I had the opportunity to present at a hearing in Washington last week – this was a public meeting of the Biomass Research and Development Technical Sub-Committee. This group was composed of notable academics, as well as representatives from government and NGO’s – helping to shape the discussion on biofuels. I presented the results of the study we completed this past spring for the USDA on the Economic Impact of the Biobased Sector.
Some of the recommendations I made to the group are discussed here in this blog, and published in the latest edition of Industrial Biotechnology journal. What we found during the course of our research was a highly motivated and engaged set of stakeholders from both the private and public sectors, who believe in the vision of a growing biobased economy. All of the individuals we met with were willing to support our work and eager to find ways to support further growth of the bioproducts industry. However, we also identified a series of important issues that may impede the development and growth of biobased technologies and limit the ability of biobased products to penetrate industrial and consumer markets. This commentary is intended to identify these needs and provide an initial set of thoughts regarding the path forward for the industry.
Insight #1: The Industry Requires Improved Product Data Codes and a Reliable Tracking System
One of the larger challenges we encountered early in our research was the lack of any government or private sector database that measured the growth of existing products as well as the emergence of new products introduced into the sector. Effectively, there is no database that permits reliable reporting on the volume of biobased products sold in the US or exported for global consumers. In large part this is due to the lack of existing coding and classification systems for tracking the sale and distribution of bioproducts by any of the federal agencies. We were chagrined to learn that the Bureau of Labor Statistics, the US Department of Agriculture (USDA), the Department of Commerce, the Environmental Protection Agency (EPA), the Department of Energy, or the Federal Consumer Agency do not track the sector. Unfortunately, The North American Industry Classification System (NAICS) is the standard-bearer for classifying businesses and sectors. Unfortunately, NAICS does not currently provide necessary classifications for biobased products. As an example, Chemical Manufacturing (NAICS 325) encompasses a variety of chemical manufacturing codes including petrochemicals (3251), but none for biobased chemicals. Thus, for our modeling, we were highly dependent on prior research and literature examining the percentage of biobased products as a portion of the larger industry sector (i.e., biobased chemicals as a sub-sector of the chemicals industry) as well as insights and guidance from industry representatives.
Insight #2: A Lack of Financing, Capital, and Tax Incentives Is Restraining Sectorial Growth & Job Creation
Although the biofuels sector enjoyed a significant amount of investment 8 years ago, the venture capital (VC) market quickly became disenchanted with the biobased sector once the early start-ups did not provide the immediate payoff many were expecting. In fact, speakers at the December 2014 BIO conference noted that the level of VC funding was at a 4-year low! What will be required to attract investors to this market?
There are two sides to the equation-–one is sugar. Unlocking growth in this market is married to the concept of unlocking access to inexpensive sugar. The US produces a lot of corn, but there is still a large part of the population that believes the food versus fuel debate is alive and well! This is a myth that again must be debunked through improved education.
Insight #3: The USDA BioPreferred Label Can Gain Even Greater Utility with Industry
Since 2011, the USDA BioPreferred voluntary label has been in the market place and now has been applied to more than 20,000 certified products. Manufacturers go through a certification process that has been developed in a partnership with ASTM International to ensure quality control and consistent results.
As retailers and brands are increasingly seeking to sell environmentally beneficial products the role of biobased products and feedstocks will play an ever-increasing important role. Many of the largest multi-national retailers discussed with us the perceived benefits that biobased products can provide in their corporate sustainability goals and programs. However, each of these firms expressed that they would benefit from more direct discussions with the BioPreferred Program to find ways to increase the utilization of the label as a default “indicator” to be used in life cycle assessment (LCA) programs similar to the use of sustainable sourced forestry products. The continued public-private partnership would serve both parties well to increase the visibility and consumer demand for bioproducts.
