North Dakota's ethanol industry making big strides

Gov. Hoeven has asked legislature to approve ethanol initiatives, including up to $3 million in annual subsidies for new plants
By Tom Bryan | November 01, 2002
North Dakota has earned a reputation in the ethanol industry as a state with a finicky ethanol incentive program and a moderate-to-weak supply of corn. In fact, just two ethanol plants have been built in the state - ADM in Walhalla, N.D., and Alchem in Grafton, N.D. - and the construction of those plants took place over twenty years ago.

However, ethanol proponents in North Dakota seem to be making progress, thanks to a handful of determined corn growers and an ambitious governor who has taken a leadership role with the Governors' Ethanol Coalition and outlined an ethanol initiative aimed at bringing more ethanol production and use to the state.

Gov. John Hoeven, who served as vice chair of the Governors' Ethanol Coalition in 2002 and will take over for Missouri Gov. Bob Holden as chair of the coalition in 2003, has asked the state's Legislature to approve his ethanol initiative, including up to $3 million in annual subsidies for a possible new ethanol plant in southeastern North Dakota.

The package includes money to encourage the use of ethanol and biodiesel, increased purchases of state vehicles that can use E-85, and $5,000 grants for as many as six service stations that agree to begin offering E-85.

In its last session, the N.D. legislature increased the subsidies it gives the state's two ethanol plants from $1.5 million to $2.5 million during the 2001-2003 state budget. Alchem will receive $1.7 million and the larger ADM plant in Walhalla will be given up to $800,000. Under the current legislation, ADM must share its portion of the state subsidies equally with any other ethanol plant that would begin operating during the current biennium. The subsidies do not extend beyond 2003.

Promoters of a third ethanol plant in North Dakota, who are organized as Dakota Renewable Fuels, LLC of Fargo, are considering whether to build near Valley City or Wahpeton. As planned, the factory would use about 12 million bushels of corn annually, and be capable of producing 30 mmgy.

A Counter-Cyclical Plan

Hoeven's plan is "counter-cyclical," linking subsidy payments for new plants to the difference between the cost of corn used to make ethanol, and the cost to buy the fuel itself.

Cheap corn, when coupled with higher-priced ethanol, will make for healthy profits for an ethanol factory, and it should not need state subsidies, Hoeven claims. However, when corn gets more expensive and ethanol prices drop, an economic squeeze begins, and a plant would need state support, he said.

Ethanol proponents in the state say they think Hoeven's plan is mild enough to gain approval in North Dakota's legislature, while providing enough incentive for new production to begin. "This is the most cost-effective way to go," the governor said.

Lance Gabe, Hoeven's ag policy advisor, told EPM the governor's initiative has four legs, three of which can be implemented without legislation.

"The only part of the plan that needs the state legislature's approval is the $3 million in annual subsidies," Gabe said. "It's still up in the air but the monies are in the state budget and the financial picture looks good."

Gabe said the initiative could be amended in the legislature this spring, but the Hoeven administration hopes the ethanol provisions are passed uncompromised.

The concept calls first for ethanol production payments based on a formula keyed to the price of corn relative to the price of ethanol. When the price of ethanol is higher relative to the price of corn, and manufacturers are able to realize a profit in the market, they would receive no incentive payment. The incentive would pay up to $3 million dollars a year to help new plants get up and running.

The Dakota Renewable Fuels group advanced the formula concept as an effective way to structure a new industry incentive. The group is currently reviewing the potential for its proposed 30 mmgy plant in North Dakota. A plant of this size would have a $44.5 million annual economic impact on the state, according to the governor's office.

The second leg of the initiative provides up to $500,000 for a statewide renewable-fuels marketing campaign to enhance public awareness and consumption. The plan creates a marketing program to provide retail fueling stations with incentives to promote and advertise ethanol blends and other renewable fuels, such as biodiesel. The goal is to nearly double consumption in the state, from 26 percent currently to 50 percent within five years.

"We have been working closely with the Corn Growers Association and the Retail Petroleum Marketers to create a thoughtful and effective customer-awareness program," Hoeven said. "Once consumers are aware of the multiple benefits of ethanol, we believe it will create demand for the product."

The third leg of the plan encourages the availability of E-85 fuel by providing six matching grants of up to $5,000 each for stations willing to help complete a statewide network of E-85 fuel. E-85 is a blended fuel with 85 percent ethanol and 15 percent gasoline. Currently, the state has E-85 retail stations only in Bismarck and Grand Forks; the initiative will help to make the product available statewide.

