 4.79 million workers were hired, while 4.58 million left their jobs for a variety of reasons. The number of job openings decreased as well, to 4.14 million from 4.18 million. The hire rate remained unchanged, at 3.5%, while the separation rate fell to 3.3% from 3.4%.
    • MBA Delinquency Rates
    • The delinquency rate of first mortgages decreased 11 basis points to 4.84% on a quarter-to- quarter basis in the first quarter of 2007, while foreclosures increased nine basis points to 1.28%. The decline in delinquency rates may reflect a concerted effort from the owners of mortgages to cure loans and avoid the total costs associated with foreclosure sales.
    • MBA Mortgage Applications Survey
    • Mortgage demand increased 6.6% in the week ending June 8. Purchase applications increased 7.2% and refinance applications increased 5.6%. Purchase applications are up even from four weeks ago, but recent industry trends could increase the number of mortgage applications per sale filed with MBA members.
    • Retail Sales (MARTS)
    • Total retail sales soared 1.4% in May, lifted again by strong growth at gasoline stations. Non-auto sales grew 1.3% as auto sales also grew strongly. Growth was strong nearly across the board especially among apparel, building supply and sporting goods stores. Growth in April was revised up to -0.1% from -0.2%. Year-over-year growth jumped to 5.0% in total and 4.6% excluding autos.
    • Chain Store Sales
    • Chain store sales rose 1.0% in the week ending June 9, the largest gain since the start of February. However, comparisons were difficult so year-over-year growth eased to 2.1%.
    • Oil and Gas Inventories
    • Crude oil inventories rose by 0.1 million barrels for the week ending June 8, according to the Energy Information Administration, above expectations of a 0.5 million barrel draw. Gasoline stocks were unchanged; they were expected to rise by 1.7 million barrels. Refinery runs came in well below expectations. Distillate inventories rose 0.3 million barrels, well below expectations. This release is very bullish for oil and gasoline prices.

    Source: Economy.com, ICSC SmartBrief & Financial Times

  • This Weeks Leads:
    		•

    Food Leads II:

    • Dee's Family Restaurant
    • Dee's Family Restaurant operates 12 locations throughout UT.
    • The restaurants occupy spaces of 5,000 sq.ft. in freestanding locations.
    • Expansion opportunities are sought throughout UT.
    • For more information contact
      • Mike Olsen,
      • Dee's Family Restaurant,
      • 777 East 2100 Street,
      • Salt Lake City, UT 84106-1829;
      • 801- 487-4201;
      • Fax 801-487-4207.
    • Applebee's
    • The Rose Group trades as Applebee's at 30 locations in DE, MD, NJ and PA.
    • The restaurants occupy spaces of 5,000 sq.ft. in regional centers and freestanding locations.
    • Expansion opportunities are sought in MD, NJ and PA. The company needs 1.5 acres of land for freestanding locations.
    • Leases running ten years with a five-year option are typical.
    • Preferred demographics include a population of 12,000 residing in a one-mile radius earning an average annual household income of $35,000.
    • For more information contact
      • Hank Lieberman,
      • The Rose Group,
      • 826 Newtown Yardley Road,
      • Newtown, PA 18940;
      • 215-579- 9220;
      • Fax 215-579-9226.
    • Steak-Out
    • Steak-Out Franchising, Inc. trades as Steak-Out at 91 locations nationwide.
    • The take-out/delivery restaurants occupy spaces of 1,500 sq.ft. to 1,800 sq.ft. in strip centers and freestanding locations.
    • Plans call for 30 openings in the coming 18 months and expansion opportunities are sought in the west, southeast and the midstates.
    • Leases running five to 10 years with options are typical.
    • A vanilla shell and tenant improvement allowances are required.
    • The company is franchising as well as expanding through company-owned stores.
    • Preferred demographics include a population of 40,000 residing in a three-mile radius earning an average annual household income of $42,000.
    • For more information contact
      • Joe McCord,
      • Steak-Out Franchising, Inc.,
      • 6801 Govenors Lake Parkway, Suite 100,
      • Norcross, GA 30071;
      • 678-533-6000;
      • Fax 678-291-0222.
    • Candy Cafe
    • Bayliss Company Inc. trades as Candy Cafe at two locations in MA.
    • The restaurants occupy spaces of 1,000 sq.ft. to 2,000 sq.ft. in regional, strip, specialty and outlet centers and freestanding locations.
    • Plans call for two openings in the coming 18 months and expansion opportunities are sought in CT, MA, ME, NH, RI and VT.
    • For more information contact
      • Steven Tenofsky,
      • Bayliss Company,
      • 1000 Boston Turnpike,
      • Shrewsbury, MA 01545;
      • 508-845- 5000;
      • Fax 508-842-6100.
    • Arby's
    • Sybra Inc. trades as Arby's at 220 locations in CT, FL, MD, MI, NJ, PA, TX, VA and WV.
    • The restaurants occupy spaces of 3,000 sq.ft. in freestanding locations.
    • Plans call for 12 openings in the coming 18 months and expansion opportunities are sought in New Haven, Fairfield, Middlesex and New London Counties in CT.
    • The company prefers Wal*Mart and grocery stores as cotenants.
    • Leases running 15 years are typical and the company prefers a turn- key rent structure.
    • Preferred demographics include a population of 20,000 residing in a two-mile radius earning an average annual household income of $60,000.
    • The company cites McDonald's, Burger King and Wendy's as competition.
    • For more information contact
      • Steve Patton,
      • The Proto Group,
      • 116 Washington Avenue, North Haven, CT 06473;
      • 203-234-6371;
      • Fax 203-234-6372.
    • The Coffee Bean & Tea Leaf
    • The Coffee Bean & Tea Leaf operates 137 locations in CA, AZ and NV.
    • The restaurants occupy spaces of 1,000 sq.ft. to 1,475 sq.ft. in regional and strip centers and freestanding locations.
    • Expansion opportunities are sought in the existing markets.
    • For more information contact
      • Paul Goldman,
      • The Coffee Bean & Tea Leaf,
      • 1945 South La Cienega Boulevard,
      • Los Angeles, CA 90034;
      • 310-237-2378;
      • E-mail: pgoldman@coffeebean.com.
    • Wendy's
    • Wendy's International, Inc. trades as Wendy's at 6,500 locations nationwide and internationally.
    • The fast food restaurants occupy spaces of 2,800 sq.ft. to 3,300 sq.ft. in freestanding locations, malls, entertainment, lifestyle, specialty, strip, tourist and value centers in addition to urban/downtown areas.
    • Growth opportunities are sought nationwide during the coming 18 months.
    • Typical leases run 15 years with 15-year options.
    • Preferred demographics include a population of 20,000 within two miles.
    • A land area of one acre is required.
    • For more information, contact
      • Kris Kaffenbarger,
      • Wendy's International, Inc.,
      • 4288 West Dublin-Granville Road,
      • Dublin, OH 43017.
    • Dunn Bros. Coffee
    • Dunn Bros. Coffee Franchising, Inc. trades as Dunn Bros. Coffee at 86 locations throughout IA, IL, KS, MN, MO, ND, SD, TN, TX and WI.
    • The specialty coffee shops occupy spaces of 1,200 sq.ft. to 1,400 sq.ft. in freestanding locations and malls in addition to entertainment, specialty, strip and tourist centers as well as in urban/downtown areas.
    • Plans call for 25 openings throughout the existing markets during the coming 18 months.
    • Typical leases run 10 years.
    • Specific improvements are required.
    • Competition is cited as It's A Grind and Starbucks.
    • For more information, contact
      • Chris Eilers,
      • Dunn Bros. Coffee Franchising, Inc.,
      • 111 3rd Avenue South, Suite 220,
      • Minneapolis, MN 55401;
      • Web site: www.dunnbros.com.
    • Fox Sports Grill & Il Fornaio
    • Sequoia Restaurant & Entertainment Group trades as Fox Sports Grill at seven locations throughout AZ, CA, NY, TX and WA.
    • The restaurants occupy spaces of 10,000 sq.ft. to 12,000 sq.ft. in entertainment and lifestyle centers and urban/downtown areas.
    • Plans call for four openings nationwide during the coming 18 months.
    • Preferred cotenants include hotels, offices, movie theaters and retail shops.
    • The company also trades as Il Fornaio at 26 locations throughout CA and NV.
    • The restaurants occupy spaces of 8,000 sq.ft. in lifestyle centers.
    • Plans call for one to two openings nationwide during the coming 18 months.
    • For more information, contact
      • Brian Kjos,
      • Sequoia Restaurant & Entertainment Group,
      • 610 Newport Center Drive, Suite 500,
      • Newport Beach, CA 92660;
      • Web site: www.sequoiacompany.com.
    • Bob Evans Restaurants
    • Bob Evans Farms, Inc. trades as Bob Evans Restaurants at 591 locations throughout DE, FL, IL, IN, KS, KY, MD, MI, MO, NC, NJ, NY, OH, PA, SC, TN, VA and WV.
    • The family-style restaurants occupy spaces of 5,300 sq.ft. in freestanding locations, malls, power and strip centers.
    • Plans call for 10 openings throughout the eastern coast and in FL during the coming 18 months.
    • Preferred cotenants include Home Depot, Kohl's, Lowe's Home Improvement, Wal*MartSupercenters and Target.
    • Preferred demographics include a population of 50,000 within five miles earning $50,000 as the average household income.
    • Competition is cited as Cracker Barrel, Denny's, IHOP and Perkins.
    • A land area of 1.5 acres is required.
    • For more information, contact
      • Stephen Warehime,
      • Bob Evans Farms, Inc.,
      • 3776 South High Street,
      • Columbus, OH 43207;
      • Web site: www.bobevans.com.
    • Manchu Wok
    • Manchu Wok, Inc. trades as Manchu Wok at 206 locations nationwide and in Canada and internationally.
    • The Chinese restaurants occupy spaces of 500 sq.ft. in food courts.
    • Growth opportunities are sought nationwide during the coming 18 months.
    • Typical leases run 10 years.
    • The company is franchising.
    • For more information, contact
      • Joycelyn Wiley,
      • Manchu Wok, Inc.,
      • 85 Citizen Court, Unit 9, Markham,
      • Ontario, CN L6G 1A8;
      • Web site: www.manchuwok.com.

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