Insight #4: The BioProducts Sector Benefits a Much Broader Segment of America
One of the big insights from the analysis in our report is that the biobased economy is emerging in states all over the country. There exists a myth that biobased products only benefit the corn producing states in the Midwest. Our research found that this is not the case. The “Location Quotient” in our study is a ratio that compares an industry’s share of total employment in a region to the national share. In our study, we applied the Location Quotient as a ratio comparing the bioeconomy’s relative employment contributions at the state level to its national share of the US economy. This was calculated as the percent of state employment in a bioproducts sector divided by the percent employment in the same sector in the US.
We were surprised to find that many states with the highest Location Quotients were not states that are typically associated with the biofuels economy, including Oregon, Wisconsin, North Carolina, Mississippi, Alabama, Maine, and others. In fact, this analysis shows that the biobased economy is a growing and significant portion of almost every state in the union, and in some cases, states that have a very low rate of economic growth.
Insight #5: The Industry Would Benefit from a Research-Oriented Consortia
Reflecting on our many meetings with industry representatives and discussions with small groups at workshops and conferences it became very clear that individual actors within the industry are expending significant human and financial capital to address a number of environmental, social, and economic issues. As an industry, companies would benefit by following the lead of other sectors such as the apparel and footwear industry, which realized that there was intrinsic value by pulling resources together to address sector-specific issues such as LCA data and protocols. The global apparel sector’s effort resulted in the development of the Higg Index, a universally accepted LCA tool and life cycle inventory database. The bioproducts sector is faced with even greater pressures by institutional buyers at retailers, government agencies, and regulators / nongovernmental organizations (NGOs) to quantify the environmental trade-offs of the products they produce, many times in comparison to traditional non-renewable products. The costs and time for individual firms to garner the life cycle inventory data from global suppliers can be cost prohibitive and time demanding. Additional emerging issues such as the development of “dynamic LCA,” which examines carbon impacts over time, further rationalize this need.
There are many misperceptions around the biobased sector that could be addressed through such a consortia. Some of these misperceptions exist, even within government. For example, yesterday I was speaking with someone who works with the United Soybean Board, and who had spent 25 years with the EPA. What this expert shared with me was incredible – there are parts of the EPA that are biased against the biobased sector! Why? Because they view “industrial farming”, as well as “commercial farming runoff” as bad for the environment. But has anyone ever seen a commercial farm? I haven’t – and neither had she! In fact, the biggest “commercial farm” was a family-owned operation, maybe farming 5000 acres….certainly not a greedy corporation that sectors of the EPA are pointing to…
Insight #6: The USDA Should Expand the Reporting on the Economic Impacts of the BioProducts Industry
As discussed previously, there is a major gap in the ability of government agencies to track and measure the growth of the bioproducts sector in industry. Although the federal BioPreferred database includes about 20,000 biobased products, there is no federal database that tracks the actual “quantity of biobased products sold.” In addition, the BioPreferred database contains very few forest products or traditional textile fiber products, as these were only recently added to the biobased sector in the 2014 Farm Bill. As such, the actual number of biobased products is dramatically higher than indicated in the BioPreferred database.
To be able to track this number better, a system for coding and measuring biobased product sales and products will need to be established. This should include the following four elements:
- Improved NAICS codes
- Annual reporting
- Enhance to state and county level tracking
Insight #7: The Federal Government Can Do More in Purchasing Bioproducts
Established by the Farm Security and Rural Investment Act of 2002 (2002 Farm Bill) and strengthened by the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill), and the Agriculture Act of 2014 (H.R. 2642 2014 Farm Bill), the USDA BioPreferred program is charged with transforming the marketplace for biobased products and creating jobs in rural America. The program’s mandatory federal purchasing initiative and voluntary “USDA Certified Biobased Product” label have quickly made it one of the most respected and trusted drivers in today’s biobased marketplace (visit www.biopreferred.gov for more information). Private and public purchasers now look to the USDA BioPreferred program to ensure that their purchases are biobased. Beginning in 2005, with its first designation of six product categories, the program has now designated 97 product categories representing approximately 20,000 products that are included in the mandatory federal purchasing initiative.
