RuralCoop Sept06 PRINT copy · began his quest, the United States was producing 1.77 billion...

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COOPERATIVESCOOPERATIVESUSDA / Rural Development September/October 2006

Ethanol IssueHopes, Concerns & Potential

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Five years ago, shortly after the Sept. 11 attacks, Indy racecar driver Paul Dana had an idea: run the Indianapolis 500,the world’s largest single-day sporting event, on ethanol as asymbol of America’s determination to reduce its dependenceon imported oil.

The idea came naturally to Paul, who had grown up on aMissouri farm with a Corn Belt perspective on ethanol. So heset out to make it happen, with the help of the RenewableFuels Assoc. and some farm groups. He lobbied drivers, teamowners and anyone else who would listen, and he soon per-suaded Tony George, the owner of the Indianapolis MotorSpeedway, to take a close look.

Paul’s perseverance paid off. Once the engineers had vet-ted the project, Tony George gave the order and the IndyRacing League (IRL) announced a historic switch: Indy carsare going green. The 2006 race was run without incident ona 10 percent ethanol blend, and the 2007 IRL circuit will be100 percent ethanol powered.

Paul Dana was tragically killed in a racing accident inMarch 2006 at the Homestead-Miami Speedway in Florida,but his vision lives on. The Farm-Belt “homebrew” of the1960s is now powering high-performance race cars, as well ashelping fuel millions of private automobiles across the coun-try. Ethanol has truly come of age.

This issue of Rural Cooperatives reviews ethanol’s rapidlygrowing impact on America’s farm economy. When Paul Danabegan his quest, the United States was producing 1.77 billiongallons of ethanol annually. In 2005, barely five years later, weproduced 3.9 billion gallons. When the 42 plants now underconstruction join the 102 already operating, total capacity willexceed 7.8 billion gallons. Ethanol this year may absorb 20percent of the U.S. corn harvest. The effects are many:

• Improved national security due to a reduction in oilimports.

• A cleaner environment. • Higher prices for corn growers.• Wealth creation, new jobs and tax-base increases in rural

communities.• Potentially higher costs for livestock operations, which

are at least partially offset by an increased supply ofdried distillers grain.

• Lower support payments and reduced U.S. vulnerabilityto WTO litigation.

• New markets for third-world producers if ethanoldiverts U.S. corn from the export market and as ethanolproduction expands internationally.

These and other adjustments will continue to unfold as theethanol industry matures. From a rural development stand-point, it is important to note that ethanol is much more thanjust BTUs. It is a rural, distributed resource. Farmers ownthe feedstock. Transportation costs favor local sourcing and adecentralized production base. State-of-the-art technical andmanagerial assistance is readily available. A franchise modelof development opens the door to local ownership and con-trol.

While the ethanol boom is attracting an ever-wider poolof investors, agricultural producers and cooperatives arethus still able to compete. This is also true in other emerg-ing energy resources like wind, solar and — a few yearsdown the road — cellulosic ethanol. Renewable energy isdistributed energy, and that spells opportunity for ruralentrepreneurs.

A strategic goal for USDA Rural Development, therefore,is to encourage local investment in, and ownership of, therenewable energy resources already present in rural commu-nities. This is a historic opportunity for wealth creation inrural communities. Renewable energy is a top priority forAmerica’s farmers as well as the nation as a whole, and welook forward to working with America’s cooperatives to getthe job done.

Another great opportunity: some of you may still havetime to register for Advancing Renewable Energy: AnAmerican Rural Renaissance, a conference to be held Oct.10–12 at America’s Center in St. Louis. See pages 35 & 42for more details, or visit: www.technologyforums.com/6EN/—Thomas Dorr

USDA Under Secretary for Rural Development ■

2 September/October 2006 / Rural Cooperatives

C O M M E N T A R Y

Renewable Energy: Ethanol Comes of Age

Driver Jeff Simmons of the Rahal Letterman Racing Team (left) dis-cusses the conversion to ethanol fuel at the Indianapolis 500 withRural Development Under Secretary Thomas Dorr. USDA photo byDarrell Mowery

Rural Cooperatives / September/October 2006 3

Rural COOPERATIVES (1088-8845) is publishedbimonthly by Rural Business–Cooperative Service,U.S. Department of Agriculture, 1400 IndependenceAve. SW, Stop 0705, Washington, DC. 20250-0705.The Secretary of Agriculture has determined thatpublication of this periodical is necessary in thetransaction of public business required by law of the Department. Periodicals postage paid atWashington, DC. and additional mailing offices.Copies may be obtained from the Superintendent ofDocuments, Government Printing Office, Washington,DC, 20402, at $23 per year. Postmaster: send addresschange to: Rural Cooperatives, USDA/RBS, Stop3255, Wash., DC 20250-3255.

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The U.S. Department of Agriculture (USDA) prohibitsdiscrimination in all its programs and activities onthe basis of race, color, national origin, age, disabili-ty, and where applicable, sex, marital status, familialstatus, parental status, religion, sexual orientation,genetic information, political beliefs, reprisal, orbecause all or part of an individual’s income isderived from any public assistance program. (Not all prohibited bases apply to all programs.) Personswith disabilities who require alternative means forcommunication of program information (Braille,large print, audiotape, etc.) should contact USDA’sTARGET Center at (202) 720-2600 (voice and TDD). To file a complaint of discrimination, write to USDA,Director, Office of Civil Rights, 1400 IndependenceAvenue, S.W., Washington, D.C. 20250-9410, or call(800) 795-3272 (voice), or (202) 720-6382 (TDD). USDAis an equal opportunity provider and employer.

Mike Johanns, Secretary of Agriculture

Thomas C. Dorr, Under Secretary,USDA Rural Development,

Jack Gleason, Administrator, Rural Business-Cooperative Programs

Dan Campbell, Editor

Vision Integrated Marketing/KOTA, Design

Have a cooperative-related question?Call (202) 720-6483, orFax (202) 720-4641, Information Director,This publication was printed with vegetable oil-based ink.

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COOPERATIVESCOOPERATIVESSeptember/October 2006 Volume 73 Number 5

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F E A T U R E S

Special Issue > Energy by the Bushel

D E P A R T M E N T S

2 COMMENTARY31 CO-OP DEVELOPMENT ACTION33 NEWSLINE 43 INSIDE RURAL DEVELOPMENT

O n t h e C o v e r :

Mid-Missouri Energy Cooperative member Brian Miles isn’t just harvest-ing corn, he’s harvesting ethanol and helping to wean America from itsdependence on foreign oil. The hopes, concerns and potential for thenation’s ethanol industry are examined in this special issue. USDA photoby Dan Campbell

4 Fuel FarmingMissouri farmers harvestbumper crop of ethanolBy Dan Campbell

8 A farm-supply co-opview of ethanolBy Dan Campbell

10 Left BehindSome country elevators leftbehind as ethanol divertssuppliesBy Catherine Merlo

13 Bring It on HomeLocal ownership of renew-able energy helps ‘keep it on the farm’By Alan Borst

16 From Grass to GasHow soon will cellulosicethanol be a factor?By Anthony Crooks

19 Keep on Truckin’Ethanol boom creates transportation challengesBy Stephen Thompson

22 Measuring the gainsfor distillers grainsBy Anthony Crooks

25 Ethanol from SugarWhat are the prospects for U.S. sugar co-ops?By James Jacobs

29 VAPG programhelping fuel biofuelgrowth

By Dan Campbell, editor

[email protected]

s he guides his combine across fields ofripe corn near Marshall, Mo., BrianMiles doesn’t look anything like a Texasoil tycoon. Nor do Randy Britt of nearbyKaseyville or Dale Samp of Cairo, Mo.,

as they tend their crops and livestock. But a new breed of home-grown ‘oil baron’ is

sprouting on farms like this all across America. J.R.Ewing (of “Dallas” fame) has nothing on these farmersand others like them, some of whom are making moreprofit these days from their investments in ethanol thanfrom other farm income. Indeed, J.R.’s oil fields probablywent dry years ago, but these “fields of renewable ener-gy” should never run dry, barring severe drought.

Much of their crop will be trucked just a few milesaway to be processed into ethanol. Better still, the cornwill be processed at bio-refineries that Miles, Britt,Samp and hundreds of their fellow Missouri producers own and operate.

Inside the cab of his combine, Miles glances at the corn stalks bowing down and disap-pearing beneath him, then at a yield monitor that displays his per-acre haul and the aver-age moisture content of the corn. As he drives, the GSP-enabled monitor creates an elec-tronic map of his fields that will later be used to fine-tune everything from his fertilizerand seed applications to where he will lay new drainage tiles.

“This technology helps us practice precision agriculture, so we only apply what thecrop needs,” he says over the rumble of the machine. “We treat the land with respect,because I want my kids and their kids to be able to farm this land as well,” says the youngfather of three. The increased returns the farm nets from its ethanol investment may alsohelp ensure that farming remains economically viable enough to keep his children infarming, should they so choose.

In addition to the economic benefits of biofuel, producers also cite patriotic and home-land security incentives as adding to a sense of urgency for renewable fuels development.

“We are showing the nation that we do not have to be so dependent on foreign oil,and that we should not allow ourselves to be held hostage to Middle East oil,” says JohnEggleston, president of Northeast Missouri Grain Processors Inc., a cooperative which ismajority owner of Northeast Missouri Grain LLC (NEMO) in Macon, Mo., the state’sfirst ethanol plant. “We still have a long way to go, but farmers are helping to change theenergy picture. We feed the world, and we can help fuel it too.”

Co-ops unite producers Miles is one of 700-plus farmers of Mid-Missouri Farmers Energy (MidMo), a new-

generation cooperative that operates a 50-million-gallon-per-year ethanol plant near the


A

Fuel FarmingMissouri farmers harvest bumper cropof ethanol, raising spirits and cash

small village of Malta Bend, about 12 miles northwest ofMarshall. This new-generation co-op plans to begin an expan-sion project next year which will double the plant capacity to100 million gallons of annual production. Samp and Britt areamong the 311 members of NEMO, which produces about 45million gallons of ethanol annually in Macon.

Producers who invested in the ethanol plants have reapeddividends “beyond our wildest expectations,” says RylandUtlaut, president of MidMo and former president of theNational Corn Growers Association. “We couldn’t have pickeda better time for our plant to come on line,” he says, notingthat the start-up 19 months ago coincided with a tremendous

run-up in ethanol prices. Ethanol profits climbed steadily as oil prices

soared from $40 to more than $75 a barrel lastsummer. The phase-out of MTB as an oxy-genator for gasoline and the hurricanes thatbattered Gulf Coast oil refineries also com-bined to push the price up.

Some producers report that their stock val-ues in co-op ethanol plants have increased 5 to10 times since the initial purchase (althoughvirtually no one is selling stock, so such claimsare hard to verify). MidMo paid members a 31-percent dividend on its first partial year ofoperation, and will pay an even higher dividend

this year. NEMO has also paid sizable dividends for severalyears running.

In addition to returns from their ethanol plants, producershave also benefited from corn prices that have been boostedfrom 10 to 20 cents per bushel in the plants’ procurementareas. “That doesn’t just help co-op members, it helps all farm-ers,” says Eggleston.

Good uses for ethanol dividends On the Miles’ farm, those ethanol dividends helped to buy

an additional 140 acres that the family had been renting formore than 30 years. For Samp, ethanol dividends providedadditional funds for the custom home he built on his farm.Britt says he’s used his ethanol returns in a number of ways toimprove his grain and cattle operation.

Miles credits NEMO and the Golden Triangle EnergyCooperative in Craig, Mo., for “paving the way for our suc-cess.” The success of MidMo is similarly inspiring more biofu-el projects. Three or four of his fellow MidMo directors are onboards of co-ops or LLCs that are building biodiesel plantsaround the state, including one slated to open this fall inMexico, Mo.

Miles, who grew up in Marshall and graduated from theUniversity of Missouri in Columbia, says the town’s economyhad been fairly stagnant for many years. But the ethanol planthas been a jolt in the right direction. “The addition of 35 or 40good jobs at the plant — and that doesn’t count other spin-offjobs it created — is a huge plus for a rural town like ours.”

“The impact has been tremendous,” agrees Matt Staley,


Clockwise from upper left: Brian Miles used ethanol dividends tobuy some rental acreage; the Mid-Missouri Energy plant; RandyBritt says ethanol has provided an alternative market for corn,helping to boost prices; The Northeast Missouri Grain ethanolplant; Dale Samp’s ethanol dividends helped with costs of buildinga new home on his farm. USDA photos by Dan Campbell

vice president and branch manager for the Farm CreditServices (FCS) of Missouri office in Marshall. FCS helpedmany producers finance their stock purchases in MidMo. “It’snot only the dollars the plant has generated, but its successhas also been a great source of community pride. And it hasinspired other fledgling co-ops and LLCs that are now ridingtheir coat tails.”

Macon County Presiding Commissioner Craig Jones saysthe NEMO plant is “pulling grain from 100 miles away andhas been the most productive new business venture the coun-ty has seen in years. And it’s virtually all new money,” hestresses, adding that its spin-off benefits have “mushroomed”throughout the county.

NEMO has created 42 full-time and seven part-time jobs.Pay and benefits are good, and that doesn’t count related jobsin trucking, rail and all the other “ripple-effect” jobs, Jonesadds. He thinks NEMO’s success mayeven have helped inspire voters toapprove a special tax needed to four-lanea highway through the county, which inturn should help attract other new busi-nesses.

“Ethanol has been the best thing tohappen in Missouri in a long time,” saysBritt while driving his pickup truckacross a pasture of tall grass where someof his 400 Black Angus cattle are graz-ing. “Returns have been much betterthan anyone could have reasonablyexpected, and it has strengthened thecorn market. Our choices used to be to feed corn to our cat-tle, haul it to the river terminals or ship it south to turkeygrowers. Now we keep it close to home and get and extra 10-15 cents a bushel for it.”

With the production of so much dried distillers grain(DDG) at the ethanol plants, which is sold for livestock feed,Britt says ethanol may even help bring back some of the cat-tle-feeding industry, which moved west years ago.

Opening the doorWhen Eggleston and his fellow producers first discussed

building an ethanol plant in the late 1990s, Missouri had noethanol facilities and no new-generation co-ops. So raisingequity investments from producers and lending institutionsproved challenging. “It seemed this plant was never meantto be built,” Eggleston recalls.

“It was almost like pulling teeth,” agrees Dale Samp,Eggleston’s co-director on both the NEMO co-op and LLCboards. “A lot of the producers were already highly lever-aged and were reluctant to take on more risk.” In his owncase, Samp says one factor that influenced his decision tojoin was attending a meeting where Jeff Broin, CEO of theBroin Companies, made a strong case for producers toinvest in ethanol as a hedge against low corn prices.

While enjoying the high dividends of recent years, Samp

says the ethanol market will have to drop back to earthagain at some point. But he expects the operation to contin-ue to be profitable, especially with China and India nowsoaking up more world oil supplies.

NEMO’s initial plan had been to build a 30-million-gal-lon plant. But the reluctance of growers to invest in itmeant the co-op had to keep reducing the scale of the proj-ect, eventually settling for a 15-million-gallon plant. Theco-op had hoped to own the plant outright, but it formedan LLC to facilitate raising additional funds.

The co-op wound upowning 81 percent of theLLC and holds five of theseven seats on the LLCboard. Broin andAssociates., which built the

plant and provides operational management under contractto the LLC, holds one board seat, and Corn Energy LLCholds the seventh seat. Other investors include RallsElectric Cooperative and the Missouri Corn MerchandisingCouncil.

It took about 100 producer meetings to raise the $6 mil-lion in equity needed to build the plant. The minimuminvestment was five shares at $2,500 each. Ralls ElectricCooperative stepped in at a crucial point in the planningwith assistance when the fledgling co-op was low on money,and the co-op was also able to tap into a state economicdevelopment fund.

Missouri recognized that the state and rural communitieswould gain much more from local, producer ownership than


from outside ownership. So it established a 20-cent-per-gallonsubsidy for the first 12.5 million gallons of ethanol producedand 5 cents per gallon for the next 12.5 million gallons, butonly if producers own at least 51 percent of the plant.

NEMO’s plant capacity was doubled about three yearsago, to 36 million gallons, and it is actually producing at a

45-million-gallon clip, which Eggleston says is a tribute tomanager Steve Burnett and the staff. The expansion timingwas good, as ethanol prices were climbing just as the workwas completed.

In the early days, it was hard to find local buyers for theplant’s DDG, so most of it was shipped to Arizona andCalifornia. But now most is shipped by truck to cattle,poultry and hog producers in-state.

In addition to ethanol and DDG sales, NEMO has invest-ed in a food-grade carbon dioxide facility and the companythat markets and trucks the pressurized CO2 to beveragecompanies, a brewery, a municipal water plant and somefood and meat processors. A truck terminal was built to han-dle the CO2 traffic, which employs another 15 full-time

drivers and mechanics. The co-op leases the facility to a sub-contractor.

Investing in other venturesAnother plant expansion isn’t really feasible for NEMO at

this time, but members wanted to expand their presence inthe ethanol market, so it instead purchased a 30-percentinterest in a new, 45-million-gallon ethanol plant openingthis fall in Ladonia, Mo. NEMO has also invested in Mo-Biofuels, a new biodiesel plant in Mexico, Mo.

It has also purchased an interest in some non-biofuel proj-ects, including Mo-Farm Dairies, a 1,250-head dairy in thesouthwest corner of the state, and it contracts with FavoredGrain, which procures non-GMO grain from producers forfeeding to cattle raised to supply meat to high-end restaurants.

When the plant capacity was expanded, NEMO alsoentered into a joint venture with the city of Macon on a 10-megawatt turbine generator. Under the arrangement, the citygets the electricity and NEMO gets the waste exhaust heat

from the large jet engine that powers the generator.The waste heat is fed through a large boiler which,in turn, generates more than half of the steamrequirements of the ethanol plant.

NEMO’s plant is located on a 1/2-mile-long railspur, but the majority of its ethanol goes out ontrucks. Still, Eggleston says it would have been a mis-take to build without rail access. In the early monthsof operation, when NEMO was having a hard timeselling DDG, “we would have drowned in DDG ifwe hadn’t been able to ship it out on railcars,”Eggleston says. DDG sales now account for 15 to 25percent of the plant’s annual revenue. “We call DDGand CO2 co-products, not byproducts, to emphasizehow critical they are to our success,” he adds.

