Renewable fuels
industry rife
with opportunity for
co-ops
By Lynn Pitman
University of Wisconsin Center for Cooperatives
Editor’s note: UWCC established the Farmer Cooperative
Conference in 1998 with seed money from the Farm Foundation,
which continues to provide funding. The conference objective is to
provide co-op directors and managers, professional organizations,
government representatives and academics with information on
major trends and issues affecting agricultural cooperatives. For
information on next year’s conference, visit: www.wcc.wisc.edu
rom ethanol to methane, agriculture is playing
a significant role in addressing today’s energy
issues. The 9th annual Farmer Cooperative
Conference, held in Minneapolis in November,
addressed the tremendous opportunities – and
challenges—that exist for farmer cooperatives in the rapidly
developing field of bio-energy and other renewable energy
resources. The conference—sponsored by the University of
Wisconsin Center for Cooperatives (UWCC)—attracted
more than 150 U.S. and Canadian co-op leaders.
As energy prices and policy interact with the resources and
needs of agriculture, the shifting biofuels industry is presenting
new opportunities for cooperatives to deliver benefits to
producers. Speakers stressed that cooperatives are uniquely
positioned to provide an infrastructure for many facets of the
biofuels industry and for the development of the environmental
offsets market.
Opportunities for traditional marketing and supply services
will continue, while new opportunities for cooperatives
will develop in response to innovations in renewable energy.
New Farm Bill likely to increase support for energy
Will there be significant changes in the 2007 Farm Bill,
and what kind of challenges and opportunities will be created
for farmer cooperatives? Terry Barr, economist for the
National Council of Farmer Cooperatives, tackled that question,
although he noted that many specifics are still lacking.
While bio-energy priorities are influencing Farm Bill legislation,
many energy policy issues—such as ethanol imports—are controlled by non-agricultural legislative committees. It is
important not to lose sight of the fundamental programs that
have been part of the Farm Bill, Barr stressed.
The Farm Bill will be influenced by a broad range of factors,
including the federal budget, the Doha trade talks and
the general political climate. Battles over discretionary spending
may be exacerbated by concerns about federal debt, he
said. Any resumptions of the Doha Round of trade negotiations
will involve difficult tradeoffs between domestic supports
and market access for imports, and are expected to
work against the status quo.
Barr noted that the last three Farm Bills have been written
in election years. Because the margin of control of Congress
is now so close, it will more difficult to move through any
legislation in 2007. Positioning for the 2008 elections and
budget concerns will influence legislation more strongly than
policy issues.
The Farm Bill also affects a wide variety of other non-producer
groups that are often at odds with current farm policy.
Most farm groups favor a one-year extension of the existing
Farm Bill, with the exception of corn and specialty groups,
Barr said.
Any significant shifts of funding in a new Farm Bill will
alter the business risks and incentives for farmers and cooperatives.
Co-ops will have expanded opportunities in marketing
and risk management if new revenue stabilization programs
replace the marketing loan and counter-cyclical programs and
shift more risk to the farmer.
Co-ops need to “follow the money” and develop the
appropriate delivery mechanisms for new environmental programs,
Barr urged. The ability of co-ops to aggregate the
efforts of smaller producers allows co-ops to document environmental
compliance and conservation practices needed to
establish tradable offsets, and to participate in the development
of markets that buy and sell environmental credits.
Most of the significant initiatives for biofuels are outside
the jurisdiction of the agricultural legislative committees, but
Barr said that significant incentives for cooperatives to participate
in the biofuels industry may be part of the next generation
of energy legislation.
Biofuel policies no substitute for commodity programs
Randall Fortenbery, Agribusiness Professor at the
University of Wisconsin-Madison, described the recent activity
in biofuels as being driven by four different concerns: the
need to reduce dependence on imported oil; an interest in
the potential environmental benefits; a way to increase
demand for agricultural commodities and as a catalyst for
rural economic development. Fortenbery took a critical look
at how effectively current biofuels policy addresses these
issues.
