[Rhodes22-list] Hey Roger, Ethanol News

[brad haslett]

 Roger, here's an article from yesterday's Wall Street
Journal you might be interested in.  You can probably
still find the print version at the newstand if you
want the charts and graphs that go with it.  Brad
       
March 9, 2005 
 
 
 PAGE ONE  
  
 
    
 
Home Grown
In Midwest Investment Boom,
Corn-to-Fuel Plants Multiply

Betting on Ethanol, Farm Towns
Gain Jobs and New Hope,
But They Risk Overdoing It
Road Show in the Local Gym
By SCOTT KILMAN 
Staff Reporter of THE WALL STREET JOURNAL
March 9, 2005; Page A1

NEVADA, Iowa -- Truck driver Dean Rogers made the
biggest investment of his life last year. He scraped
together $25,000 for a stake in a plant to turn corn
into a gasoline substitute called ethanol.

"It's a big chunk of change," said the 61-year-old Mr.
Rogers, who has spent a quarter-century driving from
farm to farm delivering fuel. Tapping a bandaged
finger on his stenciled work shirt, he added, "I'm
hoping it will be a big part of my nest egg."

Mr. Rogers is among thousands of farmers, teachers,
storeowners, retirees and others who have raided their
savings and borrowed money to join the biggest
investment movement in rural America in decades.
Driven in part by hopes of reviving weak local
economies, the investors, together with rural lenders,
are pouring billions of dollars into ethanol plants.

Ethanol -- which is distilled from corn essentially
the way moonshine is -- is blended into gasoline, both
stretching the fuel's supply and making it burn
cleaner. So far, the business is booming. With the
price of gasoline up, so is ethanol's, 40% in two
years. The Chicago Board of Trade is about to launch a
futures contract in ethanol. Midwestern plants built
by farmers' co-ops and private companies, at a cost of
$50 million to $125 million each, now are showering
their hometown investors with benefits.

 
In Oakley, Kan., population 2,173, a plant called
Western Plains Energy has created 30 jobs. Open just
over a year, it has already paid its investors $2
million in dividends. The town's lumberyard has
reopened, a new bank has come in, the truck stop is
remodeling and people are fixing up homes.

Rushing to get aboard, other communities are offering
tax deferrals, building roads to plant sites and
floating bond issues for construction. Banks eager to
support their communities are offering loans to buy
stock, sometimes not requiring the investors to put up
any money of their own. The result is that 25 new
ethanol plants are under construction, adding to an
existing 83, a third of which are themselves less than
three years old. In Minnesota, a single builder has 42
more new plants on the drawing board.

"I've never seen people so excited," says LaVon
Schiltz, director of the economic-development council
in the Iowa town of Nevada. Jeff Broin, who builds
ethanol plants from Sioux Falls, S.D., calls it "a bit
like a gold rush."

But will it last? Ethanol's price is closely tied to
that of gasoline and thus to the price of crude oil --
currently high, but volatile and hard to predict.
Ethanol plants have little pricing power in case the
cost of their raw material, corn, goes up. Because
ethanol usually costs more to make than gasoline, its
usage depends heavily on federal incentives and
clean-air legislation -- which could change. An
earlier ethanol boom, in the 1980s, largely fizzled
when oil prices fell.

Above all, the frenzy of plant building could outstrip
demand, creating a glut that would leave some farmers
and townspeople with too little income to pay
investment debts. At the current rate of construction,
by year-end the U.S. will have the capacity to turn
out four billion gallons of ethanol annually. Energy
Department economists don't see the need for that much
ethanol for another five years.

"Production is growing faster than demand," says
Martin Andreas, a senior adviser at
Archer-Daniels-Midland Co. Tellingly, the commodity
giant, which is the biggest ethanol producer of all,
has no plans to add capacity. Credit-rating agency
Standard & Poor's calls the industry "highly
speculative."

The idea of running cars partly on corn-derived
alcohol has been a dream in the rural Midwest for
three decades. The advantages include new markets for
corn, reduced dependence on foreign oil and even
environmental gains, since it's a renewable fuel
(although raising corn burns energy, too). It's a
tempting concept to fading farm communities long
squeezed by flat grain prices and ever-rising costs,
particularly since new technology makes small ethanol
plants affordable. At a time when few Americans want a
new oil refinery in their backyards, these rural
ethanol plants get an eager welcome.

