Ethanol rules much of the ag world right now. That probably won’t change anytime soon, thanks to the Energy Independence and Security Act recently signed into law by President George W. Bush.
The legislation sets an annual goal of 36 billion gallons of biofuels by 2022, a five-fold increase from current production levels. It establishes the platform for the ethanol industry to emerge from its infancy and assume a major role in the energy marketplace. Will farmers benefit? You bet.
Will there be problems? Yes. We’re already facing some. High corn prices are affecting the bottom line for livestock producers. Grain farmers cringe at soaring land rents and input costs.
“It’s finally our time, and it’s finally our time to start paying off some of that debt. With this market volatility, you can be wrong one day and lose a lot of money. It’s a problem to deal with, but we’re going to have to get used to it,” says marketing consultant Jerry Gulke, who farms near Rockford, Ill., and writes a column for our sister publication Top Producer. He spoke at the recent Top Producer Seminar.
Ethanol plants, many feeling the strain of $4-plus corn prices, could be stretched tight in the tumult of the next year or so.
“As far as ethanol plant investment goes, I’m really concerned about the industry over the next 18 months. In any industry that experiences that kind of growth, it’s hard to keep supply and demand in sync. I’m worried it’s going to experience some difficulty over the short term. Long term, I think the industry is here to stay,” says Moe Russell, a risk management consultant based in Panora, Iowa.
Changes, though, could come fast. The new federal energy bill aims to pump plenty of dollars into cellulosic ethanol. By the 2022 deadline, the majority of the nation’s ethanol will come from feedstocks, such as wood chips, agricultural byproducts and switchgrass, if projections run true. How much will that impact corn?
“Ethanol will last, but it may not always come from corn; it may be from sugar cane or one of the grasses. If there’s more money to be made in switchgrass, let’s say, then, thanks, I’ll take it,” says Ted Dowson, who grows row crops and owns a dairy and a hog operation in Auburn, Ill.
Ethanol producers are already gearing up for cellulose. Poet, the nation’s largest ethanol maker with 22 plants now turning out 1.2 billion gallons a year, plans to open a 25-million-gallon cellulosic facility in 2009 alongside its expanded grain ethanol plant in Emmetsburg, Iowa. Corn cobs from local fields will supply it.
“The same acres that supply the corn to the plant will supply the cobs. There are enough corn cobs in the country to produce 5 billion gallons of ethanol,” says Jeff Broin, Poet’s CEO.
Range Fuels recently broke ground on a 20-million-gallon cellulosic plant in Soperton, Ga., that will run on wood chips. In York, Neb., Abengoa Bioenergy opened an expanded pilot cellulosic plant also fueled by wood.
The University of Tennessee and partner Mascoma Corporation are moving forward with their plans for a 2009 $40-million pilot ethanol plant that runs on switchgrass. Kelly Tiller, director of external operations for the university’s office of bioenergy programs, says farmers responded well to a program subsidizing switchgrass production to supply the plant. They’re scheduled to plant 800 acres this year, 2,000 to 3,000 acres in 2009 and 3,000 to 4,000 acres in 2010.
To entice farmers in a four-county area around the still-unbuilt plant to grow switchgrass, the university rolled out an incentive program. Farmers get $450 per acre yearly for three years, plus seed and technical advice from university experts. “We are covering all the cost of production, as well as some of the opportunity cost for taking the risk and being pioneers,” Tiller says.
These will likely be just the first pioneers of many entries in the cellulosic ethanol industry. The Department of Energy earmarked $385 million to six companies for cellulosic demonstration plants. Another $125 million for cellulosic research went to three bioenergy centers last summer.
Corn growers should not fear cellulosic ethanol chipping away at their markets, most industry-watchers say.
“There’s plenty of room for both. We import 68% of our oil, so there’s a lot of room for renewable fuels if we don’t want to be dependent on foreign sources for energy,” says Keith Gibson, CEO of Iroquois Bio-Energy Company, a 40-million-gallon privately owned corn ethanol plant in Rensselaer, Ind.
“Grain-based ethanol also fits into the marketplace. Cellulosic ethanol’s ability to match it is going to be years down the road, maybe three to five years. We’re doing it in our labs every day. There’s definitely profitable cellulosic technology available. We’re working to reduce the cost of putting it on the marketplace,” Broin says.
The push to curb carbon impact on climate should make ethanol look even better, as plants find greener and cleaner ways to make it. Right now, ethanol has a 15% to 20% cleaner carbon footprint than oil; technology can increase that to as much as 80%, says Laura Sands, senior associate with The Clark Group, a bipartisan Washington, D.C.,-based consulting company.