The fourth part of the plan increases directly the state's commitment to ethanol consumption. Hoeven is directing the state Department of Transportation (DOT) to include flexible fuel vehicles (FFV) in new purchases for the state fleet. FFVs are able to run on E-85 fuel or gasoline. Last spring, the Governor directed the state DOT to use a blended fuel with 10 percent ethanol in all state vehicles.

Both Hoeven and North Dakota legislators have taken steps recently to promote ethanol use. Last January, Hoeven ordered state fleet vehicles to use a 10 percent ethanol blend. Last month, members of the Legislature's interim Agriculture Committee endorsed a bill for the 2003 Legislature that would require all regular gasoline sold in North Dakota to contain 10 percent ethanol.

North Dakota's fleet has 2,925 vehicles, ranging from sedans to grain trucks. Feyereisen estimated that as many as 1,500 of them could eventually be replaced with flexible fuel cars, trucks and vans. The state buys between 425 and 450 vehicles annually.

Third N.D. expected soon
Members of the Dakota Renewable Fuels group say they have enough investor interest to proceed and are now counting on the state legislature to pass Hoeven's initiative.

"We can't really move forward until it's passed," said Jocie Iszler, executive director of the North Dakota Corn Growers Association, and North Dakota Corn Utilization Council and a DRF board member.

The steering committee for Dakota Renewable Fuels LLC received significant investor interest during state-wide informational meetings that ended Nov. 1, although the group has not said how much potential investors have pledged and the group has not officially started its equity drive.

The organizers of Dakota Renewable Fuels hope to raise about $18 million from investors and finance the rest of the $40 million needed to build the facility. In August, the steering committee narrowed its possible plant sites from 18 to two, choosing Valley City and a site near the ProGold corn sweetener plant in Wahpeton as the best locations.

At EPM press time, the committee was still weighing the pros and cons of both sites.

Lurgi, ICM project
The group has chosen Memphis-based Lurgi PSI to build the plant, utilizing an ICM design. The group is currently waiting on water quality and natural gas studies before determining a final site. The final selection should be made in January.

Currently, the group has an interim board of directors that includes 10 producers, 8 community development leaders and five others.

Iszler said both sites have an adequate corn supply to sustain a 30 mmgy plant. "The growth of corn production in those areas has been marked," she said.

In fact, corn production has risen dramatically in North Dakota. The average corn acres planted in the state for the past 18 years ranged from 700,000 to 900,000. The 2002 acreage peaked at 1.03 million acres. According to North Dakota State University corn experts, early maturing hybrids, increased wheat disease and changes in North Dakota weather patterns have been responsible for the expansion.

Can N.D. sustain four plants?
Although the Dakota Renewable Fuels project is first in line for funds, talk of a fourth ethanol plant in the western part of North Dakota has already begun.

A Scranton, N.D.-based group met at the town's community center this month to talk about building an ethanol plant in the region. The meeting was held to gauge the reaction of area agricultural producers. Survey forms were handed out to the approximately 40 people who attended.

Mark Erickson, a district sales manager for a hybrid seed company based out of Aberdeen, S.D., along with Ambrose Hoff of Richardton, N.D. who operates a specialty seeds company, and Jody Hoff, a grain bin manufacturer, also of Richardton, organized the meeting.

"This is our very first step," Erickson told EPM. "We're just gauging the interest out there."

The surveys distributed at the meeting asked corn producers if they would increase their acreage, and how many acres they would plant if an ethanol plant was developed in the area. They were also asked if they were interested in buying stock in the ethanol plant, and if it should be organized as a cooperative or as limited liability company (LLC).

If the idea is carried beyond the meetings, Jody Hoff said the next step would be to conduct a feasibility study. The study would address issues such as the plant's location, the availability of corn and access to utilities for the plant's operations. The state's Agricultural Products Utilization Commission may be a source of some of the funding for the study. The commission awards grants to projects that would assist agricultural processing ventures.

One thing the proposed project would have going for it, Erickson said, is an ample market for DDGS.

"We have one feedlot of 9,000 head and another of 4,500 head, and the feeding industry is growing by leaps and bounds," he told EPM. "There are several operations out here feeding wet distillers grains from South Dakota. My understanding is that if we could produce the feed locally, it would save the plant and end-users considerable sums."

The dates of future meetings regarding the proposed plant in southwest N.D. have not yet been announced.