The plants mix corn and water into a mash, add enzymes
that turn starch to sugar, cook the batch and then
ferment it with yeast. They leave behind liquid
ethanol plus solids called distillers' grains. The
operators sell the solids for livestock feed and ship
the ethanol off to fuel distributors to be mixed with
gasoline.

The resulting blend is higher in oxygen and burns more
completely, thus polluting the air less. The U.S.
Clean Air Act requires areas with the worst pollution
to use clean-burning blends. Some once used fuel with
an additive called MTBE that did the same thing, but
several states banned it because of
groundwater-pollution concerns -- a boost to ethanol.
The U.S. also gives gasoline distributors a partial
tax exemption for adding ethanol, and a law in one
state, Minnesota, requires its use. In all, ethanol
makes up nearly 3% of U.S. motor fuel.

 
Wall Street has little to do with this decidedly
grass-roots investment boom. Residents crowd into
firehouses and gymnasiums for presentations, often by
farmers, about plants with names like Tall Corn
Ethanol and Amaizing Energy. Some listeners never
bought stock before. Prospectuses list how long
directors have been married, church affiliations and
hobbies. "Enjoys singing in a barbershop quartet,"
says one.

When a group of farmers here in Nevada (pronounced
na-VAY-da) held a meeting about building a plant, the
community center filled with a crowd that included
Terry Branstad, Iowa's governor from 1983 to 1999. All
$38 million of shares in the business, Lincolnway
Energy LLC, sold in 53 days. Buyers included a tractor
mechanic, a school-bus driver and the ex-governor, who
says he invested $25,000.

The businesses aren't publicly traded, but their
shares change hands through services that keep track
of who wants to sell and who wants to buy. Prices of
some shares roughly doubled last year. Some offerings,
organized by farmers' co-ops, are open only to active
farmers.

Those who invested in the Midwest Grain Processors
plant in Lakota, Iowa, population 255, reaped $5
million in dividends last year. That was a 25% return
on their two-year-old investment.

"By raising a bulk commodity like corn, this town had
been at the lowest end of the value chain. Now we're
in the energy business," says banker Jim Bollig at
Farmers & Traders Savings Bank in nearby Bancroft,
Iowa. He says the bank made loans to about 30 farmers,
of up to $40,000 each, to buy ethanol-plant stock.

A little of the new wealth trickled down to Spa Dee
Dah in Bancroft, which charges $55 for a men's facial
and $45 for ear candling, a wax-removal technique.
"Ethanol is great for us," says owner Deb Goche, who
launched her spa after the plant opened.

Successes like these are tempting farmers who've just
about given up on raising grain in the face of rising
export competition from low-cost places like Brazil.
The crop subsidies that in some years provide most of
farmers' profit also appear threatened. The Bush
administration wants to cut some for budget reasons
and has also signaled a willingness to curb subsidies
to win a World Trade Organization accord on other
matters.

"Buying shares in an ethanol plant has to make more
sense than trying to make a living on $1.80 [per
bushel] corn," said farmer Brian Wrage as he sipped
coffee at a truck stop in Lincoln, Ill. He and a group
of other farmers are crisscrossing Illinois seeking
investors in a plant to be called Illini Bio-Energy.
They hope to sell $33 million of stock in it and
borrow $50 million more.

Mr. Wrage, 51, who spends spare time giving out Gideon
Bibles outside schools, says he is putting $100,000 in
the shares. Of that, $80,000 will come from a loan. He
knows he could lose it, and that "would be
devastating." But he says farming has accustomed him
to taking risks; it costs him $500,000 a year to farm
his 1,375 acres, and many things beyond his control
can waste his best efforts.

At one of his presentations, 50 farmers filled a
golf-course banquet room at Auburn, Ill., on a recent
icy night. A banker stood up to say he'd brought forms
for people to apply for loans of up to $100,000 to
become investors.

The room fell silent as Mr. Wrage laid out the
forecast: a 19% return on stockholders' investment in
the second year of plant operation, rising to 24% by
the fourth year. "This is not a fairy tale," he said.
Nobody challenged him.

The forecast came from Christianson & Associates, an
accounting firm in Willmar, Minn., that has advised
more than 35 investor drives for ethanol plants. It
compiled the outlook from data the plant organizers
supplied, such as 10-year averages of corn and ethanol
prices.

