The U.S. ethanol industry is growing at an unprecedented rate. With over 30 plants under construction with a combined capacity of approximately 1.5 billion gallons per year, the plants being built today equal the entire industry output of just a few years ago. This growth is being fueled by the continued phaseout of MTBE, the renewable fuels standard and high energy prices. Nearly all of this growth is from "standard" dry-grind ethanol plants using corn or milo as a feedstock. In light of this rapid growth and subsequent competition, how can you develop a successful ethanol project in today's industry? This article will present some strategies that may be right for your project.
 
 Getting started
 You will be purchasing some real estate for your project, so let's start with choosing a location. What's the best location for an ethanol plant today? In a cornfield? Near a large ethanol market? Near a distillers wet grains market (e.g., feedlots and dairies)? The answer is yes, yes and yes. You might also look for a location near low-cost energy and good transportation—roads, rail and water, if you can find all three together. Sites outside of the Corn Belt can also be viable if there are product, transportation or energy advantages that offset the higher cost of corn outside of the Corn Belt.
 
 Once you have that perfect location, you will need to do some more homework. A feasibility study is always recommended to confirm that the site and the project overall is a feasible one. Do not proceed with a marginal project. When tough times come—and they will—your business may find itself in financial trouble. Your feasibility study should confirm that your site or sites possess the required site infrastructure: roads, rail, water, energy, electricity, water disposal, community support and a trainable labor force.
 
 The feasibility study should also document feedstock availability as well as historical pricing for the feedstock, ethanol, distillers grains, energy and other production inputs. With this data, along with the capital cost to build the plant, a financial analysis can be conducted to determine the potential returns for the project. The returns should be high enough to justify the investment risks. The returns should also indicate that the proposed project will be competitive in today's ethanol industry. Again, you do not want to build a marginal project and end up being a high-cost producer. This is a recipe for disaster for you, your investors, the lenders and the industry in general.
 
 If your project will be a start-up venture (no other source of income other than the ethanol plant), think long and hard about using new, non-commercial or unproven technology for your project. If the technology does not work or takes months to get on line, how will you make debt payments and meet other financial obligations? Having a backup plan may mitigate these risks, but be very careful about investing millions in a new technology that may not work as planned. Cash flow for a start-up venture is critical, and your project must perform as planned to avoid serious financial problems including bankruptcy. 
 
 Following a positive feasibility study, you will need to write and then implement a business plan. Keep in mind that everything you do to develop the project will eventually be reviewed and approved by your senior lender. Your plans for designing and building the plant, marketing your products and procuring raw materials must meet the minimum requirements of lenders. Not all lenders are alike, but the leading lenders in the industry today will be looking for a design/build team with a proven track record, marketing companies that are leaders in the industry, and solid plans for procuring grain and energy at the lowest cost with an integrated risk management plan for grain, ethanol and energy.
 
 You should plan on raising 40 percent equity with 60 percent debt financing, although some lenders will lend more of the project capital for exceptional projects. Today, the two most popular ways to raise equity are a private placement or a public offering. A private placement can be initiated in a relatively short period of time, but advertising your project is not allowed, and your investment pool may be limited. 

 
 A public offering can take several months to gain Securities and Exchange Commission (SEC) approval and will likely be significantly more expensive than a private placement. Once approved by the SEC, however, a public offering should provide greater access to capital, increased public awareness (advertising is allowed) and increased liquidity to investors (stock can be sold). The public offering route will result in higher ongoing costs for reporting, and SEC regulations require public companies to release all operating details to the public, including sensitive information about their markets, profit margins and future plans. Be sure to utilize your legal council throughout the development of the project for this and other important project development issues.
 
 Gaining an advantage
 Throughout the development process, you will need to keep your focus on developing a "financable" project—one that lenders and investors alike will find attractive and worthy of investment. To accomplish this, you will need to set your project apart from the dozens of others vying for investment and debt capital. An outstanding management team is one way to accomplish this. Other strategies include: locating your project where there is low-cost grain available with little competition, selling all or a significant portion of your distillers grains wet (thus avoiding drying costs), increasing net ethanol income by reducing ethanol transportation costs (selling to local markets without depressing local prices), and purchasing or producing energy at an overall cost that is lower than natural gas, the most common energy source for ethanol plants in the United States.
 
 To give you insight as to where to look for that all-important "advantage," the impact of key project variables on profitability of a "typical" 50 MMgy dry-grind ethanol plant with corn or milo feedstock is shown in <a href="#" onclick="moreImagesSpecific(1837, 234);">Table 1</a>. For this example, we used $2.30 per bushel for the feedstock price, $1.40 per gallon net ethanol income and $8.00 per million Btus for thermal energy costs. The resulting pre-tax income for this typical plant is $10 million annually. The return on investment (ROI) for a $32 million equity investment in the project is 31 percent. 
 
 If all of the distillers grains are sold wet at a price equal to 96 percent of the price of the feedstock grain on a dry weight basis ($32.47 per ton of distillers wet grains), the pre-tax income increases to $14 million, and the pre-tax ROI increases to 44 percent.
 
 If the cost of thermal energy input to the plant is decreased $2.00 per million Btus, the pre-tax income is about $13.5 million and the resulting pre-tax ROI is 42 percent. If the cost of grain is decreased by 20 cents per bushel, the pre-tax income is $12.6 million, and the pre-tax ROI is 39 percent. Finally, if the net income from ethanol sales is increased 4 cents per gallon, the pre-tax income is $12.2 million, and the pre-tax ROI is 38 percent.
 
 The typical plant with no "advantage" has a very respectable projected return of 31 percent on a 40 percent equity investment. To do better than this, look at the project variables that have the greatest impact on the projected returns, and invest your time to improve your project in those areas. Selling distillers wet grains can cut your energy cost by up to one-third and yield great dividends. Purchasing or producing steam at a cost lower than natural gas can have a similar positive impact on returns. Lowering your grain cost and increasing your net ethanol income will also make your project more attractive to investors and lenders alike, and financing your project is after all, the end game in project development. EP
 

 Mark Yancey is vice president of BBI International Project Development. Reach him at <a href="mailto:myancey@bbibiofuels.com">myancey@bbibiofuels.com</a> or (303) 526-5655.

Project Development in a Booming Ethanol Industry

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Upcoming Events

2024 International Fuel Ethanol Workshop & Expo

Biodiesel Summit: Sustainable Aviation Fuel & Renewable Diesel

Carbon Capture & Storage Summit

North American SAF Conference & Expo

2025 International Biomass Conference & Expo

Project Development in a Booming Ethanol Industry