Producer ownership of ethanol
a major plus for rural America
By Dan Campbell, Editor
ural America reaps
substantially more
benefits from the
biofuels revolution
when ownership is
held on Main Street rather than
Wall Street, according to John M.
Urbanchuk, director at consulting
firm LECG LLC, who called
ethanol “an engine for the
economic revival of rural
America.” Speaking in March on a
biofuels panel during the 2007
USDA Ag Outlook Forum in
Arlington, Va., Urbanchuk said
biofuel production is bringing new
vitality to rural towns, and even
helping to attract young people
back home who had moved away
to find jobs.
While the long-term outlook
for ethanol production looks
promising, the next two years
could be a little bumpy, added
Tom Houser, a biofuels lending
specialist with CoBank in Omaha,
Neb.
Another panelist, Ryland Utlaut, president of Mid-
Missouri Energy (MME) in Malta Bend, Mo., provided a
step-by-step overview of how producers organized and
financed their plant. He also discussed how the co-op’s
sudden success has attracted buy-out offers from outside
(non-producer) investors.
Panel moderator Jack Gleason, USDA Rural
Development’s administrator for Business and Cooperative
Programs, noted that there is a direct link to increased
numbers of rural jobs created when ethanol plants are under
local ownership, and stressed that USDA is promoting local
ownership through its programs, an example being the
financial help it provided to Mid-Missouri Energy.
How important are these
biofuels jobs in rural areas?
Consider this: for the 40 jobs
created at the Missouri ethanol
plant, Utlaut said the co-op
received 450 applications.
Study sees major gains
from local ownership
Urbanchuk was hired about
a year ago by the National Corn
Growers Assoc. to study the
impact of absentee vs. local
ownership of ethanol plants.
While rural America benefits from
both types of ownership,
Urbanchuk said that more valueadded
dollars clearly stay at home
when the ownership is held by a
producer-owned co-op or LLC
than if owned by outside investors.
Today, nearly half of
ethanol plants and 38 percent of
total ethanol production are
farmer-owned, he noted. But that
is up sharply from just five years
ago, when producers owned about
20 percent of ethanol production. However, total ownership
in farmer hands, as a percent of production, is likely to drop
in the future as plants get larger and more expensive to build,
“although I hope I am wrong about that,” he said.
The rapid increase in plant building costs — the average is
now $2 per gallon of plant capacity vs. $1.35 just a few years
ago — added to the fact that the average size of a plant has
increased from 50 million gallons to more than 100 million
gallons — is making it hard for farmers to compete with
outside investors.
Investment firms have ready cash at hand and often have
unlimited borrowing capacity, whereas farmers usually must
undertake lengthy equity drives to raise money to build a
plant.
Despite the expanding size of new plants, Urbanchuk stressed that a well-managed, 50-million-gallon plant is still
highly viable.
“In many respects, the economic impact of a farmerowned
and absentee-owned ethanol plant on the local
community is similar,” Urbanchuk said. “There are, however,
two significant differences that increase the impact of a
farmer-owned plant: larger local expenditures and dividend
payments. Since a farmer-owned cooperative ethanol plant is
literally a member of the community, the full contribution to
the local economy is likely to be as much as 40 percent larger
than the impact of an absentee-owned corporate plant.”
Not only are more jobs associated with a locally owned
plant, many of those are the higher paying jobs. Accounting,
administrative and marketing functions are much more likely
to be filled locally if farmers own the plant, he said.
Financing of a farmer-owned plant is also more likely to be
provided by local lenders.
Farmer-owners of a cooperative participate in the profits
of the ethanol plant through dividends. The distribution of
dividend payments represents additional income to the
individual farmer-owners and their families, and these dollars
turn over many times in a local community or region. With
absentee ownership, most dividends instead flow back to the
corporate headquarters.
Crunching the numbers
Urbanchuk’s analysis was based on a plant producing 50
million gallons per year in a facility that cost $2 per gallon of
capacity to build, with depreciation over 15 years. He figured
60 percent debt financing over 10 years at 8.5 percent
interest, with borrowing done locally for the co-op, or
outside the area by the absentee-owned plant. He calculated
that the farmer-owed plant would set aside 20 percent of the
net margins as retained earnings, with the remainder paid as
dividends to the farmer-owners. Total operating expenditures
were estimated at $78.2 million for the absentee-owned plant
vs. $84 million for the farmer-owned plant.
Based on this model, Urbanchuk calculated that the plant
would have revenue of $120.7 million if the fuel sold for $2
per gallon and earned an additional 35 cents per gallon from
dried distiller grains (DDG). Net margins would have been
$28.11 million in 2006, or 55 cents per gallon. Retained
earnings would be $5.6 million, with an available dividend of
just under $22.5 million.
The economic impact of co-op dividend payments would
generate $171.2 million in GDP for the co-op vs. $123.2
million for the absentee-owned plant. There would also be an
additional 648 jobs in all sectors of the entire local economy,
Urbanchuk said.
