Biodiesel project looks promising for Iowa co-op - Value-Added Corner

Rural Cooperatives, March-April, 2004 by Jeff Jobe

Cooperatives everywhere are looking for new opportunities to add value and expand markers for their members. Farmers Co-op Elevator Co. (FCEC) at Ruthven, Iowa, is accomplishing this by processing its members' soybeans into an array of soy oil and meal products and biodiesel fuel.

FCEC, founded in 1902, is a full-service cooperative providing grain handling and marketing, agronomy services and feed and petroleum products to 1,176 members in northwest Iowa. Annual sales for the cooperative have exceeded $50 million.

In 1999, the cooperative management and board of directors created a new company called Soy Solutions to explore and expand marketing opportunities for the 3.5 million bushels of soybeans produced by co-op members. After exhaustively analyzing the soy-processing industry, Soy Solutions created Iowa Lakes Processing (ILP) to use the Insta-Pro extruder and expeller's process to transform locally grown soybeans into soybean meal and oil.

ILP produces a high-quality, natural soybean meal that can be used in a variety of products for human consumption and livestock feed. This was a natural fit for the co-op's feed division, as it allowed FCEC to source a high-quality protein through its own operations. The same process also yields soybean oil, which ILP has initially been selling on the open market.

Soy Solutions looked at the opportunities available far further processing and enhancing the value of the soy oil. With the assistance of Cenex Harvest States, Iowa Soybean Promotion Board, National Biodiesel Board and Iowa State University's Institute for Physical Research and Technologies, Soy Solutions created Power Plus Technologies to develop and operate a soy methyl ester manufacturing plant.

Soy methyl ester is commonly known as biodiesel, an alternative fuel that can be used as a blend in petroleum diesel. Its physical and chemical properties (as it relates to operation of diesel engines) are similar to petroleum-based diesel fuel. More than 10 years of testing and 60 million road miles have proven that biodiesel is comparable to conventional diesel in performance, fuel efficiency, power and torque.

Fuel distributors across the United States are beginning to offer biodiesel in blends of 2 percent (B2), 5 percent (B5) or 20 percent (B20) soyoil mixed with conventional diesel fuel. Diesel engines can run on 100 percent biodiesel with little or no modification.

"If all Iowa farmers used a B2 biodiesel blend, they would use the oil from 3 million bushels of soybeans, and if all on-road trucks used B2 biodiesel, they would use the oil from 473 million bushels of soybeans," says Karen Andersen-Schank of the Iowa Soybean Promotion Board. "That's basically Iowa's entire crop."

In developing these opportunities, Farmers Cooperative Elevator Company has made a sizable investment in this project. There was overwhelming support in Iowa for the project. Funding for the project came from many sources, including the city of Milford, Dickinson County Economic Development Group, the Iowa Department of Economic Development, the Iowa Energy Center and CoBank.

"Our cooperative is a 101-year-old company operating as a traditional Chapter 499 (Iowa Code) cooperative," Kevin Hartkemeyer, general manager of the Farmers Co-op Elevator Co., says in an article in the Iowa Institute for Cooperatives newsletter. "One required provision of being a 499 cooperative is that a minimum of 20 percent of all profits must be returned to our member/owners each year. However, we return 40 percent of all our company's profits in cash. This makes it very difficult, if not impossible, for even a profitable company like ours to build large sums of venture capital needed for a project like this.

"Having extra capital in addition to the normal working capital it takes to run a corporation our size can be challenging, especially when trying to grow a company like ours. With that in mind, we knew it would be necessary to tap nontraditional sources of funding for us to complete this project."

In June 2002, the co-op learned that it might be eligible for a USDA Value Added Development Grant after visiting with Dave Holm from the Iowa Institute of Cooperatives and with Jeff Jobe, director of cooperative services with USDA Rural Development.

"Since we were almost half done with the construction of our plant, we focused on the feasibility of obtaining a working capital grant," Hartkemeyer continued. It was a tough decision to decide whether it was worth the large effort it would take to obtain a grant.

"To help our decision-making process, I contacted Dick Drahota of the Storm Lake Rural Development Office. Dick came to my office and sat down with my project manager and myself, and very extensively reviewed the program and its intent. We went step by step through the evaluation criteria, and compared our scope and intent-it was critical that these complimented each other. Based on our review, we reached the conclusion that our project should be on target with most of the evaluation criteria.