Outside Interests Put Money on Table

Ethanol was built on cash from farmers and their neighbors;
But the boom is pushing them aside in favor of deeper pockets

By Minneapolis Star Tribune Staff

Editor’s note: this article was the fourth in
a five-part series on the ethanol boom in
Minnesota and the Midwest that appeared
in the Minneapolis Star Tribune in
October. It is reprinted by permission of the
Star Tribune, www.startribune.com.

orris, Minn. — Bobby Johnson is still not used to the snide comments and envious glances. Johnson, who owns the grain elevator in this western Minnesota city, dates the resentment to a Nov. 14, 2005, meeting at the Old No. 1 Bar & Grill. There, amid impassioned speeches and accusations of selling out, Johnson and other shareholders voted to sell the city’s ethanol plant to an Australian company.

The sale generated windfalls, some in excess of $2 million, for some investors. Johnson, 54, made half-a-million dollars — enough to pay off four decades of debt. But it also turned some farmers against one another, creating division in a community once united behind the ideal of a locally owned ethanol plant.

“You couldn’t pry their farms away from them, but they sold this one [ethanol plant] real quick,” said Gerald Rust, a Glenwood farmer and former chairman of the plant’s board who voted against the sale.

Midwest farmers may have built the U.S. ethanol industry, but two decades later they are increasingly worried about being elbowed aside as Washington politicians, Detroit automakers and Wall Street investment bankers finally embrace it.

Just one in eight ethanol plants under construction this summer were farmer-owned, compared with eight in 10 just two years ago, according to the Renewable Fuels Association, a trade group. And with foreign and U.S. investors combing the countryside for sites to build or plants to buy, a number of farmers are opting to sell rather than risk competing against the much larger privately owned plants.

This spring, Global Ethanol, an Australian investment group created by a large South African bank and other investors, bought a 60-percent stake in an ethanol plant in Lakota, Iowa, for $100 million. About a third of the plant’s nearly 1,300 farmer members voted against the deal.

About 125 miles west, in Sioux Center, Iowa, a farmerowned ethanol cooperative is weighing a merger offer from a public company that it won’t identify. The plant’s general manager, Bernie Punt, said he expects the board of directors to vote on the proposal within the next month.

A cooperative effort
To some farmers and politicians, the notion of sending profits from an ethanol plant to far-flung investors undermines the rationale behind the industry — that farmers reap the profits from value-added processing. It’s a sensitive issue in Minnesota, where most of the ethanol plants are still owned by farmer groups.

In Winnebago, a southwestern Minnesota city with fewer than 1,500 people, the Corn Plus ethanol plant employs the mayor, three firefighters and two members of the city’s rescue and ambulance squad, according to general manager Keith Kor. Each spring, the plant sponsors the after-prom party at the local high school, with refreshments and prizes paid for by ethanol money.

Last year, the farmer-owned plant paid $16 million in profits back to its 750 shareholders.

David O’Brien, owner of the Napa Auto and Farm Parts store in Winnebago, said he makes up to two deliveries a day to the plant. “No one from a big city can comprehend what an ethanol plant means to a farming community of this size,” he said.

In June, VeraSun Energy raised more than $400 million through an initial stock offering. Before the ethanol boom, however, plant backers would spend months on the road, meeting in American Legion halls, coffee shops and church basements, where they would try to sell the concept to hundreds of individual investors.

“They were like evangelical meetings,” recalled Loris VanHooserof Foley, Minn., who owns shares in the Central MN Ethanol Co-op, a plant in Little Falls, Minn. “Only people who truly believed in the promise of ethanol would commit themselves to that much work.”

Lenders usually needed more convincing. Directors of the Corn Plus plant, desperate for a loan in 1993, resorted to sending a batch of strawberry pies to a local bank.

“In the old days, you generally had to sweeten people up before they’d talk to you about ethanol,” said Bob Weerts, former chairman of Corn Plus. “Now they’re bringing us the pies.”

Today, nearly one out of three farmers in Minnesota who grow at least 100 acres of corn owns shares in ethanol plants, according to the Institute for Agriculture and Trade Policy in Minneapolis.

