Marketing 101: Biofuels Market Extends Beyond State Border

• We’ve heard a lot of talk during the Iowa biofuels mandate debate about national security and foreign oil dependency. These are extremely important issues, but should be addressed at the federal level using an integrated approach – working with retailers, producers and vehicle manufacturers. The federal government has implemented increased fuel economy standards and new rules for the renewable fuels standard with positive results. This combination of efforts will help us decrease our dependence on foreign oil more effectively than individual state biofuels mandates.
  
  
• Iowans should take a global perspective on biofuels. We should look for more demand in the global marketplace. Supporters of the mandate recently shared an analogy with the House Ag Committee, pointing to Texas. While they are no longer a top oil producer, the state continues to enjoy significant revenue through value-added services. This ongoing success, however, was not acquired by forcing Texans to buy Texas oil. It was developed by taking a strong, global leadership position in the oil industry. If Iowa is going to maintain and enhance its biofuels leadership position, it will not be by eliminating supplier competition and fuel choice in Iowa.
  
  
• As we’ve said from the beginning, our coalition supports biofuels, we simply oppose product mandates. We agree that renewable fuels offer great potential for Iowa farmers and entrepreneurs. So let’s develop a sound, global business strategy to grow this industry with strategic marketing strategies rather than free-market-corrupting mandates.
  
  
• A new report from Pike Research, a Colorado-based cleantech market research and consulting firm, says biodiesel has a bright future. Innovations in feedstocks will begin to have a meaningful impact on world energy markets over the next several years. They predict industry revenues will climb to $71 billion worldwide by 2020 – up from a projected $18.4 billion this year. Big picture thinkers are not focused on an additional 45 million gallons with in-state mandates.

Economic Study Says Biodiesel Mandate is Wrong Approach

CLICK HERE DOWNLOAD THE FULL SUMMARY REPORT

Iowans for Consumer Fuel Choice (ICFC) released an economic study analyzing the impact of a statewide biodiesel mandate, as proposed in Senate File 464 and currently being considered by the Iowa State Legislature.

Economist Wayne Newkirk, Ph.D., a longtime Drake University professor and president of Economic and Financial Consulting, reviewed and addressed the effects of a state mandate on demand, prices, employment and tax receipts, as well as the impact to fuel marketers and retailers.

“The proposed B5 mandate is rooted in upside-down economics,” said Dr. Newkirk. “In our free market system, apart from demand, the foremost issue is price. This mandate is attempting to force demand by eliminating competition for suppliers. Removing competitive products will inevitably drive up price and consumers will have to pay, or choose to refuel outside of Iowa.”

According to data published by DTN and OPIS, the average premium paid by Minnesota consumers for mandated biodiesel was nearly 7.5 cents per gallon. Newkirk points out that this premium does not take into consideration the loss of the $1.00 Federal blender’s credit, which would increase the premium paid for B5 to nearly 12.5 cents on average.

“There is no logical reason to believe an Iowa biodiesel mandate would deliver any different result than what we’ve witnessed in Minnesota,” said Dawn Carlson, spokesperson for ICFC and president and chief executive officer for Petroleum Marketers and Convenience Stores of Iowa. “Since B5 blended biodiesel is not readily available at major Iowa racks, it’s difficult to pin down the exact price impact a mandate would have here. There is absolutely no validity in the argument, however, that it would lower prices at the pump.”

With a state biodiesel mandate, Iowa retailers will be at a competitive disadvantage with competitors in neighboring states. Representatives from the Iowa Motor Truck Association warn that more than 75 trucking companies have said if forced to buy biodiesel in Iowa, they will purchase their fuel outside the state.

“Bypassing Iowa retailers is not an empty promise,” said Brenda Neville, president of the Iowa Motor Truck Association. “Motor carriers typically use an on-board computer program to help plan travel routes and identify the most cost effective refueling options. Given fuel capacity to travel as many as 1,200 miles per tank, drivers can easily opt to refuel elsewhere.”

According to last year’s Iowa Department of Revenue figures, truck stops operating along Iowa’s interstate highways sold more than 228 million gallons of on-road-use diesel fuel – or more than one-third of the state’s total sales of 612 million gallons.

In his study, Dr. Newkirk estimates costs emanating from losses in employment, motor carriers bypassing Iowa, and related declines in tax revenue could exceed $100 million in lost revenue to the state. He also sees spillover effects from the B-5 mandate in terms of transportation costs ($49 million), pipeline upgrades ($500,000 to $2 million per location/terminal) and increased jobber expenses ($12.5 million).

“In today’s economic environment a B5 mandate will only add to our state’s fiscal and monetary burdens,” said Newkirk. “With the loss of the federal blenders’ tax credit Iowa’s biodiesel industry is struggling, but a state mandate is not the solution.”

Iowa’s Biofuel Leadership Position Must Focus on Demand

• Oil companies are obligated to use biodiesel to comply with federal fuel mandates. Renewable fuel groups say biodiesel outperforms petroleum diesel. So, why do we need a mandate that eliminates consumer choice and forces Iowans to use this product? If Iowa wants to re-establish a biofuels leadership position, stop trying to force consumers to buy this product and focus on developing a product that consumers want.
  
  
• The biodiesel industry says 66% of Iowans want biodiesel. Yet, only 16% of those surveyed have ever owned a diesel-powered vehicle. You know who does drive diesel-powered vehicles? Truckers ... 98% of the Iowa Motor Truck Association members are opposed to this legislation. In fact, more than 75 motor carriers have said they will bypass Iowa retailers if a mandate is passed. If retailers are not selling fuel to truckers, they will have to eliminate jobs. Keep in mind, according to Department of Revenue figures, last year, truck stops operating along Iowa’s interstate highways accounted for more than one-third of the state’s total diesel sales.
  
