Commentary
Co-op business model well suited for
next-generation biofuel development
By Dallas Tonsager, Under Secretary
USDA Rural Development
Editor’s note: The following commentary is based on remarks
Tonsager delivered in January at the Fourth Annual Iowa
Renewable Fuels Association Conference in Des Moines, Iowa.
hen Congress passed the Energy
Independence and Security Act of 2007, it
established a significant challenge to the
nation to produce 36 billion gallons of
biofuels by 2022 to power cars, trucks, jets,
ships and tractors. However, only 15 billion of the 36 billion
gallons can come from corn ethanol. We are nearing that
point. The Energy Information Administration predicts that
ethanol production will grow from about 11 billion gallons in
2009 to 12.95 billion gallons in 2010.
This poses a substantial challenge to the nation as we tap
other renewable fuel sources. But we can achieve it if the
technology and lender confidence are there.
Biofuel production is an evolutionary process. As with
computer technology, the newest version is always just ahead
of us. To reach our goal, second-generation biofuel
technologies will need to become commercially viable,
including those that turn crop residue (such as corn stover)
and energy crops (such as switchgrass) into ethanol. Thirdgeneration
biofuel technologies that turn feedstocks into
advanced biofuels will also be needed. USDA’s Research,
Education and Economics Service is researching the
technology needed for this effort, while USDA Rural
Development is working to forge the necessary business
deals.
The conversion efficiency of ethanol production has
improved markedly in the past decade. For example, just 200
bushels of corn can now be processed into about 540 gallons
of ethanol. It would take no more than 40 gallons of fuel to
produce that crop, so we would net about 500 gallons to
distribute. That’s a huge improvement over the conversion
rate of the early 2000s. It is reasonable to expect we will see
similar advances in next-generation biofuels, given the
current rate of advances in technology.
USDA has been promoting the economic opportunities
derived from emerging local and regional food systems. In
the Midwest, we should
also consider the
economic opportunities
afforded by a regional
energy system. The
production and use of
renewables on a regional
basis make economic sense
and represent a historic economic opportunity for
agricultural producers and rural America.
How do we do this?
By working backward from the 36 billion-gallon target,
using a regional supply-chain approach. We should focus on a
diverse group of dedicated feedstocks, including: 1. perennial
grasses; 2. energycane (similar to sugarcane); 3. biomass
sorghum; 4. oil seed crops and algae; 5. woody biomass. In
using crop residues and planting special “energy crops” to
produce biofuels, we must do so in a way that doesn’t deplete
soil fertility or create problems for other crops (see page 19
of this issue for more on this topic).
A business model similar to how we developed the ethanol
industry can be used in this effort. Capital was found for
ethanol projects in the 1990s by issuing proposals that asked
for public participation in a project. With the membership
fees paid, business plans were developed and prospectuses
were issued to sell stock in a company.
If enough people were willing to invest, we would be able
to complete a project. We could spread the investor risk and
the credit risk as widely as possible.
To encourage public support, cooperatives are a great
business model. New-generation cooperatives, unlike
traditional cooperatives, are financed through the sale of
delivery rights. Delivery rights represent a member’s right to
deliver a specific amount of commodities to the cooperative.
A Rural Development staff member in Iowa told me about
a new-generation cooperative operating a producer-owned
ethanol plant that is producing more than 30 million gallons
per year. Within two months of its formation, 400 area
residents had invested in the plant and become memberowners
of the company. The shareholders are area farmers
who are also the primary suppliers of the corn processed in
the facility. The producers are contractually obligated not
only to provide funds, but also to deliver their products to the
cooperative.
Farmers invested in the plant
because they are getting their feed and
fuel from the cooperative. All of the
corn that is processed is used in some
capacity, whether it’s liquid, wet or dry
feed for livestock, or alcohol for fuel.
There is no waste.
Whichever way you look at it, the
key is to spread the investments widely,
with lots of opportunities to limit risks.
About one-third of the funding for
next generation biofuel will likely need
to come from producers and wellcapitalized
investors, with two-thirds of
the funds coming from lenders.
At USDA, we are keenly aware of
today’s business environment and how
sensitive lenders are to risk mitigation.
We are dedicated to addressing these
issues in order to get capital flowing
again. We’ve been meeting with
lenders, establishing new relationships
and building on old ones.
As we continue to invest in, and
develop, advanced biofuels
technologies, many projects will
become eligible for more conventional
forms of financing.
We must continue to develop new
technologies and demonstrate to
lenders the importance of transitioning
to advanced biofuels. There will always
be uncertainties. There will always be
surprises. Neither markets nor
technologies are static.
But Congress clearly defined our
mission in the 2008 Farm Bill, and we
at USDA Rural Development are fully
committed to reaching our goal. Our
job is to implement legislation. Our
responsibility is to support the
entrepreneurs who have the initiative
and the drive to go out there and
compete in the marketplace to build a
new energy future.