“In most cases, ethanol in and of itself is low carbon the way it’s made. However, when we have a low-carbon economy, there’s going to be built-in demand for ethanol with carbon-reducing properties. This will be the biggest driver for ethanol we’ve seen yet,” Sands says.
“As the transportation sector reduces its carbon footprint, it will have to turn to ethanol,” Sands adds. “This is a built-in market, thanks to the renewable fuels mandate in the new energy bill. Ethanol has an opportunity to replace those well-entrenched existing technologies like petroleum.”
It sounds good to Gerald Tumbleson of Sherburn, Minn., past chairman of the National Corn Growers Association, who bubbles with biofuels enthusiasm. We’re now living in a carbohydrate world, where photosynthesis, “sunlight on a green leaf,” packs unprecedented power, he says.
The long-term potential excites Tumbleson. “Several farmers here are looking at building a new ethanol plant that produces ethanol, fiber and energy. It’ll produce many different coproducts. All ethanol plants will adapt to that down the road. It will happen in the next 10 to 15 years. The world needs corn ethanol. In five years, the nation will realize it cannot fill the 21 billion gallons called for in the energy bill with cellulosic,” he says.
“There will be an adjustment coming down the road. Cellulose is where the money is in the energy bill. But where are we going to raise it? If you think there’s a food and fuel issue with the current price of corn, take one-fourth of the land out of corn and put it into cellulose, and then see what the price of corn is,” Tumbleson says.
Cellulosic ethanol lacks the diversity he wants. Growing a single-market crop makes little sense to him.
“Cellulosic just is not versatile enough for me. Look what’s made of crude oil: everything, just about. If cars get to 90 miles per gallon average, the oil companies still make money. If we raise grass for ethanol and something happens to the market, then we’re in deep trouble. Grain has a number of uses. If one market gets tight, move it to another use,” Tumbleson says.
When the new ethanol plant becomes reality, Tumbleson expects it to be a 30- to 40-year investment. “We’re tying our production to it, and we’re getting permits now. Poet is looking at a similar process. We live in an area that really needs versatility. We have to have people in this business with vision. It is not as simple as politicians telling you what you’re going to be. If I can plant a crop with 50 uses, I’m going to plant that crop. I love the greenhouse effect with cellulosic, but I have to make a profit,” he says.
Minnesotans, early ethanol innovators, continue upgrading their older plants to remain competitive. Corn Plus in Winnebago, Minn., cuts energy costs by recycling a syrup byproduct to steam power the plant. Corn Plus also installed two wind turbines that could eventually supply as much as 45% of the plant’s electricity.
Al-Corn, the ethanol plant in Claremont, Minn., found ways to reduce its energy and water consumption by 25%. “Everybody is looking at ways to become more efficient and adopt new technology as it comes along,” says Randy Doyal, Al-Corn’s CEO. In addition, Al-Corn members may spin off a second 55-million-gallon plant using the same management team. Called Claremont Renewable Energy, it could make use of the latest technology. Fund-raising, however, has proven tough and somewhat frustrating, Doyal says.
“The high corn price makes farmers say, ‘What do I need an ethanol plant for?’ But because of market conditions, available labor and infrastructure issues, this is the right time to build. We can give the farmer more value for his corn through ethanol than he can get on the open market,” Doyal says.
“We think the new energy bill will help us raise funds to get the plant built. Short term, it may not look good. Long term, it should be an excellent investment. A lot of farmers here, particularly young farmers, haven’t had the opportunity to invest in an ethanol plant. That’s why we got this going,” says Dick Buckwalter, chairman of the board for the new co-op.
Further west, near Winthrop, Minn., Heartland Corn Products, a farmer-owned co-op, opened a second ethanol plant about a year ago, pushing total capacity to 100 million gallons. Both plants use the same management. The timing worked out just about perfectly.
“We’re glad we got it online when we did. Heartland paid an 80¢ dividend last fall and returned more than $4 per bushel delivered,” says Steve Sjostrom, a Lafayette, Minn., grain grower and dairy farmer. “Heartland was built to add value to corn, and that is what it’s doing.”
To keep right on doing that challenges all existing ethanol plants right now. “We see the corn ethanol industry growing, albeit at a slower pace. There are still a lot of projects under construction. We could still add over 1 billion bushels of corn grind over the next 18 months,” says Rodney Weinzierl, executive director of the Illinois Corn Growers Association.
