Special Section > Co-ops and Biofuels

Fueling a rural revival

Ethanol co-op supports farmer income
while providing lift to rural community

By Dan Campbell, Editor
e-mail: dan.campbell@usda.gov


t started as the dream of farmers and the managers of the local electric cooperative who were searching for a way to add value to corn and to help stabilize electric rates. The Chippewa Valley Ethanol plant outside Benson, Minn., has not only accomplished that, it has also been a sparkplug that ignited efforts to reverse the rural decline Benson seemed locked into for a time.

If you go back 15 years or so ago, Benson was facing a malaise like that of so many other rural towns with slowly declining populations, loss of jobs and an eroding tax base, says ethanol plant manager Bill Lee. Lee first came to the town of 3,400 people about 130 miles west of Minneapolis in 1994. At that time, he was an engineer for the firm that built and originally operated the ethanol plant (Delta T Corp.) He switched over and went to work for Chippewa Valley in 1996 when the co-op bought out Delta T’s minority ownership position.

The people of Benson are survivors and have a very progressive business philosophy, Lee continues. They were willing to vote with their pocketbooks-- to invest their money in the future of the community.

In the years after the ethanol plant began operation in 1995, Benson took a number of steps to strengthen its economy. Citizens and the business community launched a concerted effort to keep a farm-manufacturing plant in town when it appeared likely to move. They not only succeeded in keeping it in Benson, but it has since been expanded, now employing 235 people.

Townspeople also joined forces to raise the $2.5 million needed for remodeling to keep the local hospital operating at a time when it appeared headed for failure. Today, it is not only thriving, but was recently rated as one of the nation’s most efficient rural hospitals. Benson also will soon be home to a new biomass powerplant-- FibroMinn-- that will burn turkey liter to generate 55 megawatts of electricity.

The success of Chippewa Valley and the town of Benson go hand in hand and is indicative of the power of people working together in co-ops to boost farm income and bolster their communities, says Jan Lundebrek, board vice chair of Chippewa Valley Ethanol and president of First Security Bank in Benson. Rather than blaming other people or forces for the problems facing us, we just decided that we ourselves had to step up to the plate and do what was necessary to turn things around. She also credits several USDA Rural Development loan programs (such as the Community Facilities loan program, which provided a $1.5 million loan for the hospital) for helping in Benson’s revival.

Confidence breeds confidence, adds Lee, noting that another indicator of improving economic health here is the increase in the number of new homes constructed in recent years.

Study sees widespread rural
benefits from renewable fuels
The Renewable Fuels Association (RFA) commissioned a study in 2002, Ethanol and the Local Community, that shows dramatic impacts on a local economy from ethanol plants. The study was based on a hypothetical, 40-million-gallon-per-year ethanol plant and national averages. Such a plant is likely to: Benson has been fairly reflective of these averages.

It’s no wonder many communities view value-added opportunities like ethanol production as the best way to revive stagnant rural economies, says Bob Dinneen, former RFA president. The economic activity generated by an ethanol plant ripples throughout the region as new wage-earners spend their money at local businesses.

Plant accident only
temporary setback
Chippewa Valley Ethanol was successful virtually coming out of the chute, operating at 100 percent of capacity within 30 days of start-up and averaging 98 percent of design capacity during the first six months of operation.

But there have been struggles and setbacks. It certainly hasn’t been a cake walk-- there have been challenges all along the way, says Lundebrek, who was recently honored as Minnesota’s Woman Banker of the Year and who, along with her husband, has a 360-acre farm.

The biggest of these challenges occurred last October, when there was an explosion, apparently sparked by welding work being done on the plant’s saccharification tank. One employee was killed and two others were injured. Major damage was sustained by the plant building and a fuel tanker truck. Through sheer determination and hard work while coping with the tragedy, workers had the plant back in partial operation in just three weeks.

