Collaborative Growth Platform

Guardian Energy intends to keep local ownership a viable part of the ethanol industry, building on the success of the Renewable Products Marketing Group, another collaborative effort of a group of ethanol companies. Guardian's vision: Providing the platform for collaborative growth in renewable energy. 

Collaborative is the key word behind the unique business model that Guardian Energy represents. “At the core of each individual company are farmer owners,” explains Guardian Energy Management LLC CEO Mike Jerke, who left Chippewa Valley Ethanol Co. to take over the position April 14. Some Guardian member companies are organized as farmer cooperatives and others are LLCs, but they share a common understanding of how a farmer and locally owned company does business. Jerke points to RPMG as an example of what that means.  

As RPMG CEO Doug Punke says, “Our goal is to get the highest netback price that we can get, be it for ethanol, corn oil or DDGS.” While on the surface, making a profit for the investor seems the same as for any business, it’s how they go about it that is different. Punke explains RPMG got its start with two ethanol cooperatives, “that said ‘let’s combine our volume and do a better job of managing sales and sharing the marketing piece.” The two became five that pooled their gallons and received a weighted average price.

Pooling had its limitations, though. In 2010, RPMG adjusted its approach to leverage the collective volume while marketing individually for each plant. “We may have six plants’ production that is going to the same market,” Punke explains. “Maybe that’s New York Harbor, maybe that’s Atlanta or Florida, maybe the Pacific Northwest.  We take that collective volume and market those gallons. Every plant gets the weighted average delivery price and we use the freight of each individual plant.” 

Individualizing the netback in that way gets a higher return for plants that invested in unit train loading facilities, for example, by rewarding them for the lower freight costs.

Two other things also make RPMG unique, Punke says. “Over 95 percent of all the ethanol volume that we do is sold to an end user. To our knowledge, no other marketer does that—they’re all trading.”  Second, RPMG does not have a trading group creating a conflict of interest where a trader says: “I should buy this a littler cheaper [from the ethanol producer] because I can sell it for a little more over here, and I get to keep that money.” “We don’t do that,” Punke says. “Our value is proved by getting the best price and getting that back to the producer.”  RPMG charges a flat marketing fee and is transparent on sale prices and freight charges.

The changes to RPMG’s marketing strategy has brought more plants under its wing, says Punke. The company now markets ethanol for 19 plants, going from under 900 MMgy of ethanol moved before the change, to more than 1.6 billion gallons today. Of the 19, 14 have invested in RPMG to become owners, which includes the Guardian plants in Janesville and Hankinson. Nonowners are treated like owners, he adds. “They’re going to see the prices we’re getting for their ethanol. We’re going to take our marketing fee and they get everything else. That is a very powerful message and proposition to get growth. It’s very tough to beat.”

RPMG has become a force in the world of ethanol marketing. Next year it expects to market 1.7 billion gallons, putting it in the top three alongside Archer Daniels Midland Co. and Poet LLC. It’s in first or second place alongside Poet for corn oil marketing at more than 200 million pounds, plus it moves more than 2 million tons of DDGS.  The marketing structure has given individual, locally owned ethanol companies a means to achieve economies of scale in marketing their products. Punke adds that it has been rewarding as Guardian purchased new plants and they’ve compared RPMG’s performance with others. “We’ve come in and gotten them a better price than what they were previously getting.”

Like-Minded Investors
The group of like-minded ethanol producers involved in RMPG took their collaborative philosophy the next step when they formed Guardian. “It’s allowing them to reinvest in the ethanol business, where they couldn’t necessarily do that at the current facility—they didn’t have the ability to expand locally,” Punke explains. “There is a higher level of liquidity to have your investment egg in three different plants versus all in one.”

As outlined below, in, “The Genesis of Guardian Energy,” the trust built among companies involved in RPMG allowed them to pool their resources and reinvest in the industry and rural America. Returning cash into the hands of the owners, the farmers and local investors, is the focus for all these like-minded companies, says Jerke. “That has been the goal. That thinking has been clearly driven home by the boards that run these companies and to the management that reports to these boards. Guardian Energy carries that same philosophy. We think the ethanol industry is best served by being owned by farmers, by folks in rural America.”

Maintaining local ownership as the industry matures and faces increasing consolidation, is the next challenge, Jerke says. “At gatherings of ethanol industry people, and if there’s a lot of local board representation, you’ll hear conversations about how to provide an equity event, so people don’t feel like their equity is trapped.” In some areas there are farmers ready to step up and buy ownership units, but there are a lot of rules around how those events happen, he explains. “Is there a way, if you have a number of people who are ready to move out of that investment, that they can capitalize on that in a fairly liquid way?” While Guardian’s first investments have been the outright purchase of two plants and partnership with a capital investment group in a third, the group is interested in finding new ways to retain a level of local ownership within future Guardian acquisitions. “To the extent that consolidation is going to happen, these farmer-owned companies, these local investor-owned companies are finding a way to get together and compete with entities much larger than them and maintain their focus,” Jerke explains.

Jerke relates a conversation with an Iowan who works in a different industry:
“He was asking about Guardian and he said ‘Gosh, do people know about this?’  

“I said, ‘Look, this is a bunch of ethanol plants that at their core are farmer owned. You don’t have to be around farmers very long to know they’re not very crazy about broadcasting what they’re doing. Having a marketing department is not a priority.’

