Toward Energy Independence

Northwestern Financial Review, Oct 15-Oct 31, 2004 by Hilgert, Jackie

Volatile oil prices spur interest in alternative fuels By Jackie Hilgert

The string of hurricanes that whipped up destruction across the gulf region recently was just one in a series of events that have pushed oil prices to a record high. Uncertainty over foreign oil supplies also has led to price volatility. The latest spike, which sent the cost of a barrel of oil to about $50, coincided with the end of the summer driving season, historically a valley in the pricing cycle when suppliers are able to catch up on production before cold weather sets in. But that hasn't happened and economists addressing various banking groups this year have been emphatic in their statements that volatile energy prices hinder the nation's economic growth.

But bad news for a nation dependent on oil is good news for an alternative energy industry that was largely ignored during years of cheap oil. Energy companies have begun to harvest the wind to generate power and now, due to government grants and incentive programs, more than a few farmers are able to cash in on wind energy too. Ethanol, meanwhile, has finally moved beyond boutique status into a serious industry for farmers who stand to benefit as policies emerge that favor the use of the gasoline additive.

Thus, renewable fuels have moved out of the fringes and into mainstream consciousness - especially in the Midwest - where prairie breezes are being converted into kilowatts, where corn is king, and where farmers and rural communities stand to reap the economic benefits.

Leading the pack in ethanol use

Last month, Minnesota Gov. Tim Pawlenty issued a proposal that would double the percentage of ethanol mixed with every gallon of gasoline sold in the state. Currently the state mandates all gasoline sold in Minnesota to contain 10 percent ethanol; it's the only state with such a mandate. Gov. Pawlenty also said he plans to cut gasoline usage by stateowned vehicles in half by 2015. The announcement came as ethanol production and use in the state is at an all-time high; 17 percent of Minnesota's corn crop goes into ethanol production. Ethanol, the governor said, has an important role to play in the state's energy and agricultural policies.

That's a relatively recent development.

The first Minnesota group to embrace ethanol were blenders who received a 4-cent per gallon state tax credit for adding ethanol to gasoline. It was a popular incentive back in the late 1980s, said Ralph Groschen, marketing specialist with the Minnesota Department of Agriculture. As a result, 40 percent of the gasoline sold in Minnesota was blended with ethanol. "The problem was none of the ethanol was being made here," Groschen said. In fact, 96 percent of the ethanol consumed in Minnesota in 1986 was produced elsewhere. By 2000 however, 100 percent of the state's consumed ethanol was produced in state. Previously, Illinois and Iowa had the lion's share of ethanol production and the big companies operating there preferred to expand locally rather than come to Minnesota and build a plant.

So the state cut the blender incentive in half and put $10 million into a pot of incentives to build ethanol plants. "It had to be done by farmers," Groschen explained.

Bill Lee, who's been with the farmer-owned Chippewa Valley Ethanol Plant in Benson, Minn., since its construction and now manages its day-to-day operations, had worked at one of those ethanol plants in Illinois. "There wasn't a track record for farmer-owned facilities," Lee said. Lenders had questions, he added, about technology, about the scale of operations, and if these small dry mill ethanol plants could be competitive with large operators like Lee's former employer, A.E. Staley. "And, lenders wondered, could farmers manage these businesses?" Lee recalled.

"Our ulterior motive came to be, 'wouldn't it be nice if the farmer actually invested the money and benefited from that investment by having their crops processed into a higher value product?'" MDA's Groschen said. As a result of the state's incentive program, 14 ethanol plants commenced construction in the early 1990s, all but two organized as New Generation Farmer Co-ops. (See the Nov. 1-14, 2003 edition of North Western Financial Review for more on new generation co-ops.) "By and large, farmers have gotten consistently more for their corn product than they would have got by just going to their local elevator," Groschen said.

In Benson, Janet Lundebreck, president of First security Bank, is seeing Chippewa Valley co-op members realize profits of 70 cents to 80 cents per bushel of corn going into their plant. Area farmers also benefit by the increased demand for their corn, which they sell at the area-average price.

Lundebreck sits on the board of Chippewa Valley Ethanol and her bank helped many area farmers buy into the co-op, either through a guaranteed loan program for young and beginning farmers or through an interest reduction program the bank offered. "We've been in it for eight years and it's gone marvelously for us," she said. "But the producer credits have been very important. What the state gets out of this program, in terms of economies, has made every state in this country envious."