The plant was originally built to produce 15 million gallons of ethanol per year, and subsequent modification boosted capacity to 20 million gallons annually. But most new plants today are being built to produce around 40 million gallons, and the co-op knew it would need to expand capacity again to remain competitive. So, in June 2003, a major expansion was completed that boosted production capacity to 45 million gallons.

Lee says that is about the optimal size for ethanol plants. After that, they have to start going so far afield to procure corn that the extra transportation costs offset any gains from economy of scale in the processing operation.

As part of the expansion project, the co-op spent several million dollars extra to install special thermal oxidizers, which put plant residues through an extra firing to reduce emissions into the air. The plant is within a mile of town, but now you would never know it’s there, Lundebrek says.

Total investment in the plant to date is about $55 million, and annual sales are running at about $62 million. Membership is about 950. Membership includes producers, co-op elevators and other local investors.

Lundebrek says non-producer investors are virtually all local people (ranging from dentists to merchants) who wanted to invest in the co-op to show their support for agriculture, which she says is still the lynchpin to the region’s economy. If agriculture isn’t successful here, they know they won’t be either.

USDA loan program
helps young producers
The original plant construction in 1994 cost $28 million, for which the co-op needed to raise $10 million. The initial equity drive required members to purchase at least 5,000 shares, which represented an investment of $10,000. But many growers at that time were cash strapped. It was difficult to get some people to commit, because we had been through a series of bad (corn) price years and they were hurting, Lundebrek recalls.

USDA Rural Development’s thennew Cooperative Stock Purchase Program played a key role in helping young producers without strong collateral to buy shares in the co-op. Under this program, USDA will guarantee a maximum of 80 percent for up to seven years for loans of up to $400,000 to producers buying stock in a valueadded agriculture co-op.

Our bank issued loans to a number of those producers, many of whom might not otherwise have been able to join, she says. It turned out to be a good business for the producers, the co-op, the bank and USDA . None of those loans ever went delinquent, Lundebrek says proudly. (Call 202-720-8381 and request PA 1640 for a free brochure on this program.)

That helped the co-op raise all but $1.5 million of what was needed. The gap as filled through a consortium of 10 banks which agreed to issue a letter of credit for that amount. Growers paid it off through an assessment of an additional 10 cents per bushel of corn.

In this way, the letter of credit was redeemed in just eight months. The co-op also received a $500,000, interest- free loan from the Rural Utilities Program of USDA Rural Development to use as collateral when financing the plant.

When the plant was expanded, the co-op made an additional stock offering to members for $2 per share, or $2.50 per share for non-members. We could have sold stock to new members for a higher amount than that, but the co-op wanted to keep the price low to help young farmers invest, says Lundebrek.

Bio-refinery outlook
needed for long term
Jill Nichols Euken, a biofuels expert with the Iowa State University Extension office, says she sees great potential for continued expansion of the ethanol and biodiesel industries if the owners see their plants as the first step in building a bio-refinery.

Ethanol, biodiesel and the coproducts they produce-- dried distillers grains (DDGs) and glycerin-- will fast become commodities. The goal needs to be building true biorefineries where the renewable feedstock is fractionated into various components. Each component should then be used for its highest value: intermediate chemicals, fibers, nutrients, fuels, etc.). Euken notes that this is the way in which petroleum refineries have maximized their profits.

The greatest pitfall facing the industry is farmers stopping with the production of (just) ethanol, she stresses. The best ethanol and biodiesel operations are those that are continuing to look for ways to improve their processing and expand their product line.

For drymill ethanol plants, the most important of their byproducts is dried distillers grains (DDGs). Chippewa Valley is selling its DDGs to a broker that works for several co-ops, with the primary market at present being the turkey industry. About 50 percent of the plant’s production is being sold within 30 miles of Benson.

Another unique venture the co-op is involved in is production of premium vodka-- called Shakers Original American Vodka. It is being marketed through Infinite Spirits of Nappa Valley, Calif. (see March-April 2002 issue of Rural Cooperatives, page 20). The vodka is distilled from Minnesota wheat, purchased from co-op members and others. While corn can be used to make vodka, Lee explains that wheat produces a smoother, slightly sweeter taste needed for premium vodka.

