Farmer Cooperatives and local investors have had a dramatic impact on the growth of the biofuels business, especially the ethanol business. In January 1999, 28% of the country's 50 ethanol plants were locally owned. Eight years later, nearly 42% of the country's 110 ethanol plants were owned locally, according to the Renewable Fuels Association (RFA).

Figures for ownership of biodiesel plants are not readily available. But, in general, these plants are more likely to be individually owned (which does not exclude farmers or local agribusinesses) or owned by large oleochemical processors like Archer Daniels Midland (ADM) and Cargill, says Todd Alexander, partner, Chadbourne & Parke, New York. Alexander's practice includes representing lenders to developers of ethanol, biodiesel and other energy businesses.

Up until about six months ago, some publicly held companies were attempting to buy out locally owned ethanol plants. But, until recently, as ethanol prices have fallen, there was no reason for existing owners to get out of the business, says John Urbanchuk, director, LECG, Wayne, PA, which provides economic, planning, marketing and policy analysis consulting services.

Even now, Urbanchuk does not see a big departure of local owners from existing ethanol plants, although of about 80 ethanol plants that are currently under construction, only 9% are owned by farmer cooperatives or local investors.

The pace of ethanol plant construction and farmer ownership will likely slow because plants have gotten bigger to take advantage of economies of scale. Today's average plant produces 50 to 60 million gallons a year and requires significant capital investment ($2.25/gal. of annual capacity). It will be more difficult to raise equity for such projects in the future, Urbanchuk says.

In the next decade, ethanol plants will likely have a hybrid ownership: farmer cooperatives or local owners partnering with another equity partner, such as a real estate investment trust, Urbanchuk says. Some of these types of arrangements already are being brokered by venture capitalists, he adds.

From corn to cellulose

Concerns about future profitability as well as capacity could slow expansion, Urbanchuk says. The U.S. ethanol industry produced a record 4.9 billion gallons of ethanol in 2006. With more ethanol plants under construction and eight existing plants expanding, the RFA forecasts an additional 6 billion gallons of new production capacity by 2009.

The current demand for ethanol and other additives is 14.5 billion gallons a year, so expansion may not really be needed, Urbanchuk says.

However, President Bush's goal of replacing 75% of the country's oil imports from the Middle East by 2025 with ethanol and other energy sources will likely keep investors interested in the biofuels market. More investors, including farmers and farmer cooperatives, will look seriously at the new opportunities of cellulosic ethanol, Urbanchuk says.

Farmers and others outside of the Corn Belt also could become interested in cellulosic ethanol because of the different feedstocks (for example, switchgrass and other energy grasses, poplar trees) that could be used in production. As a result, there could be a wider geographic distribution of ethanol plants in the future.

However, the cost of cellulosic ethanol plant construction and the amount of equity required could again pose some challenges for farmer-owned cooperatives and local owners, Urbanchuk says. With cellulosic ethanol, other industries, such as the paper and forest product businesses, could get involved in funding processing projects.

Biodiesel plants

According to the National Biodiesel Board, there are currently 160 biodiesel plants in the U.S. producing about 1.85 billion gallons annually. The average plant produces about 12 million gallons of biodiesel. The cost to build a plant is about $1.00/gal. of annual capacity.

One reason farmer cooperatives own fewer biodiesel plants than ethanol plants is that most cooperatives do not have the type of capital-intensive soybean-crushing facilities that companies like ADM and Cargill do. Relatively few of today's biodiesel plants use feedstocks other than soybean oil, although more will likely use multiple feedstocks in the future, says Chadbourne & Parke's Alexander. And today's higher soybean prices have tightened margins in the biodiesel business.

As a result, some companies with biodiesel interests are selling out. A trend toward consolidation makes it more difficult for small shareholder groups to control assets, Alexander says. Moreover, many biodiesel plant projects will not be completed because their planners have been unable to finance equity drives.

But if investor groups do have the equity, debt sources are available, Alexander says. The best strategy is a well-conceived project — for example, a plant that would be built on either coast to take advantage of export markets. “European demand for biodiesel is good,” he says.

Projects that call for using feedstocks other than soybean oil also would help other investors diversify their risk profile, Alexander says. The plants that use feedstocks must show comparative advantages over biodiesel plants that use soybean oil.

Wall Street is interested in biodiesel but has not been investing a great deal in it lately. “Given the tight margins, it's a tough sell,” Alexander says. “At the same time, if a plant has the ability to export biodiesel to Europe or if it is co-located with a terminal or a crushing facility, there is interest.”

In the next 10 years, more U.S. biodiesel plants may be owned by other countries, says Alexander, explaining that Europeans are more bullish on biodiesel than Americans. Moreover, they have been investing in wind energy and ethanol here.

Finally, Alexander believes the biodiesel business will further consolidate. He says, “We'll continue to see firms come in with strong risk management programs.”

In January 1999, 28% of the country's 50 ethanol plants were locally owned. Eight years later, nearly 42% of the country's 110 ethanol plants were owned locally, according to the Renewable Fuels Association.

Today's average ethanol plant produces 50 to 60 million gallons a year and requires significant capital investment ($2.25/gal. of annual capacity).

The current demand for ethanol and other additives is 14.5 billion gallons a year.

The U.S. ethanol industry produced a record 4.9 billion gallons of ethanol in 2006.

With more ethanol plants under construction and eight existing plants expanding, the RFA forecasts an additional 6 billion gallons of production capacity by 2009.