New money changes ethanol industryby Mark Steil, Minnesota Public Radio
The bulls on Wall Street have developed a taste for Midwest corn. They're investing in corn-based ethanol, which is both good and bad news for Minnesota farmers. The state is a leader in building farmer-owned ethanol plants. But now that model is feeling pressure from the corporate world. Farmers are concerned it means a good share of future ethanol profits will leave the state.
St. Paul, Minn. — The surest sign of corporate interest in Minnesota ethanol is in the southern part of the state. Three ethanol plants there are in the planning stage. Each would be two to three times larger than the average ethanol plant currently operating in Minnesota.
Unlike the farmer-owned model which dominates, all three will be constructed mainly with money from large non-farm investors. John Christianson of Willmar, an ethanol industry insider, says it's definitely a departure from business as usual.
"The change that that symbolizes is that the ethanol industry has caught the attention of corporate America," says Christianson, "and has also caught the attention of Wall Street."
As part of an accounting firm, Christianson has helped plan and guide the financial side of more than 50 ethanol plants around the U.S. He's followed ethanol money for years, and he says right now grassroots investment is falling behind venture capitalists.
"It's coming in with larger blocks of dollars that are from some institutions that are buying larger investments -- some larger companies and just individuals that want to make a significant investment into the ethanol market," says Christianson.
Christianson says Wall Street has accepted ethanol as a relatively safe long-term investment. Big investors have taken years to reach that comfort level.
Christianson says early on, many believed ethanol was too dependent on government subsidies. They worried if the subsidies ended, the industry would quickly fold.
Several events have eased that doubt. Oil prices have increased, making ethanol a competitive fuel. World tensions make foreign oil supplies less dependable, and ethanol plants have turned large profits.
State and federal governments have reacted to these developments. Far from ending subsidies, they've increased their ethanol support. That was underscored most recently by President Bush in his State of the Union address, where he famously said "America is addicted to oil."
"We'll also fund additional research in cutting-edge methods of producing ethanol. Not just from corn, but from wood chips and stalks of switch grass," Bush said. "Our goal is to make this new kind of ethanol practical and competitive within six years."
One of the companies interested in building an ethanol plant in southern Minnesota is US BioEnergy. It's currently based in Brookings, South Dakota, but the company plans to move to St. Paul in the next year.
The company intends to build Minnesota's largest ethanol plant about 15 miles southeast of Mankato, near the town of Janesville. One of the company's major investors is a Twin Cities-based grain, food and energy company.
US BioEnergy Communications Director Kristi Lee says the Janesville plant will be good for the agricultural economy.
"Farmers have built this ethanol industry on their backs, there's no doubt," says Lee. "And we want to make sure that they continue to benefit."
Lee says that will happen in two ways. First, since the company will buy most of its corn for the ethanol plant from the immediate area, local grain prices will increase. Second, she says the company also hopes to go public at some point in the future, meaning farmers can invest directly in the company by purchasing shares.
Farmers like Bryant Hokeness will be watching to see just how much benefit they get from the corporate ethanol plants.
"It's definitely a change," says Hokeness. "Time will tell whether it's going to be a change that remains with us."
Hokeness says a plant like the Janesville operation will boost local grain prices by as much as 15 cents a bushel. That's extra money for farmers. Unfortunately, he says, that price bump represents a small slice of the money generated by the plant.
"The big part of the profit goes to the investor, which in this case is not the farmer," says Hokeness. "So that money doesn't stay in the rural communities. It goes to wherever the larger investors live at."
Hokeness knows how big that investor profit can be. He's a member of a farmer-owned ethanol plant. He says he's earned back as much as 25 percent of his original investment in one yearly dividend check.
The rush by corporations to take advantage of those types of profits has turned the industry upside down, according to David Morris with the Institute for Local Self-Reliance in the Twin Cities.
"In 2000, about 80 percent of all new ethanol plants were farmer-owned ethanol plants," says Morris. "In 2006, of those ethanol plants that are now planned -- that'll be operational in the next 12 to 24 months -- only 20 percent are farmer-owned ethanol plants."
That change may be part of ethanol's natural life cycle, according to the CEO of VeraSun Energy. VeraSun, also based in Brookings, South Dakota, is planning to build an ethanol plant in southern Minnesota.
CEO Don Endres calls farmers critical to the success of the industry. But he says nonfarm investment is a natural byproduct of ethanol's growth.
"We believe that that is all good. We need investment capital to come into the Midwest. For so many years we didn't have the opportunities that the coasts have," says Endres. "As a result of this new investment coming in, we'll see additional plants be built. We think that long term, there's a lot of room for technology and investment to come into play. We're very early, and we'll see this industry expand dramatically."
In just a few years of operation, VeraSun Energy has become the nation's second largest ethanol producer. Archer Daniels Midland is still by far No. 1, making about one-quarter of all U.S. ethanol.
Farmers' concerns over the corporate ethanol surge is tempered by the benefits it brings, like higher demand for their corn. And there are still investment opportunities. For example, one ethanol plant in northwest Minnesota is looking for farmer investors.
Still, David Morris of the Institute for Local Self-Reliance says it's a critical time for the farmer-owned model. He says it may be eclipsed in a few years by its high-flying corporate cousin.
"Someone needs to stand up and say that there's a difference here," says Morris.
Morris says one way to do that is by directing a greater share of government subsidies to smaller farmer-owned plants.
Farmers themselves differ on what, if anything, should be done. With generous government help already in place, they fear asking for more favors risks a public relations backlash against ethanol.
- Morning Edition, 02/09/2006, 7:45 a.m.