Des Moines Register, IA
04-29-07
Biofuels Money 101: Mixing public, private
Q. Who invests in ethanol plants and how is it done?
A. There are several ways to invest. Two of the most common are buying stock
in a publicly-traded ethanol company or as a private investor. The reason private
capital is necessary is that many banks are cautious and private investment
lowers lending risks, says Iowa State University researcher David Swenson.
Many existing companies seek capital through a bundle of investors, or they
might take their chances on the stock market and let the potential earnings value
of their company determine stock price, Swenson says. Some invest via hedge
funds — partnerships among a select number of investors who use high-risk
techniques in order to make potentially extraordinary returns.
Q. What’s the right balance between local and outside ownership?
A. Experts disagree. Some say the industry shows better promise of expanding
with a mix of investors. But research at Iowa State University also shows rural
economies benefit more when an ethanol plant is owned by local investors,
because those investors reinvest their earnings locally. One thing is for sure:
Iowans could invest more if they wanted. Rural America owns $1.7 trillion in debtfree assets that could be used for renewable energy projects, says Thomas Dorr,
an Iowa native and a top U.S. Department of Agriculture official. Dorr,
undersecretary for rural development , believes more Iowans should take
advantage of the opportunity. For every $1 in farm assets, there are 11 cents
borrowed against it.
Q. Have all the prime locations for biofuels plants been taken?
A. Some argue that improved crop and ethanol yields, combined with other
innovations, will expand Iowa’s production far into the future. Right now,
however, others believe Iowa’s industry is close to reaching capacity. “There’s
probably room for a few more (plants),” says Raymond Defenbaugh, CEO of Big
River Resources, which operates a plant in West Burlington and is building two
others. Stephanie Moline, executive vice president of corporate banking for First
National Bank in Omaha, says much of the Midwest has been staked out. The
best spots are measured by a high density of corn production, available water
and nearby rail, Moline said.
Q. Will Iowa have enough corn to greatly expand its ethanol production?
A. Iowa will reach a capacity of 3 billion gallons of ethanol in the next 18 months.
Currently, about one bushel of corn yields 2.8 gallons of ethanol. So, 3 billion
gallons of ethanol requires 1.1 billion bushels of corn. That would equal about
half of Iowa’s current corn production, which is also needed for export and to
supply livestock feed and food. But what’s reality today might be obsolete
tomorrow, especially in a fast-moving industry investing billions of dollars into
research. “When in the history of America has there been a demand for a product
and Americans haven’t found a way to profitably supply that product?” asks
Monte Shaw, executive director of the Iowa Renewable Fuels Association. In the
next 10 to 20 years, Iowa’s ethanol production from corn and other materials
could reach 10 billion gallons, according to Shaw. Even at that level, he predicts
that ethanol will require 30 percent to 40 percent of the state’s corn crop.
Q. What are other barriers to the growth of the industry?
A. Infrastructure needs. Planned increases in biofuels production, for example,
could outstrip the capacity to build the rail cars and storage facilities needed to
accommodate the growth. If issues like that aren’t addressed, the growth will be
slowed, according to a report issued last fall by Roger G. Ginder, professor of
economics at Iowa State University. However, some signs suggest the railroad
and transportation industry at least is responding. For example, a new truck and
rail loading, trading and storage terminal is scheduled to open this spring in
Manly.