It's a boom that started a scant few years' back and continues to roll through the Midwest like a summer thunderstorm.
The push into aggressive ethanol plant construction was fully fueled even before events from 2001, much of it coming from government incentives. And for many states, the incentives and opportunities are still there.
But if you're not currently involved in an ethanol plant, should you be? And more importantly, do opportunities exist for long-term returns?
“There's no doubt that there will be continued value for farmers involved in value-added ethanol plants,” says Trevor Guthmiller, executive director of the American Coalition for Ethanol, based in Sioux Falls, SD. “However, the projects still have to be good projects. Not all ethanol plants are the same — there are risks.
“We tell people to look at the track record of the designers and builders,” Guthmiller says. “That's a huge part of this — making sure whoever you're paying millions of dollars to has a strong track record.”
Steve Sershen, whose Chester, SD-based Val-Add Service Corporation provides feasibility studies and risk management services for ethanol projects, couldn't agree more. “In my experience, nearly every ethanol plant builder has had their first plant fail in some way, and then had to come back and rebuild,” Sershen says. “Know who you're doing business with.”
Case in point: Quad County Corn Processors built an 18-million gallon facility near Galva, IA, with plans for production to start in early 2002. Working on a different concept, farmers delivered wet corn for processing; the advantage being farmers would save drying costs and potentially speed the ethanol process.
The concept failed and the 415 local farmers who helped raise millions of dollars for the plant are faced with a long redesign and reconstruction project before operations can begin.
Another consideration that farmers need to look at, Sershen says, is to assess all possible scenarios and then take a strong look at their surroundings before venturing ahead. “If you're going to build a plant today, you better have some strategic advantage,” he notes. “You need to put down on paper; Why you? What advantage do you have? What would make your plant better than one that exists in Minnesota, South Dakota or wherever?”
It's that type of planning that can help stave off unwise decisions to forge ahead with building projects at a breakneck pace.
According to the Renewable Fuels Association, 11 plants are being built, with over 50 others in the development phase. From the 66 plants in current production, 28 of which are farmer-owned, the expected output for 2002 is a record 2.55 billion gallons/year.
“It's been a gold rush,” says Mark Warren of Business Advisory Services, Greenwood Village, CO. He's seen the aggressive ramp-up of plants through advising clients on the risks and opportunities.
Warren believes the typical farmer-owned coops producing 20-40 million gallons will need to constantly think in a proactive manner in order to sustain themselves. “One possibility is that some of the smaller plants may need to band together to achieve greater economies of scale and leverage each other's strengths to be more efficient,” he says. “Today is not nearly as competitive as it will be two to four years from now.”
Hedging against price swings, forward contracting corn prices and locking in low-cost natural gas are all part of protecting the risks for plants already in production to remain profitable, says Jason Sagebiel, risk management consultant for FCStone, West Des Moines, IA.
“If they protect their risk and all the parameters of plant operations, and run it efficiently, there will definitely be opportunities,” says Sagebiel. “With sound management and good decision making, plants can be price makers instead of price takers.”
There are some “ethanol plant basics” that are the essentials for a plant to be successful. Here is a short list, according to the American Coalition for Ethanol:
Corn: Access to a plentiful supply of corn or other economical feedstock is crucial. The cost of corn represents about 65% of operating costs.
Natural Gas: The preferred fuel for processing, site locations should have ample supply and opportunities for reasonably priced natural gas.
Water: Access to a strong, good-quality water supply.
Rail: Railroad access is critical for delivering where demand is great and markets exist. In addition, it provides a low-cost transportation alternative for the distillers' grain co-product.
Roads: In addition to rail, local infrastructure and sound roads are equally important for truck transportation.