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Corn+Soybean Digest

Ethanol's Growing Pains

The ethanol boom is bringing higher crop prices and bigger farm profits. It's also causing growing pains, as the grain and transportation industries adapt to a powerful new player.

“New ethanol plant construction has come so fast that some sectors were caught off guard,” says Purdue University Extension economist Frank Dooley. “Now they're in the midst of adjusting to serve these new markets.”

Ethanol's immense appetite for corn is fundamentally changing grain marketing and distribution, storage and road and rail use, industry observers say. Here's a brief look at some of the trends.

  1. Less corn, more ethanol riding the rails

    Corn that was previously shipped out is staying home. In Indiana, for example, “as much as 200 million bushels of corn could be shifted from out-of-state shipments,” as ethanol production climbs to 1 billion gallons in the next three years, Dooley writes. That means less corn riding rails and barges to distant markets.

    Fewer corn shipments will be offset by more ethanol and distillers dried grain (DDG) shipments. The nonpartisan Congressional Research Service in March reported that ethanol train carloads tripled between 2001 and 2006 and are expected to rise another 30% this year, straining already congested rail networks. Heavy demand means rail rates will favor shippers who can supply unit trainloads in steady volumes, Dooley notes.

    Meanwhile, elevators are worried about grain shipping delays and price hikes, says Zelenka, who also heads up the Midwest Shippers Association, a multi-state freight consolidator. “Railroads are being asked to serve these new ethanol facilities. Is it going to be at the expense of grain movement?”

  2. Ethanol distribution services expanding

    A year ago, just four U.S. fuel terminals had facilities to receive unit trainloads of ethanol. Now there are seven, and ten more are being discussed, according to Dooley.

    New ethanol distribution services are emerging, too. At Manly in north-central Iowa — the heart of biofuel country — the nation's first truck-to-rail ethanol trading and distribution center will open this fall. The Manly Terminal LLC will store, consolidate and reload ethanol for shipment on 75- to 95-car trains, says company president Lee Kiewiet. Ethanol makers will get the benefits of unit-train freight prices and access to several major rail carriers, Kiewiet says.

  3. More trucks traveling rural roads

    As ethanol plants draw corn deliveries from farms up to 75 miles away, more trucks are traveling longer distances over rural roads. In southwest Minnesota, where ethanol production will likely double to 540 million gallons by 2009, the Minnesota Department of Transportation is projecting a 200% increase in truck traffic, according to a draft report.

    The obvious result: more road wear and tear, accelerating the need for public road and bridge investments. For example, a new 100-mgy ethanol plant going up in tiny Alberta, MN, population 139, has the county planning for a $1.2-million upgrade of a nine-mile stretch of road serving the plant, says Brian Giese, Stevens County highway engineer. The road's price tag is greater than the county's entire average annual road construction budget.

    Local and state governments throughout the Corn Belt are feeling the same burden, Dooley says. Ethanol plants bring jobs, economic activity and tax revenues to rural areas, he says, but they also require good public infrastructure and efficient transportation.

    “For state DOTs and county highway departments, the question is: Where's the money coming from?” Dooley says.

  4. Grain channels changing

    Many ethanol plants prefer to buy corn from farmers, “and bypass the local elevator,” says Bob Zelenka, director of the Minnesota Grain and Feed Association. In Iowa, for example, ethanol plants purchase about 60% of their corn directly from farmers, says Howard Shepherd, program coordinator for the Iowa Grain Quality Initiative at Iowa State University.

    Country elevators within 50 miles of an ethanol distillery are finding it harder to compete nowadays “because the plants have raised cash bids,” says Purdue's Dooley. “It could be some rough times ahead,” especially for smaller co-op elevators. “There's going to be a two- to three-year shakeout.”

    In Minnesota, Zelenka says he's already seen about a dozen elevators “either go out of business or forced to merge because of ethanol plant competition.”

  5. Country elevators seeking new roles

    Some grain handlers have “arranged to source grain for ethanol plants and be their partners,” Dooley says. Others are supplying storage for nearby plants.

    “The way we look at it, we're another market for elevators,” says Greg Kleindl, corn buyer for a 30-million-gallon-per-year (mgy) ethanol plant in Morris, MN.

    To protect their markets, elevators have also invested in ethanol plants. In Iowa, for example, four ethanol plants that acquire most of their corn from local elevators are owned or partly owned by grain handling companies, according to a November 2006 report from the Iowa Grain Quality Initiative.

    The new 100-mgy ethanol plants going up now in Indiana and other states may prefer to work with commercial suppliers in order to avoid delivery bottlenecks, Dooley says. “The last thing they want is a line of 50 trucks delivering corn.” So for some grain handlers, “ethanol could become their most important market.”

  6. Farmers putting up bigger bins

    The country is brimming with corn, thanks to ethanol, and that has sparked a huge jump in grain storage, especially on farms, Shepherd says. Ethanol plants need a steady, year-round flow of high-quality corn, and most don't want to store more than about 21 days' worth of corn, he says.

    To meet the demand, farmers are building much larger storage facilities than in the past, Shepherd notes. Steel bins that hold 50,000 or 100,000 bu. are going up on farms all over, he says.

  7. Storage crunch persisting

    Despite this year's bin-building boom, the Corn Belt will be scrambling for covered grain storage for years, Shepherd predicts. If ethanol production reaches 12 billion gallons by 2010, as the Renewable Fuels Association projects, “storage capacity will need to increase by nearly 1.4 billion bushels” in Iowa alone, writes Iowa State University Extension economist Roger Ginder. “This is more than all the commercial storage currently in service in Iowa.”

Intensifying the storage crunch, Ginder says: “Low margins in the grain elevator sector will make it difficult to expand commercial storage as rapidly as the ethanol production sector is expanding.”

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