They didn't see that one coming…

    Margaret McGuire

    Discontinuities (unexpected step changes in underlying market trends and drivers) are one of the “usual suspects” when business performance suddenly deteriorates. Last Friday, after most of the business and political press had gone home for the weekend, the EPA announced an unexpected change to the volume mandate of the Renewable Fuel Standard (RFS).

    The proposed amendment would reduce the total renewable fuels mandate from 18.2 to 15.2 B gallons for 2014 with corn based ethanol being reduced from 14.4 to 13.0 B gallons. The reduction in corn demand will be approximately 4 M acres – a significant quantity, especially when combined with 2013’s expected record harvest in the Unites States of almost 14 B bushels.

     1) EPA proposed changes to the Renewable Fuel Standard

    Renewable Fuel B Gallons METhe EPA’s announcement came as a surprise and upset a wide range of stakeholders. The National Corn Growers Association President Martin Barbre was scathing:

    “This recommendation is ill-advised and should be condemned by all consumers because it is damaging to our tenuous economy and short-sighted regarding the nation’s energy future. Agriculture has been a bright spot in a failing U.S. economy, but current corn prices are below the cost of production. The EPA’s ruling would be devastating for family farmers and the entire rural economy.”

    Brent Erickson, executive vice president of BIO’s Industrial & Environmental Section, (BIO represents more than 1,100 biotechnology companies, academic institutions, state biotechnology centers and related organizations in more than 30 other nations) was equally scathing:

    “The proposed rule released today turns the logic of the RFS on its head and could significantly chill investments in advanced biofuels projects…

    …Advanced biofuel companies have put more than $5 billion worth of private investment into this new technology so far, creating more than 7,600 permanent jobs. That investment has been put at risk by this proposal. It does not seem prudent for the United States to discourage this type of major investment in innovation and reward incumbent refiners that have been recalcitrant participants in the RFS program. We cannot strangle the advanced biofuels baby in the cradle.”

    According to the Association for Convenience & Fuel Retailing (NACS), nearly all gasoline in the U.S. is now E10 (fuel with up to 10% ethanol). Advances in vehicle fuel economy and lower than forecast vehicle miles traveled (a 3% reduction from the peak of 2007) have pushed gasoline consumption far lower than expected when Congress passed the RFS in 2007. As a result, the EPA indicates the U.S. fuel market is at the “E10 blend wall,” the point at which the E10 fuel pool is saturated with ethanol. The EPA is expected to release a final ruling after a 60-day public comment period.

    2) Fuel Consumption and Average MPG

    Fuel Consumed B Miles Traveled METhis is a classic example of multiple, high impact uncertainties combining to create a market discontinuity. It is also an excellent example of why scenario planning is a critical strategic marketing skill. Very few businesses would have forecast the ‘perfect storm’ of lower miles driven, higher fuel efficiency and the current administration lowering green energy mandates. However, a robust scenario planning process would have recognized the possibility that these market drivers were not guaranteed to remain on existing trends and could combine with serious implications.