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Corn+Soybean Digest

Buying Into Biofuels

The future of renewable fuels looks bright. The passage of some sort of renewable fuels standard seems likely. Consumer awareness of the benefits of biofuels is growing, reducing demand on foreign oil seems increasingly attractive and Methyl-Tertiary Butyl Ester (MTBE) bans put biofuels on the front burner as an environmentally suitable alternative.

So, with all the great news about biofuels, it would make sense to jump on the bandwagon and invest in a plant, wouldn't it?

But there are several factors to consider before investing in a biofuels plant, says Jack Cassidy, senior vice president, manager, corporate and board relations, CoBank, Englewood, CO. CoBank leads the nation in biofuel plant lending.

“There are lots of ideas out there. The question is, do those projects have long-term viability?” asks Cassidy. “These are complicated transactions. Farmer investors need to consider their confidence in the management, the technology and the business plan. They also need to look at the equity position of the project. We like to see a minimum of 40% equity.” He urges potential investors to consider the logic of the project.

“We say no to a deal when we don't think it's going to make it,” he says. “If the project fails, we might get something out of it, but the farmer equity investor loses it all.” Cassidy says CoBank is cautious about projects that depend too much on federal or state subsidies for their success.

Ralph Groschen, senior marketing specialist, Minnesota Department of Agriculture, is an expert on issues related to ethanol, biodiesel and related value-added ag products. He says while renewable fuels are a risky investment given their reliance on the rise and fall of oil and the competition with huge corporate enterprises, there is an overall history of success, especially with ethanol. He suggests potential investors not put all their eggs in one basket.

“If there's no risk, there's usually no gain,” says Groschen. “But at least 6,000 farmers in Minnesota have decided it's a good investment. Most of the plants have doubled or tripled their capacity in the past few years.”

While it might seem exciting to invest in a biofuels plant project, Groschen urges caution. “Look at the proposal and be very careful about what you're getting into. If your intent is to build a farmer-owned plant, don't rely on someone else's lawyer and accountant — hire your own to look at the contract. Make sure, when all's said and done, that you're building a plant for farmers and not for someone else.”

Ryland Utlaut, president of Mid-Missouri Energy, says the support for construction of an ethanol plant near Malta Bend, MO, has been phenomenal. In five months the group of farmers supporting the project has grown from 15 to 700, with an average investment of $30,000.

Utlaut, a corn and soybean grower from Malta Bend, says, “In developing new markets for corn, I liked the idea of producing ethanol. It's a market for corn and does good things for the country, too — it's environmentally beneficial and reduces our dependence on foreign oil. It's a great opportunity for farmers to add value to a cash crop.”

Mid-Missouri Energy began talking about its project about a year ago and has been on the fast track ever since. After receiving a feasibility study and deciding where the plant should be located, the group conducted its initial equity drive for its 40-million gallon plant in February. More than $20 million has been raised, with the goal of having the plant be 100% farmer owned. The group was scheduled to close on the land June 30. If it can successfully complete its fund drive and finish its long-term lending agreements, the group hopes to begin construction this month, with production beginning in mid 2004.

Should farmers invest in ethanol? “Yes, I think so,” says Utlaut. “We need to diversify our markets. Obviously with any investment there's a risk, but in the past ethanol plants have provided a good return on investment.”

He stresses the importance of planning and communication to the success of the project. “A good feasibility study will lay out the information objectively and let you know if the rate of return is great enough for you to move forward,” he says. “We've had more than 75 meetings. I'm a great believer in telling people exactly how I feel. In all cases, tell the truth as best you know it, not shading or slanting the information one way or another.”

On the soy side, West Central Soy, Ralston, IA, began producing biofuel products — cleaners and lubricants — in 1996 and built its biodiesel plant in 2001. West Central is currently the largest biodiesel plant in the country, producing 12 million gallons of fuel each year, and the only plant that uses the continuous flow process. It's one of the only farmer-owned plants in the U.S.

The cooperative so firmly believes in the future of biodiesel that six months ago it formed a partnership with Todd & Sargent to create Renewable Energy Group (REG). REG provides support for those interested in producing biodiesel, combining turnkey facility design and plant construction into one complete package, which can even include biodiesel marketing, procurement of input chemicals and hands-on employee training.

Nile Ramsbottom, executive vice president of the soy and nutrition divisions for West Central, believes the demand for biodiesel will grow by leaps and bounds in the next few years. Impacting that demand are the current federal legislation being considered and a federal mandate that sulfur in diesel fuel be reduced from 500 ppm to 15 ppm by 2006. According to Ramsbottom, biodiesel can add the lubrication needed when sulfur is removed from fossil fuels.

“We're trying to add value,” says Ramsbottom. “We're not a small company, but we're not huge, and we need to do whatever we can to add value in the market place.”

He advises those interested in investing in a plant to do lots of research and consider all the options. “Don't jump to any conclusions. There are lots of ways to put a project together,” he says. “We can show people a plant that works and how it works. It's important that they can physically touch it so they can visualize what they want for their own group. If they're interested, they can then put together a feasibility study and we'll build it for them.”

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