  
• Price is a critical part of the demand equation. According to data published by DTN and OPIS, the Minnesota wholesale cost for B5 (not B100) on average was nearly 7.5 cents per gallon more than petroleum diesel in Minnesota during the period from Jan. 1, 2008 to Feb. 25, 2010. Note that these figures do not take into consideration the loss of the $1.00 Federal blender’s credit, which would increase the premium paid for B5 to nearly 12.5 cents on average.
  
  
• It is difficult to pin down the exact price impact a mandate would have here in Iowa. However, there is absolutely no validity in the argument that a mandate would lower prices at the pump. If farmers were forced to buy and plant seed corn grown only in Iowa, how much would seed corn cost? Retailers will sell any fuel that consumers want. We are confident they want the least expensive and most reliable fuel available.
  
  
• Biodiesel is a commodity subject to the effects of supply and demand in the marketplace. Consumers should not be the victim of a “Field of Dreams” marketing plan that touts an “if we build it, they will come” slogan. Consumers should not bear the tax of a fuels mandate. Let consumers decide what fuel they want.
  
  

Fear And Politics Are Overtaking The FACTS

• When challenged about their conclusions for the 2 Million Mile Haul, supporters of a biodiesel mandate desperately responded by arguing the validity of a B20 study for a B5 mandate. Let’s not forget they were the ones touting the study as indisputable proof for their position. We simply responded to their half-baked claims.

• For the record, quality and performance are significant B5 issues. In Minnesota, their mandate has been suspended multiple times due to cold weather issues. Also, engine manufacturers caution against various grades of biofuels and they void warranties for using these blended fuels. If biodiesel competed favorably, there would be no need to mandate it.

• You’ve heard a lot of theories about the price impact from a mandate. The fact is nothing is more telling than the reality we’ve witnessed in Minnesota. Since implementing their mandate, the average premium paid by Minnesota consumers for a gallon of diesel was 7.468 cents per gallon (based on DTN and OPIS data). This premium does not take into consideration the loss of the $1.00 Federal blender’s credit, which would increase the premium paid for a B5 blend to 12.468 cents on average.
  
  B5 is not readily available at any major Iowa racks. So, it is difficult to predict exactly what the real-world pricing differential would be in Iowa. Yet, there is no reason to believe that the premium would be materially different than it is in Minnesota.
  
  
• After losing the battle of facts, biofuel mandate supporters undoubtedly will return to emotional arguments. They’ve accused us of being anti-farmer, anti-Iowan and anti-American.
  
  The truth is our mission is to protect the rights and interests of all Iowans by serving as the voice of reason for a responsible and fair marketplace. We have and will continue to support biofuels because of the impact on our ag industry. However, mandates eliminate Iowans choice at the pump and drive up fuel prices. They are not good for our state.
  
  We are all about the American free-market system. Our position opposing mandates is based on the sound economic principle that supply and demand should drive the marketplace. It is important to find viable alternatives to petroleum-based products, like biodiesel. Yet, we do not support forcing consumers to buy any single product.
  
  
• Proponents of the mandate also would like for you to believe the only options are biofuel or Iraqi oil. The truth is a small percentage of our oil comes from the Middle East. Our biggest supplier is our friends from Canada.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
• Mandate supporters like to label our coalition as “big oil.” It is true the American Petroleum Institute is a supporter of our group — they believe in our free-market stance. Yet, it’s important to note, Iowans for Consumer Fuel Choice represents a broad and diverse group of Iowans, including:
  
  Teamsters Local 238; Broadway Flying J Travel Plaza; Casey’s General Stores; Hy-Vee, Inc.; Iowa 80 Truck Stop; Iowa Association of Business & Industry; Iowa Association of School Boards; Iowa Automobile Dealers Association; Iowa Good Roads Association; Iowa Grocery Industry Association; Iowa Motor Truck Association; Iowa Rural Water Association; Iowa Section of the American Water Works; Keck Energy; Kum & Go, LC; Kwik Star; Pilot Travel Centers, LLC; and, Petroleum Marketers & Convenience Stores of Iowa.
  
  

The 2 Million Mile Haul: A Double-Decker Dose of Confusion

“Iowa Biodiesel Board, Iowa Soybean Association and REG are promoting the 2 Million Mile Haul as a success but if the report is read, THE TRUE RESULTS ARE BURIED IN A MOUNTAIN OF DATA.”
— Steve Lursen, Special Projects Manager, Decker Companies

Beware of all the hoopla and fanfare surrounding the 2 Million Mile Haul. Sponsors tout test results as evidence supporting a biodiesel mandate. They also imply support of the mandate by Decker Truck Lines, the Fort Dodge-based motor carrier that participated in the study.

Study sponsors regularly tout fuel economy performance and cold weather characteristics, as well as improved lubricity for biodiesel compared to conventional on-road diesel fuel. Decker officials offer a notably different perspective of the results:

• Biodiesel MPG was 2% lower during the test
• Cold weather is a major issue
• Lubricating advantages of biodiesel were unsubstantiated
• Quality is inconsistent
• Biodiesel availability is limited
• Biodiesel proved to be significantly more expensive

Despite confusion surrounding the study one thing is clear, biofuel mandates are not the solution. Fuel is a leading expense for trucking companies, who measure profitability by costs per mile. A mandate will force motor carriers to purchase fuel outside Iowa, and this will have a negative, rippling effect on Iowa retailers, our biodiesel industry and our state in general.

CLICK HERE to review full contents of Steve Lursen’s letter.