Great Expectations

Ethanol is hot, but what is the long-term outlook for biofuel?

By Steve Thompson, Assistant Editor

s ethanol the answer for corn producers? Across the Midwest and Great Plains, 75 ethanol production facilities are now in operation, with an additional 13 under construction. Fuel ethanol consumption is climbing briskly, and over 3 billion gallons are expected to be produced in 2004, adding $15.3 billion to the gross domestic product and supporting 143,000 jobs.

Whatever its future, there’s no doubt that ethanol is a growth industry at the moment.

Most domestic ethanol is produced by fermenting corn, and corn growers see production of the fuel as a hedging tool against low commodity prices and a way to add value to their product. Currently, the ethanol market is very attractive, with ethanol consumption in the United States climbing apace with the expansion of production.

But is ethanol production an answer to volatile corn prices? Does it offer farmers a stable source of income? Is it possible to find the capital to start up an ethanol plant without bringing in outside owners? And will a farmerowned ethanol plant provide an acceptable rate of return on investment?

The answer to those questions is a resounding maybe.

Successes and failures
Glacial Lakes Corn Processors is a new-generation cooperative that operates an ethanol plant in Watertown, S.D., through a limited-liability corporation, Glacial Lakes Energy LLC. By all accounts, the operation is doing quite well. It is entirely locally owned and has succeeded in its goal of raising the local price of corn received by area farmers. (See page 21.)

The plant is performing beyond expectations: with a rated output of 40 million gallons per year, it actually produces closer to 50 million gallons, helping to put its accounts firmly in the black.

Tri-State Corn Processors has another story to tell. Formed by farmers in and around the small agricultural town of Rosholt, S.D., Tri-State recently filed for bankruptcy after being closed for an entire year. With a much smaller capacity than the Glacial Lakes plant, Tri-State’s facility was unable to operate even in the ballpark of its design specifications, and was unable to raise the capital needed for repairs and modifications.

The co-op hopes to get the plant up and running under a Chapter 11 plan that will have the plant operating at capacity while fully paying off all creditors. But local farmers and creditors have taken a big financial hit, and it will be years before their community recovers. (See page 32.)

Ethanol’s appeal rests on the expected growth in its demand for use as a fuel additive or alternative fuel. As the most economical substitute for methyl tertiary butyl ether (MTBE)-- a gasoline additive used to meet Environmental Protection Agency requirements in certain markets-- ethanol would seem to provide rich value-added opportunities for farmers (see sidebar). And current high petroleum prices have made it attractive as a fuel extender-- a way to stretch the supply of gasoline.

However, to be practical for these uses, ethanol’s price must be close to that of gasoline. And therein lies one important rub.

Subsidy rate extension
key to ethanol’s future
Currently, the use of ethanol in motor fuels is subsidized through a reduction of up to 5.3 cents a gallon to the federal excise tax of 18.3 cents, which is paid by gasoline marketers and refiners. However, the tax reduction is due to expire in 2007, requiring Congressional legislation to extend it. While such extensions have been passed before, the 2003/2004 energy bill, which contained further extensions, was stopped by a filibuster in the U.S. Senate due to opposition to the subsidy as well as other issues.

Another possible monkey wrench in the works is a plan by the Cargill Corporation to import ethanol from Brazil via El Salvador. El Salvador is one of the countries covered by the Caribbean Basin Initiative, which allows for duty-free importing of goods manufactured in participating nations. Up to 7 percent of a previous year’s domestic ethanol output can be imported under current law, which means that up to 230 million gallons could enter the United States under the tariff barrier this year.

By producing the ethanol in Brazil from sugar cane, Cargill can lower costs of production dramatically. Brazillian ethanol costs about 60 cents a gallon, while ethanol rack prices in the Midwest in early July were averaging about $1.80 per gallon. Refining ethanol to fuel grade in a plant in El Salvador, as proposed, would mean the $60 billion agribusiness firm could not only further undercut costs, but avoid duty payments, allowing it to underbid domestic producers easily.

California, the largest oxygenated fuel market in the United States, has banned the use of MTBE as a gasoline additive, and the EPA may decide to ban the substance nationally. The excise tax credit is not the only help offered ethanol producers by the federal government.

USDA programs support
bioenergy development
Through its Bioenergy Program, USDA’s Commodity Credit Corporation offers assistance to ethanol and biodiesel producers, helping compensate them for the cost of increased commodity purchases, for the expansion of production in existing facilities and for starting new ones. In 2002, CCC paid $78.7 million for nearly 228 million gallons in increased ethanol production.

USDA Rural Development offers the Biobased Products and Bioenergy program, which provides loans through its Business and Industry (B&I) program for projects that convert farm and forest products into energy. Through its Cooperative Services office, USDA Rural Development also administers the Value-Added Producer Grants program, which provides funds for planning and working capital to agricultural coops for marketing valueadded agricultural products, including biofuels (for a list of VAPGs issued to date for alternative energy projects, see page 34).

Many states also offer incentives for ethanol. Minnesota subsidizes ethanol at 20 cents per gallon, and requires all gasoline to contain ethanol or other oxygenators.

