Fair warning, this blog post is going to sound like a business school strategy class (thanks Wharton!).
In 1990, Michael Porter released a landmark study called “Why Nations Triumph,” in which he identified four key drivers of competitive advantage that explain why certain industries in certain countries thrive while the same industry somewhere else fizzles.
These four drivers, collectively known as “Porter’s Diamond,” are a good starting point from which to understand why pongamia pinnata has the potential to be the most cost-effective, sustainable energy crop in America.
Demand Conditions: In the U.S., very strong demand for sustainable, domestic sources of energy are driving innovation and capital formation in wind, solar, biofuels, etc. At the same time, certain large agriculture communities are facing “generational” problems with existing crops, which is stimulating demand for new crops like pongamia. Florida citrus growers, TerViva’s largest customers, are confronting falling demand for orange juice and higher production costs caused by a citrus greening blight that has no cure.
According to an estimate by the Florida Department of Citrus, more than 450,000 acres of citrus have come out of production in the last 10 years. The New York Times highlighted the issue on its front page in May. Domestic demand for sustainable energy sources and energy self-sufficiency, coupled with a changing citrus landscape make conditions in the U.S. ripe for pongamia.
Factor Conditions: Pongamia “drops in” to the existing agriculture infrastructure, meaning that it leverages existing distribution networks, equipment and labor. This is far and away the most important driver of pongamia’s success in the U.S. As a result, pongamia benefits from advancements in agronomy practices and the existence of a highly skilled agricultural labor force. TerViva works with citrus growers who have the know-how to grow large-scale tree crops and who have access to the labor, land and resources needed for the cultivation of pongamia. In addition, there are millions of acres of marginal and/or underproductive land in the U.S. including diseased citrus land, mined land and pasture land. With the infrastructure to grow pongamia already in place and ample land suitable for pongamia harvesting, the U.S. is an ideal setting for scaled plantations of pongamia.
Additionally, processing and refining suppliers for pongamia already exist. Pongamia can be cultivated using existing fruit/nut tree equipment and oilseed processing infrastructure, which materially limits the amount of capital expenditure required. In contrast, new biomass crops such as switchgrass and miscanthus cannot be processed into valuable outputs using conventional equipment. They require new and expensive bio-refining infrastructure. There are billions of gallons of existing refining capacity throughout the U.S. that can convert pongamia’s vegetable oil in to fuel without additional capital expenditure. We work with Renewable Energy Group and Dynamic Fuels to make biodiesel and renewable diesel, leveraging the latters’ capital investment and expertise.
Company Strategy, Structure & Rivalry: The U.S. government’s strategy to reduce its reliance on foreign oil has spurred a number of innovations and collaborations among previous rivals (e.g. big oil vs. everyone else). Porter writes “industries thrive when they are forced to overcome high labor costs or lack of natural resources, when their customers won’t accept inferior or outmoded products…” This is true of the agriculture communities in Florida and Texas and all around the country. The citrus community has not given up and will continue to innovate and adjust. Our business model is to partner with these growers to deploy pongamia using jointly developed agronomy best practices.
Related and Supporting Industries: Pongamia cultivation is buttressed by a number of related and supporting industries in academia, agriculture and finance. For example, pongamia has attracted the attention of several U.S.-based academic institutions, which have been the source of many of this country’s greatest innovations. TerViva has pongamia development programs in partnership with UC Davis and Texas A&M for genomics and co-product development. It also has partnerships with existing commercial greenhouses and plant propagators, with whom the company has developed techniques to optimize the clonal propagation of pongamia. These partnerships avert the need to build expensive large scale nurseries.
All four of the elements identified in Porter’s Diamond point to pongamia being a major source of domestically produced clean energy in the U.S. Next time, I’ll discuss how these factors lead to crude pongamia oil production cost at less than $70 per barrel.
Sudhir Rani is TerViva’s CFO.