Tapping rural equity
Ryland Utlaut said the energy picture was vastly different
just four or five years ago, when producers in Missouri
started pursuing the construction of a new ethanol plant
(only the third one in the state). At that time, crude oil prices
were hovering around $40 a barrel, a bushel of corn averaged
$1.80 and ethanol was selling for $1.25 a gallon. At those
prices, Wall Street investors were still very much on the
sidelines and farmers were on the playing field.
“Our challenge in building Mid-Missouri Energy (see also
Sept./Oct. 2006Rural Cooperatives) was to find enough
investors to build a $60 million, Fagen-ICM designed plant,”
he said. The plan was to raise $24 million in equity and borrow the other $36 million. The minimum investment was
two shares at $10,000 each. Members also had to make a
commitment to deliver corn to the plant, and are paid 80
percent on delivery.
The co-op got bankers and ag lenders involved at the getgo,
inviting them to the pre-kickoff meetings for the equity
drive, where the business plan was shared with them.
One of the first hurdles was to secure funds to conduct an
equity drive of more than 100 producer meetings. Area banks
provided the co-op with a line of credit of up to $500,000.
The co-op’s 15 board members guaranteed $150,000 of that
total. The co-op also received a $189,000 grant from the
Missouri Small Business Development Authority.
The co-op collected $30,000 in donations from
community organizations that wanted to support the project,
including $25,000 from Catholic Charities (which has since
been repaid $50,0000 by the co-op). Members also paid a
$500 membership fee to join the co-op.
Grain merchandisers were among those the co-op forged
early strategic alliances with. “MME buys grain only from
shareholders and grain merchants,” Utlaut stressed. “We did not want to knock any grain merchants out of business, as has
occurred elsewhere when large amounts of grain have been
diverted to ethanol plants.”
Utlaut said the project was pursued much like “an oldfashioned
barn raising.” The community responded with
ongoing, supportive coverage in local newspapers and radio
stations. Co-op members were featured on radio call-in
shows. Service clubs and farm equipment dealers threw their
support behind the co-op.
USDA Rural Development provided a big boost —
psychological as well as financial, according to Utlaut —
when it provided the co-op with a $500,000 Value-Added
Producer Grant in June 2004.
The first round of equity-drive meetings raised $16
million. There was a 60-day extension, during which another
$20 million was raised. It was followed by yet another 60-day
extension, during which another $24 million was raised. Ag
Star, a Minnesota-based cooperative bank, committed to lend
the co-op the other $36 million.
The plant’s ethanol is also marketed through a
cooperative: the Renewable Products Marketing Group.
The plant went into operation just in time to reap the
rewards of a major run-up in ethanol prices, and members
were delighted with a 31 percent dividend in the first year of
operation. MME is considering doubling its 50-milliongallon
production capacity, financing the new construction by
using retained earnings and new borrowing. The other
alternative is to use the dividends to pay off its loan from
AgStar ahead of schedule. “It’s a tough decision,” Utlaut said.
Such tremendous success soon attracted buyout offers
from outside investors — at least one offer being for 10
times the investment cost. “There were plenty of people
saying we would be fools to not take such a price,” Utlaut
recalled. Others felt it was in the best long-term interested of
the producers and the local economy to maintain producer
ownership. However, most of the offers began dissipating
when ethanol prices began to drop and amid ongoing press
reports about the industry being overbuilt.
Buyout offers are especially tempting to those producers
who borrowed most of their investment money – and some
borrowed all of it, Utlaut said. On average, co-op members
invested $33,000. “The co-op’s policy is to return as much as
it can as dividends, since many need that money to service
the debt.”
Perfect weather, or storm brewing?
CoBanks’s Tom Houser provided the perspective of the
nation’s largest ethanol financer, with involvement in nearly
50 plants and well more than $1 billion in debt funding so
far. “Biofuels are here to stay, and the industry will continue
to grow,” Houser predicted, noting that “well-located, wellcapitalized,
low-cost producers” will do well.
“My concern is not for the long term, but for the next two
years,” Houser said, adding “the industry scares me for the
next couple of years. Are we faced with perfect weather, or a
perfect storm,” in terms of production supply/demand and
industry economics?
The nation’s 113 ethanol plants are currently producing
more than 5 billion gallons of ethanol annually, but with
another 78 to 84 plants under construction (and others
expanding), Houser said production will increase to 11
billion gallons is just two or three years.
The primary risk plant owners face, he said, is the
volatility of oil prices and the related impact on ethanol
market values. Houser said the increase in oil prices from $40
to $60 a barrel completely changed the dynamics of the
ethanol industry by attracting more outside investors.
Corn prices are, of course, the other big factor impacting
ethanol profitability. Ultimately, higher corn prices could
slow the expansion of the industry, Houser said.
The DDG market also has risks. The market has improved greatly in recent years with more livestock feeders
buying DDG. But with so many new plants being built, the
DDG market could become saturated.