Two types of processes are used to produce ethanol from corn. One, called the wet-mill process, soaks the corn kernels in water so that their components can be separated mechanically, before grinding the starchy part of the seed for fermenting into ethanol.

Wet-milling can be used to produce a wide range of goods, including corn syrup, highfructose corn syrup, corn starch and corn oil, as well as extracting complex high-value chemical compounds for use in the pharmaceutical and other industries. The flexibility of the wet-mill process means that the operator can switch output to different products in response to market changes. The down side is its complexity, high expense and the necessity to build very large plants to achieve economies of scale. Wet mills are generally built and operated by large corporations.

The second method, the drymill process, is much simpler. The entire kernel of corn is ground and then fermented. The products of fermentation are ethanol, carbon dioxide, distillers grain and the liquid left over from the distillation process. This remaining liquid is concentrated into condensed distillers solubles (CDS), which are usually combined with the distillers grain to make a high-quality animal feed containing about 28 percent protein.

Carbon dioxide can be sold if a market for it is easilyaccessible, but it is not an important factor in profitability. The sale of distillers grain, however, often is the difference between profit and loss.

Success factors
The success of a farmer-owned ethanol plant hinges on a number of factors, including the following:

The supply of corn. Transportation costs for corn are a significant factor; the plant usually must be able to depend on getting its corn within about 30 miles.
The price of corn. The higher the price of corn, the lower the profit margin of the operation. Even at $1.60 per bushel, grain costs make up half of total operating expenses.
Accessibility to transport. If a local or regional ethanol market exists, the product can be moved by truck, at costs between 2 and 7 cents per gallon. Transporting ethanol to markets on either coast will cost at least 13 cents per gallon. For longer distances, the product can be moved by truck, but rail is more economical, and access to a rail spur can make a big difference in profitability. For a plant located on a navigable waterway, barge transport to the Gulf of Mexico and then transfer to ships may offer a highly cost-effective means to reach some markets-- most notably California, which used to receive most of its MTBE through seaports.
Size of the facility. Dry-mill ethanol plants are subject to economies of scale. The costs of labor and administration, for example, are very similar for a plant that produces 40 million gallons per year and for one that produces half that amount. The costs of construction, estimated at an average of about $1.50 per gallon of annual output, fall with increasing size up to about a 40 million-gallon yearly capacity. Above 40 million gallons, economies of scale in construction costs do not increase significantly.
Design and engineering. Ethanol production is a mature technology, but incremental improvements continue to be made in efficiency and plant design. A well-thought-out and well-constructed plant design, taking into consideration the factors unique to the site, is fundamental to a successful ethanol operation.
Supply of energy. Ethanol plants use large amounts of energy, usually in the form of natural gas, both to distill ethanol and to dry distillers grain and CDS. Local gas prices are a vital factor in determining profitability, and locating the plant so as to minimize the costs of constructing a gas supply pipeline can be important in reducing start-up costs. Even better would be a location close to an existing manufacturing site that offers excess steam or electric power as a byproduct. For plants dependent on natural gas, rising gas prices can have a marked effect on profits: for a 40-million-gallon-per-year plant that dries its distillers grain, an increase of $2 in the price of a thousand cubic feet of gas will increase annual operating costs by nearly $5 million.
Market for distillers grain and CDS. As with the supply of corn, the transport costs of delivering the fermentation byproducts to the end user weigh heavily in the profitability equation. In addition, the energy expended to dry distillers grain and CDS is a large proportion of total costs. Locating near a feedlot or other livestock operation that will use the entire output of distiller’s grain saves significantly on transport costs. But even more important, a nearby animal feed user may allow the ethanol facility to deliver the product wet, which is not only preferred by the animals but saves as much as 50 percent in energy costs. Wet distillers grain has a shelf life of only three to six days, and because two thirds of its weight is water, a distance of 50 to 60 miles is the limit it can be transported economically. A 40-million-gallon-per-year ethanol plant will produce enough distillers grain every day to feed up to 240,000 or more head of cattle.
Financing. Getting the necessary capital is the first and often most difficult hurdle faced by any startup operation. In the case of cooperatives looking to build an ethanol plant, financing can be especially problematic due to the difficulty of raising enough equity from the membership to enable obtaining funds from lenders. For a 40-million-gallon plant-- the size considered the sweet spot in terms of economies of scale --a co-op of 3,000 members would require investments of $20,000 each.

Various methods for raising funds
Some co-ops, among them Mid Missouri Energy, have been able to raise the needed funds from producer members. Others have dealt with the challenge by establishing a limited liability corporation (LLC) to build and run the plant, which allows sharing ownership with outside investors.

In some cases, financing schemes have included granting partial ownership and sometimes plant management contracts to constructors. For co-op members, the issue in such arrangements can become whether or not they control or benefit from the operation in the end.

No industry operates in a vacuum, and, like any other, success in the cornbased ethanol business may stand or fall on factors over which co-op members have no control. While the industry is expanding now, a day will come when the market reaches saturation, and corn ethanol plants will find themselves in close competition.

