The idea of putting alcohol fermented from corn into your gas tank was foreign to most people 20 years ago. So was the idea of investing in a plant to produce it.

“Nobody would touch ethanol with a 10-foot pole when I started out,” said Jeff Broin, whose father launched his company’s first production facility – a 250,000-gallon ethanol plant on the family farm in South Dakota – in the mid-1980s.

“All the plants were marginal at best, so it was quite an evolution,” said Broin, now chief executive of the Broin Cos. The Sioux Falls-based company has since built 16 large-scale ethanol plants in the Midwest. Its first Iowa plant, Tall Corn Ethanol in Coon Rapids, became profitable within its first month of production last year, he said.

With the surging interest in ethanol, however, “I think there’s risk of a shakeout in the future of the ethanol industry,” he said. “It’s the intent of our company to be very efficient and be the low-cost producer when and if that time comes.”

Until about three years ago, Archer Daniels Midland Co. and Cargill were the only entities producing ethanol in Iowa, with three wet-milling plants in operation.

Now, Tall Corn is one of five producing dry-mill ethanol plants in the state, in a high-octane industry that can’t seem to build plants fast enough. With four new plants under construction and another five in the planning stages, Iowa is on track to surpass Illinois as the nation’s top ethanol producer by 2005, according to projections by Iowa State University economists.

Collectively, Iowa’s ethanol producers currently generate 600 million gallons of ethanol. That production is expected to ramp up to at least 830 million gallons within the next two years.  It was in 1999 that the interest in farmer-owned ethanol production really took off, said Lucy Norton, director of marketing for the Iowa Corn Promotion Board and executive director of the Iowa Renewable Fuels Association.

“With low corn prices, farmers were looking for another market to sell their grain, and it provided them the opportunity to be an owner in a value-added production facility,” she said.

All of the ethanol plants planned or under construction in Iowa are the dry-mill variety, because those are less capital-intensive to build than wet-mill plants, Norton said. A typical dry-mill plant costs roughly $1 per gallon of annual production, meaning a $40 million to $50 million investment for the average-sized plant.

The wet-mill plants, which separate the byproducts to produce higher-quality animal feed, have become uneconomical to build because the byproducts are priced the same as corn.

The desire for greater energy independence and cleaner air are among the factors driving demand for ethanol, Norton said.

“The banning of (the fuel additive) MTBE in California was a primary reason we saw an increase in interest in building more ethanol plants,” she said. That demand has now intensified with state bans in the Northeast and the potential for a national ban on MTBE, she said.

In the northwest corner of the state, Little Sioux Corn Processors LLC’s 40-million-gallon-per-year plant began production in April. Like most of the plants that have recently been built or are in the planning stages, the majority of the limited partnership’s 645 investors are farmers.

Though it does not release financial figures, the operation is running at or above its capacity and has “a positive cash flow,” said Steve Roe, the plant’s general manager.

“I think with the plant up and running and the success we’re having, [the investors’] perception of the risk is fairly small,” he said.

Little Sioux ships the majority of the ethanol it produces out of state, Roe said, both east into the Chicago and New York markets as well as west to the Denver and California markets.   Sales of dried distillers grains and soluables, a byproduct of ethanol production that’s a high-quality animal feed, is an important part of the business. “It can return a third of your corn cost every month,” he said. Seventy percent of the grain is sold within 100 miles, with the remainder going out by rail to buyers as far away as New England and New Mexico.

The markets for both ethanol and dried distillers grain are national and rapidly becoming international, Norton said.

“Some of them are going to market it locally; some are going to send it to the East or West Coast,” she said. “It’s going to depend on what their transportation capabilities are and what they’ve decided their market is.”

Initially, ethanol plants in Iowa were clustered on the far east and west sides of the state, within about 70 miles of the Mississippi and Missouri rivers, because the cattle concentrations make them good markets for marketing the grain byproducts, said Paul Gallagher, an associate professor of economics at ISU.

“The ones we’re moving into now are more centrally located; there aren’t a lot of local cows around. That means you have to ship the byproducts out,” he said. “The corn’s a little cheaper, though.”

Researchers are close to being able to pull out the corn oil in the dry milling process, however, “which would give you some of the advantages of wet milling without the higher cost,” Gallagher said.

Within the past three years, the average return on investment for ethanol plants has been as high as 35 percent, though in other years, they just broke even.

Though most of the new plants are stand-alone operations owned by independent investment groups, three of the new Iowa plants will be under management of the Broin Cos., which by next spring will manage 14 ethanol plants in the Midwest. In addition to the Tall Corn plant, Broin will manage the Otter Creek plant in Ashton and Voyager Ethanol in Emmetsburg.   The plants have an advantage in sharing risk management programs, joint purchasing agreements, and research on new processes and technology, Broin said.

“What we’re doing is leveraging our 20 years of experience across all the plants in the group, and that has been very profitable for our partner plants,” he said. As a group, Broin’s plants currently produce more than 450 million gallons of ethanol per year, and more than 1.2 million tons of distillers dried grain per year, which gives it strong market leverage, he said.

“We think we have significant advantages over stand-alone facilities,” he said. “We feel that our investors with the Broin Cos. will be much happier over the long term.”  The ethanol industry in the past has been sensitive to price fluctuations in corn, with plants shutting down when corn reached $3 to $5 a bushel. That risk will affect some operations more than others, Broin said.

“We’ve seen some plants that haven’t been located in the right place; it’s critical they be located in the right place for corn supply, and we’ve seen some mistakes in that in the past year,” he said. “We’re concerned that investors are not considering the risk aspects of this. It’s rare to find a suitable site for an ethanol plant; they won’t work everywhere. Siting, design, management and marketing are really critical factors. As the industry grows, we hope it grows intelligently.”

Roe said he believes most plants’ business plans have adequately weighed corn supply and other critical factors.

“There are probably some that will fail because of mismanagement,” he said. “I think the percentage will be fairly small. That happens in every business. But I don’t think they’ll sit idle; I think someone will come in and take them over. It all boils down to the management you have in the company.”

Natural gas supply and access to main rail lines will be among the definitive factors in how many more ethanol plants Iowa can support, Roe said.

“There will be more plants built if the business stays reasonably profitable,” he said. “As in any business, there’s going to be a time when returns are lean. I think the industry has a good future; I’ll say it over and over again, it all comes down to management.”

RECORD PRODUCTION

The U.S. ethanol industry is expected to produce more than 2.7 billion gallons in 2003, up from a record annual production of 2.13 billion gallons in 2002, according to data released earlier this month by the U.S. Energy Information Administration. Currently, 74 ethanol plants have the capacity to produce more than 3 billion gallons annually.

A potential major boost for the industry is the proposed Renewable Fuels Standard in the federal energy bill, which would drive production to increase to 5 billion gallons annually within the next 10 years.

Also driving the market, Norton said, are other possible uses for ethanol that are now being explored, such as e-diesel, a mixture of 10 percent ethanol with diesel; and e85, an 85 percent mixture of ethanol with gasoline.

The Iowa Corn Promotion Board is helping to fund commercialization work in e-diesel as part of a multi-million-dollar research project with John Deere & Co., she said. Additionally, the U.S. Department of Energy recently provided $1 million in funding toward e-diesel research.