Minnesota's Ethanol Production Aims to Benefit Investors

Published on: February 10, 2005

by Lee Egerstrom

Ethanol production in Minnesota is no longer just an enterprise to boost the value of farmers’ corn crops. It’s evolved into an industry focused on returns on investment for urban and rural investors alike.

As a result, most of the plants built in Minnesota have been expanded to increase production and boost returns, with outside investors playing a key role.

The larger plants cost more than the early farmer-owned variety, said Tim Carlson, a co-founder of AgMotion Inc., the St. Paul-based commodities firm that provides brokerage services for farmers and ethanol plant operators.

But equally important, farmers and local residents can link with investment bankers to reduce the amount of startup capital needed to launch the new fuel businesses.

Farmers formerly raised about 50 percent of the cost of an ethanol plant — usually by buying shares valued at $5,000 apiece — and would finance half the cost. Now, they raise 20 percent to 40 percent and investment groups tap capital markets for the rest.

Minnesota ethanol production reached 400 million gallons in 2004, valued at $1.35 billion, the Minnesota Department of Agriculture said in a year-end report. That industry now provides 5,300 biofuels jobs in the 13 currently operating plants, an increase from 41 million gallons, worth $101.5 million, and 590 jobs in 1994.

Three plants currently under construction in Minnesota will add 135 million additional gallons of capacity to the fuel additive industry. All but one Minnesota plant uses corn for distilling into ethanol; the exception is a comparatively small Land O’Lakes ethanol plant at Melrose that uses whey from a cheese factory.

Nationwide, about 70 percent of the ethanol capacity coming on line is still farmer-owned, although many tap outside investors, said Monte Shaw, communications director for the Renewable Fuels Association trade group for the ethanol industry.

"The industry has had huge returns in the past couple of years, and this didn’t go unnoticed by Wall Street and equity funds around the country," he said.

While most ethanol companies are closely held and don’t have to disclosure their finances, the industry is known to have enjoyed double-digit profits for the past two years, he said. Strong demand came as California, New York and a few other states mandated use of the cleaner-burning fuel additive.

Closer to home, AgMotion has a good read on plant profits from providing brokerage services for plants or their farmer-members.

The typical plant in Minnesota now produces 30 million gallons of ethanol a year, or twice the plant capacity of a decade ago. This average production generated $8.6 million in profits per plant in 2004.

Even though outside investors may be indifferent to the impact these local plants have on corn prices, Carlson said AgMotion’s data show the plants increased the value of their farmer-members’ corn by 80 cents a bushel during the past year, for an average year-long price of about $2.35 per bushel.

In contrast, the price of corn for winter delivery traded at the Chicago Board of Trade on Friday was $1.95 per bushel, with the price paid to farmers at countryside elevators running as much as 30 cents less than that.

Rolf Peters, Carlson’s partner in AgMotion, said the growth of ethanol is adding to the volatility of markets for both the fuel additive and corn markets. Currently, about 14 percent of the nation’s corn crop is being used to make ethanol. That percentage will swell enormously in the next few years.

AgMotion has created a model that helps ethanol plants project expenses and profits that need to be protected by using futures, options and forward contracting.

It includes major input costs, such as corn purchases amounting to about 65 percent of expenses, natural gas costs of about 20 percent, electricity costs of about 2 percent, and other costs total about 13 percent. Revenue from output, or production, would include 70 percent from ethanol marketing, about 20 percent from distiller’s grain by-products, and about 8 percent from selling carbon dioxide to food industry and other industrial customers.

How well these variable costs and revenue flows are managed will determine future profits for investors and for farmers. While most plants were highly profitable in the past year, Gopher Ethanol at the former West Seventh Street brewery site in St. Paul did not survive paying high corn prices in late 2003 and early 2004.

Some corn growing areas of Minnesota and Iowa will need to import corn from surrounding areas to keep the new and expanding ethanol plants working at capacity, Peters said. That already happened in southern Minnesota’s Dodge County in the past year, he added.

The challenge ahead for ethanol company managers will be to maximize returns on capital for investors or maximize markets, or corn prices, for farmers. It’s not clear that both objectives can be served over time.

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