Golden Grain Energy

Source: Energy Digital

Date :01/06/2007 18:33:41

Corn saved the Pilgrims and now Golden Grain Energy is using it to help clean the nation’s air and reduce dependence on foreign oil

Written & Produced by James Buchanan & Kevin Doggett

Consensus is quickly building within the U.S. and around the world that ethanol should be pursued as a means to replace fossil fuels.

And with the race on to increase the use of ethanol, Golden Grain Energy is finding itself in something of the catbird’s seat.

According to the American Coalition for Ethanol’s website, ethanol production “drives economic development, adds value to agriculture, and moves our nation forward toward energy independence. Its use cleans America’s air and offers consumers a cost effective choice at the pump.”

Following the laudatory talk of the effects of ethanol production within the U.S., President George W. Bush has recently announced an agreement with Brazilian president Luiz Inacio Lula da Silva to increase the development of ethanol as a leading alternative to oil. According to the agreement, the U.S. and Brazil will share technology to enhance ethanol production and push its development across South America and the Caribbean.

Companies such as Golden Grain that are already on the leading edge of this alternative fuel are in a great position to increase production and grow profits. For example, Golden Grain, which is owned by its 800 members, (of which 60 percent are farmers in northeast Iowa,) has seen extraordinary growth since going online in 2004.

The company currently produces more than 55 million gallons of ethanol annually on its 70-acre plant site near Mason City, Iowa. According to the company, earnings for the fiscal year ending October 31, 2006, were $42 million, which represents an increase over the previous year of 218 percent. The company attributes that dramatic increase to a 32 percent increase in the price of ethanol and a 30 percent increase in the number of gallons they have sold.

The company also produces wet and dry distillers grains for feed for local livestock producers. The distilling process, which essentially removes the starch for ethanol, leaves a feed with approximately three times the fat, protein, fiber and minerals of regular corn. Being located so close to many livestock operations is an added bonus as it reduces the cost of delivering it to farmers.

To address growing demand, later this summer, Golden Grain expects to bring its expanded facility online, which will grow production to approximately 150 million.

To produce ethanol at the company’s current rate, Golden Grain purchases and processes approximately 19 million bushels of corn, with 90 percent of that grown within a 30 mile radius of the plant.

However, there are issues that have arisen to challenge this budding industry. For example, according to the U.S. Department of Agriculture, ethanol production nationally grew last year to consume approximately 20 percent of the corn crop and is expected to take another 25 percent this year.

As supply is decreasing, prices are increasing. Last year a bushel of corn cost approximately $1.20, but has gone up to $3.20 as of February, 2007. This increase in the cost of corn, says the USDA, has increased the cost of feed for livestock, driving up prices to consumers.

As stated above, the price of a gallon of ethanol has gone up by 32 percent over last year, and could be expected to increase as well, with the increased cost of a bushel of corn. According to Chad Kuhlers, plant manager for Golden Grain, the cost to produce a gallon of ethanol has increased by approximately 70 percent as the cost of corn has increased.

“What that really means to us,” he says, “is that it squeezes our margins, which cuts down on our profitability for every gallon we produce.”

Where they may really feel a pinch is when the industry as a whole reaches the target set under the federal Renewable Fuels Standard. The standard requires gasoline refineries to include ethanol as an oxygenate (oxygenates help engines burn gasoline more efficiently, reducing emission of air pollutants) in the gasoline it produces. When passed, the RFS requires the use of 7.5 billion gallons of ethanol by the year 2012.

This requirement means that as long as total ethanol production is below the target, then there is a market for ethanol that is set at a price relative to the cost of a gallon of gasoline.

“The price of ethanol is a function of the cost of gasoline,” Kuhlers says. “If a gallon of gas goes up by 10 cents then ethanol will go up by about 8 cents per gallon.”

However, once the RFS standard is met, the supply of ethanol will surpass the demand. Refineries are required to use up to 7.5 billion gallons of ethanol to meet oxygenate requirements, but not one gallon more. Therefore, if the standard is not increased the price of ethanol will drop. Kuhlers estimates that the 7.5 billion gallon target will be hit this summer in either June or July. That means each gallon they produce after that will be at a reduced price.

“We now sell our product at a premium because of the need by refiners to meet the Renewable Fuels Standard,” says Kuhler, “after the goal for the standard has been met we will have to sell at a discount.”

One of the ways to mitigate this issue, says Kuhler, would be to put ethanol on the open market so that it is traded on the New York Mercantile Exchange like other commodities. By doing this, he says, the price per gallon of ethanol could be stabilized.

For its part, Golden Grain is taking a two pronged approach to mitigating the double whammy of corn cost increases and a potential drop in the per- gallon cost of ethanol. The first prong is to negotiate contracts with corn growers to lock in prices over a set period of time.

Asked if increased corn production could resolve the cost issue, Kuhlers says, perhaps.

“More production might help,” he says, “but there are more ethanol plants going online and production over all is increasing.”

Kuhlers adds there definitely will be more acres dedicated to corn this year, but they could be of limited productivity. “Are these acres the best ground for corn or some other crop,” he says.

To address a potential drop in ethanol prices, Kuhler says Golden Grain is looking within its operations to cut the cost of production. For example, they have installed an Advanced Process Control system, which helps plant operators maximize their real-time operations of the plant.

The plant expansion project will also help increase profitability.

“Most of our costs are fixed costs,” says Kuhler, “so by more than doubling our capacity while our costs remain relatively fixed, we will be able to cut our cost to produce a gallon of ethanol.”