Ethanol plant profits should remain solid in face of budget cuts

Ethanol's ace state may cut its producer payments by more than $22 million through 2010, state's producers remain confident
By | February 01, 2002
Several of Minnesota's top ethanol producers say the state's plan to cut producer payments is "short-sighted," but most also say they're strong enough to take a small hit.

A budget proposal offered by Gov. Jesse Ventura now threatens to cut the state's well-known producer payment from 20 cents per gallon to 18 cents per gallon. If Ventura's budget is accepted by the state legislature this session - and if the cut is retained through 2010 when Minnesota's ethanol program is slated to end - the state will pay $22,396 million less to its ethanol producers, cutting into shareholder dividends and "punishing" one of the nation's most successful farm-based programs.

Arguably the nation's most progressive, and multi-faceted ethanol state of the 1990s, Minnesota is widely credited with developing a template for small-scale ethanol production incentive programs.

The "Minnesota Model" provides a producer payment of 20 cents per gallon, up to 15 million gallons of ethanol produced per year for a maximum of 10 years. The payment is limited to in-state producers and the small-scale requirement has resulted in the formation of a dozen farmer-owned ethanol cooperatives. 13 of 14 plants in Minnesota currently receive a payment. Aspects of the model have been effectively used by several other states that developed ethanol programs in recent years and the it has been hailed as the industry's ideal ethanol program.

What will a cut do?
Most plant managers agree the a small cut won't bankrupt ethanol plants if it is enacted. Nevertheless, said Chippewa Valley Ethanol Company General Manager Bill Lee, the cut will certainly lower shareholder dividends and make financing plant expansions less attractive to investors.

"We'll certainly make it. I think all Minnesota producers will," Lee told Ethanol Producer Magazine this month. "But why would a state punish a program because it's successful?"

Lee and others argue that ethanol plants have become an important part of Minnesota's rural economy, noting that ethanol operations often increase corn prices by 5 cents to 10 cents a bushel in local markets and bring additional income to over 10,000 Minnesota farmers who own shares in the facilities.

In a recent issue of AgriNews, Tony Simpson, general manager of EXOL, in Albert Lea, Minn., echoed Lee's sentiments, saying, "We're not crazy about this. We understand the state has issues, but we want the legislature and governor to look at not cutting something that returns so much to the state. To cut (producer payments) right now is short sighted. . . We don't want to throw stones at the governor. We want to discuss ways to keep the program."

David Kolsrud, chairman of the Minnesota Coalition for Ethanol, recently told the Minneapolis Star Tribune that many of the state's ethanol producers are still seeking ways to work with the legislature on producer payment cuts.

"As an industry, we want to work with the governor to find some solutions," Kolsrud said. "The reduction is going to hurt, but we are certainly not going to drive a stake in the ground."

New state spending unlikely
While Minnesota's producer payment will remain relatively intact, industry analysts are less optimistic about recent efforts to expand the state's ethanol program to new groups.

"I would guess that most of the spending in Minnesota has already happened," said Ralph Groschen, an ethanol marketing expert at the Minnesota Department of Agriculture. ". . .Most of the (new construction) appears to be going forward in other states."

So does that mean proposed ethanol projects, such as the one the Agricultural Utilization Research Council (AURI) helped research in northwestern Minnesota last year, is on hold indefinitely? Probably so, Groschen said.

"The (state budget) certainly is not in very good shape and that will make things more difficult for those groups," Groschen said.

Last year, Minnesota state legislator Tim Finseth presented two ethanol-related bills to the House Agriculture Finance Committee. This unsuccessful legislation called for the creation of a local wheat and barley ethanol operation and encouraged the development of second-generation ethanol plants throughout the state. The first bill sought to authorize producer payments for barley or wheat farmers and would have provided funding for an ethanol project in northwestern Minnesota. The other bill would have increased available funding for ethanol producer payments and provided a competitive grant process to encourage development of second-generation ethanol facilities.

Ethanol producer groups who were successful in developing this technology would have received preference for the expanded producer credits, according to the bill. The producer payments outlined in the bill would have allowed for the creation of up to three additional plants in Minnesota, an effort not all existing Minnesota producers agree with. Currently, two ethanol-friendly proposals are again being discussed by Minnesota lawmakers. One would extend payments to all eligible ethanol plants for two extra years (2012), and the other would give newer plants a break on the pending cut, helping them pay down debt.