His Nebraska counterpart, Scott Merritt, says: “We’re still optimistic long term. We need to develop infrastructure to move the ethanol. There are lots of transportation issues that have to be resolved.”
Nebraska’s ethanol production may have plateaued in the short term, with 20 plants turning out 1.3 billion gallons annually, he says.
“Ethanol producers in the Midwest, particularly here in Nebraska, face a situation where we’ve just about reached consumption saturation. We need to reach out to the West Coast and East Coast, to the Southeast. We need to get that infrastructure developed and move that product to market,” Merritt says.
“For just one example, the amount of fuel used in a day in the Kansas City area just about equals the amount used in the whole state of Nebraska. Last summer, we saw we couldn’t move the ethanol to markets quick enough. We have to find ways to do something about that.”
Challenges exist, left and right, high and low, for the ethanol industry. Still, many farmers remain upbeat, citing the successes in recent years.
Gerald Smith of Holstein, Iowa, delivers corn to Little Sioux Corn Processors in Marcus, Iowa. Right now, he’s pleased with their performance.
“Before we had ethanol, in the winter we had a 40¢ basis on corn. Now, we have 16¢. They need 150 semi-loads of corn five days a week. There are three other plants right in my area. It makes a big difference to me,” Smith says.
Other farmers wonder about the long-term fate of the smaller co-op plants. Gary Veenstra of Springfield, Minn., and his friend, Peter Altermatt of Sanborn, Minn., saw ADM buy out investors in one such plant in nearby Marshall, Minn.
“I kind of think it’s all going to pop, that the small plants will be bought out by the big ones. I don’t think they’re going to close up. I think they’re going to run but they’re not going to be profitable at $5 corn. I do think ethanol is around to stay. The question is, how long is corn going to be the feedstock for the ethanol plants?” Veenstra says.
It makes Altermatt carefully consider whether investing in a plant now makes economic sense.
“If you invest in one now, will you get your money back in five years if the government pulls out of ethanol? Timing is everything,” Altermatt says.
Mike Boehlje, Purdue University ag economist, wonders about it, too.
“What if, in 2010, when the 51¢ per gallon federal subsidy has to be renewed, government says uh-uh, we aren’t going to do that? That subsidy is worth about $1.60 per bushel in corn. You think maybe if we get into a huge catfight with inflation by 2010, then what happens? We could change government policy and go the other way,” Boehlje says.
Ethanol has helped push corn prices. Other factors play a role, as well, says Bob Young, American Farm Bureau Federation chief economist.
“It’s one of the drivers of the market but there are lots of other drivers putting us where we are today. I don’t think ethanol money goes away or world demand goes away,” he says.
“Ethanol very definitely is playing a role but by no means is the only actor in this game going on right now. Something else is going on in these markets a lot of us don’t fully understand.”
Fast Facts
The Energy Independence and Security Act of 2007, signed by President George W. Bush in December, requires:
* A mandatory renewable fuel standard that calls for fuel producers to use at least 36 billion gallons of biofuel in 2022, a five-fold increase from current levels. * 15 billion gallons of the 2022 goal to come from corn, the rest from cellulosic feedstocks. * 9 billion gallons of renewable fuels be used in 2008. * Funding to study the feasibility of ethanol pipelines, higher blend levels and optimizing flex-fuel vehicles. * Increasing the corporate average fuel economy standard to 35 miles per gallon by 2020.
Bathed in the honey-gold light of a late August sunset, Kevin Gerlach walks along rich green rows of Iowa corn with his 13-year-old son, giving him a “pop” quiz.
“How many rows you figure are on an ear of corn, Seth?” The boy scratches his long blond bangs a minute, then shrugs his shoulders with a bashful smile. “It’s always even, son,” Gerlach laughs, “as little as 12, as much as 20. “
Seth absorbs this agricultural trivia with quiet seriousness. “All right, then, how many kernels on an ear?” Again Seth isn’t quite sure, but his dad cheerfully informs him it’s between 600 and 700. As the last rays of sun filter through 8'-tall stalks, Gerlach snaps off an ear and pries up a kernel.
“See that black at the base of the kernel? That means it’s about dried out. That tells us it’s getting close to harvest time.”
They walk up a small rise to their pickup, parked on a gravel road above the field, and gaze shoulder to shoulder across the land that Seth may one day farm himself. At the far end of the cornfield looms an unusual spectacle, an industrial complex with 140'-tall gleaming silver towers and massive white tanks.
