New Generation Cooperatives in the Ethanol Industry

By Margaret Lougheed

Cooperatives are becoming major players in the ethanol industry. The last 5-7 years have seen a large increase in the number of farmer-owned or farmer-invested ethanol facilities. There are 44 private/investor owned and 46 farmer/investor owned ethanol producing facilities in the U.S. Sixteen of these facilities are under construction for 2004/2005 openings of which 13 are farmer owned. Iowa has the highest number of ethanol facilities at 17.  Minnesota is next with 14 facilities, Nebraska with 11, and South Dakota with 10.

Over the past ten years factors have continued to fall into place for continued growth of the ethanol industry. The industry responded to these factors by increasing production either by building new facilities or through expansion of existing ones. U.S. demand for ethanol is currently at 2.1 billion gallons and is projected to increase to 2.8 billion gallons by 2005. The 2003 production is estimated at 3 billion gallons of ethanol, with 14 more plants being completed combined with a number of plant expansions in 2004, increase in production is estimated at more than 3.5 billion gallons.

The huge increase of ethanol facilities has been triggered by a variety of factors including low prices for corn over the last 10 years (not including 1995-96), changes in the state and federal laws, financial incentives by state and federal government, and the increase demand for ethanol due to the banning of MTBE in some areas of the country.

Corn Prices

In the late 1990’s low corn prices coupled with relatively high gasoline prices provided a strong positive environment for the ethanol industry. In 1995-96 proved otherwise, as corn prices reach all time highs and many ethanol plants went out of business, or decreased production. By 1999 corn prices had settled to the second all time low of $1.82, the lowest price of corn since 1971 was in 1986 at $1.50. The price of corn over the last 5 years has averaged $1.98. Farmers involved in ethanol plants have been seeing an increase in their price of corn per bushel by 25 to 30 cents above market price.

The average acreage planted to corn since 1975 was 77,636,000 acres with acres planted in 2003 at 79,066,000 acres slightly higher than 2002. Corn production in 2003 was at a record 10.2 billion bushels. The only other time corn production was over 10 billion bushels was in 1994. If one estimates it takes 1 bushel of corn to produce 2.7 gallons of ethanol and if ethanol production is to achieve predicted estimates of 5 billion gallons by 2012, corn production for ethanol production must increase to (this theory assumes only corn used in production of ethanol) 1.8 billion bushels. Corn production came in at 10,277,932,000 bushels in 2003, up from 9,007,659,000 bushels in 2002. The acres planted to corn have increased the last three years.  

Figure 1. Corn Supply and Use. Source NASS/USDA.

Changes in Federal and State Laws

Clean Air Act Amendments of 1990

Congress passed the Clean Air Act Amendments of 1990, establishing two programs to reduce pollution by mandating specifications for “cleaner fuel”. One was targeted at reducing carbon monoxide emissions, called the Oxygenated Fuels Program and the other program intended to reduce smog-forming emissions called the Reformulated Gasoline Program. Reformulated gasoline market had been primarily met by MTBE, (Methyl tertiary butyl ether is a petroleum-based fuel additive designed to reduce carbon monoxide emissions and increase fuel octane.) while ethanol was used almost exclusively in the Midwest. MTBE has been linked to underground water contamination causing much concern about MTBE. Agencies are encouraging the federal government to ban the use of MTBE. The federal government has not passed federal legislation to ban MTBE, but several states have banned or decreased the amount of MTBE in their gasoline. Currently 17 states including California have banned the sale of MTBE as a gasoline additive. The ban in California takes effect in Jan of 2004. California consumes 31.7% of the total MTBE consumed in the U.S. New York, which will ban MTBE in January 2004, consumes 7.5 %. States that have or will ban MTBE as an additive to gasoline sold in their state:

Arizona – June 2004
California – Jan 2004
Colorado – April 2002
Connecticut – Jan 2004
Illinois – July 2004
Indiana – July 2004-limited to .5% volume,
Iowa - .5% MTBE by volume cap – already in effect
Kansas – July 2004 – MTBE limited to .5% by volume
Kentucky – Jan 2006, Jan 2004-ethanol encouraged to be used in place of MTBE
Michigan – June 2003
Minnesota – All ethers limited to 1/3 of 1% by weight after July 1, 2000; total ether ban –July 2005.
Missouri – July 2005 – MTBE limited to .5% by volume
Nebraska – July 2003 – MTBE limited to 1% by volume
New York – Jan 2004
Ohio – July 2005
South Dakota .5% MTBE by volume cap, already in effect
Washington – Dec 2003

Energy Policy Act of 2003

The energy bill being debated in the House and Senate right now is a major factor in how the industry progresses in the future. The comprehensive energy bill includes the following provisions:

      · Renewable Fuels Standard - doubles the minimum use of ethanol and biodiesel to 5 billion gallons per year by 2012.
      · Volumetric Ethanol Excise Tax Credit (VEETC) - protects highway funding while preserving an important incentive for ethanol use.
      · Modifies the Small Ethanol Producer Tax Credit to allow farmer-owned facilities to fully utilize the credit.