Current public policy includes both consumption mandates
and production incentives, influencing both demand
and supply in the biofuels market. But public policies will not
change the fact that the United States will continue to be
dependent on oil imports for decades, given current and projected
energy consumption levels.
Neither can biofuels public policies substitute for commodity
programs to enhance farm income. Ethanol prices are
driven by the price of gas, not corn, and ethanol plant investments
should not be seen as a hedge on corn crops,
Fortenbery said. The U.S. soon will face global competition
from countries such as Brazil, which will require technology
rather than low commodity prices to be used as a competitive
advantage.
Fortenbery also reviewed the type of economic benefits
that a new biofuels plant are thought to create. He pointed
out that economic impact estimates often use overly optimistic
multipliers that generate unrealistic bumps in income,
sales, jobs and tax revenues. Support for the public policy that
is critical to the growth of the U.S. biofuels industry can only
be maintained if it is based on credible, realistic assumptions
and goals that do not overstate the possible benefits, he
stressed.
Other industry challenges include expanding the transportation
infrastructure that is required to support it. Service
providers need to be part of facility planning from the start.
As biofuels production continues to increase, so will the
volume of distillers-grain byproducts. The byproducts markets
are crucial to production facility profitability, but as production
volume increases, new markets will need to be developed
to counterbalance the downward pressure on prices.
CHS, Growmark, others expanding biofuel efforts
Don Olson, senior vice president of refined fuels for CHS
Inc., presented a model for co-op involvement in the renewable
fuels industry, based on CHS’ energy-sector business.
Under the Cenex brand, CHS sells refined fuels, propane
and lubricant oil and has moved into the logistics and marketing
aspects of ethanol and biodiesel production.
At present, 98 percent of the ethanol is produced in the
Corn Belt. In five years, it is expected that this figure will be
80 percent. Transporting biofuels to the population centers
on the coasts, where competitive products from China and
Brazil are also imported, remains a challenge, Olson noted.
Government mandates are needed to promote expanded
E85 use, which will be critical to absorbing new ethanol
capacity. Cenex already retails E85 in some locations and is
well positioned to more broadly distribute it as part of its fuel
products mix.
To supply its biofuels delivery system, CHS also has a 25.6
percent ownership stake in U.S. BioEnergy, which has
ethanol plants both under construction and in production.
The two companies have formed a joint venture, Provista,
which wholesales ethanol and biodiesel. CHS plans to have 1
billion gallons of ethanol under contract by 2009 in both
U.S. BioEnergy and outside ethanol plants, and plans to
develop a larger presence in biodiesel marketing.
Steve Barwick, vice president for sales and marketing at
Growmark, said that the co-op’s energy division is its largest
division. It has interests in several other energy-related ventures.
Barwick sees cooperative opportunities on several
fronts. Increased ethanol production will drive demand for
products and services that co-ops are well positioned to meet:
farm inputs for increased corn acreage; grain storage; agronomic
services; and the aggregating, shipping and storage
related to transportation of fuels and grain. Longer term possibilities
include expansion of the market for dry distillers
grain (DDG).
Gary Haer, vice president of sales and marketing for
Renewable Energy Group (REG), discussed biodiesel project
development. REG grew out of West Central Cooperative’s
involvement in biodiesel, and offers construction, production,
management and marketing services for biodiesel projects.
Transportation, logistics and coordination with distribution
systems are critical to a project’s success.
To avoid setbacks in growth, the industry must address
product-quality issues that have resulted from investment in
projects oriented towards quick returns, he noted.
Hurdles facing the industry were discussed, including how
to handle ethanol trading credits, developing markets for the
growing DDG supply and the entry of the petroleum industry
into bioenergy. The grassroots structure of cooperatives
can be the basis of the infrastructure that is critical to biofuel
ventures. Co-op members were early adopters of biodiesel
and continue to be a prime market for the product, as well as
providers of capital, Haer said.
Co-ops also can represent farmers in the public arena, and
have lobbied for tax credits related to biofuels that benefit
them.