“If a farmer in the Midwest hasn’t been given a chance to invest in an ethanol plant by now, then you gotta wonder what rock he was sleeping under,” said Greg Lepper, a corn and soybean farmer from Ashland, Ill.

Some, such as Randy Buboltz of Hector, Minn., have bet heavily on the industry. The corn and soybean farmer owns more than 100,000 shares in the Heartland Corn Products ethanol plant in Winthrop, a stake worth about $500,000. He delivers a third of his corn crop each year to the farmer-owned plant, and twice each day he calls up the website of the Chicago Board of Trade to check the price of ethanol futures.

Buboltz said he invested in the Winthrop plant because he saw it as an attractive hedge: if corn prices fell, the local ethanol plant got more profitable and he would receive fatter dividend checks. “It was all focused on this little dream of adding a small premium to our corn value,” he said. “But from Wall Street’s perspective, it’s got nothing to do with that. And that’s what scares me.”

Indeed, with demand for ethanol surging, plants such as the ones in Winthrop and Winnebago have become prime takeover targets for large corporations, Silicon Valley-based investors and foreign syndicates looking for quick entry into a new source of energy.

In the 1990s, before ethanol really took off, Corn Plus got one or two buyout inquiries a year. The plant now gets one or two a month. Twice this spring the plant had to scuttle expansion plans after discovering that two out-of-state corporations had already snatched up the sites it wanted.

Rick Lunz, president of the Corn Plus board, said the ethanol plant learned the hard way that being local didn’t give it an inside edge over outside competitors. “The ethanol industry is expanding so quickly that the first per- son that looks at a site and has all the requirements gets to build it,” he said. “It’s just a different world.”

The issue of local control is on Washington’s agenda. Minnesota Senator Norm Coleman said federal policymakers are pondering how to tie local ownership to federal ethanol subsidies.

“Who is going to reap the benefit of this ethanol explosion?” Coleman asked. “Is it going to be folks at the local level, is it going to be farmers, is it going to be through co-ops ... or is it going to be Wall Street?”

Pride, then a divide
Built in 1990, the Morris ethanol plant was one of the city’s most conspicuous landmarks and rivaled the local branch of the University of Minnesota as a source of pride.

Known locally as DENCO — Diversified Energy Co. — the facility proved so profitable that area store owners said they timed their sales around its twice-annual dividend checks. Those who bought shares in 2000 earned back almost their entire investment in dividends within two years, plant officials say.

State subsidies helped. Like most ethanol plants in Minnesota, DENCO received state payments for every gallon of ethanol it produced — more than $20 million so far. The plant is entitled to receive producer payments through 2009.

Yet the plant’s profitability surprised some of its initial investors. At the time of DENCO’s initial share offering, local farmers worried whether the plant could survive a calamity, like the 1996 drought that drained profits from a large ethanol plant in nearby Marshall.

Doug Ehlers, president of First Federal Savings Bank in Morris, remembers a grueling information session at the Best Western hotel in Morris. There weren’t enough seats, so he spent five hours sitting on the floor while a group of farmers tried to persuade their friends and neighbors to invest.

“At that time, there were some people who thought they’d never sell those shares,” Ehlers said.

Last year, Babcock & Brown Environmental Investments offered $8.40 in cash for every DENCO share, a 740-percent return for the company’s original investors.

In Morris, some viewed the $50 million buyout as a godsend for a small plant that faced an uncertain future competing against new plants three to four times its size. More than 90 percent of the plant’s 363 shareholders voted in favor of the transaction.

Yet some farmers viewed the sale as an act of betrayal — akin to selling a local baseball team. They resented that a handful of large shareholders stood to walk away with million-dollar windfalls, while future profits would flow to a foreign company.

When shareholders arrived at the Old No. 1 that November night to vote, each received a booklet describing the offer and the amount of shares owned by the plant’s largest shareholders. Farmers who owned only a few thousand shares could compare their modest payday to those who owned 100,000 shares or more.