Its forecasts don't account for how the plant-building
boom might drive prices and profits down by increasing
supply. "We take their price data and put it into our
model," says John Christianson, 44, principal of the
firm. A one-page disclaimer in the 108-page stock
offering says the firm didn't evaluate underlying
assumptions. "We aren't going to the level of
examining or giving an opinion on the forecast," Mr.
Christianson says.

Mr. Wrage says organizers use the forecast "to show
farmers why we think it is a good investment.... I
honestly, truly believe in the forecast. I see it as a
minimum."

Also guiding the Illinois farmers was Jack Porter, a
professional ethanol-stock pitchman who books meeting
rooms, places ads and prints handouts. A former
seed-corn executive, the solidly built 64-year-old
from Omaha, Neb., knows his audiences. He tells them
homegrown ethanol is good both for their bank accounts
and for America, whose oil thirst entangles it with
unfriendly nations.

 
Mr. Porter is on retainer for a builder deeply
involved in the ethanol boom: Minnesotan Ron Fagen,
who sits atop a network of ventures that do everything
from building and running plants to working on
financing and marketing. A bear of a man with a droopy
mustache, Mr. Fagen, 56, operates from an office next
to the only stoplight in Yellow Medicine County in
southwest Minnesota. At opening ceremonies for new
ethanol plants, he often buzzes the scene in his World
War II-era P-51 Mustang fighter plane.

Mr. Fagen says he's currently building 12 ethanol
plants and planning 42 more, and his business's annual
revenue has grown fivefold in four years to $300
million. He admits there's a chance all the expansion
could create a glut. But he says he's been hearing
that warning "ever since I built my second plant," and
it hasn't come true.

Scouts help Mr. Fagen find new places to build. Albert
City, Iowa, population 709, has long been shrinking.
Despite an upbeat sign on the road into town -- "Visit
Albert City: How Swede it is" -- the town's
farm-equipment dealer went out of business last year
and the high school closed. Crops grow in an
industrial park that didn't attract a single tenant.

But to a Fagen scout, Albert City had the essential
elements for an ethanol plant: productive corn farms
all around, a tall grain elevator, a railroad line and
a natural-gas line for energy. Now Mr. Fagen is about
to start building a $125 million investor-owned plant
that will bring in 45 jobs paying an average of
$40,000 a year, higher than the town average.
Officials hope young families will move in and build
what would be the first new houses in town in decades.

Says Mr. Fagen: "We're changing the economy of the
Corn Belt."

It's true in more than one way. Ethanol plants will
consume about 12% of the corn harvested by U.S.
farmers last fall. An ethanol plant can draw in most
of the corn grown for tens of miles around. That means
farmers don't haul it to the local grain elevator for
marketing, and a grain elevator that doesn't get grain
is in trouble. Fighting back, the farmer-owned
elevator in Nevada decided it would be the one that
built an ethanol plant here, before somebody else did.

The country's largest farmer-owned cooperative,
however, sees mostly risk when it comes to ethanol. At
the co-op, CHS Inc., Chief Executive John Johnson
says, "I think it is very likely the Midwest will be
overbuilt soon."

A bill that nearly cleared Congress in 2003 would have
required the oil industry, by the year 2012, to use
five billion gallons of ethanol annually. But that
level of production may be reached in as soon as two
years. Now, some ethanol-industry lobbyists are
floating the idea of a federal mandate to use eight
billion gallons a year. Oil-industry officials are
leery, and it isn't clear whether lawmakers can
resolve differences that sunk the previous
legislation.

David Nelson, a farmer who's chairman of the
two-year-old Midwest Grain Processors ethanol plant in
Lakota, Iowa, is well aware of the overexpansion
threat. "It's starting to get crowded around here,"
says Mr. Nelson, 52, sipping a Corona in the smoky bar
of Cattleman's Steak & Provisions near his Belmond,
Iowa, farm. "In the back of our minds, we know there
is to be a day of reckoning."

But his solution isn't to cut back. It's to grow big
enough to survive a shakeout. Midwest Grain Processors
sold about $17 million more stock in January to double
the size of its plant. That means this plant alone
will be able to make 100 million gallons a year. And
its farmer owners are already thinking about where to
build a second plant.

Write to Scott Kilman at scott.kilman at wsj.com1

 URL for this article:
http://online.wsj.com/article/0,,SB111032760429274095,00.html

 
 
 

 


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