Opportunities for co-ops sourcing corn & soybeans
Joe Anniss, general manager of MaxYield, said that a significant percentage of his co-op’s total savings this year is
from ethanol. MaxYield’s area of influence is north-central
Iowa. Given its location and amount of grain handled, the
co-op had already evaluated many biofuel options when it
decided to invest in an ethanol plant project in 2002.
At this time, it appears that the co-op made the correct
decision to participate in the ethanol project, but the situation
could very well change, he noted. Annis expects corn
supplies to tighten as investment in new ethanol projects continues
in markets already saturated. Co-ops have an edge in
sourcing grain in these situations because they are willing to
work with small producers, know the product and are familiar
with the issues that producers face.
Randall Doyal, CEO of Al-Corn Clean Fuel, pointed out
that with the development of the biofuels sector, there is no
longer a separation between the cost of feedstock and the
value of the final product. This has had the effect of removing
barriers for outside investors to invest in ethanol plants.
To meet the challenges from consolidation and from foreign
competition, vertical integration with local co-ops is a possibility.
Local elevators have relationships with growers and the
knowledge of grain origination that ethanol plants lack, but
they will need to shift their perspective to build on these
advantages.
Lionel La Belle, president of the Saskatchewan Ethanol
Development Council (SEDC), said that while Canada is
energy independent, its agricultural situation is similar to
that of the United States. There are currently about 101 biofuels
plants in operation in western Canada, 48 of which are
producer-owned. Another 40 plants are under construction
or are being significantly expanded. The Canadian federal
government’s Ethanol Expansion Program (EEP) has faltered,
and five of the 11 planned ethanol plants are in limbo,
he noted.
La Belle sees the development of the Canadian ethanol
industry as an essential part of the solution to the problem of
falling wheat prices in western Canada. La Belle looks to the
federal government to support the development of the industry
by setting national renewable fuel standards, supporting
rural-based ownership, and promoting a national perspective
so that investment in ethanol capacity can occur where biomass
feedstock is abundant.
Wind, methane, switchgrass & sugar
Ron Schwartau, director of the Minnesota Rural Electric
Association, described the challenges in meeting President
Bush’s 2006 State of the Union goal of generating 20 percent
of U.S. electricity through wind. A backlog of orders for new
wind turbines, increased costs and grid interconnection are
all issues confronting the wind industry. Some of these problems
may be mitigated by newer designs, and cooperative
wind farms may be able to offer the economies of scale that
make wind power more feasible.
Dave Malmskog, director of economic analysis for
American Crystal Sugar Co., said that under current prices
and credits, U.S. sugar feedstock is too costly to be economically
viable for ethanol production. Brazil’s success using
sugar cane for ethanol is based on low feedstock costs,
national support programs and low environmental standards.
Michael Gratz, president of NewBio E Systems, discussed
on-site anaerobic digesters to process organic waste into
methane gas, using waste solids as land applications, landfill
or as animal feed. Economic feasibility of this process hinges
on savings in waste disposal costs, current energy costs and
energy value of the methane, and whether the processes are
eligible for renewable energy or emissions trading credits.
Bill Belden, project manager for Chariton Valley Biomass
Project, said the recently completed co-fire test campaigns
for switchgrass were not profitable. However, government
initiatives and future market dynamics
could make it more attractive.
Producer co-ops can offer the infrastructure
for handling and processing
biomass, and are well-positioned to
develop and manage quality control
issues, provide financing opportunities,
and provide outreach and education, he
added.
Cargill bio-energy efforts
Pat Bowe, president of corn milling
for Cargill Inc., said Cargill currently
owns three ethanol and two biodiesel
plants, one of which is a joint venture
with soybean farmers, who have a controlling
interest.
Until recently, it has not been easy
for the plants to turn a profit, but that
trend has changed. Cargill also has
service agreements with 12 plants, and
that number is increasing. The company
provides the infrastructure for purchasing
corn from local farmers and
selling to the plants.
About 2 billion gallons of ethanol are
produced from these activities—about 1
billion gallons from Cargill’s plants, and
another billion gallons from its service
agreements.
Bowe said scaling-up the transportation
infrastructure to keep large plants
running is a major challenge.
