Study highlights needs of renewable fuels industry

Cattle Market & Farm Reports, Editorials
Nov 5, 2007
by WLJ

—Rural communities shown to benefit from renewable fuel boom.

A new study has identified the required private capital investment necessary for the renewable fuels industry to achieve the production goals established in the proposed Energy Bill.

“The capital cost to meet the 36 billion gallon renewable fuels target by 2022 amounts to $105.5 billion (2007 dollars),” the study completed by John Urbanchuk, a leading analyst of the biofuels industry and a director for LECG, LLC, a global expert services consulting firm, concludes.

“Providing the Farm Credit System with greater flexibility to support the financial requirements of the biofuels industry by enabling them to provide financing to a wider range of borrowers will facilitate ethanol and biodiesel industry expansion,” the study said.

The Farm Credit System has been a major source of financing for the ethanol industry for well over a decade and reported, at June 30, 2007, $1.668 billion in loans outstanding relating to biofuels products and another $2.238 billion in loan commitments to extend credit to the industry. These outstanding loans represented 1.3 percent of the Farm Credit System’s total loan portfolio.

Urbanchuk’s analysis shows that the Farm Credit System’s support for the ethanol industry over the years has helped provide $23.2 billion in gross economic output, $5.5 billion in household income, and 136,345 new jobs in the construction of ethanol plants; $317 million in annual transportation revenue to ship ethanol; $24.8 billion in gross economic output, $3.6 billion in household income, and 99,188 new jobs in the operation of the plants; as well as $4.3 billion in annual farm revenue for corn to make ethanol.

“This study shows directly how the rural economy benefits from the Farm Credit System’s support of agricultural-based business and farmers. Farm Credit was there fifteen years ago, taking the risk to finance the early ethanol plants when others would not. Now that Congress is looking to agriculture and the renewable fuels industry to make a major contribution to our nation’s energy independence, it is important that this experienced lender be able to continue to support the industry going forward,” said Ken Auer, president & CEO of The Farm Credit Council, the national trade association representing the Farm Credit System.

The study identifies how a 50-million-gallon per year ethanol facility employs 40 people with about a $1.9 million annual payroll. Such a plant will create nearly $89 million in demand for local business and an additional $31.5 million in household income. These “Main Street” business activities largely will benefit local community banks with increased deposits of payrolls and lending as local business activity increases.

The Urbanchuk study also reviews the capacity of community banks to support the industry, noting that: “the debt cost for a new ethanol plant can easily exceed $130 million. If a typical community bank has a lending limit of $2 million, it would require a syndicate of 65 community banks to fund one new plant.” It would take another 290 plants, each with 100 million gallons of capacity, to achieve the production capacity recommended in the Senate version of the energy bill (H.R. 6).

The study also highlights how the rising cost of new ethanol facilities has changed the composition of the equity partners. A typical plant today requires investors to come up with about $95 million before going to the credit markets for the other $130 million in debt necessary to construct a plant, the study said. These higher equity threshold levels mean farmers are no longer in the position to be the major equity providers for the ethanol industry and that other non- farmer investors must play a role if the industry is to continue to grow.

The ability of the Farm Credit System to provide financing to this broader base of owners that include more non-farmers will be crucial to the ability of the industry to expand to meet the legislated target of 36 billion gallons by 2022, the Urbanchuk study points out. — WLJ