United They Stand

With a competitive overlap in sight, Fagen Management LLC, ICM Marketing Inc. and ICM Risk Management Inc. combine resources to form United Bio Energy LLC.
By Tom Bryan | January 01, 2004
A straightforward newspaper headline, "Ethanol venture to base in Wichita," broke the story when 12,000 square feet of office space in northwest Wichita became home to the industry's newest startup. It was an unusually quiet beginning to what could be one of the most-watched business ventures of the new year—in ethanol circles anyway.

To observers, the story seemed to unfolded overnight.

A pair of ethanol industry powerhouses, Fagen Inc. of Granite Falls, Minn., and ICM Inc. of Colwich, Kan., fused competitive subsidiaries, merging Fagen Management LLC, ICM Marketing Inc. and ICM Risk Management Inc. The deal yielded a quartet of subsidiaries under a single umbrella—United Bio Energy LLC (UBE).

Collectively, the UBE companies offer ethanol plant general management, ethanol and distillers grains marketing, grain origination services and overall risk management for grains and energy. The team includes UBE Management LLC, UBE Trading LLC, UBE Ingredients LLC and UBE Fuels LLC.

The formation of the company was carefully considered, yet spontaneously fashioned.

"The concept had been developing since mid-2002," said UBE President Jeff Roskam, who still holds the title of senior vice president of ICM Inc.. "It was a direction we were moving in, but there was no real timeframe for making it happen. Once we made the decision to move forward, the whole thing took shape in less than 90 days."

Roskam, who was previously responsible for business development at ICM and remains on the board of directors of two ethanol plants, said the common business objectives of Fagen and ICM led to the conception of UBE.

ICM, one of the nation's leading ethanol plant process technology providers, began working on ethanol plant management contracts in 2003, to provide management services to Big River Resources in West Burlington, Iowa, and Trenton Agri Products LLC in Trenton, Neb. (both plants are still under construction). At the same time, ICM began laying the groundwork for "group purchasing"—now one of UBE Management's key selling points. The company had also launched ICM Risk Management Inc. and, more recently, an ethanol marketing group.

Likewise, Fagen Management LLC, already a year old when it was flipped over to UBE, had signed a contract to manage Platte Valley Fuel Ethanol LLC, an ethanol plant under construction in Central City, Neb.

Suddenly ICM and Fagen, one of the best known dry mill ethanol plant design/build teams in America, were in the same game—and playing to win.

"With both of us getting into plant management and other parallel services, there was some concern about overlap of services and putting our customers in an uncomfortable position," Roskam said. "We agreed on the philosophy that it is better for plants to be 'independent and associated' than 'independent and isolated'—and that grind management is key to stabilizing and growing the industry."

ICM President and CEO Dave Vander Griend and Fagen President and CEO Ron Fagen were open to the idea of creating an alliance in management and marketing services. The two company leaders, along with Roskam and Fagen Senior Vice President of Technology and Business Development Wayne Mitchell, established a dialogue that led to a deal everyone could agree on.

"Our talks centered around the need to strengthen the industry, to offer management services that would add stability to the way ethanol plants manage—and think about—business," Roskam told EPM. "The industry is experiencing extraordinary growth, but the availability of capital is becoming more limited."

In mid-2002, Roskam determined that the ethanol industry would need over $2 billion in debt and equity over a four-year period to build plants that were being considered at the time.

"We saw an opportunity to grow our businesses and, at the same time, offer management that improves the long-term stability of new and existing ethanol plants—something that would bring more capital to the table," Roskam said. "With over 240 years of combined ethanol and grain processing experience, the two companies were prepared to make this commitment."

The crux of UBE's strategy is to provide tools and resources that allow client plants to focus on the "grind margin," the fluctuating relationship between ethanol prices, distillers grains prices, corn prices and natural gas prices.

"The idea is to always have the grind margin monitored, hedged or otherwise under close scrutiny," Roskam said.

