Q&A: Upstart Ethanol CEO Tells Why He's Upbeat
VeraSun picked the right time to challenge ethanol industry giant Archer Daniels Midland, with a lower-cost method of producing the alternative fuel. The Brookings, S.D., company, which was founded in 2001, just four years later–with oil and ethanol prices climbing–became the No. 2 ethanol producer. Its two huge plants–one in Aurora, S.D., the other in Fort Dodge, Iowa–have a total capacity of 230 million gallons per year, and three more are under construction. Don Endres, founder and chief executive of VeraSun, which went public eight months ago, talked to U.S.News & World Report about why he's optimistic concerning the future of the business–despite the challenges of falling oil prices, rising corn prices, and potential future competition from new technologies to make ethanol from feedstocks other than corn.
You must have been happy to hear the president setting a 35 billion-gallon-a-year renewable-fuels goal in the State of the Union address.
It was good to hear him underscoring that as a key part of energy policy and the vision going forward, and we're convinced our industry is up to the challenge. From an industry perspective, in '06 we were at 5 billion gallons [annual production], and there's another 6 billion in construction over the next three years. The industry is growing, robust, and we're convinced it's going to continue to grow.
The ethanol business is based on what you've called the "inherent spread" between the price of grain and the price of energy. That spread happened to reach historic levels in 2006. But can the business continue to be profitable now that those trends have reversed? There've been some analyses that ethanol is not profitable under $50 a barrel.
They may be looking at some of the higher-cost producers. ... We invested in our business back when we had $35-to-$40-a-barrel oil, and we worked very hard to be a low-cost producer as well. You can look at the overall economics–the corn-ethanol spread. And over the long term, the economics is going to stay solid.
Ethanol provides octane to the [oil] refiners, [improving fuel-burning efficiency], and that's highly valued. It enables them to produce a suboctane blend. It improves their economics and increases their output, so it's a valuable blend component, and there's going to be strong demand because the economics for them is positive as well.
But corn prices have risen 100 percent in the past year.
Corn is the principal driver of cost, and it has moved up. We think that's a normal market response and an indication that farmers' corn is in demand. We're convinced they will step up to the challenge and plant more acres of corn. Farmers are business people just like we are. They are looking at the acres and making their decisions based on the economics. I grew up on a family farm, and both my brothers are farmers, and I can tell you there's definitely an enthusiasm over planting more corn. We are convinced the bushels will be there. And prices, over the long term, will moderate.
My grandfather farmed the same acres as my brothers and got 40 bushels an acre. My father got 80 bushels an acre. My brothers produce 160 bushels an acre. We've experienced firsthand the biggest challenge with corn production ... that we've overproduced.
Endres also addressed the "feed versus fuel" controversy over corn use and the concerns that have been raised by the livestock and food processing industries over their rising grain costs. He believes that the livestock industry will switch from using corn as feed to using "dried distillers grain" (DDG), a cheaper coproduct left over after the starch has been removed from the corn for ethanol processing. Currently, some cattle farmers add a small percentage of DDG to feed but consider it too rich to use in high quantities. Endres says, however, that VeraSun produces a low-fat DDG that can replace corn (and his company will convert the oil removed from the DDG into biodiesel fuel—thus squeezing three products out of one bushel of corn):
There's a transition underway. It's going to take some time until they can perfect that process. But for many, many years, livestock producers were feeding low-cost corn for protein, frankly, because it was undervalued because we were overproducing corn. And they got hooked on feeding corn.
We notice in the local market that livestock and corn producers have made the transition, and they're very happy. Distillers grain has become highly sought after and has moved up in value.
What would the development of "cellulosic" ethanol, from cheaper feedstocks like agricultural waste and fast-growing, low-maintenance grasses, do to the corn ethanol industry?
Cellulosic ethanol will be developed over the next five years, and I believe it will contribute to [the president's] goal. But we have a large potential to increase corn-based ethanol. ... Many people are assuming that because the price of corn has moved up, we have maxed out on our ability to produce ethanol from corn. And that's just not the case. The American farmer will respond and considerably increase that level.
But cellulosic is very exciting. I'm convinced it will develop, and I believe the opportunity will fit best with the current corn-based model, where you simply add to these facilities a cellulosic expansion and use corn stover [husks and waste], wheat straw, and other grasses in the same facility. ... I think really a nice synergy will come out of it. ... We have a technical group reviewing the technology, and at some point in time, when it becomes commercially viable to invest in a small-scale demonstration or full scale, we'll make that investment.
Can you sum up the impact of the ethanol business on the Midwest?
It has changed our landscape. For many years, we've been exporting our corn and exporting our young people. Ethanol is not only new demand for corn but new jobs for the families that live here. With cellulosic, you'll extend that throughout the country.