Published: July 02, 2008 01:19 pm            

Tighter margins, but ethanol plants making it work

Originally published in the June 27, 2008, print edition.

Despite the price of corn, the nay-sayers rumblings about using corn for fuel, the headlines about world food price concerns, even rumors of shut downs of ethanol plants, despite all the chatter the renewable fuels industry continues to grow across America.

“The renewable energy market is here to stay. Sure, margins are tight right now but this is still a very young industry. It does not have the liquidity of other commodities but energy is a growing, strong market and I think biofuels will be an even bigger player down the road and we will be here to serve those needs,” said Tracy Olson, CEO and general manager of Granite Falls Energy, a 45-million-gallon ethanol plant.

Keith Kor, general manager of Corn Plus (a 45-million-gallon ethanol plant at Winnebago), agreed that profits are marginal right now but said his operation is still paying all its bills.

“We’re doing what we can to cut costs and reduce our financial risks. Next year is a tougher call. There is so much uncertainty of both corn prices and corn production. Plus there are more ethanol plants coming on line so it’s difficult to get more than a three-month commitment from the blenders,” Kor said.

He projects a “black ink” operation for Corn Plus for 2008 and into mid-2009 but has concerns about how the financials will look for the fourth quarter of 2009.

Highwater Ethanol LLC, a 50-million-gallon plant under construction by Fagen Inc., plans to start operating in the fall of 2009.

Brian Kletscher, Highwater Ethanol chairman, said, “we got lots of dirt work done last fall so construction is moving right along. I expect summer 2009, we’ll be ready to fire up and we’re mighty excited because as the price of crude oil keeps ramping up, we think the market for ethanol will keep on ramping up also.”

During a cell phone visit with Kletscher as he was planting corn May 14, he said Highwater Ethanol ended up getting investors from nine different states with the majority being Minnesota corn producers and also some non-producer investors as well.

Meanwhile, the current market conditions have prompted VeraSun Energy to delay the start-up of three ethanol plants — in Welcome, Hartley, Iowa, and Hankinson, N.D.

Is ethanol driving up food prices?

Kletscher’s not discouraged by the finger-pointing going on in the media about ethanol driving up food prices. “Seems they have to make a whipping boy out of someone. Right now biofuels are convenient to attack. But ethanol is here to stay,” Kletscher said, “American farmers are the world’s best at producing corn and soybeans and we keep getting better. We’re not hurting the food industry. Sure, we’re taking out some product for ethanol but the distillers feed byproduct is providing a huge new source of livestock feed. And last year we exported a record amount of agricultural products. I believe here in Minnesota we’re still exporting slightly over 50 percent of all the corn produced in our state. So there certainly is not a shortage of corn because of ethanol.

“The real truth is that it is the constantly escalating cost of energy (crude oil) that is the real villain in rising food costs. What we see our ethanol plant doing is providing new jobs in our community and an extra income source for our producers. The economic spin-off from an ethanol plant is much bigger than most people realize.”

There’s no doubt that ethanol has revitalized rural America. According to American Farm Bureau data, the annual local impact of a 40-million-gallon-per-year plant is:
• Economic base expansion: $110.2 million
• Additional household income: $19.6 million
• Job created: 694 new jobs throughout the entire economy
• New tax revenue: $1.2 million

Farm Bureau claims that even with higher commodity prices, the farmer’s share of the food dollar is still only about 20 cents.

“We’re a new, but mighty viable industry and we’ll only get bigger, and stronger. America and the rest of the world don’t have many options on future energy sources,” Kletscher said.

Olson indicated the lesser liquidity of ethanol compared to corn, crude oil or even unleaded gasoline somewhat hinders its trading value and he speculates this is perhaps why fund money has not yet come into the ethanol market.

“Ethanol trading on the Chicago Board of Trade is gradually picking up,” he said.

Market for ethanol byproducts

With corn prices strong, has this escalated the value of byproducts, especially the DDGs livestock feed? Olson said the DDG market basically tracks the price of corn at a discount value of 80 to 85 percent the value of corn. “In some diets it’s a higher quality product than corn.”

The environmental permit of Granite Falls Energy does not allow the marketing of wet cake so all of their byproduct is dried and marketed as distillers dried grain. His board of directors continues to pursue a restructuring of their permit for wet cake because there is a significant livestock economy within a 40- to 50-mile radius of the plant. “This would significantly reduce our natural gas usage because of much less product to dry. That in turn would significantly reduce our ‘greenhouse gas’ emissions as well.”

Spot prices for ethanol are in the $2.55 area in mid-May and Olson said it mostly trades relative to the price of corn. “Right now ethanol is trading at about a 65-cent discount to unleaded gasoline. So it’s a big win for the Big Oil companies. Not only can they buy a product to blend into their gasoline at a 10-percent rate and make essentially 65 cents a gallon in the process. They also get the 51-cent blenders credit.

He thinks Big Oil is using the “food for fuel” talk as a way to get consumers to use less ethanol and as a result that spread between ethanol and unleaded gas has widened. Yet the reality is that gasoline pump prices would be 35 to 50 cents higher if it were not for ethanol.

Cellulosic replacement

Are these plant managers concerned about the potential of cellulosic feedstocks eventually replacing corn as a primary feedstock for ethanol? Not really, Kor said, indicating that there would have to be some changing at the front end to accommodate different feedstocks be it corn stover, switchgrass material, etc. “But the alcohol production process works about the same regardless of your feedstocks.”

Olson agreed that a modern ethanol plant today could make the conversion to both feedstock sources without huge retrofitting. “It’s just a matter of will it be cost-effective. There’s strong political support for the cellulosic research and eventually it will happen. But it won’t replace corn; it will merely become another feedstock to process through our existing plants. The challenge will be in the handling of all the mass material involved with cellulosic feedstocks,” Olson said. “Their capacity may not be as great as the corn process so maybe we’ll be needing more plants.”

Creating career opportunities

Meanwhile on May 14, Minnesota West Community and Technical College at Granite Falls graduated 32 students from its two-year Renewable Energy curriculum. Duane Carrow, program director, said the market demand continues strong for these graduates.

“Every graduate will have a job opportunity. Starting pay is $14 to $15 per hour with most ethanol plants also offering overtime pay and performance incentives. And if the new graduates are willing to do some travel in their new work, even more jobs are available,” he said.

Minnesota West was the first to initiate a renewable energy curriculum and Carrow said he is now working with several other colleges across the Midwest who want to develop a similar program.

Graduates from Minnesota West’s renewable energy program find jobs wherever the ethanol industry is still developing. That used to be mostly in Minnesota but graduates now find work across America, Carrow said. As technologies change, Minnesota West is on the cutting edge with new instruction information. He refers to corn ethanol production as the “sugar platform” but with the introduction of cellulosic feedstocks there will be some changes at the front end of today’s ethanol plants but the remainder of the plant stays as is. At Minnesota West the “thermal platform” covers that phase of instruction.

“In essence, when this technology gets adopted, an ethanol plant can switch from one feedstock source to another. When corn is the ‘better buy’, they’ll be processing corn. When cellulosic sources are a better buy, they’ll be able to go that route,” he said.

The food versus fuel debate will rage on indefinitely. The U.S. Ethanol Industry rejects claims that biofuels are responsible for food price increases saying ethanol and other biofuels account for just 4 percent of the price surge.

A University of Wisconsin study says ethanol has increased corn prices by only 41 cents per bushel over levels that would have otherwise existed. The study suggests a much-bigger effect comes from speculative trading by outside investors.

        

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