MidMo 100 percent farmer owned MidMo was formed through the merger of two

different groups pursuing ethanol plants; one effortwas centered in Marshall, the other at Carrollton,Mo. Patty Kinder, now assistant plant manager atMidMo, was at that time an economic development

officer in Carrollton. Utlaut credits her for bringing the twogroups together and for making the call to the Fagan Groupthat resulted in an initial ethanol feasibility survey of the area.

By 2001, the combined group had a business plan in hand.The new co-op then launched its equity drive, which ithoped would raise just over $12 million of the $24 million inequity needed, which would give the co-op 51 percent con-trol. Shares were $10,000 each, with a minimum of twoshares required for membership. Only producers were eligi-ble to join. Average investment per member was $33,000.The co-op signed up members in 43 Missouri counties andfive other states.

After 82 meetings, the co-op had commitments for more


Clockwise from upper left: ethanol and corn samples are tested in the lab at theNEMO plant; MidMo (next two photos) plans to double production capacity, to100 million gallons; NEMO Plant Manager Steven Burnett checks on the CO2

plant, which supplies a brewery and other beverage customers; Ryland Utlaut,center, in the receiving room at MidMo. USDA photos by Dan Campbell

continued on page 39

They are like first cousins who are oftenmistaken for each other. Both are farmer-owned co-ops with headquarters officespractically next door to each other inColumbia, Mo. Both provide vital suppliesand services to their members.

But MFA Inc. and MFA Oil are two sepa-rate businesses. MFA Inc. provides mem-bers with fertilizer, seed and livestock feed,as well as grain-marketing services. MFAOil deals mainly in gasoline and diesel fuel.

Both co-ops have much at stake in theregion’s rapidly evolving renewable fuelseconomy.

At MFA Inc., the reaction to ethanoldepends on which side of the building youare on. Ron Utterback, vice president ofcrop protection, farm supply and seed, isoptimistic. “We could definitely benefitfrom it, depending on the speed of its devel-opment and how fast we adapt.”

He has little doubt that the state’s corn acreage willincrease sharply as a result of ethanol development,probably at the expense of soybeans. He also expectsthat some land in the CRP conservation program will alsobe put back into production. But that will likely beacreage that “really should have never gone into the CRPto start with,” he says.

For MFA, more corn acreage means more sales,because corn requires more fertilizer and crop protec-tants than soybeans, Utterback says. Typically, two acresof soybeans are planted for every acre of corn in thestate. So there is room to expand corn without evenrequiring that more land be put into production. Utterbacksays he thinks that the planting pattern will shift closer toa 50-50 corn/soybean split, more typical of other CornBelt states.

When it comes to soil types and micro-climates, Mis-souri is a very complex state. Few know that better thanUtterback, who directs MFA’s efforts to tailor its seed andfertilizer products to the state’s unique growing regions(it also supplies producers in neighboring states). MFAhas climbed to the top of its market because its productshave been adapted over the past century to the region’smany micro-environments and soil classifications, henotes.

The emergence of ethanol is not the only factorprompting more acres to shift to corn. New seed varieties

that allow corn to thrive on drier, “tighter” soils have alsobeen prompting some expansion of corn planting. SoUtterback sees potential for this traditionally corn-deficitstate to increase its corn crop considerably, and for MFAto increase its business right along with its members’corn crops.

Livestock concerns On the other side of the MFA Inc. building, Dr. Kent

Haden, vice president of livestock operations, has someconcerns. He doesn’t want to be the rain cloud over theethanol parade. However, he gets paid to look at thehealth of the state’s livestock industry and factorsimpacting it. Ethanol is most definitely such a factor, sohe has been studying its potential impact in a state thatranks second only to Texas in the size of its cow-calfherd (2.1 million cows).

His main concern is that if increased corn plantingdoesn’t take up the slack, competition for corn coulddrive prices so high that it could force some of Missouri’slivestock out of state – perhaps even to Argentina orBrazil. “When livestock goes, usually it’s poultry first,then hogs and then cattle [which corresponds to eachsegment’s dependence on corn for feed],” Haden says.

Haden views dried distillers grain (DDG) as a good-quality protein ingredient for up to 20 percent of feed forcattle. But DDG has turned the feed picture somewhattopsy-turvy. Protein has long been the main nutrient cat-

A farm-supply co-op view of ethanol


MFA Oil is selling E85 at 30 retail outlets and a10-percent ethanol-gas blend atvirtually all of its 77 Break Time convenience stores and 166 unmanned fuelingstations. Photo courtesy MFA Oil


tle producers sought in their feeds. However, cattle on aheavy DDG ration get plenty of protein, but may not begetting sufficient starch.

Starch, of course, is stripped from corn in makingethanol. Without sufficient starch, beef does not marbleproperly — especially not the way the Japanese andsome other Asian export markets like it, Haden says. Andthere’s the rub, since corn is by far the most cost-effec-tive source of starch for cattle, Haden says.

Dressed carcasses of hogs fed a heavy DDG rationalso typically weigh about 6 pounds less than corn-fedhogs, based on University of Missouri data, becausemore of the growth goes to the guts, notes Haden. He isnot aware of any similar data for cattle. MFA is produc-ing some special mineral supplements it recommends forproducers feeding high-DDG rations.

Some have suggested that new feed yards could opennear DDG sources in Missouri. Haden says he hopes ithappens. But, he adds, it will be tough to accomplishbecause 30 Missouri counties have adopted stricter envi-ronmental regulations that make it hard to keep morethan 300 head confined in one location. “And more coun-ties are adopting those regulations.” The same regula-tions will likely limit growth of the state’s dairy industry,he notes.

Oil co-op sees gains Things are more clear-cut for MFA Oil. Tom May,

director of marketing, says the co-op is bullish on ethanoland is doing all it can to educate consumers about theadvantages of its use. MFA Oil sells a 10 percent ethanolblend at virtually all of its 77 Break Time conveniencestores and 166 un-manned retail outlets. E85, a blend of85 percent ethanol and 15 percent gasoline used in flex-fuel vehicles, is sold at 30 of those locations. Variousblends of biodiesel are also available at many outlets aswell.

Most of MFA Oil’s retail outlets are in rural Missouri, aswell as parts of Arkansas, Iowa and Oklahoma. “So thehealth of rural towns is absolutely critical to the health ofour cooperative. We think ethanol is making a positiveeconomic impact on the communities we serve,” Maysays. MFA Oil was recently presented with the Paul DanaAward (named after the race car driver who got ethanolapproved for use in the Indy 500) by the American Coali-tion for Ethanol, designating it as its marketer of the year.

MFA Oil has entered into a partnership with Mid-Mis-souri Energy (MidMo) under which it is selling E85 for 20percent less than regular gasoline. Flex-fuel vehicles get5 to 20 percent less fuel mileage, so a 20-percent reduc-tion in price makes E85 a good value for the cooperative’scustomers.

“MFA Oil is excited to partner with another farmercooperative to bring more value to Missouri’s corn cropand economy. We felt working with MidMo was a greatway of keeping more ethanol dollars at home,” says May.

MFA Oil gave away a Ford F-150, flex-fuel pickuptruck last Fourth of July as part of an ethanol-educationcampaign. At that event, May says he “lost track of howmany people stopped by our booth and said they wouldbe filling up with E85 now that it costs 20 percent lessthan unleaded gasoline.” He also sees signs that con-sumers are beginning to understand that E85 is better forthe environment because it burns cleaner than fossilfuels. (E85 emissions contain just 1 part per million ofnitrogen oxide vs. 9 parts per million for gasoline,according to the October issue of Consumer Reportsmagazine).

May says he finds it “almost mind-boggling that it tookthe nation so long” to finally get a head of steam goingbehind its biofuels industry. In Missouri, there are 120,000flex-fuel vehicles, a number that should be steadily goingup as consumers get behind homegrown fuels, May says.The state of Missouri has passed a law mandating that by2008, all gasoline in the state be blended with 10 percentethanol, which will encourage further development of thestate’s ethanol industry.

“Ethanol is not the only answer to our energy needs,but it is one thing that is working out there right now,”May says. “Cellulosic ethanol will probably be playing arole in the future, too. With sky-high gas costs, you knowthe market will find a way to produce more alternativefuels.”

— By Dan Campbelll, editor ■

“They’re the good guys!”High oil prices, the war in Iraq and other fac-

tors prompted a group of protestors to set up apicket line outside a Big O Tire-Petro Mart gasstation in Columbia, Mo., in June.

But when the leader of the group, University ofMissouri librarian Rebecca Schedler, learned thatthe station is owned by MFA Oil, she redirectedher troops, according to a report in the ColumbiaDaily Tribune. “That’s a farmers’ cooperative.They’re the good guys,” she said.

The picketers instead set up shop outside thegas station of a major national oil company.

Chalk up another “cooperative advantage.”

By Catherine Merlo

Editor’s note: Merlo is a Bakersfield, Calif.-based writer/editor with extensive experi-ence writing about cooperatives and theissues that impact them.

n his 25 years as executivedirector of the MinnesotaGrain and FeedAssociation, Bob Zelenkahas faced farm crises,

droughts and floods. But nothing hasshaken him or the 600 country grainelevators and feed mills he represents asdeeply as the current ethanol boom.

“It’s been the biggest thing to hit ourindustry,” says Zelenka, “and the hard-est to adapt to.”

In the last year alone, Zelenka hasseen almost a dozen Minnesota grainelevators go out of business and severalothers forced to consolidate “because ofthe ethanol industry’s growth,” he says.

Zelenka and his members aren’t theonly ones worrying about ethanol’s grow-ing appetite for corn. As more of theU.S. crop is diverted to ethanol produc-tion, some agricultural insiders are begin-ning to voice concerns over the pell-mellpace of the renewable fuel’s growth andits impact on various farm sectors.

While the ethanol gold rush delivers amuch-needed boost for corn farmers andrural America — more demand for theyellow-eared crop, more ethanol plants,more tax revenues and jobs — a growingnumber of analysts are calling for a clos-er look at the boom’s wider-reachingconsequences. Already, a “food vs. fuel”ethics debate is emerging in agricultural,energy and academic circles.

Some farm experts predict the explo-

sion of corn-based ethanol productionwill shift demand away from importantfood and livestock needs. They say thatcould lead to potential corn shortagesand higher costs for grain exporters,hog and poultry operators, transporta-tion companies, even food processors.Others wonder whether vastly expandedcorn acreage might consume marginalland and affect conservation practices.

Even Warren Staley, CEO ofagribusiness leader Cargill, has ques-tioned whether biofuels such as ethanoland biodiesel are the answer to U.S.reliance on foreign oil. Staley said thatat a time when the need for increasedfood production is critical, promotionof ethanol runs contrary to Cargill’s pri-ority to be the leading global foodprovider, Dow Jones’ MarketWatchreported May 1.

Moreover, Staley and others alsohave pointed out that even if all of theU.S. corn crop were used to produceethanol, it would replace only about 20percent of motor fuel.

“Ethanol is not the be-all, end-allsolution,” says Don Roose, president ofU.S. Commodities, an Iowa-based grainand livestock hedging and trading firm.“It’s one of a number of sources ofrenewable energy, and it’s unrealistic tothink we can switch grain productionover and stop imports of foreign oil.”

Ethanol’s “untethered” growthMinnesota’s Zelenka has ruffled a

few feathers in the last year by ques-tioning ethanol’s unchecked growth,which, he says, is propelled by govern-ment incentives, not by the market.

“We get criticized for suggestingthere are ramifications from the unteth-

ered growth of this industry,” he says.“But you can’t help but see that thereare downsides to this industry’s growththat, unfortunately, no one seems towant to recognize.”

Zelenka points to grain elevators,which depend heavily on the export anddomestic feed markets. Some now findthemselves bypassed in the corn buy-and-sell process because ethanol plants oftenprefer corn shipments straight from thefarm. That leaves many elevators feelingthe pinch of hard-to-find supplies to ful-fill their market requirements. In someareas, corn deficiencies are driving uplocal prices, creating thinner margins forthe grain storage businesses.

“A lot of our members have foundthat ethanol is a real threat to their exis-tence,” says Zelenka.

For example, two or three years ago,some grain elevators invested $5 millioneach to build new shuttle-loading facili-ties. “Those were massive investments,”Zelenka says. “Now they’re having dif-


Lef t Beh indSome country elevators left behindas ethanol diverts traditional supplies

IBob Zalenka says ethanol is divertingcorn from many local elevators, causing adozen facilities in Minnesota to shut downlast year. Photo courtesy Minnesota Grain andFeed Assoc.

ficulty competing with, in some cases, asubsidized ethanol plant nine milesaway. Who would have expected thisexplosion in ethanol?”

Ethanol boom forces major ag changes

Fueled by increased demand forenergy, ethanol commenced its eye-pop-ping growth at the new millennium’sstart. In 1999, there were 50 ethanolplants in the United States. Today, thereare 102 ethanol bio-refineries, withanother 42 under construction, reportsthe Renewable Fuels Association.

“Planned plants, if all develop, wouldtake total corn processing into the 8.2-to 8.6-billion-bushel area — assumingprocessing for non-ethanol uses remainsrelatively constant,” says Robert Wisner,an agricultural economics professor atIowa State University. “Other uses ofcorn are currently running at about 8.3billion. This year’s corn crop, with thesecond highest yield on record, is fore-cast to be just under 11 billion bushels.The bottom line is that we will need alot more corn acres in the next few yearsif most of these plants materialize.”

Many of those acres will come out ofsoybeans and will be continuous corn,Wisner adds, which carries a number ofimplications for other farm sectors.“Major adjustments will be required bya large part of the agricultural sector,including input firms and retailers,grain handlers, transportation firms,manufacturers of grain bins and han-dling equipment and livestock-relatedbusinesses,” he says.

Hard on hog producersAmong those wary of ethanol’s

potential to devour U.S. corn suppliesare hog and poultry producers. Theethanol explosion is “a negative” forthem, says Glenn Grimes, professoremeritus of livestock marketing withthe University of Missouri-Columbia.

That’s because those industries relyheavily on corn for feed. About 10 per-cent of the nation’s corn production isfed to hogs, Grimes says. On the plusside for livestock, ethanol productiongenerates distillers grains (DDG), a

high-protein co-product of ethanol thatcan replace corn in beef and dairyrations, and to a lesser extent in hogsand poultry (see page 22).

Both hog and poultry production arehighly vulnerable to feed price increases.“Each 50-cent increase in corn equatesto a $2.50 per-hundredweight rise inhog production costs,” Grimes says.

The breakeven price for producinglive hogs during 2005-06 was $39-$40per hundredweight, says Grimes. Ifcorn prices should rise from their cur-rent $2-per-bushel level to $5 perbushel — not an impossible scenario —that could send hog costs $15 higher,pushing producers out of business.

“With the growth in ethanol produc-tion that is planned for the next fewyears, any kind of short corn cropwould mean $5 or higher corn prices,”says Grimes. “With crude oil prices andgovernment programs, ethanol plantscan pay $8 to $9 and still break even.We’d see drastically lower U.S. hogproduction long before we hit $8 corn.”

Pushing hog producers out of busi-ness would remove many more jobsthan found in ethanol production,Grimes says. “The number of peopleinvolved in producing ethanol from 1million bushels of corn is much smallerthan in raising hogs with 1 millionbushels of corn,” he says.

Among the results of higher corn

prices also would be “significantly high-er food prices,” adds Grimes.

Another consequence could be adrop in corn exports as producersscramble to fill domestic ethanol orders.That export decline “could be a savinggrace for Latin American farmers whohave been battered by fierce U.S. com-petition,” writes the Council onHemispheric Affairs (CHA).

Environmental consequencesConcern over environmental impacts

has some observers waving a yellow flagover the alternative fuel’s boomingdevelopment.

About five to six gallons of water areneeded for each gallon of ethanol pro-duced, Iowa State’s Wisner says. Anethanol plant that produces 100 milliongallons of fuel a year will use about 500to 600 million gallons of water annually.Many areas, including parts ofMinnesota, are short on water suppliesand have not planned for the high wateruse of thirsty ethanol plants. “Someareas’ water resources will be placedunder stress,” Wisner says.

What’s more, America’s corn fieldsalready take up the largest chunk ofU.S. farmland, accounting for some 80million of the nation’s roughly 357 mil-lion acres of farmable land. To meetescalating demand, corn acreage mayhave to expand another 3 million acres


Ethanol leaders aware of concernsEthanol leaders are aware of the concerns from various farm sectors about

the consequences of ethanol’s corn-driven needs, says Matt Hartwig, commu-nications director with the Renewable Fuels Association. “We’re very cog-nizant of the limits of how much corn can be used before it has negativeimpacts on other industries, which we don’t want,” he says.

With technological advances and improved efficiencies at both the farmand ethanol plant levels, “we’ll be able to get increased ethanol productionusing roughly the same acres as now,” says Hartwig.

By 2015, U.S. corn growers will produce 15 billion bushels per year, Hartwigsays, based on numbers from the National Corn Growers Association. “We’llbe able to produce 15 billion gallons of ethanol, using 5 to 5.5 billion bushels ofa 15-billion-bushel crop,” he says.

“Ethanol represents one of the, if not the, most important value-addedindustries for American agriculture,” adds Hartwig. “Its positive impact can’tbe denied.” ■


USDA Chief Economist Keith Collins addressed keyethanol-related issues in a statement before the U.S. SenateCommittee on Environment and Public Works on Sept. 6. Fol-lowing is a brief excerpt. For more on each of these pointsand Collins’ other comments, visit: www.usda.gov/oce.

• Gasoline and ethanol prices are likely to stay highenough over the next several years to maintainethanol expansion.

• Corn ethanol returns are such that plants can remainprofitable over a wide range of corn prices.

• Corn prices could set new record highs over the nextfive to six years.

• Ethanol plants will likely continue to operate even ifcorn prices rise well above past record highs.Ethanol plants will be able to bid corn away from avariety of other uses over a wide range of corn prices.

• The United States will need substantial increases incorn acreage to prevent exports from declining andlivestock profitability from falling.

• The Conservation Reserve Program (CRP), which has

36 million acres set aside from crop production forenvironmental reasons, may provide a source of addi-tional crop acreage.

• It is likely other exporters (such as Brazil and Argenti-na) will have to supply more corn to the world marketas world meat demand rises and U.S. corn ethanolproduction increases.

• Corn stocks are likely to be increasingly tight and cornprices high, so the corn sector will be highly vulnera-ble to market disruptions — ethanol plants and otherusers will be operating in a much riskier environmentthan we have today.

• Corn ethanol alone cannot greatly reduce U.S.dependence on crude oil imports.

• Cellulosic ethanol production appears to be the bestrenewable alternative for reducing crude oil imports.