Also being debated are the issues surrounding MTBE. If the federal government bans the use of MTBE as an additive to gasoline this could mean an increase in the demand of ethanol to more than 5 billion gallons by 2012.

Federal Tax Incentives

Federal Highway Bill of 1998

The industry has been influenced by favorable federal tax provisions, which has effectively reduced the retail price of ethanol. The Federal Highway Bill of 1998 extended the current tax credit for ethanol through 2007 but stipulated reductions from the current 54 cents per gallon to 53 cents in 2001, 52 cents in 2003, and 51 cents in 2005. Although gasoline tax and tax credit provisions include clauses that limit their duration, they have been extended historically.

State Tax Incentives

While some ethanol-producing states do not subsidize ethanol, others offer tax incentives for gasoline blended with ethanol and for ethanol production, which vary from $0.10 to $0.40 per gallon

• Database for State and Federal Incentives for Renewable Fuels
• New and Proposed Federal Incentives for Bioenergy Production – Bioenergy 2002 Conference 

Factors Influencing the Ethanol Industry:

• Market for ethanol – the U.S. market for ethanol will be greatly influenced by the passing of the energy bill now in Congress and the Senate. Will MTBE be banned nationwide? If not will states continue to ban MTBE on their own?
• Funding for the Commodity Credit Corporation’s Bioenergy Program (This program, which was launched in late 2000, provided cash reimbursements to bioenergy producers for converting targeted commodities into bioenergy. The 2002 farm bill provided over $200 million for continuing funding of the program), and continued USDA grants, etc awarded to ethanol projects will encourage new growth. (see Added Note)
• Corn and oil prices will contribute whether or not the ethanol production stays profitable. Rising corn prices and falling oil prices could affect profitability.
• Geographic limitations and logistics are also key factors to the impact of ethanol use. Costs of transportation are a concern for states like California who are not in the Midwest or close to ethanol facilities. The rail transit costs from the Midwest ethanol plants to California for example could run as high as 14 to 17 cents per gallon and take 2-3 weeks to arrive to its destination.
• Over expansion could lead to excess capacity of ethanol. With future demand depending on a variety of things right now, the industry may need to exhibit some caution so growth doesn’t overshoot demand.
• Several states have great incentive programs, including Minnesota and Iowa. Will these programs continue? Minnesota decreased the state’s ethanol producer incentive from $.20 to $.13 per gallon on the first 15-million gallons for the next two fiscal years. Will state budget cuts influence these programs?

Conclusion

There are approximately 90 ethanol-producing facilities across the U.S. These facilities are producing approximately 3.6 billion gallons of ethanol. To achieve the 5 billion gallon goal for 2012 there will need to be built 35 facilities with the capacity to produce 40 million gallons of ethanol annually.

An Added Note:

There are federal and state grant programs, and other programs to help finance ethanol projects. There is a listing of funding and technical assistance on the Renewable Fuel Association's Website.

• Illinois Coal Infrastructure Program awarded Central Illinois Energy $750,000 to assist in construction of the new ethanol production facility.
• Pine Lake Corn Processors raised more the $13 million on their equity drive to secure financing for the $34 million ethanol project. The group also received a $500,000 grant from the USDA and a $100,000 grant front the Iowa Department of Economic Development.

The USDA Rural Development Grant gave 19 grants to ethanol related projects in 2002.

