Challenges to Producer Ownership of Ethanol and Biodiesel Production Facilities

Article excerpt

This study examines the rapidly expanding biofuels industry and identifies challenges for producer-owned biofuel projects. The U.S. ethanol industry has been growing rapidly, and biodiesel production is poised for similar growth. Producer involvement is driven by the desire to add value to farm commodities and the impact of biofuel projects on local grain prices. Local state and federal incentives have also stimulated producer interest. The long-run profitability of biofuel projects is driven by feedstock availability, access to market centers for biofuels, access to markets for coproducts, and utility costs and availability. The rapidly increasing size and scale of ethanol and biodiesel plants make it difficult for producers to fund these projects. Additionally, the development and adoption of new non-grain biofuel technologies may negate some comparative advantages of producers, such as feedstock cost and availability. The geographic expansion of biofuel projects into grain deficit regions will also create additional challenges.

Key Words: alternative energy biodiesel, ethanol, producer-owned business

JEL classifications: 013, Q42, Q55

The U.S. ethanol industry has been growing rapidly, and biodiesel production appears to be poised for similar growth. Ethanol production has increased at over 445 million gallons per year for the last five years, an annual growth rate of over 20% (Dhuyvetter, Kastens, and Boland 2005). Eighty-one plants located in 20 states produced over 3.4 billion gallons of ethanol in 2004 (Renewable Fuels Association 2005). Ethanol now represents approximately 2% of U.S. gasoline consumption. Over 12% of U.S. corn and sorghum production is now consumed by the ethanol industry. U.S. biodiesel production is at much lower level, with 2005 production estimated at 50 million gallons. However, biodiesel production is also expanding rapidly. One hundred million gallons of new capacity is scheduled to be on-line in 2006, and over 25 firms have announced new projects with a combined capacity of over 250 million gallons.

Agricultural producers have been heavily involved in the growth of the ethanol and biodiesel industries. Based on the Renewable Fuels Association's list of production facilities, over half of the currently operating ethanol plants are farmer-owned. Producers are also participating in the expansion of the biodiesel industry. For example, Minnesota Soybean Processors is completing a 30 million gallon facility in Brewster, MN, owned by 2,300 farmer-members, and SoyMor, a cooperative based in Lea, IA, with 700 farmer-members recently completed a 30 million gallon plant in Glenville, MN.

Producer involvement in biofuel projects has been driven by a number of factors. Biofuel project investment reflects producers continued interest in "value-added" activities. Biofuel production is perceived as a means of further processing corn, sorghum, and oilseeds and generating increased returns. Feasibility projections for ethanol and biodiesel projects often have projected returns on investment of 25% or higher. After watching many producer-owned food products manufacturing projects struggle with competition, branding and market access issues, many producers perceive biofuel projects as a more attractive value-added alternative. The recent trends of low grain prices and increasing petroleum prices have further stimulated interest in grain to fuel transformation processes.

Many producers also anticipate that biofuel production will increase the demand for the grain feedstocks and lead to higher grain prices. McNew and Griffith studied corn prices surrounding 12 ethanol plants that opened between 2001 and 2002 and found an average increase of 12.5 cents/bushel. Other studies have estimated grain price impacts of 5-10 cents/bushel (Dhuyvetter, Kastens, and Boland 2005). The majority of existing ethanol and biodiesel plants has been built in areas of high grain production (Illinois, Iowa, Nebraska, Minnesota, and South Dakota). …