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Corn farmers not alone on the ethanol bandwagon

January 1, 2001


Ron Wirtz Editor, fedgazette
Corn farmers not alone on the ethanol bandwagon

In the Midwest, corn is king. That?s particularly the case with ethanol, where corn is the main ingredient in about 95 percent of all domestic ethanol. But high gas prices and favorable government policies are encouraging a slew of new ethanol entrants hoping to share the wealth, while pushing a slow evolution in the industry.

Other crop commodities see ethanol production as a hedge against existing and future commodity surpluses and want to replicate the value-added income that ethanol has brought to corn farmers. Hawaii, for example, recently passed $50 million in tax credits for investments made in ethanol facilities to support the local sugar industry, which has struggled under crop surpluses and low prices. A 75-million gallon wheat and barley plant has been in the development stage in Great Falls, Mont., for a number of years but has yet to break ground.

Ethanol can be made from many different inputs—as long as each can be broken down into basic sugars—including a wide variety of food and commodity byproducts. A Kraft General Foods plant in Melrose, Minn., makes ethanol from cheese whey; plants in Washington and Colorado use beer waste to produce ethanol; a Wisconsin plant makes ethanol from, among other things, the byproducts of paper, beets and artichokes; an Idaho plant uses potato waste.

Probably more important for the industry in the long term, however, is the development of biomass or cellulose-based ethanol, which converts the cellulose of plants and other organic matter into basic sugars, which are then turned into ethanol.

Biomass ethanol today exhibits more promise than production. Pilot plants using tree trimmings, rice straw and even municipal waste have been in development for years by the likes of BCI, Genencor and Arkenol. "I am excited about the prospects of cellulose to ethanol," said Ralph Groschen, senior marketing specialist of the Minnesota Department of Agriculture. "In the meantime, I've been hearing it's around the corner for the last 15 years." The making of ethanol from biomass is more complex than that of corn or other crops because carbohydrate-based food crops are more easily broken down into sugar than cellulose found in plants. The processing technology is available but unproven on a commercial scale, which has made larger pilot plants difficult to finance.

Arkenol, based in Mission Viejo, Calif., has a proprietary cellulose conversion process but has struggled to find investors for a pilot plant near Sacramento that would use rice straw as the main feedstock, according to Michael Fatigati, the company's vice president of engineering. "Project finance has been a real, real problem," Fatigati said. "If we had a balance sheet like Exxon, we'd just build it." But it doesn't, and Fatigati said that finding investors to finance anything "first of its kind" comes at a premium. "We've got all kinds of people willing to [finance] the second project."

Ethanol production from food crops likely has a ceiling—some suggest around 4 billion to 6 billion gallons—because there is a finite amount of crops, and increasing diversion to ethanol could have a dramatic effect on food as well as ethanol prices. If biomass ethanol ever develops on a commercial scale—years, if not decades away—it could spark new ethanol production by a factor of 10 or more.

Such a development would likely be a boon to corn farmers because they hold one of the single largest accessible supplies of biomass in the form of corn stover—the leaves and stalks left behind after harvests.

"I don't see biomass as a threat to farmers," Groschen said. "I think when it happens the first thing it's going to benefit are corn plants." Any large-scale shift to biomass would still be a "huge logistical task," he said. "Who does that better than farmers?"

Randy Doyal, chief executive officer of Al-Corn Clean Fuels, pointed out that the farmer cooperative model used by many corn-based ethanol plants "is light-years ahead of any other means in taking advantage of cellulosic conversion" because the delivery infrastructure is largely in place. Such a production shift would require some capital reinvestment in plants, "but much less than building a brand new building," he said.

Ethanol processing is also likely to evolve the same value-added product chain as oil, with future ethanol plants becoming "bio-refineries" that develop new, higher-value products, according to David Morris, vice president of the Institute for Local Self-Reliance, an environmental organization with offices in Minneapolis and Washington, D.C.

Transportation fuel—both oil and ethanol—has a comparatively low price by weight because it is a commodity, Morris said. Only half of every barrel of oil goes for gas production, he pointed out, while the other half is used for the production of specialty chemicals and products like plastics that provide significantly more value.

The same potential holds for ethanol and is already happening to small degree. Ethanol can be made from either a dry or wet process. Along with fuel, wet plants produce corn syrup, industrial starch and other products that have higher comparative value than fuel ethanol. Such value-added products don't receive the subsidies of fuel ethanol but are sold at higher prices.

Dry plants—which represent the significant majority of ethanol plants in the Ninth District—typically produce only fuel ethanol and a protein-feed byproduct used by cattle ranchers. Groschen said some dry plants are beginning to produce an industrial-grade ethanol that is used as a solvent, "and are always looking for other products ... to expand their markets."

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Ron Wirtz
Editor, fedgazette

Ron Wirtz is a Minneapolis Fed regional outreach director. Ron tracks current business conditions, with a focus on employment and wages, construction, real estate, consumer spending, and tourism. In this role, he networks with businesses in the Bank’s six-state region and gives frequent speeches on economic conditions. Follow him on Twitter @RonWirtz.