• Ethanol growth is manageable in the near future. Mar-kets will work over the longer term, but the allocationfunction of market prices can mean substantial costsfor some sectors … . ■

a year, says U.S. Commodities’ Roose. That could mean spreading corn

production into marginal land anddrawing acreage out of conservationreserve programs. Such acreage expan-sion is likely if U.S. corn production isto reach the 15 or 16 billion bushelsexpected for food, ethanol and exportneeds, say Grimes and Wisner. Thatcould potentially impact soil conserva-tion and wildlife.

Rethinking ethanol policiesWhat Zelenka and others want is a

more carefully thought-out national pol-icy on ethanol. Many would like to seeethanol produced from corn alterna-tives, such as switchgrass, or corn stalks.

A clear hierarchy for the nation’sagricultural resources should be estab-lished, Zelenka says. In his opinion, thatmeans a ranking of food, feed and fuel— in that order. Zelenka is not opposedto ethanol, calling its concept “good.”

“We’ve encouraged our members towork more closely with ethanol plants,”says Zelenka. “But it’s been a real chal-lenge for [grain elevators]. It createsuncertainty when you don’t know whenthe next ethanol plant will pop up.

They’re thinking, ‘Should I build addi-tional storage? Improve my transporta-tion facilities?’”

Open discussion, however, is difficult,says Zelenka. “People are scared tospeak out,” he says. “The zeal to putthese ethanol plants up clouds the realis-tic picture. It’s considered blasphemy ifyou say anything negative about them.”

Too far with ethanol incentives?Like Wisner, Roose and Zelenka,

Grimes recognizes ethanol’s positiveimpact on corn producers. But theUniversity of Missouri professor thinksgovernment incentives for the renew-able fuel need to be re-evaluated.

“We do need to wean ourselves fromforeign oil, but we’re going too far withincentives for ethanol,” Grimes says.“With $70 (per-barrel) crude oil, wedon’t need subsidies to produce ethanol.With $50 crude, we do.”

Grimes says Middle East instabilitypoints to continued $70 or higher crudeoil prices.

“There’s no stopping of ethanolplants with the incentives we have orthe mandates for more ethanol in ourfuel,” he says. “The market system itself

would be more useful now than policyto promote the use of ethanol.”

Ultimately, the future of corn andethanol may be determined by a combi-nation of market forces and governmentpolicy, the system for many crops evennow. “Our crops for export, feed andfood have always been kept in balanceby government programs,” says U.S.Commodities’ Roose. “It’s been a slowmigration over the years. But with thenew, unprecedented growth in ethanol,the story is yet to be written.”

Finding a balance for ethanol in thesee-saw world of agriculture could posea big challenge. The escalating pressureon corn supplies may come down to amatter of national priorities. At somepoint, the crop’s supply and demandcould become inelastic, Roose says. Inthat world of corn scarcity, all corn-related sectors will be fighting to keeptheir industries alive.

“Whether large or small, grain cropsare 80 percent dependent on weather,”says Roose. “If we ever get a dramati-cally reduced crop as we did in 1983,’88, ’93 and ’95, we’re going to have toask, ‘What gives?’ or, more to the point,‘Who gives?’” ■

USDA chief economist’s ethanol outlook

Alan Borst, Ag Economist

USDA Rural Development, Co-op Programs

ood, fiber… and now fuel. In the 21st century,U.S. farmers are challenged to meet the coun-try’s needs not only for food and fiber, but alsofor much-needed renewable energy. An impor-tant policy ques-

tion to be answered is: Who willhave ownership of the facilitiesthat will produce energy fromrural Americans’ wind and crops?

According to the RenewableFuels Association, 46 of 102U.S. ethanol plants are farmerowned, with a capacity to pro-duce 1.6 billion gallons ofethanol. Total U.S. ethanolcapacity is 4.4 billion gallons,giving producer-owned plants a39 percent share of the market(for a complete list, visit:http://www.ethanolrfa.org/indus-try/statistics/#EIO). Accordingto the National Biodiesel Board,as of April 2006 there were 65U.S. biodiesel plants in opera-tion with a total productioncapacity of 395 million gallons(for the list, visit:http://www.biodiesel.org/buyingbiodiesel/producers_marketers/ProducersMap-Existing.pdf).

Growers and local residentshave been investing in ethanoland biodiesel plants across the country to share the marketwith larger agribusinesses. Many of these ventures have beenvery profitable over the past few years. This has attractedmuch outside investment in competing plants.

In 2004, less than 1 percent of installed U.S. wind energycapacity was owned by farmers. Most farmers with wind tur-

bines on their property have leased their land to larger ener-gy companies. Where farmers own the turbines, they mayexpect to double or triple their income over leasing. The“Windustry” website lists 52 farmer-owned U.S. wind proj-ects, most individual and quite small(http://www.windustry.com/maps/CommunityDatabaseApril272006.pdf).

In the case of both biofuels and wind, greater farmer own-ership implies both thepotential for greater profitsand the risks of greaterlosses. One challenge thathas confronted ruralAmericans consideringsuch a venture has been thequestion of how to organ-ize it — selecting the bestbusiness model to follow.

There is a large matrix ofU.S. public policies andprograms at all levels ofgovernment that acutelyinfluence the potential andactual economic perform-ance of farmer-ownedenergy ventures. The wayin which these policies andprograms are designed andimplemented can make orbreak the best designedrenewable energy ventures.

Why promote localownership?

In the European Union,where a much larger shareof energy is generated from

local renewable sources, the promotion of local energyinvestment has been a major policy goal in recent years.Predac, an EU network of 23 energy organizations from 10countries, has identified four arguments for favoring localownership of renewable energy sources. Here is an adapta-tion of their list for the American setting:


Br ing I t on HomeLocal ownership of renewable energy helps ‘keep it on the farm’

F

Producer-owned ethanol plants, such as Mid-Missouri Energy,return an average of 56 percent more income to local communitiesthen do plants owned by absentee investors, according to a newNational Corn Growers Association study. USDA photo by DanCampbell

• Share the economic benefits of renewables. When proj-ect financing comes from a few large investors from outsidethe project area, profit flows away. Local investment allowsrural residents to retain a greater share of the earnings. ASeptember 2004 U.S. Government Accountability Officereport modeled the relative economic impacts of locallyowned and remotely owned wind systems. It found thatlocally owned wind systems generated an average of 2.3times more jobs and 3.1 times more local dollar impactthan do wind systems financed by out-of-area interests.

• Support economic development in rural areas. Inregions where agriculture or traditional industries aredeclining, renewable energy source projects offer an oppor-tunity to diversify economic activities by a production thatcannot be transferred elsewhere.

• Improve local acceptance of renewable energy proj-ects. Some renewable energy source projects face localopposition, including windenergy, which unavoidablymodifies the landscape.Local investment is likely toreduce the risk of a strongopposition by allocatingmore benefits to those peo-ple who actually or poten-tially endure the drawbacks.

• Play an educational role.Local investment can play asignificant educational roleby increasing the number ofpeople directly and indirect-ly involved in projects, andthus the public awareness ofrenewable energy. By creat-ing social links in the frame-work of a local project, itcan also promote the emer-gence of new local projectsthrough exchanges aboutthe initial one.

Federal policies to promote greater local energy ownership

There is one major federalprogram specifically targeted atpromoting farmer and ruralsmall business ownership ofrenewable fuel facilities throughgrants and loan guarantees:USDA Rural Development’s Renewable Energy Systems andEnergy Efficiency Improvements Program. It was authorizedby Section 9006 of the 2002 Farm Bill. The program author-izes loans, loan guarantees and grants to farmers, ranchersand rural small businesses to: (1) purchase renewable energy

systems, and (2) make energy efficiency improvements. In August 2006, USDA announced the awarding of $17.51

million in Section 9006 Grants to 375 recipients in 36 states.The grant program complements the Bush Administration’soverall effort to increase America’s energy independencethrough the development of renewable energy resources aswell as improving efficiency of existing systems.

USDA Rural Development grant funds can be used to payup to 25 percent of the eligible project costs. Additionally,the program provides loan guarantees of up to $10 million to

fund up to 50 percent of eligible projects. Eligible projectsinclude those that derive energy from a wind, solar, biomassor geothermal source, or hydrogen derived from biomass orwater using wind, solar or geothermal energy sources.



Local ownership of ethanol plants keeps morevalue-added dollars in rural towns, such asMarshall, Mo. (also see cover story, page 4).From top: the Waggin’ Wheel Cafe in Malta Bend(near Marshall) saw business soar with the con-struction of the new Mid-Missouri Energy ethanolplant; the street circling the county courthouse inMarshall gets a new “overcoat”; new home construction in Marshall. USDA Photos by Dan Campbell


Two recent reports stress that producer ownership ofbiofuels plants does far more to stimulate the rural econo-my than do plants owned by absentee investors.

The National Corn Growers Association (NCGA) study —“Economic Impacts on the Farm Community of CooperativeOwnership of Ethanol Production” — concludes that:“Since a farmer-owned cooperative ethanol plant is literallya member of the community, the full contribution to thelocal economy is likely to be as much as 56 percent largerthan the impact of an absentee-owned corporate plant.”John Urbanchuk of LECG, LLC, conducted the analysis.

The Institute for Local Self-Reliance (ILSR) has also issueda report that urges the U.S. Department of Energy to changewhat it terms a “piecemeal approach” to commercializingethanol from cellulose and develop a comprehensive strategythat emphasizes a local, producer ownership. “The future ofAmerican agriculture may depend on this,” says David Mor-ris, ILSR vice president and author of “Putting the PiecesTogether: Commercializing Cellulosic Ethanol.”

Keeping profits at home In many ways, the economic impact of farmer-owned

and absentee-owned ethanol plants on the local communityis similar, the NACG study points out. Yet, there are twoimportant differences that significantly increase the impactof a farmer-owned plant:• The share of expenditures for operations of a farmer-

owned plant derived in the local community is likely to belarger than that of an absentee-owned plant. For example,virtually all accounting, administrative and marketingfunctions will be provided locally, while these functionsmay be centralized off site for an absentee-owned plant.

• Farmer-owners of a cooperative or limited liability corpo-ration (LLC) ethanol plant will participate in the profitsthrough dividends. Dividends paid to farmer-owners rep-resent additional income that is spent and invested largelyin the local community, according to the study.

Most absentee-owned facilities are owned by central-ized agribusiness corporations.

“By putting money directly into the pockets of local resi-dents, farmer-owned ethanol plants have spurred economicgrowth in rural communities across the country,” said BruceNoel, chairman of the NCGA Ethanol Committee. “Whenfarmers and other local investors are given the opportunity toparticipate in the ownership of ethanol plants, the economicbenefits to the community are magnified enormously.”

Nearly half of all ethanol plants are owned and operated

by farmer cooperatives or LLCs and account for 38 percentof total ethanol production. However, during the past twoyears there has been substantial influx of non-farmer capi-tal into the ethanol market. According to the RenewableFuels Association, only two of the 43 ethanol plants underconstruction are majority farmer owned.

“It’s unfortunate that there currently aren’t more opportu-nities for farmers and other locals to invest in the plants beingconstructed in their communities,” Noel said. “With locallyowned plants, the profits stay in the community and that dis-cretionary income is what truly facilitates rural development.”

“Any ethanol plant — regardless of who owns it — isgood for corn farmers and good for the U.S. economy,”Noel said. “But if you’re talking about the effects on thelocal economy and farm income, ownership matters. Thoseplants that are farmer-owned undoubtedly have a more pro-nounced impact on the local economy.”

ILSR sees gains from farmer ownership Congress made clear in the Energy Policy Act (EPAct)

that its focus was on farmers and rural development, Mor-ris stressed, adding that Congress required that projects“demonstrate outstanding potential for local and regionaleconomic development.” In addition, EPAct requires that apriority be given to projects “that include agricultural pro-ducers, or cooperatives of agricultural producers, as equitypartners in the ventures; and...have a strategic agreementin place to fairly reward feedstock suppliers.”

The ILSR report proposes that DOE’s strategy take intoaccount a key element of the Energy Policy Act: a man-date for 250 million gallons per year of cellulosic ethanol by2013. ILSR argues that the various incentives contained inthe Act — direct grants, loan guarantees and direct pur-chasing — will not significantly accelerate that time line.Therefore, ILSR has urged DOE to use the EPAct’sresources to achieve its qualitative goals: maximizing thebenefits to the nation’s farmers and rural communities.

“Given the mandate, the country will achieve EPAct’squantitative goals regardless of what DOE does,” says Mor-ris. “On the other hand, the future structure and prosperityof American agriculture may well depend on how DOE andUSDA craft their biofuels strategy.”

“Will we have over 1,000 farmer-owned bio-refineries,allowing virtually all full- time farmers in the country todirectly benefit from the coming age of biofuels?” Morrisasks. “Or will future agriculture look the same as currentagriculture, with millions of small producers selling to ahandful of dominant processing companies?” ■

Studies: farmer-owned ethanol plants contribute more to local economies

By Anthony Crooks, Ag Economist

USDA Rural Development

ur nation used more than 140 billion gallons ofgasoline last year and imported about 60 billionfrom the Middle East. The 4.3 billion gallonsof fuel ethanol produced largely by our nation’sfarmers was a good start toward extending the

nation’s fuel supply, but really is just a baby step. “America is addicted to oil,” President Bush stressed in his

State of the Union Address, during which he outlined theAdvanced Energy Initiative (AEI) to address this seriousproblem. “We will increase our research in better batteriesfor hybrid and electric cars, and in pollution-free cars thatrun on hydrogen. We’ll also fund additional research in cut-ting-edge methods of producing ethanol, not just from corn,but from wood chips and stalks, or switchgrass. Our goal is tomake this new kind of ethanol practical and competitivewithin six years.” For more on the AEI, visit: http://www.whitehouse.gov/news/releases/2006/05/20060524-4.html.

Speaking at a Senate Foreign Relations Committee meeting in June, former Federal Reserve Chairman AlanGreenspan said: “Corn ethanol, though valuable, can playonly a limited role, because its ability to displace gasoline ismodest at best. But cellulosic ethanol, should it fulfill itspromise, would help to wean us off our petroleum depend-ence.”

Advocates of cellulosic ethanol have been saying its daywould arrive “within the next five years” since the mid-1990s.But this time they just may be right. They too were encour-aged by President Bush’s remarks. And while everything turnson oil prices, rising oil prices encourage new technologies bymaking them economical — including, perhaps, cellulosicethanol within five or six years.

Is industry heading to cellulose? Cellulosic ethanol is fuel ethanol made from cellulose, the

inedible fiber that forms the stems and branches of plants. Asthe main component of plant cell walls, cellulose is the mostcommon organic compound on earth. Crop residue (cornstover, wheat straw and rice straw), wood waste, and evenmunicipal solid waste are sources of cellulose. High-biomassdedicated energy crops — think of President Bush’s reference

to switchgrass in his State of theUnion Address — are also prom-ising cellulose sources that canbe produced in many regions ofthe United States.

Switchgrass is noteworthy forethanol production because of itspotential for high fuel yields,hardiness and ability to be grownin diverse areas. Trials show cur-rent average yields to be aboutfive dry tons per acre. However,crop experts say that progres-sively applied breeding tech-niques could more than doublethat yield. Its long root systemhelps to make switchgrassdrought-tolerant, growing welleven on marginal land, and itrequires little to no fertilizing.Its expected ethanol yield rangesfrom 60 to 140 gallons per ton;with typical yields in the 80-to-90 gallon range.

The potential energy fromcellulosic ethanol is significant.A recent study estimates that agallon of ethanol produced fromcorn provides about 20,000 Btu(British thermal units) moreenergy than the energy that wentinto making it. The net gainfrom cellulose, however, from a crop such as switchgrass,which doesn’t require fertilizer, irrigation, or other energy-intensive activities, is triple that of corn, about 60,000 Btuper gallon. Not only that, but an acre of land planted inswitchgrass can produce four times the cellulosic material ascan land planted to corn.

Cellulose is among the most undervalued and underusedenergy assets in the United States. The Natural ResourcesDefense Council recently reported that by 2030, cellulosicethanol could supply half of U.S. transportation fuel needswithout reducing food and animal feed production.


From Grass to GasOn the road to energy independence,how soon will cellulosic ethanol be a factor?

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Moreover, the unrealized potential ofindustrial biotech, completely apart fromethanol, is astonishing. Once plant sugarsbecome abundantly available, any numberof substances that now contribute to our“oil addiction” may be replaced with sugarmolecules.

But before dedicated crops such asswitchgrass and miscanthus (a tall grass) areplanted for cellulosic ethanol production,an abundance of annually generated crop

residue is available for conversion. Rightnow, ethanol, blended into gasoline,accounts for only about 2.5 percent of thenation’s fuel supply. The potential fromforestland and agricultural land, the twolargest sources for biomass, exceeds an esti-mated 1.3 billion dry tons per year. That’s acellulosic ethanol replacement equivalent ofabout 30 percent of the demand for gaso-

line without affecting food production. Ethanol in the United States is made primarily from the

sugar that makes up the starch in corn. Ethanol manufactur-ers process the corn kernel using enzymes that break downthe starch into simple sugars. Those sugars are then fed intoa fermentation tank, where yeast digests them to produceethanol. The corn stalk and leaves, actually about half of theplant material, is disposed of.

Ethanol from cellulose is more complicated because cellu-lose forms a more complex chain of sugar molecules (6-car-bon sugar molecules, a.k.a. C6) than those from corn starch(5-carbon molecules, C5). Breaking down cellulose into fer-

mentable sugars for ethanol production therefore, requires a“pretreatment” process to open the cellulosic structure inorder for conversion to occur.

Ready for commercialization?One of the keys to progress has been to reduce the cost of

converting cellulosic materials into fermentable sugars. TheDepartment of Energy’s National Renewable EnergyLaboratory (NREL) has partnered with private biotech com-panies to make important advances in conversion technology.

Novozymes, a biotech company based in Denmark withoperations in the United States, began collabo-rative research with NREL in January 2001 tocut the cost of converting corn stover into sugarsfor the production of ethanol. Recently, the twopartners announced a monumental achievement— a 30-fold reduction in the costs of theenzymes needed to produce ethanol from cellu-losic sources. Now costing between 10 – 18 centsper gallon in laboratory trials, enzymes are nolonger an economic barrier to the commercial-ization of cellulosic ethanol.