Transportation logistics are also challenging the industry
to come up with better ways of getting ethanol from plant to
refinery. Rail shipments of ethanol have tripled since 2001.
In 2010, the current 54-cent-a-gallon ethanol subsidy
could end, although Houser said he expects it to be extended.
Ethanol processing technology is constantly being improved
to require less energy, he added, which bodes well for the
future of the industry.
As for the long-term future of the ethanol, it may well be
in cellulosic production — fuel made from grasses, corn
stover and wood wastes. It’s not so much a question of “if”
but “when” cellulosic ethanol becomes part of the industry,
Houser predicted. However, he also emphasized that
significant technological progress must be made for
production to be economical compared to corn. In addition,
infrastructure/ logistical issues associated with gathering and
transporting feedstock will also require substantial investment
and time to evolve.
CHS: Make ethanol-blended fuel mandatory
The best way to support continued development of the
ethanol industry is to require that all gasoline sold nationwide
contain a set amount of ethanol, probably 10 percent,
with 85- and 20-percent ethanol blends also available in
states that want to go further, according to CHS Inc. President
and CEO John Johnson. Speaking at USDA’s annual Ag
Outlook Forum in March, Johnson said a nationwide mandate
of 10 percent ethanol would require 14 to 15 billion gallons
of ethanol production annually. Current annual production
is about 5 billion gallons, but rising steadily.
“We believe this kind of across-the-board national
standard is the best way to get every driver in our nation to
embrace renewable fuels,” said Johnson, who leads the
nation’s largest federated farmer co-op, representing
350,000 farmers and ranchers.
“We’re also seeking continued tax assistance for
ethanol and biodiesel production and blending, as well as
economic incentives when companies substitute an alternative
energy source for petroleum or natural gas-based
production,” he said. CHS is advocating accelerated investment
in cellulose-based ethanol research and development.
CHS owns 22 percent of U.S. BioEnergy, the second
largest ethanol producer in the United States, with 650 million
gallons of production either on-line or in process. But,
unlike most others in the renewable fuels industry, CHS also
has a major stake in fossil fuel refineries and distribution.
“So, CHS is deeply involved in literally every aspect of
these complex businesses, from the farm field to the gas
tank,” Johnson said.
The CHS system has been the leading marketer of
ethanol-blended fuels for 30 years, he noted. Despite the
vast potential of renewable fuels, many challenges must be
met, he noted, to build an industry that is resilient enough to
withstand the wild swings of the fuel market.
“During just the past six months, we’ve seen wild economic
swings that can impact this business,” Johnson said.
“When corn prices were $2 in mid 2006 and crude oil
reached $70 a barrel, the economics were extremely
attractive. Investors of all types raced to grab their share;
plans for new and expanded ethanol production were
announced almost daily.” Between 2004 and 2007, non-traditional
investors pumped $1.9 billion into the industry,
Johnson noted.
But when corn hit $4 a bushel and crude oil prices fell
into the low $50s in 2007, the economic equation changed
quickly, he said. [As of this writing in late April, oil prices
were soaring again.] “The picture was suddenly far less
attractive to those seeking quick returns and who were
unprepared or unwilling to be part of what essentially is a
commodity business subject to market-driven highs and
lows.”
Johnson said CHS sees the nation’s energy future “not
as a single pathway, but as a four-lane superhighway, with
each lane representing one component of the energy solution,
but all headed in the same direction.” Those four lanes
are: fossil fuels, renewable fuels, emerging energy technologies
and conservation.
With 20 percent (and expected to go much higher in
coming years) of the nation’s corn already being diverted
from traditional channels to ethanol, concerns are rising
about the availability of adequate grain supplies for other
customers, including domestic livestock producers and
export markets.
Johnson said other complex issues also must be
addressed, including transportation logistics for both
renewable fuels production and dried distillers grains,
along with concerns about water use in areas with limited
water supplies.
“I am convinced that research now underway will deliver
increases in corn yields and expand the production
geographies,” Johnson said. “When they are given the
seed genetics with which to do the job, I have every confidence
in the ability of the American farmer to produce
bountiful crops that can both feed and fuel the world.”
Johnson said he could not predict a time frame, but that
“Clearly, energy research will lead us to other renewable
fuel feedstocks, including cellulose, switchgrass or even
animal waste.” He also sees great potential for wind power,
conversion of coal to gas and other technologies.
On the conservation front, agriculture is helping to lead
the way in reducing fuel consumption, Johnson said.
“More seed genetics, more efficient equipment and fuelconserving
farming practices have cut overall farm diesel
consumption in the past two decades.” He cited research
showing that in 2004 alone, no-till farming practices gained
through weed-resistant crops reduced greenhouse gas
emissions by 10 million metric tons. “That’s the equivalent
of taking 20 percent of our nation’s cars off the road for a
year.”
Ethanol and biodiesel are here to stay, Johnson
stressed. “In the end, I believe as industries and as a
nation, we have the commitment and ingenuity to tackle all
of these issues, but there are no simple solutions.”
By Dan Campbell
