Ethanol industry ailing

FERGUS FALLS - The U.S. ethanol industry's woes have hit the Otter Tail Ag Enterprises ethanol plant in Fergus Falls.

The plant faces serious financial difficulties, including debt of nearly $650,000 to Otter Tail County.

Though the industry's prospects are improving, plants nationwide are still struggling after "an imperfect storm" of factors last year, said Ron Lamberty, vice president of the Sioux Falls, S.D.-based American Coalition for Ethanol, an industry trade group.

Hardest hit were plants that opened last year, when a combination of high corn prices, declining gas prices and tight credit markets squeezed ethanol producers, he said.

"A lot of plants had trouble (financially) last year. The ones that had the most trouble were the ones that just got open," he said.

The Fergus Falls plant opened in the spring of 2008.

Lamberty said he's unfamiliar with the Fergus Falls plant's specific situation, but that what happened there is "kind of a familiar story."

A little background:

Midwestern corn dominates the U.S. ethanol industry, and most ethanol plants are in the Midwest.

Ethanol production - and the number of ethanol plants - shot higher in recent years, in large part because of government mandates for more use of it.

The U.S. produced about 9 billion gallons of ethanol last year, up from 3.9 billion gallons in 2005.

In 2005, America had about 80 ethanol plants. Today, there are about 220.

Lamberty estimated 175 to 180 of the 220 are operating, with about 20 idled and another 20 in some stage of construction.

Higher corn prices, which shot from $3.40 per bushel in the spring of 2007 to more than $8 per bushel in the summer of 2008, hammered plants' profitability last year, Lamberty said.

Because ethanol is an alternative to gasoline, falling gas prices in 2008 lowered ethanol's price, he said.

Finally, many ethanol producers suffered last year when the financial crisis limited their access to capital, Lamberty said.

Plants' ability to overcome those hurdles depends in part on how long they've been in business, he said.

"If you've been open for five or seven years, you've had time to pay your debt down, you've had time to make some profits and get some money in the bank," he said.

Plants that opened last year didn't benefit from the industry's prior success and consequently suffered more, he said.

Fergus plant debt

Otter Tail Ag Enterprises owes $61.5 million to a number of lenders, including lead lender AgStar Financial Services, and repayment is due by Friday, said Otter Tail County Auditor Wayne Stein and AgStar spokeswoman Heather Leiferman.

AgStar Financial Services could take legal action to collect on the debt if it's not paid by then, according to a letter from AgStar to Anthony Hicks, chief executive officer of Otter Tail Ag Enterprises.

Hicks told The Forum on Monday that he couldn't comment on the plant's status or the company's plans.

But he did confirm that the plant, which can produce 55 million gallons of ethanol annually, is still operating and that it employs about 30 people.

AgStar Financial Services isn't commenting because of client confidentiality, Leiferman said.

AgStar, based in Mankato, Minn., provides financial services to farmers and rural communities in Minnesota and Wisconsin.

Otter Tail Ag Enterprises also owes $648,000 Otter Tail County, which also lent money to the project. Some of the money was due in January and the rest was due last week, Stein said.

The money owed to the county won't be repaid until and unless the debt to AgStar is paid, Stein said.

County officials will need to look carefully at how to deal with Otter Tail Ag Enterprises and its debt, he said.

Other area plants

The Fergus Falls plant is one of four area ethanol projects in recent years.

Plans to build an ethanol plant near Jamestown, N.D., were scrapped earlier this summer. Officials said changes in the ethanol industry hurt the project's chances.

A Hankinson, N.D., plant, built in 2006 and capable of producing 110 million gallons of ethanol annually, is idle as a new owner is sought.

The former owner of VeraSun, a Sioux Falls, S.D.-based ethanol company, ran into financial problems and filed for Chapter 11 bankruptcy protection last fall.

A group of lenders, led by AgStar Financial Services, took over some of VeraSun's plants, including the one in Hankinson.

AgStar is optimistic that a buyer for the Hankinson plant will be found, Leiferman said.

The fourth area ethanol plant - the Tharaldson ethanol plant near Casselton - opened early this year and continues to operate.

It has 50 employees and can produce as many as 120 million gallons annually.

Russ Newman, vice president of development for Tharaldson Energy, said the plant benefited because it opened after corn prices had fallen sharply.

"It helped that we were lucky with our timing," he said.

Lower corn prices - down by half from their year-ago highs - bode well for the ethanol industry's future, he said.

Lamberty said it may take years for some plants to overcome financial harm suffered in 2008.

Even so, "The good news is, things are much better than they were a year ago," he said.

-----

The Forum and the Echo Press are both owned by Forum Communications Company.