Further competition may come in the form of technologies now being developed to produce ethanol from low-cost agricultural residues such as wood waste, corn stalks and cobs, stover, wheat straw and whey. Other possible low-cost feedstocks include municipal solid waste, switch grass and even fast-growing hardwoods.

While nobody can predict the future or determine every last variable, any cooperative contemplating an ethanol operation must do a rigorous due diligence before making a decision.

Clean Air Act kickstarted ethanol

In 1990, Congress amended the Clean Air Act to establish two programs to reduce air pollution from road-going vehicles by requiring changes in the formulation of fuel sold in certain designated areas. The Reformulated Gasoline (RFG) program was intended to reduce smog-forming pollutants such as nitrogen and sulfur oxides. The Oxygenated Fuels program was to reduce emissions of carbon monoxide.

Meeting the requirements of both programs meant that gasoline refiners selling in the affected markets had to add oxygen to their fuel.

The two substances most widely used as fuel oxygenators are methyl tertiary butyl ether (MTBE) and ethanol. MTBE is cheaper to use, but after a decade has been found to have some major disadvantages. One is its tendency to leak from storage tanks and contaminate groundwater. Another is that it evaporates readily, and breathing its fumes is unhealthy and may even lead to cancer.

Although the Environmental Protection Agency has not banned MTBE, some states, including California, have, resulting in a big demand for the only practical substitute for MTBE — ethanol.

Ethanol is ethyl alcohol — the same alcohol as in beer, wine and other alcoholic beverages. And it’s produced in much the same way as distilled drinks such as whisky and vodka. Feedstock, usually corn, is fermented with yeast in large tanks and the alcohol produced by the fermentation is distilled. While distilled beverages usually contain about 50 percent alcohol, fuel-grade ethanol is distilled to be almost pure, except for a small amount of unleaded gasoline added as a “denaturing” agent to prevent the fuel’s consumption by humans.

Approximately 35 percent of the ethanol molecule is oxygen. When added to gasoline, the oxygen in ethanol makes for cleaner combustion, reducing carbon monoxide emissions by up to 30 percent. Usually the fuel is mixed in a ratio of 1 part ethanol to 9 parts gasoline, but in vehicles configured to burn alternative fuels ethanol can also be used pure, or as an 85/15 blend with gasoline.

Contrary to allegations by some opponents of ethanol, the fuel does not require more energy to make than is available in the finished product. USDA’s Economic Research Service calculates that it takes 1 btu of energy to produce 1.24 btu worth of ethanol.

— By SteveThompson

Biodiesel: the 10 percent solution

Biodiesel is diesel fuel made from plant or animal products. It is produced by modifying fats and oils into a substance that can be used by diesel engines. The modification process, known as transesterification, is not complicated; in fact, some private individuals make biodiesel at home from used restaurant cooking fat for use in their own vehicles.

Biodiesel is not simple vegetable oil, although some people do burn unmodified vegetable oils in diesel engines. Doing so can cause problems, among them excessive carbon buildup in combustion chambers and reluctance to start.

Most biodiesel in the United States is made from soybeans, although lard, tallow, or any other biological source of fats can be used. European biodiesel production relies mainly on rapeseed, which offers a higher yield and can be grown in areas not suitable for soybeans.

Blue Sun Biodiesel is a limited liability company affiliated with a cooperative that proposes to produce biodiesel from rapeseed grown on the western High Plains area of Colorado and neighboring states. Biodiesel is a superior fuel in many respects. It burns more cleanly than petroleum-based diesel, and also has higher lubricity and detergent properties. Among its disadvantages is the fact that its high detergency can loosen debris in fuel systems that formerly used petroleum diesel, clogging fuel filters for a while if they’re not carefully watched.

At higher concentration, it can also degrade parts made of certain kinds of rubber. However, biodiesel is usually used as an additive in petroleum diesel at 10-percent ratio, at which level it causes few problems. The use of biodiesel is endorsed by all major manufacturers of diesel engines in the United States.

The EPA is promulgating regulations that will drastically reduce the amount of sulfur in diesel fuel. Sulfur is used as a lubricant for fuel-injection pumps and other diesel fuel system components. The removal of sulfur will mean that vehicles will emit fewer components of acid rain in their exhausts, but new additives will be needed to restore the necessary lubricity. Biodiesel added to diesel fuel restores this lubricity and results in lower emissions, as well.

Sulfur reduction rules are to go into affect in three years. That’s good for the environment, says Doug Tiffany, a research fellow at the University of Minnesota who studies biodiesel. However, the low-sulfur fuel doesn’t lubricate as well, so additives will be needed to keep fuel-injection pumps and other parts working smoothly. “Adding even 1 or 2 percent biodiesel restores the fuel’s lubricating qualities, slowing engine wear and tear,” he says.

Biodiesel backers also cite national self-interest as a reason to use the new fuel. The United States burns roughly 30 billion gallons of diesel fuel a year, equivalent to more than a quarter of the country’s annual crude-oil imports. “By using more biodiesel, we are reducing our dependence on foreign oil and contributing to our own economy, while decreasing pollution,” said Jenna Higgins, a spokeswoman for the National Biodiesel Board. “It’s a win-win-win situation.”

July/August Table of Contents