United Bio Energy, as its name suggests, is focused on uniting ethanol producers through group management and marketing services. The company is a small part of a much larger strategic shift towards greater industry cooperation.

"It's a reaction to the fundamental changes in the way corn is processed in the Midwest, and it's a direct result of dry mill ethanol production," Roskam said. "We're seeing the decentralization of grain, feed and fuel processing systems. It's a huge shift, an unfolding paradigm in agriculture that will require new models of management."

The industry is also maturing and there are more—and larger—players, which means the models that worked 10 years ago need to adapt to stay competitive. Unlike the cooperative-driven "Minnesota Model" that gained widespread popularity in the late 1990s, many of the plants being built today are not dependent on corn delivery contracts from farmer-investors. The new plants are bigger—often not true co-ops—and increasingly being built on the outer fringe of the Corn Belt.

"There is a growing need to maximize bushels and minimize cost," said Randy Ives, vice president of UBE Ingredients.

Formerly the leader of ICM Marketing Inc., Ives helped the company create a high-volume retail merchandising operation with services ranging from grain procurement, feed ingredient sales, logistics, fleet management and quality control to risk management through hedging, market forecasting, inventory management and the carrying of accounts receivable.

Today, UBE Ingredients continues all of these services, providing a customer-oriented focus on distillers grains marketing and, now more than ever, grain procurement. The company is able to handle transportation logistics, accounts receivable and credit risk assumption for its client plants.

Other than reshuffling a handful of employees into other areas of the company, ICM Marketing remains largely intact as UBE Ingredients.

"We have 15 people on staff," Ives said. "I think we'll double that by the end of 2005. I'm interviewing people regularly and adding marketers to get the results our customers expect."

New employees would include UBE personnel stationed at client plants managing corn procurement and distillers grains merchandising.

The company has an original base of 650,000 tons of distillers grains on the market right now. Roskam would like to see that number grow to over 1 million tons by mid-2005. Ives said his team is up to the task.

"I'm excited about this new company," he told EPM. "The future is brighter than ever before. Opportunity knocks."

In addition to setting a marketing goal of 1 million tons of distillers grains by mid-2005, Roskam wants the company to represent at least 300 million gallons of ethanol, and he wants to hit the mark in the next 18 months. They represent about 130 mmgy today.

The company has a contract to market ethanol for U.S. Energy Partners LLC in Russell, Kan., and two other contracts with plants under construction: Big River Resources LLC in West Burlington, Iowa, and Platte Valley Fuel Ethanol LLC in Central City, Neb.

"We're very close to closing the deal on two or three more, but I probably shouldn't talk about those agreements until they're final," said Dave Dykstra, vice president of UBE Fuels. "We also deal in the wholesale business—buying ethanol on the open market, which brings another 30 million gallons a year to our portfolio."

UBE maintains customer relationships with many national and regional oil and gasoline refiners, blenders and marketers. Its service package includes assumption of credit risk and the increasingly critical transportation logistics component of ethanol marketing.

Dykstra, a sixteen-year veteran of fuel ethanol and industrial alcohol marketing, joined ICM's Ethanol Marketing Group in April 2003 after successfully leading marketing efforts for MGP Ingredients, and later Abengoa Bioenergy Corp., for several years.

The "biggest switch," he said, from ICM Marketing to UBE Fuels was an even greater focus on margin management services.

"The company stressed its ability to monitor the margin in order to achieve stable earnings," he said. "It sounds easy enough but for many ethanol producers it's not. Earnings are cyclical and, as any plant manager can tell you, it can get bad—sometimes real bad—if you aren't playing your cards right."

With dry mill ethanol plants being built to a larger scale, some as large as 100 mmgy, transportation logistics have become more complex, Dykstra told EPM.

"With access to the BNSF Unit Trains into California and CSX into the Northeast, we can move the product at these high volumes," he said.

