Piling It On, Strategically

Todd Becker says his job is to reallocate as much of the middleman margin as possible to the company’s bottom line. So it may have seemed odd when in the fall of 2012, the company he leads as CEO, Green Plains Renewable Energy Inc., sold 83 percent of its grain storage capacity. 

Becker explains that the company wasn’t abandoning the strategy of being a first-handler of corn. The elevator system was making money and reducing risk. “But it wasn’t fully integrated in our supply chain,” he says. “We didn’t actually ship a lot of corn out of our facilities to our ethanol plants. A couple of years ago, we said, ‘We love the grain business, but what if there’s a better way to skin the cat?’” The company decided there is. Green Plains sold 12 grain elevators in Tennessee and Iowa to another ethanol producer with a good-sized grain business—The Andersons—for $133 million. “We had 38 million [bushels of] storage and we sold them 32.6 million [of it], but we’re not leaving the agriculture handling business,” Becker says. “We’re just going to reallocate that capital so it more closely aligns with our supply chain, with direct access to our ethanol production.” 

The transaction worked well for both parties. Green Plains freed up capital and The Andersons extended its asset base in Iowa and into Tennessee. “We got to reallocate some resources in a different way, and we bought more ethanol plants,” Becker says. “We found a value we could sell at. They found a value they could buy at, and it worked for both of us. It was as important to them as it was for us.”  

At a cost of between 50 cents and $1 a bushel, Green Plains is building permanent systems using an old strategy—piling corn outside. Installed first at Green Plains facilities in Fergus Falls, Minn., Riga, Mich., and Bluffton, Ind., the new grain storage systems are high velocity, high volume. “They’ve got walls, we cover and put air on them to keep the quality,” Becker explains. “And we have them right in line with assets—we have the roads already, got the rail, the scale, the people and a lot of land.” 

Making better use of infrastructure is one advantage of the system, but there are others. With the first-handler margin ranging between 20 cents and 40 cents per bushel, being able to capture that margin on a larger proportion of grain purchases adds some long-term stability to the margin structure. The piles allow the company to buy more corn at harvest, when prices are typically the lowest, although there have been opportunities to refill the piles in the winter when prices were advantageous, Becker adds. Green Plains is also planning to add grain dryers at some facilities so they can handle more wet corn in future seasons. “We probably won’t keep [the corn] a whole year,” he adds, saying once the piles are opened, they want to move it all. “So you have to think about logistics and supply chain.” 

Outdoor storage can increase the odds of corn going out of condition, but Green Plains currently mitigates that risk by buying dry corn and building aeration into its piles. The outdoor piles sit directly on the ground, rather than concrete or blacktop, so Green Plains relies on its ethanol plants’ screening systems to remove foreign material from the grain before grinding.

While the outside piles are boosting potential corn supplies at the ethanol facilities from the typical 10-day to a 45- or even 60-day supply, the ethanol plants actually don’t own the extra stored corn, but rather Green Plains’ grain division. “The ethanol plant typically buys corn and sells ethanol,” Becker says. “The grain company buys corn and sells corn futures. The grain company wants to earn the first-handle margin and carry, where the ethanol plant wants to earn the crush. They’re two separate distinct businesses. When the corn gets picked up from the ground after the economic incentive to hold the corn is gone, if the ethanol plant is the best bid, we’ll send it to the ethanol plant. If it’s not the best bid, we’ll truck to somebody else’s demand.” 

The piles at the first three facilities quickly paid for themselves. By the end of this year, the company expects to have 37 million bushels of storage across the system, almost recreating the storage sold in 2012 and at a quarter of the cost or better. The goal is to be at 50 million bushels by the end of 2015.   “People are watching what we’re doing,” Becker says. “We get a lot of calls from plants asking how to do this.” Building the piles isn’t the biggest issue, he adds. 50 million bushels of storage capacity at $4 corn potentially requires a hefty $200 million line of credit. “You need to have the capability to finance the inventory and make the margin calls while you’re holding the corn,” he advises. “The easiest and cheapest part of it is to build the pile.”

Author: Susanne Retka Schill
Senior Editor, Ethanol Producer Magazine
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