As stated on Page 13 of the case, Bunge has several options in how to participate in the biofuels market. First, they could be more active in sugarcane-based ethanol. Advantages to the company include: a large amount of land in Brazil for the growth of sugarcane as well as relatively cheap labor; however, there is a substantial investment of $200 million. Second, they could produce more palm oil in Asia, which also requires significant investment in production facilities. Both methods result in a new position for the company consisting of the actual management of farming the commodity rather than just purchasing and processing. While removing the extra middleman from this methods could result in extraneous savings, Bunge currently is lacking in this area and has no material experts on staff. In Darbord’s discussions with Bunge CEO Archie Gwathmey, Gwathmey clearly stated that while the company needs to understand the energy markets to define the company’s risks, ultimately Bunge is a food company. Therefore, Darbord must convince the Gwathmey that biofuels present a significant opportunity for Bunge. While the company is not currently strong in this market and moving toward food may be an easier transition, this will help them hedge any risk of fuel fluctuations on food prices. This is a main concern for the company as a whole, and is not likely to subside in the foreseeable future.
Opportunities involved in biofuels:
* Significant subsidies for production of biofuels
* Increased demand for biofuels due to governmental mandates * The company already does business in Brazil and could take advantage of synergies by producing sugarcane-based ethanol there
Threats involved in biofuels:
* Subsidies can be eliminated at any time by the respective governments * Volatility in the price of the inputs
* Concerns of overcapacity in the global market
* Uncertainty who will control biofuels and value created in the chain * New...