Ethanol bringing hope to farmers
The way Bernie Hammel sees it, investing in an ethanol plant is kind of like buying a combine.
Except, instead of seeing values depreciate in a few years, the retired Champaign farmer expects to reap a profit from investing in ethanol.
"Farming has been good to me. It's a good way of life," Hammel said. But for too long farmers have grown corn, trucked it to the local grain elevator and asked, "How much will you give me for my corn?" he said.
The answer? Farmers should pool their money, build an ethanol plant (which will prop up local corn prices), sell the ethanol and byproducts at a profit, and in the meantime, boost the rural economy.
"We don't need a Cargill to come and build an ethanol plant. They're just big business and will take the profits. We need farmers to accomplish it. Pride of ownership is what's made this country great," Hammel said.
Ethanol plants are cropping up throughout the country. Nineteen new or expanding plants around the country are being built or are planned, according to the Renewable Fuels Association, a trade association for the ethanol industry. Most of the new plants are in the Midwest and many are farmer cooperatives, limited liability companies or a combination of the two.
In 2004, America's ethanol plants produced 3.41 billion gallons of the fuel. After the new plants are up and running, they're expected to boost production by an additional billion gallons.
Ethanol production and demand have been growing in the last year primarily because of the banning of MTBE, a gasoline additive believed to have contaminated ground water in some areas of the country, said Monte Shaw, spokesman for the Renewable Fuels Association.
Gas stations in states where MTBE had been used are now using ethanol instead.
"Three states – California, New York and Connecticut combined – created demand for 1.5 billion gallons of ethanol. That spurred a lot of the growth," Shaw said.
"The high price of crude oil has also made ethanol more attractive as an additive in the octane market," he added. Instead of using a petroleum-based oxygenate, blenders are choosing ethanol, he said.
With congressional passage of an energy bill that includes a production mandate for ethanol, many of the ethanol plants in production or slated to begin production will have a guaranteed market for the fuel.
And farmers who live and work near the plants will have another market for their corn.
"If you have a 50-million-gallon plant, you need 20 to 25 million bushels of corn and that's really exciting," said Dan Meyer, Tuscola farmer and president of the Douglas County Farm Bureau.
The farm bureau, along with the Tuscola Economic Development Group, Inc., support the possibility of an ethanol plant in Tuscola.
"The main reason that we're looking at an ethanol plant is we feel we've got the infrastructure in place," said Phil Lamb, president of the development group. The groups have chosen as a potential site a parcel of land on U.S. 36 adjacent to Lyondell's Equistar plant (a chemical plant), and Cinergy, which supplies electricity to Equistar. A feasibility study is under way, Lamb said.
Nearby are rail lines, natural gas pipelines, a water plant and plenty of cornfields. The plant could run on natural gas or coal, he said.
"I think the rewards for the economy are great: additional jobs and tax base. It will also bring in auxiliary jobs with it, such as trucking jobs," Lamb said.
Ethanol plants "are really powerful economic drivers," said Hans Detweiler, deputy director of the Illinois Department of Commerce and Economic Opportunity's bureau of energy and recycling. Illinois has given money to not only gas stations to install ethanol pumps, but also to ethanol plants, with the hopes that they will boost local economies of the towns where they're located. For example, the state has given $4.8 million to Lincolnland Agri-Energy, an ethanol plant in Palestine, Ill.
When consumers buy ethanol, their money stays in the area, as opposed to being funneled to out-of-state companies or foreign countries, Detweiler said.
Ethanol plants may also spur development in small towns. Because ethanol plants produce carbon dioxide, another facility could be built near the ethanol plant to produce dry ice or the carbon dioxide could be sold to beverage companies, said Palestine Mayor Patricia Schofield.
Across Illinois, several farmer groups are thinking about ethanol plants, said Roger Sy, Newman farmer and president of the Illinois Corn Growers Association. They're all in various stages of the game, from mulling the idea of building a plant to organizing equity drives.
"It's a way for farmers to participate in the value chain," Sy said. "It's no longer a matter of selling to the elevator and the corn is gone. ... As ethanol is produced and sold, part of that profit goes back to the farmer-owner," he said.
Even a farmer not involved with an ethanol plant, as far as investing in one or selling corn to a plant, stands to benefit from growth in the ethanol fuel industry.
