Marketing Midwest Succotash

By Frank Levinson

For the high tech readers of this web blog it is probably important to start out with a definition for the word succotash because it probably is not familiar to most of you.

Succotash is a dish (food) made from beans and corn. Can be lima beans and corn, but can be green beans and corn too.

The beans and corn in this essay are soybeans and field corn. Both of which really are not grown for human consumption. Soybeans are primarily grown today as a source of protein for feeding to animals and field corn is grown with the same target in mind – feeding to animals but is not the source of protein but rather of carbs. These substances often get blended and palletized so that they can be fed in concentrated forms on feed lots where much of our “on the hoof” meats are raised these days.

All of this is pretty clinical.

But in the last year or two the Midwest has discovered bio fuels in a big way.

Used to be that as I drove along country roads out here there were fields of corn and soybeans but there were fields that were not planted as well. The US government subsidized these unplanted fields in an attempt to keep a balance between supply and demand in the beans and corn markets.

Not so this year. Every field was planted. And the subsidies were dropped because the prices for both beans and corn are rising steadily because bio-fuels are now competing with cows, pigs and chickens for the crops. Now we could take this essay down the path of how this competition is raising the price of basic food to the poorest of people here and around the world but others have done that pretty well. So staying with the fuel thread …

Every field was planted with either soybeans or corn. This was new in the last couple of years to my untrained eye. Someone had sold the idea here that farmers here could help the USA grow its way to energy independence. So the farmers grow but then they need some place to take the output … normal grain elevators and pelletization plants are not equipped to make bio-fuels.

Enter the energy VCs, and now in the rural counties of northern Indiana there are being built a number of “refineries” that take the corn or beans and convert them to fuel. These are having token local NIMBY fights about where they should be built because they are stinky and it is not clear how they impact local water and other resources. But the fights are token. Because it is patriotic to grow energy and it is something these people can do to try and make a difference.

You see the Midwest is the heartland of the USA. It supplies feed grains, livestock for meat and sons and daughters in large quantities to the Army and National Guard for Iraq. If you live in Silicon Valley, I wonder if you know any young person who has served in Iraq. But in rural Indiana, it is easier to find people, families who have sons and daughters over there. Folks here believe in doing good, helping the USA where they can and so they sign up for things pretty readily. And so it is also now with the effort to build a USA based bio-fuels industry. [ 1, 2, 3]

For example, Indiana is the 5th largest corn producing state and in January 2005, there was only 1 ethanol refinery (corn to fuel) but today there are 12! And Indiana is the 4th largest soybean producing state and now it has 3 bio-diesel refineries as well. These plants will create 663 jobs and require a capital investment of $1.67B. That’s large even by Silicon Valley VC money.

There are some who are fighting against the bio-refinieries [4, 5 ], but this is pretty token as far as I can tell. A few signs on front lawns but clearly equal numbers on both sides of the issue and with jobs for the construction and jobs for the operation there is really no chance these giant corn and beans processing facilities will not be built.

So why write about this?

Being a founder of Finisar Corp and then taking it through its IPO, then 18 months later watching the .COM and fiber optic melt downs from not the front row seat but actually from inside the game has given me a healthy skepticism about fast developing markets. I have watched companies have their sales drop by more than 90% in 18 months. Not .com companies who never had sales but real companies who had factories and thousands of employees and real sales and profits. And it all came crashing down when some global reality hit home. For fiber optic markets it was that the technology was not so important as the amount of invested capital was chasing in 2000. So too much capacity was created for markets that could not absorb the output.

Living in the San Francisco Bay area it is easy to drive through the Altamont pass and see the little windmills and the effort made there 30 years ago with the government’s blessing. It was not the right sight and the windmill designs were not anywhere near optimal and so many gentle investors wanting to help make a difference in energy generation and use volunteered their money to help build this facility. And they all lost their money. In this case it was the fact that we simply did not know enough about how to build wind farms, how to determine where were optimal sights and what physical scale and designs were best to make a profitable business. But because of hopes and dreams we built anyway. And now Altamont pass is to me the symbol of how not to do a large scale energy project.

And I fear that the same lesson is playing out here in the Midwest. The energy budget for processing corn and beans into fuels is not well established but at best it is a bit better than break even. You have to spend fuel to plant, fuel to harvest, fuel to transport and fuel to refine. And when you are done you make about 10-20% more fuel than you used to if you are very careful.

[Aside – corn and beans are not processed in the same way. Corn is processed into alcohol, like the “moonshine” and “corn-squeezins” of the past but much more efficiently. Soybeans are pressed for their oil and then the residual material can largely be processed for its protein.]

You see, most of the plant is left in the field. We do not know how to process cellulose into fuel. That is an unsolved problem. And if we can learn this it is not clear that the refineries being built will have the right structure to run the new processes. And processing more of the plant is the key here. Researchers must develop bacteria that like to eat cellulose and poop out methane, ethane, alcohol. And there are some candidate bugs that do this but as they do they die in their own desirable by-products.

So the Midwest looks to me to be engaged in a .com bubble, an Altamont pass build up that is premature, where massive amounts of money (refineries cost tens to hundreds of millions of dollars!) are being deployed to help build an industry that is not ready to be profitable and where we will likely change good people’s lives temporarily instead of long term. And where the environmental and energy budgets are not well studied.

And the succotash they are diligently growing may not be the mash up we all hope for.