NREL has also partnered with other firms tomake improvements in pre-treatment technolo-gy. But the industry is only at the earliest stagesof commercialization. There are still many tech-nical hurdles to be overcome to make cellulosicethanol production commercially competitive.Recent spikes in oil prices and energy policy ini-tiatives help to encourage the continuation ofresearch and development. Developments mayhave come piecemeal, but at least they are nowin place. The key is to integrate the pieces intoan economically competitive process and com-

mercialize it. Iogen Corporation, headquartered in Ottawa, Canada, the

only company in North America operating a stand-alone,demonstration-scale, 1-million-gallon-per-year (1 MMGY)plant, is planning its first full-scale facility to produce ethanolfrom cellulosic biomass sources. Drawing on its partnershipwith Novozymes, Iogen has formulated an enzymatic “cock-tail” that can break down wheat straw into sugars that can betransformed into ethanol.

EcoEthanol™ is the patented name of Iogen’s celluloseethanol process which uses enzymatic hydrolysis to convertthe cellulose into sugars.

Executive Vice President Jeff Passmore said the effort hasbeen a painstaking exercise in going back and forth betweendeveloping the enzymes and scaling up the process to indus-trial levels. But with support from its partners — RoyalDutch Shell, Volkswagen AG, the Canadian government anda recent commitment of $30 million from Goldman Sachs(representing a combined investment of more than $130 mil-lion) — Iogen hopes to build the world’s first commercial-scale cellulosic ethanol plant.


Switchgrass (left) may have even more potential than corn as a source for ethanol.Miscanthus grass (above) is also being researched as a potential cellulosic energycrop. Photo courtesy Steve Long, University of Illinois

The company is considering sites forthe facility in Idaho or in Canada, andhas met with Idaho farmers to ensurethey can contract enough wheat andbarley straw to make that location feasi-ble. In Idaho, 320 farmers stand readyto supply the 500,000 tons of straw forthe proposed plant. (See RuralCooperatives, Jan/Feb ‘06.)

Iogen officials say the proposedplant could produce between 40 millionand 50 million gallons of cellulose-based ethanol annually and would add aconsiderable revenue stream to thelocal area for the straw feedstockrequired. Although the plant’s size isrelatively modest by today’s standardsof 100 – 200 MMGY, its price tag cer-tainly isn’t. Because cellulosic ethanolrequires not one but three processingfacilities — an ethanol distillery, a pre-treatment facility and a power genera-tion plant, Iogen’s commercial-scaleenterprise is expected to cost from$350 to $400 million, or roughly sixtimes the cost of a corn (dry mill)ethanol plant of the same scale.

To finance such a formidable under-taking may require a shared risk/invest-ment arrangement among Iogen, itspresent partners, and the U.S. federalgovernment (DOE and USDA). A fed-eral grant of as much as $80 million anda guaranteed loan to hedge against therisks associated with unproven tech-nologies were provided specifically forcellulosic ethanol plant development inthe Energy Policy Act of 2005.

But, despite its substantial upfrontcosts, the plant’s day-to-day operatingcosts are expected to be about the sameas, or even a bit less, than an equivalentcorn plant. Furthermore, a cellulosicplant has a number of alternative co-products and potential revenue streamsthat would otherwise be unavailable to acorn dry mill. In addition to ethanoland alcohol, fertilizers, acids, ultra-high-quality sugars, and other productsmay also be produced or sold to helprecover the higher capital outlay. Theplant will have its own power generatorfueled by a waste material of the pre-treatment processor, called lignin, tooffset its energy costs.

Technological revolution or evolution?

Cellulosic ethanol production mayone day dominate the renewable fuelsindustry. A recent study called for CEto completely replace U.S. oil imports(around 50 billion gallons) by the year2050. Until that day, emerging CEfacilities will compete alongside corndry mill plants.

But what if instead of a dichotomouspath of development, CE on one sideand grain-based ethanol on the other,the industry developed along an inte-grated path where grain-based plantsincluded technologies to process thewhole corn plant?

Three of the larger ethanol compa-nies are betting that the future of cellu-losic ethanol will follow this evolution-ary path instead of a wholesale revolu-tion. Abengoa Bioenergy, Broin and Co.and DuPont are developing processesthat will help to integrate cellulose con-version technologies into their existingdry mill ethanol plants. Each companyis involved in a formalized Research andDevelopment Agreement with U.S.DOE to push its respective technolo-gies along.

Abengoa BioenergyAbengoa received a $10 million

DOE grant to develop a next-genera-tion dry mill corn ethanol plant. The$17.7 million project is titled“Advanced Biorefining of Distillers’Grain and Corn Stover Blends: Pre-Commercialization of a Biomass-Derived Process Technology.” Theproject involves a partnership ofAbengoa-owned High Plains Ethanol inYork, Neb., Novozymes North AmericaInc., VTT-Finland and the NREL.The project goal is to develop anddemonstrate an integrated biorefiningprocess which includes the fermentationof both pentose (C5) and glucose sugars(C6). Such an ambitious undertakinginvolves two significant steps: • Step 1 — Optimization of the dry

mill technology. Abengoa built astarch pilot facility in York two yearsago to optimize the production ofethanol from cereals: corn, wheat,

barley and sorghum. • Step 2 — Development of a biomass

fractionation system. Abengoa isbuilding a second pilot plant (also inYork) which it expects to be up andrunning by fall 2006 and will use cornstover as its feedstock.

The twin York facilities are expectedto mimic what Abengoa is demonstrat-ing with its enzymatic hydrolysis tech-nology on a larger scale in Spain. In apartnership with Ebro Puleva and theEuropean Union 5th FrameworkProgramme, Abengoa’s 2 MMGY bio-mass commercial demonstration facilityuses wheat straw and is co-located witha starch plant in Salamanca with thetwo sharing utilities and support sys-tems. However, just as with the Iogenwheat straw demonstration facility inCanada, the plant in Spain will not fer-ment the pentose (C5) sugars and glu-cose (C6) sugars simultaneously. Onlyglucose (C6) from the cellulose hydrol-ysis will be fermented into alcohol. Thepentose-laden residue will be mixedwith animal feed and incorporated intoother studies.

Broin’s effortsBefore this next-generation plant will

be capable of producing ethanol fromthe entire corn plant, it must first pro-duce ethanol from the whole kernel —both starch (the only portion currentlyutilized for ethanol) and the residualfiber (what is now the distillers grains).Converting the residual fiber requiresprocessing with cellulose enzymes. Theapplication of cellulosic technologycould dramatically increase the ethanolyield of the nation’s more than 100existing dry-mill ethanol facilities.

NREL collaborates with Broin andAssociates Inc. of Sioux Falls, S.D., on a$5.4 million project entitled “A SecondGeneration Dry Mill Biorefinery,” toseparate bran, germ and endospermfrom corn kernels prior to makingethanol from the remaining starch.Trademarked as BFrac®, the technolo-gy is expected to be merged with cellu-losic technologies.



By Stephen Thompson,

Assistant Editor

thanol producers are hav-ing little trouble findingbuyers for their product,but getting it to marketcan be another matter. As

the ethanol market matures, the avail-ability of economical transport maymake the difference between long-termprofitability and failure.

Transportation infrastructure in theUnited States is meeting the needs ofthe ethanol market, but increasing vol-umes are creating challenges. Rail com-panies are scrambling to meet demand,but until new capital investments are inplace, ethanol shippers may have to dealwith a squeeze in the next few years.

Transport by truck is an economicaloption for short hauls — up to about500 miles from the producer. Truckshave the advantages of being easy toobtain, offering operational flexibilityand requiring lower expenditures forloading facilities than other modes oftransport.

Currently, for short distances, thereare few problems with using trucks,

aside from possible local infrastructuredeficiencies. However, for long dis-tances, truck transport quickly becomestoo expensive.

Problems with pipelinesPipelines are by far the most efficient

and cheapest way to move largeamounts of liquid, costing only about athird of transport by rail or barge.According to the Association of OilPipe Lines, there are 95,000 miles ofpipelines in the United States for trans-porting refined petroleum products —by far the most extensive such networkin the world. About 70 percent ofpetroleum in the United States ismoved through pipelines.

But piping ethanol poses problems.A typical pipeline carries a number

of different kinds of petroleum prod-ucts. A pipeline might ship severalthousand gallons of high-octane gaso-line, followed by a similar amount oflower octane gasoline, followed by ashipment of diesel fuel.

With nothing between the shipmentsto keep them apart, portions of eachmix with the shipment ahead andbehind. When the product reaches its

destination, the mixed high- and low-octane gasoline can be sold as part ofthe lower-grade shipment, but themixed diesel and gasoline must be setaside and re-refined into the discreteproducts.

Unfortunately, shipping petroleumproducts leaves deposits in the pipes —deposits that ethanol — with its highersolvent properties — can dissolve, con-taminating the shipment. Water can alsoget into pipelines. Petroleum productsdon’t mix with it; but ethanol is hydro-scopic: it blends with water. As a result,with ethanol, instead of re-refining onlya small part of the shipment, it may benecessary to re-refine all of it — or evendiscard some as hazardous waste.

Shipping ethanol in an E-10 blendwith gasoline might seem a solution.However, water in the line can actually“strip out” the ethanol, again making itnecessary to re-refine the entire ship-ment. Ethanol is also said to cause cor-rosion in pipelines, a problem that isstill being studied.

Even if these factors are overcome,there’s still another, more basic prob-lem: most existing pipelines simplydon’t run in the right directions.


Keep on Truck in ’Ethanol boom creates transportation challenges

E

Transportation cost — both for procuring grain oroilseeds and shipping biofuel — is a major factorinfluencing the profitability of ethanol and biodiesel.USDA photo by Ken Hammond

Wrong directionPipelines for refined petroleum

products tend to run from the south —from refineries on the Gulf Coast — to markets in the north, including the

Midwest, where most ethanol is pro-duced. Crude-oil pipelines also supplyMidwest refineries from the Gulf.

Although gasoline mixed withethanol can be shipped from theserefineries to limited regional markets,there still remains the problem of get-ting the ethanol to the refineries.

For shipment to the larger, coastalmarkets, the pipelines just aren’t there.This is particularly true on the WestCoast and the huge California market.The Pacific coast has a pipeline supplynetwork separate from the rest of thecountry.

About 55 percent of its supply ofcrude oil comes from Alaska — shippedin tankers from Valdez to ports such asLos Angeles and Anacortes, Wash. Therest is produced mostly in California,which also refines its own petroleumproducts.

How about dedicated pipelines? Atthe moment, there just isn’t enoughethanol volume to justify the huge capi-tal expenditures required for a long-dis-tance ethanol pipeline to any market.However, local pipelines linking ethanolplants in high-density areas, such asIowa and Minnesota, with rail terminalsare a distinct possibility.

Some authorities think that ethanolpipelines may become feasible if the useof E-85 becomes widespread. BobReynolds, of ethanol-consulting firmDownstream Alternatives Inc., thinksthat if E-85 is mandated in theNortheast, a dedicated ethanol pipelinefrom the Midwest to the petroleum hubin Albany, N.Y., could be built.

However, the huge capital expendi-ture — $1 million to $2 million permile for a small-diameter pipeline —could lead to a chicken-or-egg situation,in which politicians would be unwillingto establish such a mandate without areliable ethanol supply, and investorswould be reluctant to put up the moneywithout such a requirement.

With pipelines not currently feasible,

there are two practical methods of long-distance shipment: rail and barge.

Rollin’ on the riverBarges move about 800 million tons

of freight a year, about 15 percent of thenational total. They transport about 70billion gallons of petroleum annually.Barges offer cost-effective transporta-tion to refineries on the Gulf Coast and

can be used in “intermodal” service —combining different modes of trans-portation to achieve higher efficiencies.

But there are limitations. The first isproximity of water transport to theethanol source. Ethanol can be trans-ported by rail to barge terminals andtransshipped, but that adds to cost.

The second obstacle is the need formodernization of locks on the upperMississippi River. Current locks are toosmall. That means that barge combina-tions — called “tows” — from theupper Midwest must be broken up totraverse each lock, and then reconstitut-ed below. This can cause bottlenecks,and industry experts say that if the locksare not modernized soon, increasedtraffic will cause barge transport coststo rise substantially, also putting upward

pressure on rail prices. The availability of sufficient numbers

of barges is a concern also, as is thefreezing of waterways in the winter.

The attractiveness of water transportwill depend on the circumstances facingeach ethanol producer: what markets itwishes to ship to and the relative costsof different transportation modes.

Riding the railsRailroads moved 6 million tons of

ethanol in 2004, the most recent yearfor which figures are available. That’s atiny fraction of the total rail tonnage ofmore than 1.5 billion tons. Rail carriersare currently meeting the demand forethanol transport.

However, a sharp rise in general railtraffic over the past six years is strainingcapacity. With 37 new ethanol plantsunder construction and a 50-percentincrease in production coming in thenext few years, possible bottlenecksthreaten serious delays in the short term.

Midwest cooperatives requiringtransport for grain have been complain-ing for years about shortages of hoppercars and the railroads’ failures to meettheir needs. For their part, the railroads


Rail tankers are loaded at the Mid-Missouri Energy ethanol plant, which ships out about half of itsproduction via rail. USDA photo by Dan Campbell


are spending billions of dollars onupgrading their capacity.

The best way to move bulk cargo byrail is in dedicated “unit trains,” madeup of a single cargo. This avoids thedelays and costs associated with mixed-cargo trains. The quicker a tank car canreach its destination, be unloaded andreturn, the more capacity it can carryover time and the quicker it can pay foritself (rail tank cars are usually ownedor leased by the producer).

An ethanol producer shipping a fewcarloads at a time in mixed trains canexpect to see its shipments delayed inmarshalling yards as trains are assem-bled, and possibly delayed again alongthe way as the cars are switchedbetween trains before reaching theirfinal destination.

A unit train avoids such problems.Made up of about 95 tank cars, it shut-tles between terminals. With each carholding 300,000 gallons, a unit traincan carry 28.5 million gallons ofethanol. Taking current turn-aroundtimes of about six weeks into account,this means that a plant producing 120million gallons per year could keep oneunit train busy.

Smaller-capacity plants have to sharetrains. To make the unit-train systemwork efficiently, there must be a systemfor consolidating tank cars from variousplants into the unit train, and a dedicat-ed receiving terminal at the far end.

One such terminal is the Lomita RailTerminal in Carson, Calif., owned byU.S. Development Corporation.Inaugurated in August 2003, Lomita is

a huge facility capable of unloading 95-car ethanol unit trains in 24 hours. It isconnected by pipeline to a blendingfacility that is part of a nearby Shell Oilreceiving station for petroleum tankers,and is capable of meeting the ethanoldemand for the entire Los AngelesBasin. Other terminals have been builtin Albany, N.Y., Chicago and othermajor transportation hubs.

The Lomita terminal is served by theBurlington Northern and Santa FeRailway Co. (BNSF), which runs unittrains under the trademark EthanolExpress. According to BNSF, oneEthanol Express originates in theMidwest headed for Lomita every threedays. BNSF recently ordered 30 newlocomotives to meet growing demand.

Unlike other carriers, BNSF hasreportedly managed to provide a consis-tently good level of service to ag pro-ducers, apparently due in part to earlystrategic investments in infrastructure.

Limited optionsLike grain co-ops, ethanol coopera-

tives that find themselves dependent ona single major rail carrier can find theiroptions limited. This is true not only ifthe carrier is having problems meetingits obligations, but also in choices ofdestination and in negotiating favorableshipping rates.

Some short-line railroads, such asIowa Northern Railway Co., are seek-ing to fill a niche market by providingconnections with more than one majorcarrier. Northern Iowa is also offeringto consolidate cars on its own lines,

instead of in the switching yards ofmajor carriers, claiming that it can saveproducers time. In addition, the railroadproposes a new switching yard financedin part by ethanol producers, to saveeven more time.

One bottleneck is a shortage of rail-cars: the sudden rise in demand has leftmanufacturers with a year-and-a-halfbacklog of orders for ethanol tank cars.New manufacturing facilities are beingbuilt, but shortages will persist for thenext few years due to the continuingsteep rise in ethanol production.

Rail is also an attractive option forshipping dried distillers grains (DDG).Because DDG is lighter than corn, larg-er hopper cars can be used. Some pro-ducers are exploring the use of shuttlesystems, with incoming cars carryingcorn and outgoing cars hauling DDGto feedlots in the same areas in whichthe corn originated.

Carriers adaptingIt takes time for a new industry to

reach top efficiency, and ethanol trans-portation is still being developed. Todayit takes 24 to 36 hours for ethanol trainsto offload and turn around — in con-trast to coal trains, where operationshave been refined for decades and whichcan be emptied in about six hours.

As carriers adapt, kinks will be ironedout. Extra rail side lines are being built,or planned, to deal with increased traf-fic. Production of rail tank cars shouldcatch up to demand. And transport costsshould eventually drop as more efficientmethods are discovered. ■

Barges ship about 70 billion gallons of petroleumannually. Many ethanol producers are also shippingby barge, but there is a backlog on barge orders,which may take several years to clear, according tothe Renewable Fuels Association.

By Anthony Crooks, Ag Economist

USDA Rural Development, Cooperative Programs

he development of distillers grains as a valu-able co-product for animal feed has beeninstrumental to the growth of the fuel-ethanol industry. If ethanol maintains itscurrent pace of expansion, as much as 17

million tons of distillers grains will be generated annuallyby 2012. That level could rise to as high as 25 milliontons by 2016.

Along with that growth in volume, pressure mounts tofind a home for this co-product of ethanol (see figure 1),which is largely the protein that remains after the starchcontent is removed from corn in the distilling process.Sheer volume, favorable prices and the growing quality ofdistillers grains are expected to encourage nearly everymajor livestock producer and feed manufacturer to pursueways of further using this feed.

Revenue from the sale of distillers grains once com-prised about one-third of the average ethanol facility’stotal revenue. However, two spikes in the price of oil, theEnergy Bill and soaring ethanol markets have combinedto lift ethanol income so much that those distillers grainsnow comprise a significantly smaller percent of their rev-enue, on average.

Not that plant managers are complaining about today’scircumstance. After all, it’s really a reflection of someexceedingly favorable ethanol market conditions, and noone truly expects this environment will last forever.However, if distillers grains are to again return to a greaterportion of the revenue portfolio, an increasing diligenceby plant managers to ensure a consistent, high-value prod-uct will be required. There is a real possibility that theU.S. livestock-feeding industry may ultimately approachmarket saturation for consumption of distillers grains.

From price takers to makers In the days when ethanol cost a dollar per gallon, plant

managers would have been proud to receive 10 percent oftheir plant’s revenue from distillers grains. Plant managerswere often confronted by livestock feeders whose openingbid was: “I shouldn’t even have to pay for this stuff; you’re


Measur ing the ga insfo r d is t i l le rs g ra ins

T

Sale of dried distillers grains to the livestock industry is a major componentof ethanol plant profitability. USDA photos by Dan Campbell

making ethanol.” Indeed, fre-quently the best offer was: “I’llpay the freight to haul it off.And that’s it.”