The USDA should be applauded for creating the BioPreferred program. As noted by manufacturers, the program allows manufacturers to reveal the actual percentage of a product’s content that is biobased. This transparency allows consumers to make the choice, not the manufacturer. However, adoption of the program has been slower than anticipated, as manufacturers have not readily jumped on board. The General Service Administration has not yet found a way to ensure a good way of measuring whether there is proper compliance with the federal mandate. Unless there is a way of measuring the level of growth through better management of spend data, it is unlikely that the BioPreferred Program will grow at a substantial clip, as the program really has no “teeth” to speak of. Measurement of compliance to this requirement by federal agencies will be an important part of creating these teeth.
Insight #8: The Industry Needs Congress Needs to Appropriate Funds Already Authorized
Title IX Energy Section 9002: Biobased Market (i.e., the BioPreferred program) of the 2014 Farm Bill authorizes $3 million in “mandatory” fiscal year (FY) funding from 2014 to 2018, which, because of required budget sequestration of 7.3%, has resulted in only $2.78 million of available funds during that time period. The bill also authorizes “discretionary” funding to be appropriated in the amount of $2 million per year from FY 2014 to 2018. However, Congress has not appropriated the discretionary funding, which is vital to supporting programs that can grow the US biobased products industry and create more American jobs. There were strong voices from major US companies, as well as from small and medium-sized enterprises, urging Congress to appropriate the discretionary funds.
An important realization that occurred to us during our research is that the only way the biobased economy will work is if it can be scaled up to a significant size. In general, economies of scale are working against the growth of the sector. Any type of specialized acid or polymer is derived from ethanol, which means there needs to be scale to produce it efficiently in order to compete in a commoditized world. The scale does not have to be on the scale of a petrochemical plant, but the reality is that most of the chemicals that are produced through fermentation are commodity based. Synthetic chemistry must be layered over this process to convert the chemicals to other chemicals through synthesis; and, to be successful, the total cost of production must be lower than the variable cost of production for a petrochemically derived competing product.
Insight #9: Successful technology development depends on improved execution and business fundamentals
One of the insights that repeatedly arose during our research regarded the importance of the industry having solid business fundamentals. While this sounds basic, there were many tales told to us of unrealized goals that clearly were the result of overly ambitious goals and poor execution. This includes the need for firms to start off with the hiring of an experienced program manager for plant start-ups. So many stories of failure were due to the lack of this experience. Plant construction must be carefully managed to control costs, especially with engineering procurement construction supplier contracts. Such contracts often have significant additional charges associated with change orders; thus, control over the construction process for changes needs to be documented and carefully tracked to avoid major surcharges at the end of the project. It is also critical to have risk discovery and problem analysis processes established to avoid rushing into commercialization. Several executives we spoke with emphasized that rushing to commercialization to satisfy an investor was a mistake, and rather it was better to take one’s time and perfect the technology during the small start-up phase. Otherwise, start-up failures lead to further investment challenges with investors.
Insight #10: The Bioproducts Sector Has a Positive Outlook…But More Work is Needed.
Our research and consumer product studies suggest that the “green” segment of consumer products is growing at a double-digit rate, and this has been consistent for several years. There has, in fact, emerged a “consumer pull” for green products, as millennials are willing to pay the same (or even 10% higher) price for greener sustainable products. In theory, this growth should track back to raw material growth (e.g., corn, biodegradable vegetation, soybeans, etc.)
But this is a tricky business. If consumers are buying more green products in consumer product categories that have essentially flat growth, this means they are taking market share from more conventional petrochemical-based products and changing categories over more to biobased. This should be seen as a positive thing. However, the challenge is really scale, which has to do with the entrenched nature of these categories. In most consumer products categories, biobased products are 0.5-2 % market share only. So even double-digit growth is not significant.
The people we interviewed in conducting this study are passionate about the bioeconomy and the USDA BioPreferred program. As more people learn about it, it will grow.