The faint whiff of a distillery floats across the still evening air, but this is no Jack Daniel’s plant. The brew here powers America’s cars, not its bars. This is Lincolnway Energy’s new 50-million-gallon-a-year ethanol plant. When the company first formed, Lincolnway bought all of the fields surrounding it.
“It was just a lucky coincidence, I guess,” Gerlach says. “I was working this land before the plant came in, and they contracted me to keep on going.”
Farming beside towering tanks of 200-proof ethanol each day, Gerlach has a unique view of the biofuels boom sweeping across the Midwest.
All of the corn he farms here goes directly to the ethanol plant, like pumping crude from the ground straight into a refinery. Some ends up at a nearby filling station owned by Heart of Iowa Co-op, which features E85 fuel, an 85% ethanol and 15% gasoline mix.
The red neon price a half-mile down the road tell the rest of the story: E85 $2.39. In town regular sells for $2.99.
When word first came out about building an ethanol plant in Nevada, the county seat of Story County in the heart of Iowa, locals were enthusiastic. With a series of public meetings during a three-month period, Lincolnway Energy sold its 42,000 shares before the deadline.
“Everyone supported it and everyone wanted in, from the dentist to the garbage man to the schoolteacher,” Gerlach remembers. “Both my wife and I own shares.”
Lincolnway purchases all of its corn, 18 million bushels a year, from 90,000 acres of cornfields within a 30-mile radius. Many growers like Gerlach opt for a high fermentable corn that yields more sugars than conventional varieties. Lincolnway’s own tests have been too inconclusive to justify paying a premium yet, but the plant currently coaxes nearly 3 gal. of ethanol from 1 bu. of corn and 16 lb. of byproduct sold as high-protein feed.
These Iowans know newer, high-tech ways of making ethanol could soon arrive in the form of cellulosic biofuels. Pilot plants already being built will use feedstocks, such as switchgrass, wood chips, corn cobs or agricultural waste products.
One part of the mix. “Corn may just be a transitional technology,” says David Grewell, an assistant professor of agricultural and biosystems engineering at Iowa State University, which is located just eight miles west of the Lincolnway plant. “With corn we’re learning what to do and what not to do, but even if we double present yields, this won’t meet federal energy bill targets.”
Grewell believes switchgrass, an easy-to-grow North American tallgrass prairie perennial, will be a key player in our nation’s renewable energy future. No current technology efficiently converts such cellulosic biomass sources, Grewell says. In addition, though, some claim corn ethanol consumes more energy than it yields. Grewell notes several studies showing a net positive.
“For every joule of energy you put into production, from tractor fuel to powering ethanol plants, you get as much as 1.7 joules of energy back,” he explains. “Just the same, with corn you only use a small part of the plant to produce fermentable sugar. With switchgrass, a much larger percentage of the plant would be used, and growing it requires fewer chemicals. It has the neat trick of pushing much of its nitrogen back down into its roots when it dies off in the fall.”
With recent passage of the renewable fuels standard bill in Congress, many Story County farmers expect a bright future. The U.S. now has 137 operating ethanol plants, with dozens under construction and many more in planning stages. Forecasters project a national total of 350 ethanol plants by 2016.
“Last year was the flux period,” says Larson Dunn, plant manager at Lincolnway. “Now with the energy bill and it looking like we’ll have an ethanol-friendly administration in the White House next year, we’re back on the road. We try to adjust our process to squeeze every bit of ethanol we can out of each bushel of corn, but the major cost will always be the price of corn.”
About two-thirds of Lincolnway’s expense ledger is the cost of corn. The rest is chemicals, enzymes, energy, labor and depreciables. The plant also sells the solid byproduct of fermentation, called distillers’ grains, as high-protein feed. “If we pay $4 per bushel for corn, and make 3 gal. of ethanol from it at $2 a gallon, we come out with $2 on each bushel to cover our other costs,” Dunn explains.
Gerlach knows this math well because it affects him as a shareholder and a farmer. Sitting on his pickup’s tailgate with Seth, Gerlach gives a stiff twist to the ear of corn he picked for his son’s impromptu lesson. Kernels scatter across the gravel road like nuggets of gold.
“I feel fortunate I’m a producer who touches ethanol on every side. I invest in it, farm it, sell it and live in a community where we all want to see it fly, from teachers to friends of mine who work in the plant to growers like me,” Gerlach says. Last year, Lincolnway netted a $20-million profit. Combine that with a good corn market and a record harvest, and just about everyone around here feels like a winner right now, Gerlach says.
