Future direction: Endres recently sold his stake in the co-op ethanol plant. The VeraSun team is now focused on constructing a 110-million-gallon plant with corporate structure and local private equity investors in Fort Dodge, Iowa.

Great Plains Ethanol

• Chancellor, S.D. (2003)
• Limited liability company owned by 500 members
• 40-million gallon, dry mill plant operated by a professional management company
• Example of turn-key ethanol plant investments

Turn-key management is one new model for farmer-owned ethanol plants, with several firms specializing in packaging the plant from design to ongoing operations management. The Chancellor, S.D., ethanol facility is a good example of how hired management can reduce the risks of independent farmer-owned ventures, while sharing a portion of the stockholders’ profit. It’s a cookie-cutter strategy to ethanol investments that can be considerably safer than a launch by farmers inexperienced with the manufacturing process or lacking industry contacts.

Broin Companies was hired to supervise the equity drive, the design, construction and operation of the plant. Plant managers work directly for Broin and rely on the company to hedge risks like fluctuations in grain prices and natural gas costs. This company also captures economy of scale for its customers by marketing DDG byproducts under a branded label. The board of directors includes both farmers and experienced business leaders and meets every few months.

A management firm’s experience can reduce the chances of a flawed engineering design or other management errors. The Chancellor plant was built in a record 10 months instead of the normal 13. The firm has been involved in ethanol production for over 20 years, with 23 plants completed or in the building phase. Currently Broin manages 17 of those operations. In addition to management fees for its services, Broin maintains partial ownership collecting a proportionate share of profits.

Chancellor offered the advantages of a relatively wide corn basis and large local corn supply. Other considerations were water, rail, gas and electrical availability. The facility is on the Burlington-Northern line with good access to the West Coast.

Future direction: The Midwest’s ethanol building boom could place plants too close together and erode profitability, managers say. In addition, ethanol imports under more relaxed free trade agreements could mean very low cost competition for ethanol producers in the next few years. Energy prices were so high in mid-2004 that ADM reportedly imported ethanol from Brazil for the New York market, and could still make money paying the 54¢ per gallon import duty.

Siouxland Energy & Livestock Cooperative

• Sioux Center, Iowa (opened 2001)
• 14-million gallon ethanol plant producing high moisture distillers grain
• Close affiliation with a nearby feedlot saves natural gas and drying costs, often the second largest expense of ethanol production
• Members benefit by harvesting high moisture corn and needing no on-farm storage for grain committed to Siouxland

Siouxland Energy & Livestock Cooperative may lack the sophistication of a corporately managed ethanol plant, but it offers members and its livestock-based community substantial benefits. Even though investors have not yet been fully compensated for their grain, it is in the process of turning the corner from a struggling venture with a flawed engineering design to an economic contributor.

Hiring engineers with a proven track record to design and build a plant would be top of this co-op’s recommendations. After a year of operations, the co-op’s financial projections had veered far off course due to fermentation problems. The plan had been for growers to deliver 25% to 32% moisture corn to the plant at harvest, but ethanol conversion rates were far below projections, due to a series of design problems. A second engineer was hired to correct those design flaws, improving conversion rates 50%. Conversion rates are now significantly higher using 19% moisture corn and a modified production process.

The main benefit to farmers is that they can deliver wet corn without the expense of drying or storing. Those savings are worth about 46¢/bu. to growers, on top of any dividends they might receive from the plant’s profits. Meanwhile, a co-op affiliate feeds distillers grains to cattle and markets any surplus high-value feed co-products to local livestock producers. The plant also employs 27 people who earn average salaries of about $35,000 a year.

Future direction: Ethanol is already becoming tomorrow’s commodity. Small volume operations like Siouxland could have trouble competing against industry giants or cheap South American imports in the future. The upper Midwest could be saturated with too many plants, managers also worry. To stay competitive in the industry, Siouxland is direct marketing E-85 blends (85% ethanol vs. the standard 10% ethanol) to cut distribution costs and sell more of its product directly to customers. It also has increased production capacity to 22 million gallons per year and is looking at the feasibility of producing methane from waste products to further reduce energy costs.