“He said, ‘When I listen to what I think’s happening in rural Iowa, and the questions about what’s going to happen in the future—what an interesting model to be lifted up as an alternative.’”

“We’ve got a great story to tell,” Jerke continues. “We’ve got a lot of learning to do. There’s going to be bumps on the road, but it represents an opportunity for people.” He refers to the consolidators gaining ground in the industry: “I don’t care for some of those entities and the way they are integrating. What is that doing for the local community and the local farmer? I don’t know how to describe the differences exactly. But at the core, our philosophy is so different in how we want to operate and why we exist,” he says. “I get just as tired as the next guy with this us-versus-them-mentality—we’ve got to compete—but there is great benefit if this industry is maintained and owned to a significant degree by the farmer.”

The Genesis of Guardian Energy

It is known as the Minnesota model. Value-added agriculture built around cooperative principles. Farmers invest in their local ethanol companies and make commitments to deliver a set number of bushels to the plants with the idea that when corn is cheap, they’ll make their money from the value added through the ethanol plant. When corn prices are high, the farmers get their returns directly from corn, lessening the need for returns from the ethanol plant, in turn insuring the plant survives downturns.

Back in 1996, two Minnesota farmer-owned cooperative ethanol companies wanted to take that philosophy the next step and pool their production to improve their position in the ethanol market, creating Renewable Products Marketing Group LLC. Distillers grains marketing soon followed.  As the industry grew, a hybrid business model emerged with development groups turning to limited liability corporate structures (LLCs) to allow nonfarmer investments, bringing local business owners into the growing number of ethanol companies. RPMG’s two companies grew to a half a dozen, both farmer-owned cooperatives and locally owned LLCs.

Times were good for the industry in the mid-2000s when margins were high and the build-out of the industry was booming. That came to a screeching halt in 2008 when the U.S. economy entered the long recession. One of the casualties was the 110 MMgy ethanol plant in Janesville, Minn. Completed, but never commissioned, it sat in limbo after its builder, VeraSun, went bankrupt.

RPMG members in the region near Janesville saw an opportunity. “These companies had become comfortable with one another,” explains Mike Jerke, who had just started as general manager at one of those, the farmer-owned Chippewa Valley Ethanol Co. in Benson, Minn. “They learned where the commonalities are in their vision.” Guardian Energy LLC was created to purchase the Janesville plant in 2009, with CVEC investing along with Al-Corn Clean Fuel Cooperative at Claremont and Heartland Corn Products at Winthrop. KAAPA Ethanol LLC, Minden, Neb., and Golden Grain Energy LLC, Mason City, Iowa, joined in the investment as well. (Another original investor, Central Minnesota Ethanol Co-op of Little Falls, Minn., has since pulled out as its members have approved the sale of the ethanol plant to Green Biologics Inc. The transaction is expected to close later this year.)

 “We began the process of bringing Janesville online,” Jerke says, “and began thinking long term about this company we were now part of, Guardian Energy. What came out of thinking long term was a very clear vision: to provide the platform for collaborative growth in renewable energy.”

In 2010, the Guardian group bought a second facility, this time the 54 MMgy plant in Lima, Ohio. CVEC, Heartland and KAPPA created Guardian Energy Holdings LLC to become majority owners while Paladin Ethanol Acquisition LLC retained a minority stake in Guardian Lima LLC. The Lima plant, like Janesville, was a casualty of the 2008 bust, coming online that year as Greater Ohio Ethanol, but ultimately filing bankruptcy.  PEA, an entity backed by Washington, D.C.-based Paladin Capital Group, acquired the facility.

Guardian’s third purchase was also part of the 2008 VeraSun meltdown.  Murphy Oil had acquired the 132 MMgy former VeraSun plant in Hankinson, N.D., in 2010. In a corporate decision to refocus its assets, Murphy Oil sold Hankinson Renewable Energy LLC to Guardian Hankinson LLC in December. Guardian members participating in this purchase included CVEC, Heartland Corn Products, KAPPA Ethanol and Dakota Ethanol LLC in Wentworth, S.D.

The Guardian members, all owners of RPMG, have the flexibility to choose whether to get involved in an investment opportunity, explains Jerke. “And if they choose to be involved, determine how aggressively they want to be involved.” Cash is returned based on ownership levels.

With different owners in the three entities, the group created a separate company above the plant level, for the management team, Jerke explains. “You can be a member of any one of the three investment opportunities and you will be a board member of Guardian Energy Management.” Jerke laughs when asked whether these multiple organizations make the accountants happy. “You absolutely know it. We have flowcharts that only a CPA could understand. But,” he continues, “we try to look through the structures.  We operate and want the team members to look at themselves as being part of a team, as part of a collective.”  One of the advantages, he adds, is that there’s a level of trust that allows finance and plant managers from all the Guardian plants and owner companies to collaborate. “Our benefit is having this broad group to draw from and learn from,” Jerke says.  “To get to the point where we’re not making the same mistakes. I’ve heard that comment in our boardroom. ‘We don’t mind the mistakes so much, we just don’t want to have to repeat them.’”

Author: Susanne Retka Schill
Senior Editor, Ethanol Producer Magazine
[email protected]
701-738-4922