"As the end use of ethanol increases, that will add to the amount our corn is worth," he said. Dustin Blunier, manager of the Douglas County Farm Bureau, added, "You're adding value to your product, creating more demand and adding more value to your product," Blunier said.
To encourage development of ethanol, the federal government offers small ethanol producers a tax incentive. Plants that produce up to 30 million gallons a year can receive a 10-cent per gallon income tax credit, up to $1.5 million a year. The Senate energy bill calls for increasing the production qualification to 60 million gallons per year.
The tax break makes sense, according to Shaw, because the more ethanol produced, the more demand for corn. More demand for corn means higher corn prices and higher income for farmers. And ultimately, that means less reliance on farm subsidies.
Plus, the more ethanol produced in the U.S., the less oil the country has to import, Shaw said. And more domestic economic activity translates to increased federal tax revenue, he said.
Jerry Taylor, director of natural resource studies at the Cato Institute, isn't convinced.
"Who benefits from the ethanol program? People who sell corn or process corn and people who benefit from the financial well-being of the people who sell or process corn. Who's harmed? People who don't sell or process corn. It requires no great leap of faith or advanced degree in economics to see that you're taking some money from a lot of people and giving it to a concentrated group of people," Taylor said.
Despite political support (at least in the Midwest) and projections for continued demand for ethanol as a gasoline additive, planning and building an ethanol plant is not always an easy process.
Just ask Gayle Kite of Flat Rock. Kite is chair of the limited liability company that runs Lincolnland Agri-Energy and treasurer of the farmer cooperative.
Kite said everything has gone smoothly, but building an ethanol plant can take 10 times more time and money than anticipated.
The cooperative formed after members of the Agriculture Development Association of Crawford County decided to launch a project that would add value to the farm sector. They chose an ethanol plant. So they toured other plants, conducted research and a feasibility study, formed a cooperative and kicked off an equity drive to raise money. They sought members who were involved in farming, either as owners or operators of farms.
After falling short of their financial goal, organizers decided to form a limited liability company and brought in private companies as investors. Cooperative members sit on the LLC board.
Production started in 2004.
"We're hopeful as far as our own company is concerned. We're on solid ground," Kite said. "We're a conservative board. We want to pay down more of our debt."
There are no immediate expansion plans; however, the plant may add another grain bin for storage.
Then earlier this year the price of ethanol declined.
"We're still cash flowing even if (price went down) because corn is relatively inexpensive. If corn goes up it will hurt everyone. We came in luckily at a high point so we had lot of income early on," she said.
A large chunk of an ethanol plant's expenses are tied to corn. If corn prices increase, it could cut into a plant's profit.
"Even as ethanol demand continues to grow, we tell them that's not a license to build any plant anywhere. Crunch the numbers, look at the business plan. ... Build plants where it makes sense," Shaw said.
Considering the new ethanol plants that started operating this year and are slated to start operating, is there a risk of oversupply?
Earlier this spring, share prices of Archer Daniels Midland stock declined after the company's earnings did not meet analysts' expectations. ADM, the country's largest ethanol producer, reported reduced profits in its bioproducts division, which includes its ethanol business. The company cited, among other factors, lower ethanol sales volumes.
In any industry, whether it is the making of ethanol, Q-tips or widgets, supply needs to be correlated with demand, Shaw said.
Another risk associated with building an ethanol plant is choosing the location and keeping the locals happy.
One pending ethanol plant in central Illinois, Illini Bio-Energy, ran into opposition in Lincoln when it considered building a coal-fired ethanol plant there.
Dan Meyer (who is not related to Tuscola farmer Dan Meyer) would have been living about a half-mile from the potential plant site. He and other area residents formed a group, Citizens Against Pollution, started a Web site, hired a lawyer and started researching the issues.
"I was raised on a farm. We're not anti-farm," Meyer said. "We're against the location."
"The bottom line for someone like Illini Bio-Energy is profitability. ... The board members and farmer members profit. We lose because our home values could decline, the quality of air we breathe is compromised and there are traffic and safety issues because you're insisting on putting it in the city of Lincoln's back yard."
Illini Bio-Energy has not announced its location yet.
The cooperative raised $25.5 million for the $95 million plant, but fell short of its $30 million goal. As a result, the board is involved in changing its corporate structure from a farmer cooperative to an LLC, said Sara Wilcox, project manager.
This would allow people who are not farmers to invest in the plant.