Cellulosic ethanol opportunities
for co-ops and rural ownership

“Once again, the partnership with American agriculture has proven its worth during this difficult time. As we have seen in the past, the plants that have a strong connection with farmers seem to be better able to withstand unpredictable market fluctuations. The fact is, agriculture remains the backbone of the ethanol industry. It’s puzzling that many believe secondgeneration ethanol will be largely built by big businesses, not farmers. If history is any predictor of the future, not having the direct involvement of agriculture may be a fatally flawed path forward.

“Farmers need to be involved in building the next generation of ethanol plants. We should still be forming farmer-owned cooperatives. Time and time again, we have seen that these boards can provide the kind of intelligent and careful guidance that is needed to make plants successful during a wide variety of market conditions.”


By David Chesnick, Anthony
Crooks, Alan Borst and Robin
Robinson


Editor’s note: Chesnick, Crooks and Borst
are ag economists with USDA Rural
Development; Robinson is special assistant
to the administrator of Rural Business-
Cooperative Programs.



merging cellulosic ethanol production technologies may hold great potential to expand the economic assets owned by rural Americans. Cellulosic ethanol requires biomass that may be produced in most rural areas. But will rural Americans be significant equity participants in the cellulosic future? What methods of financing will encourage rural participation?

The United States government is committed to increasing America’s domestic supply of energy and to improving energy efficiency, as indicated by the following: Continuation of the Biomass Research and Development Program, with mandatory funding of $118 million. This collaborative effort between USDA and the U.S. Department of Energy coordinates research and development to improve feedstock and biofuel production efficiencies.

The Biorefinery Assistance Program provides $320 million in mandatory funding for loan guarantees to produce biofuels. Guarantees may cover 90 percent of a loan (these loans can be for up to 80 percent of project cost, or a maximum of $250 million).

The Rural Energy for America Program provides $250 million in grants and loan guarantees to farmers and rural businesses for investing in renewable energy systems and energy efficiency. USDA is directed to fund and support expanding production of advanced biofuels under the Bioenergy Program, with mandatory funding of $300 million. Incentives are paid on increased production of biofuels developed from farm and forestry crops and waste materials.

A national mission to produce cellulosic ethanol on a commercial scale provides rural America with significant opportunities, as well as formidable challenges. Support for cellulosic ethanol is strong, and rural communities across the nation are especially capable of producing a wide variety of raw materials and other requirements for cellulosic ethanol.

At the same time, however, rural individuals and communities face substantial barriers to local ownership. Costs for these plants are very high, financing can be complex and there is a general lack of access to information and technologies.

Whether a sufficient number of rural Americans will acquire equity positions in businesses that will help sustain their communities, or whether their participation in value-added businesses remains limited, is a question critical to the future of rural America. How can rural residents move beyond servicing and/or working in ethanol plants toward leveraging of their resources into ownership stakes in cellulosic projects?

USDA study gauges
rural opportunities
USDA Rural Development commissioned a team to analyze an array of business structures, programs and strategies appropriate to the resources of rural residents for financing cellulosic ethanol projects.

The study examines the cellulosic ethanol production from a technical, operational, geographical and financial standpoint, with the following objectives: The technology for cellulosic ethanol may be better suited for the expansion and diffusion of local ownership than corn ethanol. Production may be smaller scale, suitable to a wide variety of crop feedstocks and, therefore, all regions of the nation. While the technology is evolving, progress suggests imminent gains in production and cost efficiencies.

The investment capacity of rural residents is substantial and relatively untapped. Local investors often tend to bring patient capital (investments with a longer payback timeframe) to the table — the type of funding typically required by emerging technologies or market development, such as cellulosic ethanol. They often view such investment not only as an avenue to increase personal wealth but as a way of supporting their communities.

Given the narrow range of industries in rural America, cellulosic ethanol production has the potential to revitalize rural communities. Adding a new business, such as ethanol production, to the existing local business market can bring new vitality to rural communities by attracting new residents seeking employment and former residents ( who moved to find jobs) to return.

Ethanol production offers higher paying jobs, the type more often found in metro areas, such as accounting, engineering, administrative/management and marketing. As a result, the demand for infrastructure needs, such as transportation and utilities, will increase. This in turn fosters growth of non-farm and non-ethanol businesses by providing direct input to these businesses and attracting labor.

Farmer co-op role in
cellulosic ethanol
Farmer-owners of a cooperative can participate in the profits of an ethanol plant through dividend payments. The distribution of payments represents additional income to the individual farmer-owners and their families. Further, these dollars turn over many times in a local community or region. With absentee ownership, most dividends instead flow back to the corporate headquarters.

