While talking heads sputter on about the benefit vs. cost of ethanol, plants to produce the fuel source are going up across the country. In one sense, the naysayers have already lost the argument.
Federal legislation is allowing tax breaks and other incentives to bring ethanol into the mainstream.
Environmentalists like the corn-sorghum fuel because it burns cleanly.
Many co-op members like it because it adds value to their crops.
Can the Delta benefit?
After a comprehensive study, one agricultural consulting firm says the Delta could easily profit from such a plant. Memphis-based Frazier Barnes and Associates provides technical and marketing support services to the agricultural community. Their emphasis is on value-added projects for producer groups.
“We're not a front man for a group of investors. We've been involved in producer groups in other parts of the country — mainly the Midwest — that band together to build their own ethanol plants. These are corn farmers that want to add further value to their production. We want to let growers in the Delta know that the same opportunities are available to them,” says Rod Frazier, president of the firm.
Why is the Delta a prime area for ethanol production?
It's a combination of things. Most of it relates to legislation requiring oxygenated fuels in gasoline products, says Frazier. The heaviest use for ethanol has been in metropolitan areas. In the future, to a certain extent, all cities in the nation will be required to use oxygenated fuel. Because the Delta has access to some of those markets, Frazier says, ethanol needs to be produced in the area.
A couple of projects already are located near the Delta. One is in Hopkinsville, Ky. Commonwealth Agri Energy Company is in the process of building a 20 million-gallon ethanol plant. Construction should begin in February.
A second plant, SEMO Ethanol Producers, is in Malden, Mo. “They're going to build a 15 million-gallon ethanol plant that will cost about $23 million. The standard size of one of these plants is anywhere from 15 million gallons to 40 million. The bigger the plant, the less cost per gallon — because of the longer economy of scale,” says Frazier.
The typical structure of the producer groups — as with the plant in Malden — will be set up on a “closed co-op model,” says Frazier. An investment is tied to deliveries. That means the producers agree to deliver corn or sorghum to the plant while buying shares in the operation.
“For example, the plant may need 6 million bushels of corn and — for ease in making the point — will sell 6 million shares. For every share, the farmer must deliver a bushel of grain. The setup is different for, say, Riceland, where you don't have to deliver a required volume of grain each year in order to be a co-op member.”
Two incentives drive the ethanol business. The first is on the marketing side — a tax incentive equivalent to about 53 cents per gallon to put ethanol in gasoline products. From the production side, through the Commodity Credit Corporation, there are tax incentives to take the plunge.
“One reason interest in this is increasing is federal regulations encouraging ethanol be developed. Second is adding value to your crops, something that began in the upper Midwest. They came up with this idea because the farther north you travel the less corn is worth. That's the way the transportation system and markets work. Farmers up north were, therefore, spurred to do something. They went with ethanol plants.”
As the industry grew, the concept of adding value to corn and sorghum crops gained momentum and moved south. It's now hitting the Delta. Five years ago, a farmer might have seen his crop worth $4 per bushel. It's now worth $2 per bushel. So something that may not have made much sense five years ago, now does, says Pete Moss, vice president of marketing for Frazier Barnes.
“…the position we take is based on studies that show this industry will grow incredibly over the next nine or 10 years. Currently, ethanol production is about 1.7 billion gallons annually. The low projections for 2010 show we'll be at 3.4 billion gallons. The high-side projections run from 6.5 billion to 7 billion gallons. The industry is going to grow. It already is. Sixteen ethanol plants are either under construction in the nation or will be in the next six months,” says Frazier.
Constructing a plant normally takes no more than a year. A well-located, 10-acre to 20-acre site is all it takes. And there's a transportation advantage to a plant in the Delta — truck, rail and barge systems are all available to move ethanol, says Frazier.
Sept. 11 re-emphasized the importance of a secure energy supply. Ethanol is renewable and is much more secure than oil from other nations, says Moss.
Can plants go into every Delta state?
“Right now, we believe that Arkansas fits the model best. There are several reasons, including the proximity of the state to some of the metropolitan areas as well as a fairly large amount of corn and sorghum being grown in the eastern part of the state,” says Frazier.
A couple of years ago, Frazier asked the Arkansas Farm Bureau what state crops needed value added. The organization pointed him to wheat. While 50 million bushels is produced annually, very little wheat is processed in the state. That led to similar findings for sorghum and, to a lesser extent, for corn.
“Having been involved in a recent, comprehensive study on ethanol, we believe there's potential and opportunity for producers to work this to their advantage,” says Frazier.
William Johnson, Arkansas Extension wheat, corn and sorghum specialist, told Frazier the first step in doing anything like this would be to educate farmers to the potential.
“Specialists and farmers that we speak with believe a new market for corn and sorghum would be great,” said Frazier. “While there is a fair amount of corn going to the poultry industry, well over half is leaving the state without value being added to it. A local market — like a corn and sorghum processing/ethanol plant — would provide an internal market for Arkansas farmers while creating jobs at the same time.”
Adding to Arkansas' ethanol potential are projections that state grain sorghum acreage (for a list of reasons, nematodes chief among them) is likely to double next year. With the Arkansas poultry industry, there is a place to go with state corn. But grain sorghum markets in the state are lacking.
“Here's the truth: grain sorghum is predominantly what's interesting in the Arkansas/ethanol equation. Corn is a big deal, no doubt. But sorghum is an absolute competitive advantage for Arkansas,” says Frazier.
To make 20 million gallons of ethanol, approximately 8 million bushels of corn and/or grain sorghum is needed. Ethanol production uses a dry mill process. All the corn or sorghum is ground and the starch portion is turned into sugar. The sugar is fermented, resulting in alcohol and carbon dioxide.
A bushel of corn produces about 2.65 gallons of ethanol. Co-products are 10 pounds of carbon dioxide and 15 pounds of distillers dried grain (the corn that wasn't convertible to sugar), which can be used as a livestock feed.
Fitting pieces together
To make this work, several things would have to come together, says Frazier. First, you must have a sufficient supply of the crop to run the processing plant. Second, you must have a market for the product produced in the plant. Third, you must have a producer group interested in moving some of their money out of strict production agriculture and into processing value-added products.
“We have two of the three: sufficient stocks and markets. We still need an interested producer group.”
How does the specter of aflatoxin affect ethanol production?
“That's actually a plus to the project because you can make ethanol out of aflatoxin corn. However, the distilled grain product — what's left after ethanol is produced — might not be fed to livestock. You may lose all or a portion of that,” says Frazier.
But by making ethanol, you're reducing the amount of aflatoxin corn, says Moss. After ethanol is made, you might have only 15 pounds out of the original 56 pounds in a bushel that are a concern.
The bottom line
What kind of returns can a producer group expect?
There are producer groups in the Midwest getting returns on their investments of anywhere from 20 to 40 percent, says Frazier.
“There's a plant in Missouri that began operation a couple of years ago. They're currently enlarging the plant and all the corn producers/investors have agreed to buy up the stock available due to the expansion. It's been that good of a deal for them.”