By PETER HUSSMANN
Should the Newton biodiesel plant fail, as its most recent annual report could lead one to suspect, I'd suggest that it may have more to do with the cockamamie management agreement in place than all of the other risks it faces combined.
Now I'm no alternative energy fuels expert by any stretch and could scarcely explain the viscosity differences between my lawnmower's and hair clipper's oil needs, but I do know enough that it's probably not a good idea to let your competitor run your business. That's my take, at least, on how 500 and so investors in the Newton biodiesel plant potentially stand to lose millions if the worst-case-scenario spelled out in the company's annual report comes to pass.
And the independent auditors hired by Central Iowa Energy to lay out the conundrum its shareholders face make no bones about the fact. They go on in some detail, with the directors' signed approval, to explain that maybe the management and operational services agreement the company got into with Ames-based Renewable Energy Group wasn't exactly what it bargained. Unfortunately for Central Iowa's shareholders, not much appears available to be done - or undone.
In 2006, Central Iowa entered into an agreement with REG to provide management and marketing services for its Newton facility. This followed the design-build agreement that allowed Central Iowa Energy use of REG's state-of-the-art biodiesel plant construction technology.
More specifically, according to the annual report, the management and operational services agreement calls for REG to provide:
- Market analysis of biodiesel supply and demand;
- Market access to REG's developed biodiesel distribution channels;
- Analysis and audit of biodiesel customers, including the creditworthiness, and bulk transportation providers;
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Marketing specialists and sales representatives to attain and establish sales opportunities and relationships for our products;
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Arrangements for transportation, logistics and scheduling of biodiesel shipments;
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Arrangements for leased tankers for rail shipments, where advantageous;
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Oversight and reconciliation of shipments, invoicing and payments on a weekly basis; and
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Providing invoicing and accounts receivable management for biodiesel shipments.
Sounds good. Just sit back, relax, let REG do all the work and reap in the profits. But as the annual report spells out it didn't quite work that way. Losing $5.4 million in just 18 months of operation indicates something didn't go according to plan.
One of the biggest problems facing the industry is that biodiesel supply may already far exceed its demand. According to information contained in CIE's annual report, in 2007 approximately 450 million gallons of biodiesel was produced across the United States. As of September 2008, the National Biodiesel Board reported that there were 176 operating biodiesel plants across the U.S. with a combined production capacity of 2.61 billion gallons. In addition, plants planned for construction or expansion would increase the biodiesel industry's national capacity another 849.9 million gallons a year.
"We may not be able to compete successfully or such competition may reduce our ability to generate the profits necessary to operate our plant," CIE says in its annual report.
And it's not just competition with other producers in finding markets to sell their finished products. All these producers are also in competition to find the raw materials necessary to produce the alternative fuel source. And producers can't just pass along their higher input costs to the customers because there is no correlation between the cost of the feedstock and the market price of biodiesel. To stay competitive, biodiesel producers must stay competitively priced with petroleum-based diesel. So, if the feedstock costs go up and the petroleum prices go down a biodiesel company's profit margins evaporate.
Central Iowa Energy recognizes their dilemma in its annual report.
"We are highly dependent upon REG for the successful marketing or our products and the procurement of adequate supplies of the inputs needed to produce our products," the company states in its report. "We do not have our own sales force or any other agreements with any third party for the marketing and sale of our products or the procurement of inputs. Our lack of a sales force and reliance on a third party to sell and market our products may place us at a competitive disadvantage."
As bad as that sounds it gets worse. Not only are the top two positions at the Newton biodiesel plant staffed by employees of Renewable Energy Group, REG owns and operates its own biodiesel production facilities, recently buying a big facility down in Texas.
"REG operates its own biodiesel production facilities in Ralston, Iowa and Houston, Texas and anticipates increasing its biodiesel production through wholly-owned and third-party managed biodiesel plants in the future," shareholders were told in the annual report. "This means that REG, our current plant manager and product marketer, is in competition with us in many aspects of our business, including feedstock procurement and biodiesel production and marketing. We also have to compete with REG for employees. Because REG operates its own biodiesel production facilities and competes with us in many aspects of our business, REG many have a conflict of interest in managing our plant and marketing our products. Although we have entered into a management and operational services agreement with REG for management and marketing services, there is no assurance that REG's performance of these services is not compromised by its own biodiesel production operations."
As I said, cockamamie.
Oh, and be sure to read the piece in Biodiesel magazine written by REG's CEO on the coming consolidation of the industry here.
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