Image source: fishhawk/Flickr.
Quite a few people have strong opinions about the best use of America's vast corn supply, which totaled over 11.8 billion bushels in 2014 after exports. If you were in charge of deciding the destination for each kernel of corn, how would you allocate production?
While the most arguments typically center on the "food vs. fuel" debate, most corn produced in the United States never actually becomes food. Consider that 44% of last year's harvest went to animal feed, another 44% became ethanol fuel, and the remaining 12% went to "other" uses that included food and sweeteners, according to data compiled by the U.S. Department of Agriculture.
That may come as a shock to most people, but we're not done yet. As it turns out, American corn may be most valuable when used by biotech companies. More specifically, industrial biotech companies and partners such as Archer Daniels Midland (ADM -1.41%), Solazyme (TVIA), and DuPont (DD) that use corn as the main input to produce chemicals, fuels, and foods that were worth over $125 billion in 2012. Let's explore how it works and what opportunities are available for investors.
Meet the emerging bioeconomy
The industrial biotech sector represented over one-third of the national bioeconomy in 2012. What the heck is that? The bioeconomy is all economic activity generated from products and services that rely on biotechnology. Entrepreneur/writer/investor/thought-leader Rob Carlson, who has the not-so-envious task of tracking the data, has organized the bioeconomy into three parts:
- Biotech seeds: agricultural crops that benefit from new genetic traits.
- Biologics: pharmaceuticals derived from biotechnology instead of synthetic chemistry, including six of the eight best-selling drugs in the world in 2013.
- Industrial biotech: chemicals, fuels, and foods produced from fermentation and microorganisms instead of petrochemicals.
The data are difficult to track, so updates don't come regularly, but Carlson has shown that the bioeconomy is growing nearly 15% every year and comprised 2.5% of total GDP in 2012. It may have even accounted for 7% of total GDP growth from 2011 to 2012 on its way to nearly $350 billion in annual output.
Image source: Data from Rob Carlson at synthesis.cc; chart created by author.
It's clear that biotechnology is an integral part of the American economy, although our focus here is on the sliver called industrial biotech. America clearly has the corn, now it just needs investment and development. What companies are making it happen?
These companies believe in industrial biotech
One simple way to find investing opportunities is to simply follow the corn. Archer Daniels Midland handles, processes, and distributes millions of tons of corn every year. The recent pressure to boost earnings and operating margins has led the company to invest in high margin uses for its vast network of agricultural raw materials, which includes using industrial biotech platforms to convert corn into higher value products.
The most visible partnership is with Solazyme, which uses algae to produce cosmetics, drilling lubricants, and vegan protein replacements and food ingredients. Archer Daniels Midland currently leases a 20,000 metric ton per year production facility to Solazyme and supplies the raw corn. Although production has hit a snag recently, output from the facility could generate upwards of $80 million in annual sales with 50% gross profit margin if issues are resolved. Successful operations could lead the companies to expand annual production capacity to 100,000 MT.
Solazyme converts sugars from agricultural raw materials such as corn into higher value chemicals and fuels. Image source: Solazyme.
Archer Daniels Midland has several other noteworthy investments in industrial biotech. Last year the company announced a partnership with Synthetic Genomics to convert corn into omega3 DHA, typically found in fish and other seafood products, using algae. The high value ingredient could be added to foods to boost the nutritional content or packaged as a stand-alone nutritional supplement. If successful, the companies intend to expand production into additional food ingredients.
Meanwhile, DuPont has quietly researched industrial biotech for years and officially formed its Industrial Biosciences business in 2011 after acquiring the industrial enzyme business from Danisco. Although the chemical manufacturer owns a wide range of intellectual property for engineered microbes, it has done relatively little with its patents, often licensing them instead of commercializing new technologies. That has handicapped the potential for industrial biotech at DuPont and resulted in Industrial Biosciences contributing the least revenue of any segment.
That could be about to change, however. Pressure to increase profitability bodes well for increased investment in Industrial Biosciences, which captured the second highest profit margin (16%) after DuPont's Agriculture segment (24%) in 2014. Better biotech tools that make it easier to conduct critical research and development and cheaper to mass produce chemicals also help, but customer demand is doing its part, too. The company's flagship industrial biotech product Sorona, a renewable polymer used for carpeting, has seen increased demand and higher prices in recent years, which has been key to a 23% increase in operating profit for the segment.
Growth investments could begin paying in the next few years, too. A 30 million gallon per year cellulosic ethanol facility in Iowa will begin operating in 2015, while a 50/50 joint venture with BP to produce butanol fuel end up replacing ethanol altogether. Coupled together, the two projects could be just the beginning of a growth-driving effort in next-generation renewable fuels. It may take time to ramp sales and profits in industrial biotech, but investors would be wise to keep an eye on its progress.
What does it mean for investors?
When Congress and the EPA teamed up in 2005 to require that the United States leverage its vast corn potential to produce bioethanol that would be blended into the nation's gasoline supply, many fell back on the "food vs. fuel" debate or allowed it to scare them away from potential investment opportunities. In the nine years since, the United States has added over 10 billion gallons of annual ethanol production capacity and established itself as the leading global producer of renewable fuels. Investing is volatile thanks to politics, but there's no denying that the industry, spurred from corn, helped create great returns for the leading companies.
Today, corn is on the cusp of enabling an even larger opportunity for industrial biotech. It's still very early in the industry's development and many companies are still privately owned, but the future very likely involves important partners such as Archer Daniels Midland and innovators such as DuPont and Solazyme. The latter is riskier, especially considering its unproven track record, but there may very well be life-altering investments in companies focused solely on industrial biotech platforms. In fact, I don't think the question will be if they arrive, but when -- and whether you're prepared to take action.