Charles Feenstra Diary, LLC, Mesa, Ariz.
$150,000
Purpose: To complete a feasibility study for the development of an ethanol and Distillers grain plant in Arizona that would benefit 114 livestock producers.
Olathe Potato Growers Cooperative, Olathe, Colo.
$41,300
Purpose: To evaluate the viability of the co-existence of an ethanol plant and commercial feedlot operation in Western Colorado.
Treasure Valley Renewable Resources, Weiser, Idaho
$450,000
Purpose: A planning grant to develop a 15-million gallon producer owned ethanol fuel production facility.
LincolnLand Agri-Energy, Robinson, Ill.
$500,000
Purpose: To help construct and operate a producer owned 40-million gallon per year ethanol production facility.
Big River Resources Cooperative, Mediapolis, Iowa
$500,000
Purpose: For working capital to assist in the start-up of a 40-million gallon ethanol plant.
Quad County Corn Processors, Galva, Iowa
$450,000
Purpose: For working capital to assist in the marketing of a new product developed from a co-product of the ethanol process.
Iowa Renewable Fuels Association, West Des Moines, Iowa
$48,500
Purpose: To assist in the planning and development of the marketing of eleven farmer-owned ethanol plants either in production or under construction.
Golden Grain Energy, LLC, New Hampton, Iowa
$74,000
Purpose: To assist the venture in studying the feasibility of entering the emerging ethanol market.
Little Sioux Corn Processors, Marcus, Iowa|
$450,000
Purpose: For working capital to assist in the start-up of a 40-million gallon ethanol plant. 
Western Plains Energy, LLC, Quinter, Kan.
$290,615
Purpose: To finance start-up cost for 30-million ethanol plan near Oakley, Kansas.
East Kansas Agri-Energy, LLC, Garnett, Kan
$450,000
Purpose: To finance start-up expenses of a 20-million ethanol plant near Garnett, Kan.
Western Missouri Ethanol Trust, Rockville, Mo.
$140,000
Purpose: To develop a marketing strategy and business and marketing plan for a 30-million gallon ethanol plant.Imperial Young Farmers and Ranchers, Imperial, Neb.
$40,000
Purpose: To conduct a feasibility study for developing a biomass ethanol and electric facility that utilizes waste crops such as corn stover and wheat straw.
Dakota Renewable Fuels, LLC, Fargo, N.D.
$167,500
Purpose: To complete a business plan, complete offering documents, conduct equity drive and complete other activities need to develop a 30-million gallon dry mill ethanol plant.
American Corn Growers Association, Washington, D.C.
$150,000
Purpose: To provide farmers and farm organizations with the tools to evaluate the feasibility of ethanol production and build consumer awareness of the role ethanol-blended fuels could play in meeting Clean Air Standards.
South Dakota Farmers Union, Huron, S.D.
$450,000
Purpose: To conduct a feasibility study to determine if renewable energy (ethanol) produced from corn and processed biowaste from the dairy industry would be economically, financially and technically feasible.
Farmers Cooperative Elevator, Levelland, Texas
$249,658
Purpose: To assist a grain elevator cooperative enter into a new market by constructing an ethanol production facility.Green Virginia Ethanol Project, Reedville, Va.
$211,650
Purpose: To conduct a feasibility study on fuel ethanol production in a grain mill or cellulose hydrolysis or hybrid facility in Virginia.
Western Wisconsin Renewable Energy, Colfax, Wis.
$65,000
Purpose: To obtain legal advice and assistance related to the development of a 30-40 million gallon corn to ethanol processing facility.

References

Chemical Profiles – Ethanol. The Innovation Group. http://www.the-innovation-group.com/ChemProfiles/Ethanol.htm

Crop Production Reports. National Agriculture State Statistics, United State Department of Agriculture: http://www.nass.usda.gov:81

DiPardo, J. Outlook for Biomass Ethanol Production and Demand. Modeling and Analysis Papers. Energy Information Administration. July 2000. http://www.eia.doe.gov/oiaf/analysispaper/biomass.html

Dominy, S.F. Ethanol Fueling Corn Demand. World Grain Magazine. July 2003. pp 30

Ethanol Industry Overview and Outlook.   http://www.cobank.com/colink_preview/agribusiness/industryreports/ethanolabgresearch.htm

Ethanol Production Facilities. Renewable Fuels Association. http://www.ethanolrfa.org/eth_prod_fac.html

Ethanol Industry News, Ethanol Today, Vol. 1, Issue 5, July 2003.pp 30-33

Ethanol Industry News, Ethanol Today, Vol. 1, Issue 8, Oct 2003.pp 38-39

Funding and technical assistance for Ethanol Facilities. Renewable Fuels Association: http://www.ethanolrfa.org/leg_position_usda.shtml

Value-Added Agricultural Product Market Development Grant Selections-2002. http://www.rurdev.usda.gov/rd/newsroom/2002/value_ad.htm

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