The Way I See It

Ethanol: Not really an overnight success
By Mike Bryan | April 01, 2006
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It's said that timing is everything, so I guess the timing is right for ethanol because the industry is growing at an unprecedented rate. It's kind of like the actor or actress who struggles for years just trying to put food on the table, many times waiting tables and simply trying to get a break. Then one day, they are a star, and everyone says, "Wow! What an overnight success they've become."

As little as five years ago, there were basically three banks that would loan money to the ethanol industry: First National Bank of Omaha, AgStar Bank and CoBank. You could hardly get another bank to look at your paperwork, let alone give you any money. Raising the equity was a one- to two-year process, consisting of countless meetings where often only a few potential investors might show up. There was little, if any, private investor money available, and there was certainly no venture capital money to be found.

Holding a lenders meeting to help educate lenders and other potential equity investors often resulted in small attendance, and a lot of tire kicking but rarely any buyers. It was difficult for investors to get their arms around the issue of the ethanol selling price being set by the price of gasoline and oil, and the primary input cost for production being set by the price of corn. It wasn't until the industry got serious about risk management that addressed commodity and futures hedging on ethanol and corn, as well as energy inputs, that the comfort level of investors began to rise.

Telling potential investors that there is little or no near-term alternative to gasoline except ethanol fell on deaf ears or at least ears filled with doubt that ethanol would ever be anything more than an niche market additive. Ethanol made from cellulose was a long way off, and some thought it would never happen. The promise of hydrogen vehicles focused most investors' eyes on the distant future and away from near-term solutions.

Well, cellulose is likely going to happen, and many who at one time smirked at the idea are now doing research and development to bring it to fruition. Hydrogen has been proven to be a very distant market indeed, and as a result, more and more investors seem to be focusing on the immediate opportunities of ethanol. Now investors are flocking to take another kick at the tires, but this time they are often buying the car.

So I suppose many who are now entering the industry will say, "What an overnight success ethanol has become!" Let me remind those folks that in 1980, when ADM built its first production facility, it was a difficult time to say the least. As the saying goes, "The pioneers get the arrows, and the settlers get the land." We stand on the shoulders of those pioneers, who took the arrows and simply would not give up.

Thanks!
Have a great month!