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Lamberty Report: Learning from the Competition
by Ron Lamberty

As I work with retailers who are interested in learning more about blender pumps, there are a couple of frequently occurring concerns. The first is a lack of taxable income to qualify for the federal tax credit for E85/blender pumps, and the second is that bankers seem to be reluctant to extend credit to stations for any reason right now – including new blender pumps.

These concerns are not unique to petroleum retailers. In fact, for decades the petroleum industry has used these same factors to tie retailers to long-term supply contracts. Typically, oil companies offer to pay for signage, logos, and all of the other things that people identify as a “brand.” In exchange, the retailer agrees to buy "branded" fuel from the oil company under a contract, usually for 7 to 10 years. Those contracts also require a punitive payback for dropping the brand or breaking the contract. The actual projected volume of the site is of primary concern to oil companies because the markup of premium-priced “branded” fuel enables the oil company to recoup their investment.

Rather than complaining about these practices, our industry may be able to learn from the other guys and profit from similar programs. An ethanol producer could mimic this branded model of helping to purchase equipment, creating ratable high margin sales and perhaps a presence in the retail market. Ethanol suppliers could purchase blender pumps for the retailer and become the entity to submit paperwork for the federal tax credit and any state grants or credits. In exchange, they could execute a contract requiring the petroleum marketer to purchase “branded” ethanol for a fixed period of time, with paybacks should they change suppliers.

From the petroleum marketer’s perspective, even a gallon of E85 at 25 cents above the plant gate price would likely be very competitive, and when added to gasoline at a 12 percent rate to make E10, the 25 cents would equal only 3 cents per gallon of E10. Since the difference between plant gate price and “rack price” is often 20 to 25 cents, the cost might be the same to the retailer – in effect meaning that he would pay nothing for brand new pumps.

Under this scenario, the ethanol producer would be able to capture much of the margin that is being taken from them in the form of higher markups for pre-blended fuel. Naturally, the actual volume of ethanol or E85 sold would have to be known to make the math work – but this is a familiar model to marketers, and it would solve the two primary objections we have heard from marketers while providing an added stream of income to an ethanol plant.

 
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The American Coalition for Ethanol publishes Ethanol Today magazine each month to cover the biofuels industryís hot topics, including cellulosic ethanol, E85, corn ethanol, food versus fuel, ethanolís carbon footprint, E10, E15, and mid-range ethanol blends.
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