In developing the recipe and distilling process for the Shakers Vodka, coop members and Infinite Spirits staff took several trips to Poland to study the vodka processing methods used by Old World masters of the art.

While Infinite Spirits owns the Shakers brand, Chippewa Valley is 100 percent owner of Glacial Grain Spirits, which holds the contract to manufacture the vodka.

Smaller board should
prove more effective
To improve the efficiency of its board, Chippewa Valley members recently voted to reduce the size of their board from 18 to 9 members, and reduce the number of directorial districts from six to three.

Lee says the co-op board engaged in much discussion following on the heels of a USDA study (by the Cooperative Services office of USDA Rural Development) that showed seven to nine to be the average number of directors for co-ops nationally. That sort of made clear what we had already been thinking: that 18 is an awful lot of directors for trying to reach a consensus. After lengthy deliberation, we put it to the members, and a large majority approved the reduction.

The co-op has compiled a manual that helps directors, committee members and employees understand just how the co-op works. It spells out things such as what is expected of a committee member or director, Lee notes.

The co-op has also made good use of the director-training program offered through the Quentin Burdick Co-op Center at North Dakota State University. It’s absolutely excellent-- I recommend it highly, says Lundebrek.

Based on her experiences so far as a co-op director, she says the best advice she can offer to other directors is this: When you are elected to the board, your overall objective is to do what is necessary to keep the co-op operating soundly and efficiently. You must listen to the members, but the efficient operation of the co-op is always the top concern. That may not always be the most popular thing to do.

Supply and demand remain in balance
While there has been some fear that the rapid rate of increase in the number of production plants would glut the ethanol market, so far demand has been increasing right along with the supply, Lee says.

RFA has even estimated that the already sky-high gasoline prices this summer would likely be from 14 to 15 cents per gallon higher were it not for the nation’s ethanol and biodiesel supply.

Lundebrek says critical mass is needed for the industry to take solid root. If we want ethanol to be the fuel of the future, we need to produce enough supply that (buyers) can depend on it.



Ethanol co-ops unite to form marketing venture

 While the majority of ethanol production in the United States is being produced by cooperatives, most of the fuel is being marketed through non-cooperative businesses. Thus, there has been a gradually increasing level of discussion about the need for regional, or even a national co-op marketing organization to help producers capture more of the profits from the ethanol market.

Chippewa Valley Ethanol is doing more than talking about it. It is a founding member of Renewable Market Products Group (RMPG), a cooperative-LLC formed in the late 1990s by five producer-owned ethanol plants. RMPG recently expanded to eight members. By the end of this year, plant manager Bill Lee expects the membership to have grown to a dozen ethanol co-ops.

These plants are located in Minnesota, Iowa, South Dakota, Nebraska and Missouri. After the expected expansion, the marketing co-op will be handling about 500 million gallons of ethanol annually, which Lee says would rank RMPG as the fourth largest marketer of ethanol in the nation.

The regional spread of members offers big benefits in reducing freight costs, because fuel can be shipped from plants located closest to a customer and/or take better advantage of transportation infrastructure in their area (i.e., proximity to the most cost-effective rail lines, trucking routes, etc.).

“The impetus behind RMPG was producers’ desire to own and control the marketing function of their ethanol — and to share in the proceeds derived from this part of the business,” says Lee, who was elected this year as chairman of the national Renewable Fuels Association. Not only does the co-op pool revenue and expenses, but members also share data that have helped them establish production benchmarks and improve their products and processing efficiency.

Through RMPG, members also enjoy combined buying power, which Lee says has proven very beneficial for procuring supplies such as the enzymes needed to produce ethanol.

“We’re not out to be the biggest fuel marketer, but a lot of producers find it attractive that we are a farmer owned and controlled business. They feel that through RMPG, they can better control their destiny.”



July/August Table of Contents