The situation was almost direin the beginning. Livestockfeeders had the upper handbecause they understood thatwet distillers grains had to bemoved quickly (in less thanthree days) or it would spoil.Feeders recognized the pressurethat plant managers were underto sell, so they would show upon “day two” and “graciously”offer to take the product off thepremises.

The first real technologicaldevelopment for distillers grainswas the use of driers to extendthe product’s shelf life and toimprove its consistency. Managers thenset a goal to keep the dryers going andnever make another pound of wet feedthat wasn’t pre-sold.

A few of the early plants were for-tunate enough to have FarmlandIndustries as one of their investors.Farmland’s feed division not onlyhelped to market the co-products but,more importantly, sponsored researchand conducted its own studies on howbest to make and use distillers grains.Farmland’s feed division has sincebeen merged into Land O’ LakesPurina Feeds, which continues theresearch in its own facilities and isworking with land-grant universitiesin the Corn Belt.

Co-product research and develop-ment by universities and private corpo-rations significantly enhanced the nutri-tional and market value. Researchers atthe University of Minnesota, Iowa StateUniversity and the University ofNebraska served not only to expandexisting markets for distillers grainsamong ruminants (dairy and feeder cat-tle), but also performed groundbreakingwork to develop new markets amongsingle-stomach species such as swineand poultry.

Feed inclusion rates for distillersgrains are presently as high as 40 per-cent for cattle, 25 percent for swine and

5 percent for poultry. It is expected thatthese levels could increase another 5 to10 percent.

Much more than an afterthoughtSo, far from being an afterthought,

distillers grains grew to become a sig-nificant component of a plant’s revenuestream. And that progress was critical tothe development of the entire industry.

University-trained nutritionists beganworking with the plants to help marketthe feeds in the early 1990s. Over time,with more volume and a higher consis-tency, the plants developed a trackrecord for the products’ feed value.

After years of research and a numberof technological developments (and alot of education), feeders learned thenutritional value of distillers grains witha high level of precision: it equals from120 to 135 percent of the nutrition ofcorn in the feed ration. As the corn’sstarch is removed to manufactureethanol, the corn’s protein level is raisedin the co-product.

Because nutrients are available inmany different ingredients, livestockproducers incorporate distillers grainsinto the ration simply as it makes eco-nomic sense to do so. As such, distillersgrains compete with all other feeds andfeed ingredients in terms of nutritionalcontent, energy and cost per unit. And

because distillers grains are discountedrelative to corn (despite having a highernutritional value), feeders look for waysto include (substitute) more of it intotheir ration.

The development of linear program-ming (LP) models and other computerapplications for blending feed rations atthe least-cost (subject to minimum nutri-tional requirements) contributed greatlyto the inclusion of distillers grains.These models provide the relative con-tribution of a particular feed ingredient— distillers grains, for example — givenits price. Virtually every feed manufac-turer and seller has an array of computa-tional tools to determine the optimalavailable feed ration, subject to price andnutritional specifications for the region’scattle, swine and poultry.

With these tools, a marketer or feedseller can demonstrate to the producerthe true value of including distillersgrains (or any particular feed ingredi-ent) into the ration by how it affects thebottom line. As the managers of thesemodels, nutritionists have become theindustry’s gatekeepers of distillers grainsmarket value.

The path forward: challenges, opportunities

As the ethanol industry grows, suffi-cient volumes of distillers grains will be


The DDG-loading area at the Northeast Missouri Grain ethanol plant in Macon, Mo.

manufactured to develop a consistently reliable supply at thelocal, regional and, ultimately, the national and even interna-tional levels. Between then and now, however, a few market-limiting issues must be resolved, including: • Flowability — High temperatures and humidity can some-

times cause the most commonly produced distillers grainsproduct, distillers dried grains with solubles (DDG), tostick together and harden into something resembling afine-grain concrete. The caking problem was so severe thatair hammers were used to extract the DDG from railcars.Rail carriers — understandably upset to see their cars dam-aged by the air-hammer unloading — prohibited plantsfrom using their cars to ship DDG. Having no option butto purchase or lease railcars dedicated to DDG transportput an otherwise unnecessary financial and logistical bur-den on the ethanol plants. It added about $6 per ton to thecost of shipping, or about $39 million a year industry-wide.Several preventive products are being developed to improveDDG flowability, mostly with mixed results. The industryis still searching for better solutions to this, its biggestobstacle. Opportunities for expansion into internationalmarkets, such as Mexico and Asia, are compelling reasonsfor the industry to resolve these DDG flowability chal-lenges.

• Movement toward standardization — An industry-widepush for more consistent color, palatability, nutrient con-tent, particle size and flowability of the product is openingdoors to markets previously unimagined. In concert with itseffort for consistency, the industry is developing a set ofstandardized definitions for distillers grain products alongwith standards for quality and testing. The RenewableFuels Association (RFA) and the American Feed IndustryAssociation (AFIA) have taken the lead and are workingtogether to reconcile and resolve the numerous ways thatdistillers grains are now tested and so that nutritionists maysoon have something that approaches a single standard.

• Export opportunities — There is sufficient domesticdemand to consume the potential 7 million metric tons ofdistillers grains that U.S. ethanol plants are expected toproduce in 2006. However, if the corn ethanol industrygrows to 15 billion gallons per year, there is a genuine needto develop markets beyond our borders. The U.S. GrainsCouncil (USGC) is working hard to identify new andemerging opportunities for distillers grains exports. Inroadsinto potential growth markets such as Asia, Mexico, Canadaand the European Union are being channeled through theUSGC’s education efforts in its 10 overseas offices. Thecouncil conducts DDG feed trials to demonstrate the quali-ty and benefits of using DDG as an ingredient in feedrations for swine, poultry and dairy diets.

There is great export potential in Asia because there is asizable feed industry that can use DDG (and the Asianethanol industry is only just emerging). Asia is also a tradi-tionally significant importer of U.S. grain. Japan, for exam-

ple, is the top customer for U.S. corn. Education effortsand feeding trials are currently being conducted in Japan,Taiwan and China. Other potential markets for U.S. DDGlie within the European Union, which is already a frequentbuyer and has the appropriate systems to handle DDGimports. The EU may also prove to be an especially strongcustomer during drought years.

Two significant opportunities for expanding DDGexport markets exist in Mexico. Hog growers there haveexpressed a keen interest in importing significant quanti-ties of DDG to blend into their hog feed, and they havethe infrastructure to handle it. The poultry industry, whilehaving a less advanced infrastructure, is still very promis-ing. The poultry market in the Veracruz region alone hasthe potential to displace 60,000 tons of corn per month.However, because of its infrastructure limitations, the bestway to move DDG into the Mexican poultry market maybe as a complete feed. Importing processed feeds such asDDG does not require an import certificate and avoids thequota system that regulates the volume of Mexican cornimports.

• Educating end-users — From fertilizer to fuel, to plasticresin replacement, to biomaterials (such as cat litter) andnow to novel human food applications, more and moreunconventional applications are presented for distillersgrains every year. Alternative uses could one day make up a significant portion of the global distillers grains market.Research and education efforts are having an impact topromote distillers grain use in ever-wider applications hereat home and abroad.

Figure 1 — U.S. Ethanol and Distillers Grains (DG)Production Projections Through 2016

For a list of references used for this article, please e-mailthe author at: [email protected], or call him at(202) 205-9322. ■


By James Jacobs, Ag Economist

USDA Rural Development

ore than half of world ethanol production is produced fromsugar and sugar byproducts, with Brazil being by far the worldleader. Currently, there is no commercial production ofethanol from sugarcane or sugar beets in the United States,where 97 percent of ethanol is produced from corn.

Technologically, the process of producing ethanol from sugar is simplerthan converting corn into ethanol. Converting corn into ethanol requiresadditional cooking and the application of enzymes, whereas the conversion ofsugar requires only a yeast fermentation process. The energy requirement forconverting sugar into ethanol is about half that for corn.

However, the technology and direct energy costs are but one of several fac-tors that determine the feasibility of ethanol production. Other factorsinclude relative production costs (including feedstocks), conversion rates,proximity to processing facilities, alternative prices and government policies,facility construction and processing costs. As other countries have shown thatit can be economically feasible to produce ethanol from sugar and other newfeedstocks are researched, interest in the United States in ethanol productionfrom sugar has increased.

In response to the growing interest around sugar and ethanol, USDAreleased a study in July 2006 titled: “The Economic Feasibility of EthanolProduction from Sugar in the United States” (on the internet at: www.usda.gov/oce/). The report found that at the current market prices for ethanol, con-verting sugarcane, sugar beets and molasses to ethanol would be profitable.“At this summer’s unusually high price, I can conclude that it’s economicallyfeasible to produce ethanol from sugarcane and sugar beets,” USDA ChiefEconomist Keith Collins said. However, there is not a clear-cut case thatU.S. sugar will be commercially converted to ethanol anytime soon. Thisarticle will explore some of the economic and technological factors for thepotential of sugar-based ethanol production for farmer-owned cooperatives.

U.S. sugar industrySugar beets are an annual crop grown in 11 states across a variety of cli-

matic conditions, from the hot climate of the Imperial Valley of California tothe colder climates of Montana and North Dakota. Sugar beet byproductsinclude beet pulp, which can be sold for animal feed, and molasses, which isalso sold for animal feed or further processed to extract more sugar.

Sugarcane is a perennial tropical crop produced in four states: Florida,Hawaii, Louisiana and Texas. Byproducts of sugarcane processing includemolasses and bagasse, the fibrous material that remains after sugar ispressed from the sugarcane. Bagasse is often burned as fuel to help powerthe sugarcane mills.


Ethanol f rom SugarWhat are the prospects for U.S. sugar co-ops?

M

Sugar cane, seen here at the tasselstage, fuels Brazil’s ethanol industry.The potential of using sugarcane andsugar beets for ethanol in the UnitedStates is being studied. USDAAgricultural Research Service photo


Total U.S. sugar production fell bymore than 20 percent from 2000 to2006 due to low prices and structuralchanges in the industry. Productiondeclined significantly or ceased alto-gether in five states.

Sugar beets have gained a greatershare of U.S. sugar production overthe past decade, now accounting for58.8 percent of the nation’s sugar out-put while sugarcane fell to 41.2 per-cent. Sugar producers and the mem-bers of farmer-owned cooperatives areincreasingly interested in new tech-nologies and product markets for theircrops, including the growing ethanolmarket.

Cooperatives in the sugar industryProducer-owned cooperatives now

dominate the sugar beet and sugarcaneprocessing sectors as market conditionsprompted more farmers to take owner-ship of their processing facilities toensure a market for their beets or cane.

Sugar beet processing: Beet process-ing facilities convert raw sugar beetsdirectly into refined sugar in a 1-stepprocess. While planted sugar beetacreage has fallen slightly since the1990s, sugar production actuallyincreased due to investments in new pro-cessing equipment, the adoption of newtechnologies, improved crop varietiesand enhanced technologies for the de-

sugaring of molasses.Sugar beets are very

bulky and relativelyexpensive to transportand must be processedfairly quickly beforethe sucrose deterio-rates. Therefore, allsugar beet processingplants are located inthe production areas.During the pastdecade, there was asteady conversion ofsugar beet processingplants to cooperativeownership. All 23 U.S.sugar beet processingfacilities are now oper-

ated by farmer-cooperatives. Theseinclude: Michigan, four facilities;Minnesota and North Dakota (thelargest sugar beet producing region)seven facilities; Colorado and Nebraska,three facilities; Wyoming, two facilities;Idaho, three facilities; Montana, twofacilities; and California, two facilities.

Sugarcane processing: Sugarcane isinitially processed into raw sugar atmills near the cane fields. Like beets,cane is bulky and relatively expensive totransport and must be processed as soonas possible to minimize sucrose deterio-ration. The raw sugar is then shipped torefineries to produce refined sugar.

Cooperative ownership of sugarcanemills is not as dominant as with sugarbeets. In some states, there has been adecline in the number of cooperative-owned mills. Hawaii has gone from 12mills in 1994 down to two in 2006,none of which are cooperatives.Louisiana has gone from 20 mills and10 cooperatives in 1994 to 12 mills and4 cooperatives in 2006. However, whileHawaii sugarcane acreage has declinedsignificantly, Louisiana’s acreageincreased slightly as the remaining millswere upgraded and expanded. Floridasugarcane acreage and mill numbershave remained relatively constant, withone cooperative among the six mills.The lone mill in Texas is cooperativelyowned, and acreage has been fairly sta-ble over the past decade.

Sugarbeets thrive in the rich soil of the Red River Valley ofMinnesota and North Dakota. Photo courtesy American CrystalSugar (ACS); A conveyor transports sugar beets from stockpilesinto the ACS processing plant in Moorhead, Minn. USDA photo byDan Campbell

Because all sugar beets and a signifi-cant portion of sugarcane is processedat cooperatively owned facilities, therewould be significant cooperativeinvolvement in any future sugar-to-ethanol production.

Factors impacting sugar to ethanol viability

Corn is currently the least-cost feed-stock available for ethanol production.Ethanol from sugarcane or sugar beetfeedstocks costs twice as much. USDA’srecent sugar/ethanol report providesthese comparative production costs(below).

High oil prices have spurred interestin ethanol, to put it mildly. But for howlong? (Prices were dropping at pressdeadline in September.)

With ethanol prices hovering near$4 a gallon this summer, the USDAreport concludes that it would be prof-itable to produce ethanol from sugarand sugar byproducts. However, ifethanol prices were to drop below $2.35a gallon, it would not be profitable touse raw or refined sugar as a feedstock.Based on current futures prices, theprice of ethanol is expected to drop.

Alternative marketprices for sugar

As can be seen above, it is far morecostly to convert U.S. refined sugar toethanol than to convert corn. One rea-son is that recent domestic sugar pricesmake it more profitable to convert sug-arcane and sugar beets to sugar than toconvert it to ethanol. As Jose Alvarez,vice president of operations for the

Sugar Cane Growers Cooperative ofFlorida, said: “It’s simple economics.Refined sugar sells at about 18 cents apound, and the experts tell us ethanolfrom sugar would be close to 10 cents.”(Florida Sun-Sentinel, May 31, 2006.)

U.S. policy has long been to protectdomestic producers from unstableworld prices, where sugar is sold belowthe cost of production for most coun-tries (often called the “dump” price).Imports are limited to keep domesticprices stable, with the current pricesupport level at 18 cents per pound.Refined sugar is currently a few centsabove that, and unlikely to ever fallmuch below the support price to avoidforfeitures to the government under thesugar loan program.

When domestic sugar prices were

very low a few years ago and somesugar was forfeited to the government,alternate uses for surplus sugar wereexplored. The Minnesota EnergyCooperative experimented with incor-porating beet sugar with corn in a dry-milling ethanol plant. They foundsome synergy in combining the twointo their fermentation tanks —increasing ethanol production anddecreasing the fermentation time, andallowing them to produce an additional442,800 gallons of ethanol.

When sugar prices rebounded, theconcept of mixing sugar with corn forethanol was put on the back burner.However, it demonstrated that whenmarket conditions warrant it, the tech-nology is there to significantly boostethanol production by combining sugarwith corn.

Ethanol from molasses Molasses was found to be an ethanol

feedstock that was fairly cost competi-tive with corn. Molasses is typically soldas food or a livestock-feed ingredient.However, there are limited supplies toeconomically support a new ethanolfacility.

It is bulky and costly to transport,limiting the feasibility of drawing sup-plies from multiple sugar processingfacilities.

Molasses would be most feasible ifsupplying an ethanol facility already co-located at a sugar processing plant.

Plant location & capital costs For new facilities, capital costs are

estimated to be higher for those usingsugarcane or sugar beets than for corn-based ethanol plants. Also, the econom-ics of plant location is largely dictatedby proximity to feedstocks for ethanol.

Most ethanol plants are located inthe Midwest near corn supplies.Sugarcane and sugar beets cannot beshipped very far for processing intoany product, be it sugar or ethanol.However, building an ethanol plantonto an existing sugarcane or sugarbeet factory would have a much lowercapital expenditure cost and may makeit more comparable to corn-basedfacilities.

In Brazil, nearly all sugar mills havethe capacity to produce both ethanoland sugar. One advantage of co-locatingan ethanol processing facility is thatsugar producers already bring theircrops to these facilities. Another is thatthe front end of the milling process isthe same for ethanol as for sugar, wherebeet and cane juices are extracted forconverting into either ethanol or raw orrefined sugar.

Additional fermentation equipmentwould be needed to make ethanol atexisting facilities.

Additional feedstocks needed USDA’s Economic Research Service

(ERS) reported the annual capacity ofethanol plants could expand from 4.4billion in 2006 to 7 billion gallons in2010. ERS also raised a key question:


Estimated ethanol production costsFeedstock Total Costs* Processing Costs*

Corn (wet milling/dry milling): $1.03/1.05 $0.63/0.52

Raw Sugarcane 2.40 0.92

Raw Sugar beets 2.35 0.77

Molasses** 1.27 0.36

Raw sugar** 3.48 0.36

Refined sugar** 3.97 0.36

*Per gallon ** Excludes transportation costs

Where will the corn come from to sup-ply this expansion?

In 2010, the ethanol sector will needat least 85 percent more corn than in2005. How the market adapts to thisincreased demand will likely play amajor role in the potential demand foradditional ethanol feedstocks and theincentives for developing new process-ing technologies, especially around thecellulosic conversion of biomass intoethanol (see article on page 22).

Cellulosic processing technologies: The ethanol industry has grown

almost exclusively from grain process-ing. In the future, ethanol will be pro-duced from other feedstocks, such ascellulosic materials. Cellulose is themost common organic compound onearth. However, it is more difficult tobreak down cellulosic materials to con-vert into usable sugars for ethanol.

Yet, making ethanol from cellulosedramatically expands the types andamount of available material for ethanolproduction, including bagasse and sug-arcane trash (stalks and leaves). Insteadof having to first convert the sugarcaneto sugar juice, ethanol could be pro-duced by processing the entire plantmaterial.

Conversion of sugar byproducts andwaste via cellulosic technologies wouldgreatly increase the ethanol yields ofsugar feedstocks. Cellulosic ethanolproduction will augment, not replace,grain-based ethanol, but ultimatelyexpand potential ethanol supplies expo-nentially.