He expects corn will become a
domestic, rather than an export, crop as
a result of the increased demand from
ethanol plants. That will require additional
changes in transport systems.
While money could eventually
address hard-asset problems, labor for
trucking might be a limiting factor in
the short run.
Environmental management
opportunities for co-ops
Jim Shelton, agronomy division
manager for Landmark Services
Cooperative, described agronomy services
that can be customized for the specific
needs of members. As producers
look for lower input prices, higher
yields and higher prices for their grain,
this type of program can help maintain
grower loyalty.
Duane Toenges, manager of AgCert
USA Services, described cooperative
opportunities associated with greenhouse
gas emissions. AgCert produces
and sells agriculturally derived greenhouse
gas (GHG) emission-reduction
offsets by aggregating farm and production
activities and providing a link
to potential buyers. While agriculture
accounts for 20 percent of GHG emissions
globally, farming is also an activity
that can be a sink for these emissions.
Cooperatives could provide valuable
data collection and site assessment
functions that would allow individual
farmers to aggregate emission reductions
that meet all global “credibility”
tests. Co-ops could also organize centralized
biogas recovery systems.
Larry Wojchick, of Goldstar
Cooperative, described the forest management
services that local farm supply
cooperatives can provide. Woodlands
can be a valuable economic part of the
farm, but small acreages on individual
farms makes it difficult for farmers to
obtain better timber prices, forest management
plans, or a way to participate
in the value added chain.
E.G. Nadeau of Cooperative
Development Services, sees a role for
farm supply cooperatives as aggregators
of biomass, including wood and woody
byproducts. However, the development
of this infrastructure requires that more
farmers think of their woodlots as part
of their farm profitability plan.
Financing co-op
energy opportunities
Tom Houser, vice president for CoBank’s Commercial
Agribusiness Division, provided an overview of the risks
currently associated with ethanol. CoBank has been a
lender to the ethanol and biodiesel industries since 1992,
and its biofuels commitments presently total more than
$700 million, primarily in ethanol.
The growth of the industry has
attracted many investors, and startup
capital for new plants has
recently been readily available. He
cautioned that the ethanol industry
is a function of supply and demand
for oil, and that ethanol is simply a
blend component for gasoline at this
time.
Houser said if crude prices fall
back to $40-plus per barrel, the economics
of ethanol drastically
change, although the renewable fuel standard does provide
a floor for the industry. Volatility will exist in the market
as the margin trade-offs between price increases for
corn, natural gas and ethanol work through the system.
Many of the project forecasts do not take into account
debt and depreciation.
The saturation of the DDG market will also need to be
addressed, he said. However, the current legislative landscape
is favorable to ethanol, and technology continues
to improve, Houser added.
Paul Harrison, president of Western Wisconsin
Renewable Energy Cooperative, discussed how the coop
financed its new ethanol plant. A goal of the project
was to benefit the farmer-producer, so the cooperative
structure was adopted.
State and federal grants were important in the early
development stages of the project. The board invested
the time to go through each step of the business start-up
process thoroughly. Harrison credited the process as
having created a project that could attract both producer
and outside investors.
Robert Hensley, attorney with Dorsey & Whitney, noted
that most biofuel projects are organized as LLCs,
requiring a 30–40 percent equity investment. The cost of
ethanol plants has skyrocketed, and the backlog of contracts
with reputable builders has meant that upfront letters
of intent are part of any feasibility assessment.
He cautioned against giving too much equity to outside
investors, which tend to be fee-oriented and only
interested in a quick return. Another pitfall has been a
tendency to underestimate project costs.
Mark Hanson, attorney with Lindquist & Vennum, discussed
co-op participation in biofuels projects where
both producers and investors are members. For a project
to be successful, participants must bring an advantage in
feedstock costs, process costs or marketing to the project.
Hanson sees the biggest asset that producer co-ops
bring to biofuels projects as the ability to aggregate and
store grain. Cooperative participants in biofuels projects
have not sufficiently focused on producer exit strategies
(which help producers maintain liquidity) and share valuation,
which takes into account the “enterprise value,” or
start-up risk, that early investors incur.
—By Lynn Pitman