Some farmer cooperatives have already begun to invest in this sector. In November 2007, Central Minnesota Ethanol Partners — a joint venture between Central Minnesota Ethanol Co-op, SunOpta, and Bell Independent Power Corp. — signed a letter of intent for an engineering study and feasibility analysis to construct, own and operate a 10-million-gallon per year cellulosic ethanol plant. Initial plans call for the plant to be co-located with Central Minnesota Ethanol Co-op’s existing 21.5-million-gallon ethanol plant in Little Falls, Minn. Each party owns one-third of the project.

The first feasibility study took approximately six months and examined fiber supply, fiber cost and availability, permitting issues, capital costs and variable costs.

The proposed plant would use locally obtained wood chips and combine SunOpta’s conversion technology with Central Minnesota Ethanol Co-op’s existing infrastructure, raw materials supply sources and operating experience. The objective of the second phase is to reduce capital and variable costs by 10 to 15 percent, as well as to get all permits in place.

In November 2008, Central Minnesota Cellulosic Ethanol Partners was awarded a Next Generation Energy grant of $910,000 from the state of Minnesota.

In Centerview, Mo., 220 area farmers have invested in the Show Me Energy Cooperative. Their $7 million facility has been operating since 2007. Their co-op collects and sorts plant waste from locally grown crops, which is then ground and pressurized into pellets. These cellulose pellets are then marketed as an alternative to natural gas and propane.

Show Me Energy is a major fuel supplier for local energy generation and home heating. Its cellulose could potentially be used as inputs for ethanol production, which have been part of the cooperative’s plans from the beginning.

Longer payback period likely At this stage of evolution of cellulosic ethanol, there is a need for patient capital and an acceptance of lower return on investment. Ethanol can be viewed as a maturing market that no longer offers the high returns seen in the recent past. Although cellulose is a new source for ethanol production, the end product is the same as cornbased ethanol.

Therefore, those willing to invest in cellulosic ethanol will have to be willing to accept a lower rate of return early in the project. Cellulosic ethanol requires significant early-stage investment because it is a new method for producing ethanol with limited technology available for production. Additionally, there are no standardized cellulosic ethanol plant designs and few experienced managers. Longer time frames and intensive oversight are needed to develop a successful production company.

Patient capital will be needed to assist the cellulosic ethanol producer with developing and getting cellulosic ethanol ready for commercial production.

The payoff should come later, when production ramps up. The feedstock for these new cellulosic production facilities will be cheaper than for corn-based facilities, thus providing a higher return than in the early stage of production.

Advantages for rural investors
There are three major advantages for rural investors who participate in cellulosic ethanol production: 1) portfolio diversification; 2) dividend payments; 3) community revitalization.

A diversified portfolio is important to all investors because it minimizes risk exposure. If a cellulosic investment opportunity includes dividend payments, the payments will provide additional income to the rural investor. The additional income will be turned over in the local community and region, which should help revitalize a community. Additional demand for new product and services can lead to new investment opportunities and further community revitalization efforts.

Regions are unevenly endowed with resources, but virtually all have sufficient investment potential. Lowresource communities that are locked out of the current ethanol market may be able to take advantage of programs, subsidies and supply chain opportunities for cellulosic ethanol production. Farmers and landowners control much of the equity in rural America, but nonfarm rural residents account for a significant and increasing amount of potential rural investment. Investment models therefore may need to combine both farmer and local non-farm investors.

The U.S. Census in 2006 indicated there is a potential of more than $25 billion available for investing, based on non-metro income. Therefore, communities should be able to take advantage when the environmental requirements of cellulosic ethanol production become more exacting. Communities meeting the requirements should be wellpositioned for project investment and participation.

The economics of cellulosic ethanol production encourage local participation in equity financing. The opportunity for ownership in some cases may be stronger for other parts of the supply chain than for the cellulosic ethanol production facility. Information about exact production costs is scarce, but is expected to develop as various pilot demonstration facilities get underway.

There are several promising opportunities for increasing rural equity ownership of cellulosic ethanol. These opportunities employ a government debentures program, clean renewable energy bonds, flip models, lease structures, a renewable energy fund, tax credit models and custom harvesting.

The new financing mechanisms offer alternative strategies to increase rural equity in the cellulosic ethanol economy and provide rural investors and rural communities with opportunities to pool equity resources to either obtain an ownership position or participate in feedstock logistics. It is hoped that ultimately these new mechanisms will help to stimulate the local economy and diversify rural investment opportunities.







January/February Table of Contents