Bagasse Sugarcane bagasse, the material left

over after sugar juice is squeezed from acane stalk during milling, is anotherpotential feedstock for cellulosicethanol. Creating fuel from bagasse andother biomass materials holds promisebut will require technology develop-ment. The Audubon Sugar Institute inLouisiana has a sugarcane-to-ethanolresearch project underway focusing onbagasse.

Bagasse is currently burned as fuel insugarcane mills, but researchers hope to

increase the value of what is now con-sidered a waste product. The projectreceived two $500,000 grants from theU.S. Department of Energy forresearch on producing value-addedproducts from bagasse and molasses.

Research shows that one dry ton ofsugarcane bagasse can generate 80 gal-lons of ethanol. This compares favor-ably with 98 gallons per ton of corn.Peter Rein, director of the AudubonSugar Institute, says “The challenge iseconomics. We can do it in the lab.The technology is there, but the eco-nomics aren’t there yet to be commer-cially viable.”

Government policy The growing ethanol industry in the

United States can partially be attributedto government policies promoting theproduction and use of ethanol.Incentives such as the motor fuels excisetax credits, tax credits for small ethanolproducers, import duties and state gov-ernment initiatives helped make ethanolproduction more cost effective.Regulations for cleaner air andincreased fuel efficiency significantlyincreased demand for ethanol.

The Brazilian ethanol model is oftenmentioned when the potential for sugaras an ethanol feedstock in the UnitedStates is discussed. In the 1970s, Brazilinitiated a program of direct invest-ments, subsidies and incentives toincrease ethanol production from sugar-cane and increase the use of ethanol as asubstitute for gasoline.

Brazil is now world’s largest produc-er of both sugar and ethanol. However,the economics — in terms of produc-tion, facility costs and government poli-cies — are not directly comparable tothose in the United States. Brazil pro-duction costs for ethanol from sugar aremuch lower than here. It has a muchlonger growing season than U.S. sugar-producing regions and has higher yieldsper acre because of better climate andinvestment in more-productive strainsof sugar cane.

Some lawmakers from sugar-produc-ing states have been pushing sugar-to-ethanol legislation. The Energy Policy

Act of 2005 included $36 million forsugar-ethanol demonstration grants.The funds will be used to explore com-mercialization of sugar cane ethanol,particularly for small producers withoutputs of under 30 million gallons perday.

The Act also included federal loanguarantees to build plants to produceethanol from cellulosic biomass or canesugar. Recent proposed legislation toencourage the use of renewable fuelsincluded a 100-million-gallon mandatefor sugar-based ethanol beginning in2008 and each calendar year thereafter.How this would happen was not statedin the pending legislation; it is just amandate for minimum quantities ofrenewable fuel derived from sugar.

U.S. sugar producers are a littlemore tempered in the economicprospects for sugar-to-ethanol. Sellingrefined sugar is still their primary busi-ness and the opportunity costs of con-verting it to ethanol are still such thatthe market for sugar is more profitable.There is a general sentiment that poli-cies to increase ethanol productionfrom sugar should augment, but notreplace, current U.S. sugar policy.

The American Sugar Alliance, anassociation of beet and cane sugar pro-ducers, has stated that the governmentwould need to step in to stimulate asugar-to-ethanol industry. “It wouldtake a combination of consumptionmandates to ensure that the demandwould be there, and conceivably someproduction incentives to use ethanol.”(CNN.com, June 20, 2006)

USDA’s sugar/ethanol report con-cludes that corn certainly has a compet-itive advantage in the current marketenvironment, and is helped by the cur-rent 51-cent-a-gallon federal taxexemption. Some people have suggestedthat one way to spur sugar-to-ethanol isto provide an increased credit for sugar.This was proposed, but not adopted, to compensate for more sugar importsnegotiated in the latest CentralAmerican Free Trade Agreement.

Some states are pursuing their ownsugar-to-ethanol policies. With unique



SDA Rural Development’s Value-AddedProducer Grant (VAPG) program is helping tofund producer-owned businesses all across thenation, including biofuel projects. The table onthe following pages lists biofuel-related grants

issued the past two years. VAPGs may be used for planning activities and for working

capital for marketing value-added agricultural products andfor farm-based renewable energy. Eligible applicants are

independent producers, farmer and rancher cooperatives,agricultural producer groups and majority-controlled produc-er-based business ventures. The 2006 funding decisions wereannounced in September (after this publication went to press)for the 2006 award list, visit:http://www.rurdev.usda.gov/rbs/coops/vadg.htm.

For more information about the program, contact yourUSDA Rural Development state office, or visit the abovewebsite. ■


continued, next page

VAPG program he lp ing fue l b io fue l g rowth

U

Value-Added Producer Grants for Biofuels, 2004–2005Year Recipient State Amount Type Project Description

2004 Central Iowa Renewable Energy LLC IA $139,986 ethanol Planning associated with starting a 50 million-gallon-per-year ethanol plant.

2004 Empire Biofuels LLC NY $100,000 ethanol Feasibility study and development of a business plan for marketing ethanol.

2004 Heartland Corn Products MN $279,000 ethanol Planning associated with adding value to theby-product stream of ethanol.

2004 Heartland Grain Fuels, LP SD $150,000 ethanol Evaluate the feasibility of expanding the bio-refining capabilities of existing ethanol plant.

2004 Nebraska Soybean Association NE $237,300 biodiesel Evaluate the economic feasibility of processing soybeans and marketing biodiesel.

2004 New Harvest Ethanol MN $170,000 ethanol Business plan and feasibility study for a coal/biomass-fired ethanol plant.

2004 Oklahoma Farmers and OK $235,000 biodiesel Determine the feasibility of marketing bio-Ranchers Energy Enterprise diesel, bio-based lubricants and hydraulic oil,

and other products.

2004 Siouxland Energy & Livestock Co-op IA $150,000 ethanol Working capital for marketing E-85 fuel.

2004 Timber Producers Association of WI $120,627 biodiesel Evaluate the feasibility of marketing bio-based Michigan and Wisconsin consumer chemicals, bio-based industrial

chemicals and biofuels made from slash and low-value pulpwood.

2004 Whitesides Dairy Inc. ID $28,172 biodiesel Determine the feasibility of processing dairy biogas into high-purity pipeline or automotive-quality fuel.


Year Recipient State Amount Type Project Description

2005 Blackhawk Biofuels LLC IL $100,000 biodiesel Determine the feasibility of operating a 30 million-gallon-per-year biodiesel plant in Freeport.

2005 Bootheel Ethanol LLC MO $150,000 ethanol Purchase 75,000 bushels of corn.

2005 Central Iowa Renewable Fuels LLC IA $150,000 ethanol Funding for employee training, inventory acquisition and general plant operations for ethanol plant in Goldfield.

2005 Coahoma County Bio-Energy MS $45,000 ethanol Comprehensive marketing and business plans Steering Committee for ethanol plant.

2005 Columbia Crush LLC OR $12,500 biodiesel Marketing and business plans for new oilseed-crushing facility in northeast Oregon.

2005 Commodity Enhancement Corp. MO $100,000 biodiesel Feasibility study of proposed biodiesel facility in west-central Missouri.

2005 Ethanol Grain Processors TN $150,000 ethanol Operating funds and office construction for an ethanol plant is western Tennessee.

2005 Farmers Cooperative IA $100,000 biodiesel Feasibility study for a 30-million-gallon biodiesel plant in Marble Rock.

2005 Frontier Equity Exchange KS $41,500 ethanol Feasibility study and possible business and marketing plans for ethanol production facility in northwest Kansas.

2005 Golden Grain Energy LLC IA $150,000 ethanol Purchase of feedstock.

2005 Indiana Ethanol LLC IN $100,000 ethanol Feasibility study for dry-mill ethanol plant inRandolph.

2005 Indiana Renewable Fuels IN $100,000 ethanol Feasibility study for 50-million-gallon ethanolplant in Fulton County.

2005 Lincolnway Energy LLC IA $150,000 ethanol Operating funds for 50-million-gallon ethanolplant in Nevada, Iowa.

2005 Mercer Landmark Inc. OH $31,250 biodiesel Feasibility study for marketing biodiesel, refined soybean oil, soybean meal and refined glycerin.

2005 Mid-Atlantic Biodiesel Co. LLC DE $150,000 biodiesel Operating funds for 5-million-gallon biodiesel facility.

2005 NEK-SEN Energy Partners KS $100,000 ethanol Feasibility study for 50-million-gallon ethanol plant in northeast Kansas.

2005 Ohio Corn Growers Association OH $33,000 ethanol Feasibility study for an identity-preserved corn dry milling plant.

2005 Patriot Renewable Fuels IL $100,000 ethanol Feasibility study for 50-million-gallon ethanol plant.

2005 Pulaski Alexander Farm Bureau IL $100,000 ethanol Feasibility study for ethanol plant in Pulaski County.

2005 Southern Iowa Bioenergy LLC IA $100,000 biodiesel Feasibility study for 30-million-gallon biodiesel plantin southern Iowa.

2005 Unified Soy Products LLC NE $25,000 biodiesel Feasibility study for a combination soybean crushing facility/soy biodiesel operation.

2005 Western Wisconsin Energy LLC WI $150,000 ethanol Feasibility study for 40-million-gallon ethanol plant.

2005 Wisconsin Soybean Marketing Board Inc. WI $50,000 biodiesel Feasibility study for biodiesel facility.

Editor’s note: Cooperatives are seekinginnovative structures and strategies todeliver locally produced food to a host of con-sumers, from Community SupportedAgriculture and farmers markets to schools,restaurants and grocery stores. Several ofthe new “food co-ops” (including one inNebraska discussed below) include producerand consumer members. Local marketsmean lower transportation costs and betterprices for farmers, plus higher quality prod-ucts for those who buy their products. In aworld where consumers increasingly want toknow where their food comes from, these co-ops are turning obstacles into opportunities.

Linking country to city, traditional to high-tech

Several Amish and Mennonite farm-ers of Lancaster County, Pennsylvania,were already sending fresh products toPhiladelphia, 60 miles away. Still, theyknew they were missing a lot of oppor-tunities. So they approached the Key-stone Development Center whichhelped them secure the services of afacilitator uniquely suited to help thefarmers set up Lancaster Farm FreshCooperative.

The facilitator worked well with thefarmers, whose way of life includes liv-ing without electricity or phones intheir homes. And she moved easily inthe high-tech world of the buyers. Oneof the first things she did was toupgrade the ordering system, from cellphones that farmers kept in their deliv-ery truck to on-line ordering. Sales tookan immediate leap forward.

The co-op also acquired a centrallylocated warehouse with the added

advantage of refrigeration. Most co-opmembers are certified organic, andmuch of what they ship is organic-certi-fied produce. Today, the co-op ships$16,000 of produce, meat and dairyproducts every week. It supplies notonly Philadelphia and other metro mar-kets, but also a rising demand right inLancaster County, which means a bigbreak on transportation costs.

One of the greatest benefits of start-ing the co-op has been the way farmersin the southern part of the county aregetting to know and work with theircounterparts in the northern part. They


Most members of the Lancaster County Farm Fresh Cooperative in Pennsylvania have certi-fied organic farms. The co-op has acquired a central warehouse to supply customers inPhiladelphia and the co-op’s growing local market. Photos courtesy CooperationWorks! and fea-tured co-ops

Co-ops connect ing l inks in food cha in

C O - O P D E V E L O P M E N T A C T I O N

Local marketsmean lowertransportationcosts and betterprices for farm-ers, plus higherquality productsfor those who buytheir products.


have coordinated crop cycles, thusextending the co-op’s product availabili-ty into a longer growing season andturning what could have been a divisiveand competitive situation into one thatenables them to increase market accessand weave a tighter fabric of communi-ty. For more information, visit:www.lancasterfarmfresh.com.

Nebraska co-op linksneighbor to neighbor

As interest in buyinglocally produced foodgrows around the coun-try, farmers’ markets arepopping up in rural andurban settings. Schoolsand other institutionsare incorporating localproduce. Restaurants,even supermarkets, usethe ‘locally grown’ labelto attract consumers.

All of these trends led a group ofNebraska farmers, ranchers and con-sumers to form a “multi-stakeholder”cooperative to provide not only newmarkets for locally produced foods, butalso a distribution system. With techni-cal assistance from the NebraskaCooperative Development Center, theydid just that.

Each month continues to bring newmembers and new products into the co-op. Members volunteer for delivery day,which includes pre-sorting individualcustomer orders. Working together,producers and consumers are learningmore about one another and sharing aconcern for their state’s future.

Taking advantage of new technolo-gy, the co-op offers a Web-basedordering system. Food is deliveredonce a month to members’ homes ornearby drop points. Depending onavailability and seasonality, orders mayinclude organic produce, grass-finishedand grain-fed beef and pork, pasturedpoultry, eggs, jams and jellies, naturalpersonal-care products, cheese, artisanbreads and more.

As consumer interest in local foodaccelerates and the shipping costs ofnon-local food rise, the Nebraska Food

Cooperative may play an increasinglyvital role in the nutritional and eco-nomic health of its communities. For more information, visit:www.nebraskafood.org.

Georgia farmers build peanut plantTifton Quality Peanuts has just com-

pleted its first year of operation as aLimited Liability Company doing busi-

ness as a cooperative. The 146 produc-ers located around the state have notonly avoided disaster in the wake offederal cuts in the peanut subsidy pro-gram, but have built a thriving business.They’ve even received an offer from aninternational company to buy all oftheir peanuts.

When several of the farmersapproached the Georgia Cooperative

Development Center to help them fig-ure out how to add value to their com-modity crop, they already had a shellingplant in mind. The Center stepped into help them with their business plan. Ittook a lot of work and many hoursspent talking to other farmers, but inthe end they raised $6 million in equityto construct the plant. They also creat-ed more than 50 full-time jobs in a

depressed rural area of thestate.

Tifton Quality Peanuts nowowns one of only two peanutshelling plants built in theUnited States in the pastdecade (the other, also inGeorgia, is owned by anotherco-op). It uses innovative tech-nology to control the storageatmosphere that reduces harm-

ful toxins and avoids other problemscommon in older facilities.

Oh, and the deal with the big corpo-ration that wanted to buy all theirpeanuts? The farmers declined, choos-ing to balance their market rather thansell to one customer. What they essen-tially said was: “From now on, we’regoing to be in control of our markets —and our future!” ■

By putting all their produce in one co-op ‘basket,’ farmers may offer more variety, a longerseason, improved quality or other benefits.

In Nebraska, those who produce food and their customers are formingcooperative ‘food chains’ to distribute locally.


Record earnings, returns for Countrymark members

Regional fuel refiner CountrymarkCo-op, Indianapolis, Ind., announcedrecord earnings and returns to memberco-ops at its annual meeting inIndianapolis, delivering on its funda-mental promise: to exist to supply themembers it serves. The co-op said$25.86 million will be distributed backto its member-owners, with a majoritypaid as member patronage refunds andrevolved equity. Of the total, $18.86million will be returned in cash and $7million as equity credits. Countrymarkclosed fiscal year 2005 with recordafter-tax earnings of $40.5 million.

Improved operating efficiency,changes in production and an emphasison positive commercial relationshipshelped the refinery, CEO Charlie Smithsaid. Referring to the devastating 2005hurricane season, Smith said:“Throughout that crisis, not one co-opcustomer went without product. Lastfall, nature unleashed circumstanceswhere local ownership and cooperativemembership immediately differentiatedus from every other supplier. Our oper-ations team, marketing staff and deliv-ery professionals out in the field trulyproved the advantage — and the com-

mitment — they bringto co-op customers.”

Countrymark hasinvested in a $40-mil-lion clean-fuel complexto deliver ultra-low sul-fur diesel, and was oneof the first refiners inthe nation to promotesoy biodiesel andethanol blends, Smithsaid. “Last year, approx-imately 85 percent of all

biodiesel marketed in this state wasthrough co-op members. In renewablefuel leadership, as in all areas, action ishow the co-op adds value for memberowners.”

Countrymark Co-op is owned andcontrolled by approximately 60 membercooperatives, and serves the energyneeds of agricultural, industrial andcommercial customers in Indiana,Illinois, Michigan and Ohio. It is thelargest buyer of premium Americancrude oil from the Illinois Basin, and“proudly markets co-op-refined fuelsthat are 100 percent American made,”Smith said.

Ocean Spray, Pepsi form strategic alliance

Ocean Spray and PepsiCo haveannounced a long-term strategicalliance in which Pepsi-Cola NorthAmerica will market, bottle and distrib-ute single-serve cranberry juice prod-ucts in the United States and Canadaunder the Ocean Spray name. Theagreement also includes opportunitiesfor the development of new productinnovations across multiple trade chan-nels in the future.

“As the Ocean Spray cooperativemoves to build its brand, we are seeking

alliances to reach consumers morebroadly and powerfully than everbefore,” says Ocean Spray Presidentand CEO Randy Papadellis. “We’rethrilled to re-establish our partnershipwith Pepsi and begin a fruitful, long-lived relationship.”

Integration of single-serve juices intothe Pepsi system will begin in 2007.

“This is a chance for both PepsiCoand Ocean Spray to turn up the dia-logue on the health benefits of cranber-ries,” said Dawn Hudson, president andCEO, Pepsi-Cola North America.“Over the past several years, we’ve builtsuccessful, mutually beneficial partner-ships with strong brands like Liptonand Starbucks, and now we plan towork side-by-side with Ocean Spray tocreate a major healthy refreshmentbusiness focused on cranberries. Whenpeople think of cranberries, they thinkof Ocean Spray.”

Pepsi distributed Ocean Spray prod-

N E W S L I N E

Send items to: [email protected]

Countrymark Co-op in Indianapolis had record earnings of$40.5 million last year. Photo courtesy Countrymark

Ocean Spray and Pepsi are workingtogether once again. Above, OceanSpray created a berry bog at RockefellerCenter in New York last year. Photo cour-tesy Ocean Spray

ucts during the 1990s, which helped theco-op gain access to the single-serve,convenience store market. But thatarrangement began to unravel afterPepsi bought the Tropicana juice brandin 1998. In 2004, Ocean Spray membersvoted down a proposed joint venturewith Pepsi, under which the soda giantwould have essentially taken over the co-op’s beverage business, reducing the co-op to the role of raw-product supplier.

According to the New York Times, atthe high point of their previous rela-tionship, Ocean Spray had $250 millionin annual sales of single-serve productsdistributed by Pepsi. Last year, it soldless than half that amount in the single-serve market. The cranberry market hasbeen a roller coaster ride for the pastdecade, with sales of $60 a barrel in1996, but falling to $15 a barrel by1999. This year Ocean Spray expects topay about $40 a barrel. Ocean Sprayposted fiscal 2005 gross sales of about$1.4 billion.