Dakota Premium Hay

• Meckling, S.D. (2002)
• Sell premium hay as a convenient forage product for horse owners
• Repackage bales into size easily handled by hobby farmers and stables
• Scrap the livestock feed mentality that favors high-protein hay over aesthetics

South Dakota Ag Producer Ventures, a type of venture capital group that invests in a variety of value-added ventures, describes Dakota Premium Hay‘s mission as “providing nutritionally consistent, blended hay bales to the growing high-end equine marketplace in the United States. Compact and convenient Dakota Premium hay bales are finding success as far away as Florida and Texas.”

This is a prime example of a success story utilizing a marketing strategy that worked so well that the demand exceeded the company’s ability to deliver the product. This two-year-old company has not made money yet as technical difficulties rebaling round bales hampered production. The key to success will be to match their production capacity with demand for their product.

One important fundamental is that the pet food market is growing, with more horses in the United States today than when horses were used for locomotion. Many owners live on hobby farms where ease of handling hay/feed is of prime importance. The concept of easy to handle bales (50-lb.) has led to an increase in market demand. Horse owners want a one-stop pickup point of consistent quality hay. The company started out stressing protein values but soon learned that green hay was of primary concern to horse owners. It’s newest product line slices large square bales into smaller sizes, stacks them with shrink wrap on pallets and ships them to feed supply stores or boarding stables.

Several problems arose at the start, the first being loss of leaves and moisture in rebaling. Second, some employees did not have manufacturing experience and approached the business from a farm operation perspective. Staffing the plant led to inefficiencies in shipping, scheduling, freight rates, procurement and production. Equipment broke down and the company ran out of capital.

Future Direction: The company has since hired professional management and no longer uses round bales. It has now completed a second equity drive and has ordered new equipment for retooling. It sources hay from South Dakota, rather than importing it from Canada. Managers now factor in the value of time in production. In addition, owners say they underestimated the amount of capital needed to get startups off to a smooth launch.

Dakota Layers

• Flandreau, S.D. (launched 2002)
• Limited liability egg production company with 140 local investors
• Benefits from the synergy of corn farmers who earn more for their crop, a fertilizer dealer who contracts waste for organic fertilizer and an experienced poultry partner with established relationships in the Arizona egg market
• Advantage of European-style egg production facility with permitting for 2.3 million birds
• Entered market just as industry rebounded from losses to highest egg prices in recent history

“Eggs are our business” is the motto of Dakota Layers, a model venture initially organized by crop producers and local businessmen with no experience in poultry, but who acquired the outside expertise they lacked. In an area with notoriously low grain prices, the founders’ goal was to generate jobs and perhaps raise the local corn price by 10¢ per bushel when at full capacity. But the nearly flawless launch demonstrates the importance that novices in a livestock venture align with a business partner knowledgeable in production practices and marketing. Dakota Layers’ biggest key to success is that it teamed with a well-connected equity partner who had considerable experience in the Arizona egg industry. He not only invested in the venture, but he agreed to buy the eggs under a seven-year contract and promised to find other customers for Dakota Layers.

After three years of planning, investors raised 40% of the initial $10 million capital requirement, including a federal grant of $131,000 and borrowed the balance with personal guarantees from a handful of key investors. In Phase One, they built five of the eventual 10 barns permitted for the site, with plans to house 230,000 birds per barn. The operation currently employs 40 people.

The venture capitalized on a strong dollar compared to the Euro and purchased a state-of-the-art egg-laying and conveyor system from Germany. This technology proved its advantages, since European designs had already been engineered to comply with consumer demands for animal comfort. It also allowed them to handle twice as many birds and avoid using a high rise system which creates a number of environmental problems. Consequently, their maintenance and energy costs are kept low. The facility has a separate profit center that processes the poultry litter to manure for an outside fertilizer dealer, who in turn resells the product to corn growers in the area.

Through the luck of timing, Dakota Layers opened for business just as the nation’s egg market rebounded from a period of extremely low prices. At times in the last year, egg prices have exceeded $1/dozen above breakeven costs.

Future direction: Those profits have been maintained despite significant cutbacks in bird volume. The operation’s original capacity of 230,000 birds/building has been ratcheted down to 196,000 to comply with new industry standards of 67 square inches per bird. However, good demand for eggs since the Atkins diet craze, combined with higher prices, means the outlook for profits continues to look good. In addition to the Phoenix market, Dakota Layers is now developing regional markets in Nebraska and possibly Kansas.