The information fueled the perception among some investors that the decision to sell was already made before they stepped into the restaurant that night. “The big boys made up their minds, and there was no stopping them,” said Dean Monson, a city councilman in nearby Chokio, Minn., and owner of a trucking company.

Erv Krosch, owner of the Dairy Queen in Morris, said he knew next to nothing about ethanol when he borrowed about half the $25,000 he needed to invest in DENCO in 2000. He learned about the plant from members of DENCO’s board, who would often stop in his restaurant at night to discuss strategy over a burger and coffee, he said.

Krosch was among a small minority of investors who voted against the sale. “My biggest concern was that future profits would leave the area,” he said. “Small rural areas like this need to retain as much as we possibly can.”

Johnson, despite making enough money to pay off four decades worth of debt, resisted the urge to celebrate that night. Instead, he had a few drinks, shook a few hands and went home.

“You could tell by the way people were looking at you that they were envious,” he said.

Life after the sale
Today, someone passing through Morris would have no idea that investors here reaped millions in profits nearly a year ago. Flouting one’s wealth is frowned upon in this city of 5,200.

“Around here, if you drive a fancy sports car ... there’s a good chance that no one will do business with you,” Johnson said.

For Johnson, life hasn’t changed much since the DENCO sale. He still works in a tiny office about the size of a moving van, scattered with buckets of grain and cigarette butts. He can still drive a nail with one measured blow and lift 100-pound sacks of feed with a single arm. And he still sticks his hand in the corn as it drops from the grain trucks, because he doesn’t trust the electronic moisture testers that bigger grain elevators use.

“The only way to know if the grain is good and dry is to touch it, feel it, smell it,” he said, as he let the grain pour over his arms like a warm shower.

Yet the resentment that Johnson felt that November night at the Old No. 1 still lingers. It slips out in a passing remark from old friends or acquaintances. “They’ll say something like, ‘You don’t have to worry, Bobby, with all your money,’ or ‘If I had your money, I’d burn mine,” he said. “It’s not so much what they say, but the way they say it.”

The irony is that Johnson isn’t nearly as wealthy as some people in Morris make him out to be. He used nearly all his proceeds from the DENCO sale to pay off business loans, including about $400,000 in debts on three new grain bins he built along the railroad tracks in the center of Morris.

For the first time since he took over the grain elevator from his dying father 35 years ago, Johnson is debt-free. He no longer has to worry about passing on a mountain of debts to his 24-year-old daughter, Christine. “I didn’t want her to be sitting here 25 or 30 years from now, hoping this debt gets paid off,” Johnson said.

But while ethanol freed him from debts, it’s also eating away at his business. The ethanol plant in Morris has its own grain bins now, so more and more farmers are delivering straight to the plant and bypassing his elevator. Johnson’s deliveries to the ethanol plant have fallen from 3 million bushels a year in 1998 to 800,000 bushels.

From the front window of his office, Johnson can see the semi-trailer trucks speed by on their way to the ethanol plant, kicking up clouds of dust into his parking lot. It bothers Johnson that so many of his longtime customers would show such little loyalty. He wonders out loud whether they remember him unloading corn for them on Thanksgiving Day and Christmas.

“We kept her running 365 days a year. We took care of them,” he said. “But some people’s got short memories.”

The impact could be even more severe if the Australians follow through on their plans for a new 100-milliongallon plant in Alberta, Minn., just 7 miles from the DENCO plant.

Johnson is concerned they will strike a deal with Cargill, which has a large elevator in Alberta, and stop dealing with him entirely. “Then we’re done for good,” he said.

Johnson figures his best option may be selling his business to the ethanol plant before it’s too late. He wouldn’t mind working for someone else for a few years and then retiring to Las Hadas, a seaside resort in Manzanillo, Mexico. He has gone there every year since the mid- 1980s, when he saw the resort community featured on “Lifestyles of the Rich and Famous.”

“It’s sunny every day down there, and nobody cares who you are or how much money you’ve got,” he said. “And at least I wouldn’t have to eat all this dust.”

November/December Table of Contents