New pension law helps50,000 co-op workers

Provisions included in the PensionProtection Act of 2006 (HR 4), signedby President Bush in August, will helppreserve retirement benefits for morethan 50,000 workers across the countryemployed by farmer-owned cooperativebusinesses.

The National Council of FarmerCooperatives (NCFC) says the actionhelps to ensure that farmer cooperativescan continue to meet their obligationsto their employees while not undulystressing the financial health of thecooperative.

Provisions of the law, which werestrongly supported by NCFC, put inplace special transition rules for ruralcooperatives, including farmer coopera-tives that are part of multiple-employerplans. Much like a cooperative allowsfarmers to join together to purchasesupplies or market their crops, multiple-employer plans allow individual cooper-atives and related associations to pooltheir experience and reduce their costto offer retirement benefits to theirmembers.

“I would like to commend the Houseand Senate for passing this legislation,and President Bush for signing it,” saysNCFC President Jean-Mari Peltier.“Over 750 farmer cooperatives acrossthe country will be able to keep theirpension costs in check because of thisnew law. This is important because, asfarmer-owned businesses, an increase incosts means a reduction in resources toallow farmers to capitalize on new mar-ketplace opportunities and derive moreof their income from beyond the farmgate.”

NCFC is a national association rep-resenting America’s farmer coopera-tives. There are nearly 3,000 farmercooperatives across the United Stateswhose members include a majority ofthe nation’s more than 2 million farm-ers, ranchers and growers. Additionalinformation about NCFC can be foundat http://www.ncfc.org.

WLF selects Utah sitefor new processing plant

West Liberty Foods LLC, of whichthe Iowa Turkey Growers Cooperativeis the majority owner, has announcedconstruction of a new facility inTremonton, Utah, which will becomethe fourth plant for the Iowa-basedmeat processor and marketer. The com-plex will continue to emphasize foodsafety through its state-of-the-artdesign. WLF is a leading co-packer,private label manufacturer and foodservice supplier of sliced, processedmeat and poultry products.

The new facility is expected to createmore than 500 new jobs in Tremontonand the Box Elder County area.

Production should begin in July 2007.The new complex will consist of a

93,000-sqaure-foot fabrication facilityand a 74,000-square-foot slicing facility.At full capacity, the plant will be able tofurther process more than 100 millionpounds of protein products per year, inaddition to 36 million pounds of chick-en. These facilities will be the first oftheir kind in North America to cookand slice 120-inch-long slicing logs. Noslaughter will take place on the premis-es.

“I couldn’t be more pleased aboutWest Liberty Foods’ decision to makethis very significant investment andexpand its operations in Utah,” saidUtah Governor Jon M. Huntsman, Jr.

“This is an exciting time for ourcompany as we branch out to the west-ern marketplace,” said Ed Garrett,WLF president and CEO. “The ready-to-eat chicken line will provide us theopportunity to introduce and servicenew product lines to our current cus-tomers.” Garrett praised local and stateleaders for their support of the project.

ACE honors Margaret Bau for her work with cooperatives

The Association of CooperativeEducators (ACE) has presentedMargaret Bau, cooperative developmentspecialist with USDA RuralDevelopment in Wisconsin, with theACE Award for OutstandingContribution to Cooperative Educationand Training. The award recognizeslong-term or continuing contributionsto cooperative education, such as thedevelopment of training materials, pub-lications or leadership within the coop-


An architectural drawing of a new meat-processing plant West Liberty Foods is building inTremonton, Utah. The plant will create 500 new jobs. Artwork courtesy West Liberty Foods


erative movement. One of her many projects,

Cooperative Care in WausharaCounty, Wis., was named the2003 top rural initiative byWisconsin Rural Partners andwas named one of 15 finalistsout of 1,000 in the prestigious,2004 Innovations in AmericanGovernment award, presentedby Harvard University.Cooperative Care is a worker-owned, home-care cooperativeof 88 home-care providers whohelp the elderly and disabledlive independently by offeringthem dependable and cost-effective carewhile at the same time assuring theworkers’ earn living wages and haveaccess to benefits.

As a USDA cooperative developmentspecialist for the past six years, Bau hashelped incorporate many other newcooperative businesses acrossWisconsin. She provides technical assis-tance statewide to communities inter-ested in organizing new cooperatives.While working to make individualcooperatives successful, she has alsofocused on developing and promotingcooperative business models that can beused across the country. To further thisgoal, she has spoken to diverse groupswithin Wisconsin and nationally, andhas published numerous articles.

Prior to joining USDA, Bau was aresearch fellow with the HumphreyInstitute of Public Affairs at theUniversity of Minnesota who examinedregional economies and industry clus-ters in rural Minnesota. She developedan interest in cooperatives while organ-izing a rural women’s income-generat-ing project as a Peace Corps volunteerin Costa Rica from 1988 to 1992.

The Association of CooperativeEducators (ACE) recognized five otherindividuals and organizations that havemade significant contributions to coop-erative education at its Aug. 4 awardsbanquet. The awards program was ahighlight of the ACE Institute, heldAugust 2–5 in San Juan, Puerto Rico.

ACE is an international membership

organization that brings togethereducators and cooperators acrosscooperative sectors and nationalboundaries. Additional informa-tion about ACE can be found at:http://www.uwcc.wisc.edu/ace/ace.html.

Birds Eye to sell frozen-food plants

In order to concentrate moreon its higher margin brandedlines of frozen foods, Birds EyeFoods Inc. has announced plansto sell most of its non-brandedfrozen foods business. It will sell

or close five food-production facilitiesduring the next 18 months. The plantsare located in Brockport, Oakfield andBergen, N.Y., in Fairwater, Wis., and inMontezuma, Ga. These five facilitiesemploy about 740 full-time workers.

Any facility not sold after its currentproduction season will be closedbetween October 2006 and June 2007.Birds Eye also announced plans to closea food facility in Watsonville, Calif.,which employs 550 workers, at the endof 2006.

Pro-Fac Cooperative Inc. — an agri-cultural marketing cooperative of about500 fruit and vegetable growers — hasbeen looking for a way to keep theBergen and Oakfield operations open.Pro-Fac is a minority owner of Birds

Margaret Bau, center, deep in thought as she reviews thefinancial statements of Cooperative Care, a home health-care workers co-op in Wisconsin. Bau was recently salutedby the Association of Cooperative Educators (ACE).

Johanns, Bodman to address renewable energy conferenceAgriculture Secretary Mike Johanns and Energy

Secretary Samuel Bodman will be among the speakers atAdvancing Renewable Energy: An American RuralRenaissance, a conference to be held Oct. 10-12 atAmerica’s Center in St. Louis. The conference is beinghosted by USDA and the U.S. Department of Energy(DOE). The conference is designed to help create andstrengthen partnerships and strategies necessary to accel-erate commercialization of renewable energy industriesand distribution systems, the crux of the President’sAdvanced Energy Initiative.

Leaders from government and industry will addressrenewable energy topics such as Building Supply andDistribution, Encouraging Demand, Adapting andBuilding Infrastructure and Creating Effective Market

Models and Partnerships. Other speakers will include:Vinod Khosla, founder of Khosla Ventures and co-founder of Sun Microsystems; Robert W. Lane, chairmanand CEO of Deere and Co.; Patricia A Woertz, presidentand CEO of Archer Daniels Midland Co.; James R.Woolsey, vice president of Booz Allen Hamilton and for-mer director of the Central Intelligence Agency.

Attendance is open to the public. Anyone involvedwith renewable energy is encouraged to attend, includ-ing transportation, finance and investment officials,other federal and state government officials and electedofficials. All attendees must register for the conference,including press, who may attend without charge.Attendees and press can register online at: www.technologyforums.com/6EN/.


Eye, and was the majority owner until afew years ago.

“Any opportunity must be economi-cally beneficial to growers and considerthe well-being of the communitieswhere these facilities are located,” saidBatavia, N.Y., resident and Pro-FacBoard President Peter Call. “Pro-Fac’sexpertise lies in producing raw prod-ucts, not in operating processing facili-ties,” Call added. “So a partnership

between the cooperative and an operat-ing entity is an option that will beactively pursued.”

Steve Wright, Pro-Fac general man-ager and CEO, added, “Once theseopportunities and business options canbe more fully investigated we will com-municate additional details to our mem-ber/growers and other stakeholders. Wesee this as being a ‘fast track’ discoveryprocess.”

Birds Eye Foods is the largest compa-ny in the branded frozen vegetable cate-gory, but is the only remaining brandedmanufacturing company having a signifi-cant non-branded presence. Birds EyeFoods says it has received a number ofunsolicited inquiries about the facilities.The decision to exit the non-brandedbusiness will also affect a number ofadministrative positions in offices inRochester, N.Y., and Green Bay.

Awards are made on a competitivebasis for the purchase of renewableenergy systems and to make energyimprovements. Since 2003, when theprogram was established, USDA hasprovided $87.3 million in grants and$34.3 million in loan guarantees to 844applicants. A complete list of the grantrecipients can be viewed at: http://www.rurdev.usda.gov/.

VAPG program, tax creditshelp producer-investors

The Value-Added Producer Grantprogram provides grants of up to$100,000 for business planning or feasi-bility studies, or up to $300,000 forworking capital for any value-addedagricultural activity, including renew-able energy projects. Eligible applicantsare independent producers, farmer andrancher cooperatives, agricultural pro-ducer groups and majority-controlledproducer-based business ventures. Inthe past few years, many ethanol,biodiesel and wind energy projects havereceived funding through this program.Details for this program can be viewedat: http://www.rurdev.usda.gov/rbs/coops/vadg.htm. (See page 29.)

Tax credits for small ethanol andbiodiesel producers have also beeninstrumental in enabling the expansionof farmer-owned biofuel facilities.Under current law, small ethanol pro-ducers (defined as those producing 60million gallons per year or less) receive a10-cents-per-gallon production-incometax credit on up to 15 million gallons of

production annually. The credit iscapped at $1.5 million per year per pro-ducer. The small ethanol producer taxcredit promotes local ownership.

In 2004, the incentive was strength-ened by allowing the credit to be passedthrough to the farmer owners of acooperative. The legislation also allowsthe credit to be offset against the alter-native minimum tax. In 2005, a similartax credit was created for small produc-ers of agri-biodiesel.

Wind energy projects have notenjoyed the same small producer bene-fit. Since 1999, farmer-owned ethanolfacilities have more than doubled theirshare of total ethanol production, from17 to 39 percent while only a very smallfraction of wind energy projects arefarmer-owned.

The Producer Tax Credit and accel-erated depreciation are two general tax-based incentives that can only be usedby wind project developers with a suffi-ciently large tax liability. Farmers andother local investors generally lackenough tax liability to get the full bene-fit of the PTC. This also means thatforms of business organization thatinvolve lower taxation, such as nonprof-its and cooperatives, are less able to takefull advantage of these tax-based incen-tives.

State policies for local energy ownership

The following two recent examplesare some of the more aggressive policiesfor promoting local ownership of

renewable energy facilities. • Missouri restriction of biofuel tax

incentives to farmer-owned facili-ties. In August 2006, MissouriGovernor Matt Blunt announced thatonly majority farmer-owned ethanoland biodiesel production facilitieswould receive discretionary state taxincentives. “I am firmly committed tohelping Missouri’s farm families takeadvantage of the burgeoning ethanoland biodiesel industries,” Blunt said.“Companies that are not farmer-owned are more than welcome tolocate in Missouri, but I want to makeclear that our state’s commitment isprimarily to our farm families whohave been the bedrock of our state’seconomy for generations.”

• Minnesota Community BasedEnergy Development (C-BED) tar-iff. For several years, Minnesotaoffered an incentive payment to local-ly owned wind energy facilities undera certain size. In 2005, the legislatureenacted a new program known as theCommunity Based Energy Develop-ment (C-BED) tariff. C-BED allowsfor a unique electric utility paymentstructure that helps Minnesota com-munity wind projects receive a highertariff in early debt years in exchangefor a lower tariff in later years. TheMinnesota-based Institute for LocalSelf-Reliance (ILSR) explains in areport that the new C-BED tariff willallow project developers to profit andpay off their capital costs within thefirst 10 years of their contract with-

Bring it on Home continued from page 14


CHS to invest in Brazilian grain firm

CHS Inc. announced it is investingin a newly created Brazilian grain han-dling and merchandising company,Multigrain S.A. The new company willbe jointly owned with MultigrainComercio, a Sao Paulo, Brazil-basedagricultural commodities business.

“We have continually increased ourworking partnership with Multigrain

ever since opening our own marketingoffices in Brazil three years ago,” saidJohn Johnson, CHS president andchief executive officer. “We are excitedto formalize our business relationshipeven further with this knowledgeableand experienced Brazilian agribusiness.Our investment in Multigrain S.A. willbring CHS valuable competitiveadvantages and a significant opportuni-ty for growth in our South American

grain operations.”Founded in 1998, Multigrain

Comercio’s core business is originationof commodities in the central andnorthern regions of Brazil, the coun-try’s fastest growing agricultural areas.The company has some 390 employeesat 18 locations. With a majority focuson exporting soybeans sourced fromBrazil cooperatives and producers,Multigrain is also a leading importer of

out the need for the state incentivepayment.

To qualify, a C-BED project mustbe locally owned by Minnesota resi-dents and projects must have supportof the county board in which the proj-ect is located. All utilities are requiredto negotiate C-BED proposals, but noutility is required to purchase powerfrom C-BED projects. With the avail-ability of the new C-BED tariff struc-ture, the ILSR concludes that locallyowned, community-based wind proj-ects could constitute more than 60percent of all new renewable electrici-ty coming on-line between 2005 and2010. Xcel Energy, the largestMinnesota electric utility, recentlyannounced its commitment to securewind resources of up to 500megawatts of C-BED energy by 2010.Other Minnesota utilities are current-ly pursuing C-BED projects.

While Minnesota is a leader in pro-moting community wind and Missouriis pushing the envelope in promotinglocal ownership of biofuel facilities,there is a whole array of federal andstate renewable energy incentives thathave an influence on the promotion oflocal ownership. A website with aninventory of federal and state renew-able energy incentives can be found at:http://www.dsireusa.org/. An invento-ry of federal and state biofuel incen-tives and laws can be found separatelyat: http://www.eere.energy.gov/afdc/laws/incen_laws.html.

Business models for local ownershipAccording to the Renewable Fuels

Association website, 25 of the 46 farmer-

owned ethanol plants are organized asLimited Liability Companies (LLCs).The others are organized as partner-ships or cooperatives. Some are organ-ized as combinations. Many of theplants have non-farm investors. TheNational Biodiesel Board list shows thatnine biodiesel facilities are organized asLLCs. Several soybean cooperativesalso own plants.

The business model of choice in theU.S. ethanol industry has been the ‘fran-chise’ model. A few specialized engineer-ing firms have standardized ethanol plantdesign and the project developmentprocess. These engineering firms guidefarmer-investors through every aspect ofplant development—from feasibility toplant opening and beyond, includingfinancing, contracting, marketing, pro-curement and management.

A very small percentage of U.S.wind-generated electricity comes fromfarmer-owned turbines. However, asnoted above, this is rapidly changing inMinnesota. Mark Bolinger, a researchassociate with the Lawrence BerkeleyNational Laboratory, has analyzedcommunity wind business models inthe Energy Journal article “A compara-tive analysis of business structures suit-able for farmer-owned wind powerprojects in the United States.”

High stakesWith a farm bill due next year and

many pieces of energy legislation indifferent stages of consideration, thisis now a high-stakes issue. A messagefrom the website of IowaCongressman Steve King nicelyencapsulates some of the tone many

rural legislators are taking:“We have long lamented the small por-

tion farmers receive of the value-added fooddollars, a few cents of a $3 box of cornflakes, for example. However, we can giveourselves the chance to hold onto the valueof turning our grain, wind and biomassinto energy if we act now. Securing a com-mitment to ensure as much local ownershipas possible is the key.

“We have great companies which havepartnered with our communities and farm-ers to build many of our current facilities. It is the perfect model. We have the rawproducts and capital, and they have theexpertise for design engineering, construc-tion, management and marketing. We willcontinue to work together as ownershippartners. Since the passage of the EnergyPolicy Act, all of Iowa has been abuzz withdiscussions of ethanol, biodiesel and windenergy facilities.

“When that discussion is going on inyour community, you should ask how muchlocal ownership is part of the proposal. Iflocal farmers and local investors will nothave a viable opportunity to become owners,you should consider a different businessmodel that is in the best long-term interestof your community. If this isn’t considerednow, we will look back and again lamentreceiving a small portion of the end dollarsgenerated by our labors, while others reapthe real financial rewards.

“Without a doubt, just as our agrarianforefathers met this country’s needs for food,present day farmers will meet this country’sneed for renewable energy. The questionhanging in the balance is: “Who will sharethe real profits?” We have now hitchedagriculture’s wagon to an energy future.Let’s keep our hands on the reins.” ■

wheat and operates a small flour millin Jundiai, Brazil.

Canada funding biofuels;supports role of co-ops

Canada is providing $11 million ininitiatives designed to ensure farmersand rural communities have opportuni-ties to participate in and benefit fromincreased Canadian biofuels produc-tion. The Biofuels Opportunities forProducers Initiative (BOPI) provides$10 million this fiscal year to helpagricultural producers develop soundbusiness proposals, as well as under-take feasibility or other studies to sup-port the creation and expansion of bio-fuel production. The industry councilsin each province and territory thatadminister Advancing CanadianAgriculture and Agri-Food (ACAAF)will be invited to deliver this new fed-eral funding.

The government is also supportingbiofuels opportunities through a one-time, $1 million addition to the existingCooperative Development Initiative(CDI). This funding will provide sup-port to individuals, groups and commu-nities wishing to develop cooperativesas a way to take advantage of opportu-nities associated with biofuels and othervalue-added activities.

These initiatives flow from the 2006

budget, in which Canada invested anadditional $1.5 billion in Canada’s agri-culture sector, tripling original commit-ments to the agriculture sector. Canadais committed to requiring an average of5 percent renewable fuel content intransport fuel by 2010. AAFC wants toensure that the 5-percent target isimplemented in ways that result in thegreatest possible benefit to the agricul-ture sector, including ownership of bio-fuels production facilities by agricultur-al producers.