UBE Management is set up to provide general management services for ethanol plants, including UBE personnel permanently employed at the plant site on a contractual basis. The company provides strategic "day-to-day" management of the plant's operations on behalf of the owner's board of directors and is responsible for profit and loss at the facility.

UBE's general management program includes the client's participation in group purchasing of enzymes, yeast and chemical supplies. The program is set up to create a substantial annual savings for the plant. It also includes the plant in a monthly benchmarking information system that provides continuous plant conversion and operational efficiency feedback for management and board members to compare its operations to those of similar plants.

Tim Morris, vice president of UBE Management, is the only Fagen Management LLC employee to transfer over to UBE. Although he is relocating from Columbus, Neb., to Wichita, he looks forward to the opportunity.

"It's exciting," he told EPM. "Essentially what you have is two major players coming together to form a company that is going to help bring long-term success to the industry. We really believe in what we're doing."

Morris has over 22 years management and technical experience in process manufacturing, including technical and managerial experience at several different manufacturing facilities. In January 2003, he became project manager for new ethanol plant construction in Nebraska for Fagen Management LLC. Prior to 2003, he spent 10 years at Minnesota Corn Processors (now owned by Archer Daniels Midland Co.), and several years at Cargill Inc. and Coors Brewing Company.

Echoing Roskam's objectives, Morris said the first priority of UBE Management is to get established, build relationships, and then deliver on its pledge.

"You'll see that happen this year," he said.

Will UBE-managed plants be restricted to Fagen/ICM projects?

"Not necessarily," Morris told EPM. "We are able to manage any ethanol plant, but it's a logical starting point to begin with ethanol plants that are designed and built by the Fagen/ICM team."

Managing the grind margin is, of course, essential to the UBE Management philosophy.

"We want to make sure ethanol plants are taking steps now that will set them up for success over the long term, "We believe a business should outlive its owner. That's the attitude we have." Morris said.

The company will take a team approach to business, almost like a franchise.

"I'm not so sure 'franchise' is the right word but, yes, there's no need to reinvent the wheel every time a new plant starts up. Morris said, "We can—and we should—learn and benefit from what we already know. We offer management and business practices that an isolated general manager simply could not develop."

Sometimes margin management means not reaping the highest of highs in order to avoid the lowest of lows. It's a game of moderation and resolve.

"It takes a systematic, methodical approach," Morris said.

The company is in the early stages of developing a plan to offer its client plants profit sharing opportunities, essentially allowing them to invest in UBE.

"The customer group could buy in, for example, as a value-added opportunity," Roskam told EPM. "This would allow customers to take part in the growth of the industry. It's another way to financially unite our clients."

In addition to grind margin management, UBE would help its client plants develop streamlined operations to reduce non-commodity risks, or what Roskam calls "technical risks." Benchmarking, or "bench strength" assessments, are used to establish performance comparisons among client plants.

UBE Trading, which stemmed from the 1-year-old ICM Risk Management Inc., provides a full range of risk management services and consulting to the owners and managers of fuel ethanol plants. This includes input and output price risk management for commodities including corn and grain sorghum, energy sources such as natural gas and outputs of related products including ethanol.

"Everything at UBE ties into the trading side of the company," said Sam Weinhold, vice president of UBE Trading. "Risk management complements everything UBE offers. UBE Trading is the source of much of the margin management information our clients rely on."

Weinhold, a licensed commodity broker, joined ICM in 2001 and was instrumental in developing the risk management concept that is being incorporated into various ethanol plants under the UBE umbrella. He served as president of ICM Risk Management Inc. since January 2003, before taking a leadership role with UBE Trading.

"We utilize futures, options, cash markets, and over-the-counter derivatives to protect ethanol plant processing margins," Weinhold told EPM.

Roskam believes all four subsidiaries of UBE have the potential to become leaders in their respective roles.

"Our near-term goals are simple," he said. "We will establish ourselves as leaders with each individual business and we will stay focused on management and continuing to get the highest possible returns for our client producers." EP