Co-op leader Elroy Webster diesNationally recognized cooperative

and agricultural leader Elroy Webster, aMinnesotafarmer whohelped drivehistoric jointventures andmergers ofU.S. agricul-tural coopera-tives, diedJuly 18 inMankato,Minn., at age72 following a

lengthy illness. Webster, of Nicollet,Minn., retired as a director and formerchairman of CHS Inc., in 2003 afterfive decades of involvement in coopera-

tives on the local, regional, national andglobal levels.

In 1998, he was instrumental inuniting the former Cenex Inc. andHarvest States Cooperatives to formtoday’s CHS Inc., the nation’s largestcooperative and a Fortune 200 compa-ny. Webster also helped lead the 1987establishment of a landmark joint ven-ture involving the agricultural supplybusinesses of Cenex and LandO’Lakes, Inc.

“Agriculture, cooperatives and ruralAmerica have lost a visionary, an unpar-alleled leader and a tireless advocate,”said CHS Chairman Michael Toelle.“Elroy Webster clearly stands out asone of the most influential figures inthese sectors over the last half century.”

GROWMARK sales, income climb;record patronage going to members

GROWMARK Inc. had sales of $3.4billion for the 2005-06 fiscal year, upmore than $700 million from the previ-ous year. The co-op had net income of$73.5 million, compared to $73.2 mil-lion in 2004-05. “While volumeincreases in seed and fuels haveincreased sales, energy price inflationdrove much of the increase,” VicePresident of Finance Jeff Solberg said.

More than $49 million in patron-age and refunds will be returned to


transportation circumstances and adeclining sugarcane industry, Hawaii isaiming to become the first state with asizeable sugar ethanol industry. In 2007,Hawaii state law will require that atleast 10 percent of all gasoline sold inthe state be blended with ethanol.

Co-ops would play major role While the recent USDA report con-

cludes that at current prices sugarcane-and sugar beets-to-ethanol would beprofitable in the United States, manyfactors — especially the domestic priceof sugar and the government’s energypolicies — will affect the future com-mercialization of sugar-to-ethanol in the

U.S. USDA Chief Economist KeithCollins said at the release of the USDAreport: “At some point in the future itmay be worthy of commercial develop-ment. Technologically, it’s possible. Thequestion is: is it economically feasible?”

As pointed out by panelists at therecent International SweetenerSymposium, cost is the major hurdleand new technologies and governmentinvestment will be needed to overcomethat barrier. Says Steve Williams, presi-dent of the American Sugar BeetGrowers Association and member ofthe American Crystal Sugar Co. coop-erative: “We’re always open to new usesof sugar and will look very hard at

ethanol. The question is: Will it beeconomical in the long term?”

The most promising scenario forsugar-to-ethanol appears to be linked toadvances in cellulosic and “mixedstream” technologies, especially for sug-arcane because of its broader cellulosicproperties. In any scenario, it appears tobe clear that if ethanol is to be pro-duced from sugar, the facilities must belocated at existing sugarcane or sugarbeet plants because of transit cost limi-tations. This means that cooperativeswill likely have a significant role in anycommercialization of sugar-to-ethanolbecause of their dominance at the initialprocessing stages. ■

Ethanol from Sugar continued from page 28

Elroy Webster


GROWMARK member-cooperatives.In addition, a special redemption ofpreferred stock has been authorized. Intotal, more than $60 million in cash willbe distributed to members. This will bethe largest amount of cash returned tomembers in the history of the GROW-MARK System.

The Energy Division had a recordyear, with 1 billion gallons of refinedfuel sold as a result of new supplysources, an expanded customer base andimproved distribution. Propane volumein 2006 was hurt by another warm win-ter, but margins improved, with timelypurchasing decisions and good price-risk management.

The co-op revamped its lubricantsbusiness with the acquisition ofMcCollister & Co., a lubricant-blend-ing facility in Council Bluffs, Iowa,which will now blend the FS line oflubricants. Also acquired were theArcher and United lubricant brands.“The GROWMARK System will now

go to market with three quality brandsin a greatly expanded geography,”Solberg says.

UPI Inc., the Ontario-based energycompany jointly owned by GROW-MARK and Suncor Energy ProductsInc., is a major fuel supplier in theprovince. GROWMARK projects a div-idend from UPI of $1 million for 2006,according to Solberg.

Plant food experienced a very diffi-cult year, with historically high pricesaffecting demand and significant pricedepreciation adversely affecting inven-tory values. The Seed Division had anexcellent year, topping $130 million insales, an increase of $20 million fromlast year. “

Organic Valley reaches milestoneWith the addition of its 800th

organic farmer-member, the OrganicValley/CROPP cooperative now repre-sents 10 percent of the nation’s organicfarmers, and 40 percent of the U.S.

organic milk supply. Of its 800 mem-bers, 600 are dairy farmers. “Oursteady growth shows that the marriageof organic agriculture and the coopera-tive model is a winning formula forfamily farmers who want to stay on theland, consumers who want deliciousorganic food and future generationswho want a healthy environment,” saidGeorge Siemon, CEO and founder ofthe co-op.

USDA announces $9.4 millionin development loans, grants

Agriculture Secretary Mike Johannshas announced 25 loans and grantstotaling more than $9.4 million toassist rural communities and businessesin 11 states. “These funds will helpstimulate the economy, support renew-able energy, promote business develop-ment and improve medical services inrural communities,” said Johanns.“The projects funded will help to cre-ate or save an estimated 1,400 jobs,

than $17 million. “We felt that we wereso close to having it all that we decidedto keep pushing to raise the entire $24million,” Utlaut recalls. Another 20 orso meetings later, they had it. The other$35 million needed was borrowed fromAgStar, a Farm Credit System bankbased in Minnesota.

A $500,000 Value-Added ProducerGrant from USDA Rural Developmentwas awarded in June 2004 — a crucialtime when the co-op was low on operat-ing funds and badly needed a cash infu-sion to buy corn and enzymes. “Not onlywas the money a great help, but it reallyhelped our credibility by showing thatwe had the support of USDA, as well asthe state of Missouri,” Utlaut says.

The plant was running at full capacitywithin five days of start-up, and althoughrated as a 45-million-gallon plant, it hasbeen averaging 53 million gallons.Utlaut credits plant Manger BillyGualtney, who has a degree in chemicalengineering and who formerly workedfor Cargill, and his team for maximizing

the plant’s output. Having most of thekey employees on site for two monthsbefore operations began was also wellworth the extra cost, Utlaut stresses.

The plant has one mile of UnionPacific rail frontage, and 50 percent ofits ethanol is shipped out by rail. Theethanol is sold through the RenewableProducts Marketing Group, a coopera-tive of a dozen or so ethanol plants.

Perfect timing MidMo’s feasibility study estimated

the early return on investment (ROI)would be about 15 percent annually. Butwith the opening coinciding with therun-up in ethanol prices, ROI for thefirst seven months was 31 percent. Itwill be even better this year, Utlaut says.

It’s not hard to understand why theco-op board recently voted to doubleplant capacity. The board looked at sev-eral builders, but ultimately decided tohire Fagan again, even though it meantwaiting until mid-2007 before the proj-ect could commence. The co-op will

largely self-finance the expansion, usingprofits from the plant operations, whichshould continue unabated during theconstruction.

MFA Oil in Columbia, Mo., anotherfarmer-owned cooperative, is workingin partnership with MidMo to promoteethanol (see sidebar, page 8). Tom May,MFA marketing director, thinks theindustry is still in its infancy. “We’rejust at the front gate. There has notalways been a lot of good news forRural America in recent years, but bio-fuel is good news.”

Back on his combine outsideMarshall, Brian Miles has no doubt ofwhat May says. “We just bought thiscombine last year, and the list price [over$250,000] had gone up 25 percent sincewe bought the last one four or five yearsago. The corn head was another $48,000and the platform [for soybean harvest-ing] was $25,000. Our production costsjust keep climbing. Yet corn prices stillhover around $2 a bushel. We needsomething. I hope it’s ethanol.” ■

Fuel Farming continued from page 7

underscoring the Bush administration’scommitment to strengthening ournation’s economy.”

The funds are being providedthrough USDA Rural Development’sRural Economic Development loanand grant program. Under the pro-gram, Rural Development providesloans and grants to USDA RuralUtilities Program borrowers, usuallyrural telephone or electrical coopera-tives, which in turn provide loans torural businesses and communities intheir service areas. Rural Developmentwill provide $4.1 million in grants and$5.32 million in loans to the successfulapplicants.

Projects being funded include a$450,000 loan to help construct andoperate a farmer-owned, 40-million-gallon fuel-grade ethanol plant in DunnCounty, Wis., which will create 35 newjobs. Another $300,000 will be providedto an electric association to provide a

loan to Eden Valley, Minn., for con-struction of a new fire and rescue hall.

A complete list of the loan and grantrecipients is available by going to:http://www.rurdev.usda.gov.

Co-ops & renewable energytheme of Minnesota conference

Development of bioenergy and otherrenewable energy resources, and theadoption of new environmental man-agement practices, create tremendousopportunities — and challenges — inagriculture. What do these develop-ments mean for new and existing farmercooperatives? How can cooperativesbetter position themselves for futuresuccess in these key areas?

To explore and promote an under-standing of these issues, the 9th annualFarmer Cooperatives Conference hasbeen organized around the theme:Opportunities for Cooperatives:Renewable Energy and Environmental

Management. The conference will beheld Nov. 1–2 at the Sheraton/Minneapolis South in Bloomington,Minn. Conference attendees will hearpresentations address such issues as: • the impact of federal and state poli-

cies in agriculture and energy, includ-ing the 2007 Farm Bill;

• cooperative issues and opportunitiesin sourcing grain and marketingethanol and bio-diesel;

• prospects for renewable energyresources such as wind, sucrose,switchgrass and whey;

• the Canadian experience with biofu-els, and potential partnership oppor-tunities; financing new businessdevelopment;

• potential new member services in theareas of environmental management.

Updates on the conference and reg-istration information will be posted at:www.uwcc.wisc.edu/farmercoops06. ■


Farm Credit Systemcelebrates 90th

Rural America’s customer-ownedfinancial partner, the Farm CreditSystem, celebrated its 90th anniver-sary of service on July 17, the datewhen President Woodrow Wilsonsigned the Federal Farm Loan Act in1916. Today, with more than $106billion in loans financing agricultureand its related cooperatives, ruralhomebuyers, small community infra-structure and the export of U.S. farmcommodities, the Farm Credit Systemis the oldest and largest financialcooperative in the nation.

“For 90 years, the Farm CreditSystem has been rural America’s cus-tomer-owned partner, and we lookforward to a bright future for U.S.agriculture and America’s rural com-munities,” said Wayne Lambertson, aMaryland farmer who currentlyserves as Chairman of the FarmCredit Council, the System’s tradeassociation.

The legislation President Wilsonsigned into law in 1916 created a sys-tem of 12 regional Farm Loan Banksthat would grant loans to farm coop-erative associations, allowing farmersto borrow from their local institution,using their land and improvements ascollateral.

Today, the Farm Credit System is anetwork of 101 borrower-ownedlending institutions and related serv-ice organizations serving U.S. agricul-ture and rural America. These institu-tions specialize in providing credit

and related services to farmers, ranch-ers and producers or harvesters ofaquatic products. In addition, theFarm Credit System provides financ-ing for the processing and marketingactivities of these borrowers as well asto rural homeowners, certain farm-related businesses and agricultural,aquatic and public utility cooperatives.

Unlike commercial banks, FarmCredit institutions do not takedeposits. The System raises its fundsthrough the sale of bonds in thenation’s securities markets. As theSystem’s customer-owners repay theirloans, the bonds are retired and FarmCredit investors are repaid. TheSystem’s lending institutions are sub-ject to full examination and regulationby an independent federal agency, theFarm Credit Administration.

“America’s farmers, ranchers andrural communities have benefitedgreatly from the vision and foresightthat went into establishing the cus-tomer-owned Farm Credit System,”Lambertson said.


Broin’s progress on this frontier hasbeen encumbered by the same difficul-ties shared by Iogen and Abengoa.The conversion of the BFrac fiberfraction into ethanol has been hin-dered by the absence of an organismthat will ferment C5 and C6 sugarssimultaneously. The optimum pretreat-ment process will require the develop-ment (discovery) of an elusive multi-tasking ethanologen (fermentation-inducing agent).

Broin has already experienced somesuccess in integrating other technolo-gies into its plants. Broin’s Project X(BPX), the company’s own raw starchhydrolysis technology, has been success-fully implemented on a commercialscale in 10 plants and the BFrac tech-nology has been integrated into two.Given that BPX and BFrac are comple-mentary processes, Broin’s experience intechnological integration could verywell give it an edge in the integration ofcellulosic ethanol.

DuPont takes a different approachThe $18.2 million equity investment

DuPont project is titled: “IntegratedCorn-Based Biorefinery.” With helpfrom Diversa, NREL, Michigan StateUniversity and Deere & Co., DuPonthas taken a decidedly different approachin its cellulosic research-development-commercialization. DuPont expects tolead the way in developing a bio-refin-ery concept that converts both starchand lignocellulose to fermentable sugarsfor production of value-added chemicalsand fuel ethanol.

DuPont has bio-engineered anorganism to produce enzymes thatbreak C6 sugars into a compound calledBio-PDO (a bio polymer, 1,3 propane-diol), which is used to produce itsSorona-brand apparel fabric. Soronawas once made from a petroleum-basedpolymer. Bio-PDO is now expected tobe the first of many future purifiedsugar products.

Exploiting the idea that “the cell is a

factory” unleashes a seemingly boundlessarray of possibilities. This is essentiallywhat happens in the fermentation stageof ethanol production. But just becausethe sugar is the feedstock doesn’t neces-sarily mean that ethanol is the finalproduct. DuPont uses both processes tomake its cellulosic ethanol plant work —polymers, where the value lies, andethanol as the plant’s ‘cash cow’. And justas with Iogen and Abengoa, DuPont willalso build a power plant to burn thehigh-energy lignin generated in the pre-treatment facility.

Don’t ignore the synergiesThe integration of cellulose process

technology within existing dry mill(grain based) ethanol facilities seems tobe the most practical approach to com-mercialization. It just makes sense tomake use of the whole corn plant andget all the sugar from stalk and all, notjust the starch.

From Grass to Gas continued from page 18

Cooperatives. Owned by Our Members,Committed to Our Communities.

Economic Impact. From Main Street storefronts to Fortune 500 companies, coop-erative business creates jobs and economic growth.

We generate over $229 billion in revenues annually.

We employ more than half a million Americans.

Our payrolls top $15 billion a year.

And because cooperatives are owned by their customers, what’sspent there stays there, benefiting our communities again and again.



The primary differences between thedry mill fuel ethanol processing systemand the cellulosic processes are therequired pretreatment (hydrolysis). Anideal integrated facility would integratethe three key unit operations: hydrolysis(pretreatment), fermentation and distil-lation and share utilities and supportsystems, wherever possible. The glucosefrom starch and biomass processeswould, of course, require bigger fer-

mentation tanks. And a separate processwould be required to use/preserve therecombinant organism necessary to fer-ment the pentose.

Perhaps the most practical approachat this moment would be to followBroin’s lead in recovering the corn fiberthrough the waste stream and produceethanol from the lignocellulosic materi-al. Processing the corn-fiber streaminto ethanol will become increasingly

attractive as excess supply continues toput downward pressure on distillersgrain prices. Corn-fiber streams aretypically comprised of 20 percentstarch, 20 percent cellulose, and 25–30percent hemi-cellulose — and pricedbelow distillers grains.

Editor’s note: For article references, e-mail [email protected].■

From Grass to Gas continued from page 41

By Greg Branum,

Missouri State Director USDA Rural Development

s related in the coverstory of this issue of RuralCooperatives, we inMissouri are certainlyexcited about the develop-

ing biofuels industry in our state. Webelieve that overall it is having a strong,positive impact on our rural economy,and will provide even more benefits asmore biofuel facilities are constructed.

USDA Rural Development is pleasedthat we were able to help support proj-ects such as the Mid-Missouri Energy(MidMo) ethanol plant in Malta Bendwith a timely Value Added ProducerGrant (VAPG) of $500,000. That is justone of many awards made nationwideunder this program to support produc-er-owned biofuels projects (see page29). USDA Rural Development’sRenewable Energy Systems and EnergyEfficiency Program also provided morethan $17 million this year to support375 renewable energy efforts in 36states.

But strong rural communities notonly need ways to add value to theiragricultural products, they also needgood schools, medical facilities and somuch more. USDA Rural Developmentpromotes these types of essential publicfacilities through our CommunityFacilities Loan and Grant (CF) Program.

One example in the mid-Missouriarea of how the CF program helps ruralAmerica is the I-70 Medical Center,about one hour east of Kansas City, inSweet Springs, about 15 miles from thenew MidMo ethanol plant. This med-

ical center was the recipient of an $8million CF grant, and one of four med-ical centers or hospitals financed inMissouri with USDA Rural Develop-ment CF funds during the last twoyears. The others are the ExcelsiorSprings Medical Center (northeast ofKansas City), the General John J.Pershing Hospital in Brookfield (innorth-central Missouri) and IronCounty Hospital in Ironton (about 100miles southwest of St. Louis).Nationwide, during fiscal 2005, $729million in CF Direct Loans, $194million in CF Guaranteed Loans, and$55 million in CF grants was providedto construct more than 1,200 essentialcommunity facilities in rural America.

The I-70 Medical Center is a28,333-square-foot, state-of-the-artfacility that provides acute-care andemergency-care services to area resi-dents. The 15 licensed acute-care bedsprovide health-care services to adultand senior in-patients.

The hospital also provides a variety

of out-patient services, including sur-gery and diagnostic services. It also pro-vides out-patient therapies, includingphysical, cardiac rehabilitation andemergency care. While not a traumacenter, the I-70 Center provides much-needed medical services to both thearea’s senior population and the young.

The Community Facilities programhas benefited more than 75 Missouricommunities in the past year alone, withinstallation of more than 60 first-respon-der and early-warning systems. The CFprogram has also helped 10 Missouricities acquire police, ambulance and fireor rescue vehicles. It has also helpedfund the building of: a community cen-ter; two shelters for women sufferingfrom domestic violence; a Head Startprogram building; a sheltered workshopand a 911 dispatch center.

For more information on theCommunity Facilities program, visit:www.rurdev.usda.gov/rhs/cf/cp.htm, orcall (202) 720-4323, and see how it canhelp your community. ■


I N S I D E R U R A L D E V E L O P M E N T

A

Communi ty fac i l i t ies essent ia lfo r s t rong ru ra l communi t ies

An $8 million Community Facilities grant from USDA Rural Development was used to buildthe new I-70 Medical Center in Sweet Springs, Mo. USDA photo by Dan Campbell


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