Is dot.corn honeymoon over?

Profits squeezed as corn costs rise, fuel prices drop

Gargi Chakrabarty, Rocky Mountain News

Published October 13, 2007 at midnight

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FOURTH IN AN OCCASIONAL SERIES

YUMA COUNTY - The massive combine roared over the corn field, severing the rows of stalks and seemingly inhaling fully formed ears in the process.

Sitting in the machine's cab 10 feet off the ground, Jim Lenz steadied the steering wheel with one hand and threw a switch with the other. Looking back over his shoulder, he could see a rainbow of golden kernels spew into a rear-mounted bin at the rate of 30 bushels per minute. The waste - stalks and shelled cobs- was strewn behind.

The bin filled up in about 10 minutes, enough to load about one-third of a semi-trailer. On a good day, the combine can spit out 30,000 bushels of kernels.

"In the olden days, farmers would pick the ears and store them, and shell them in winter by hand," Lenz said.

He began combining the corn in mid-September and expects to be done before the end of this month - at which time he will have harvested 700,000 bushels, the most corn the Lenz family of Wray has ever grown.

One-third will be trucked to a new plant 30 miles to the west where the kernels will be crushed, fermented and distilled into ethanol motor fuel. Nearly half of the 42 million bushels grown in the county this year will be gobbled up by the new plant, Yuma Ethanol.

The county must import additional corn from surrounding counties and neighboring Nebraska to keep up with demand from local feedlots and hog farms. It will have to buy even more outside corn if plans for a second distillery, Panda Ethanol, materialize.

With the demands on corn production what they are, Yuma farmers face the ironic prospect of being forced to reduce output in coming years because of impending water restrictions in the Republican River basin - the result of a long legal spat with Kansas and Nebraska.

Considering it all, Lenz said, "I don't think a second plant in the county is a good idea."

Lenzes invested in plant

The Lenzes invested hard- earned cash into Yuma Ethanol, as did other prosperous farmers, betting on the popularity of the alternative fuel.

They don't welcome a competing plant at a time when ethanol profits are trending downward, and as some national publications are predicting an ethanol bust - or at least a major slowdown.

The motor fuel got its rise as a cleaner, domestically produced alternative to gasoline.

Federal mandates to encourage ethanol in fuel blends, generous subsidies to blenders and stiff tariffs on imported ethanol led to a rapid expansion of distilleries and a surge in the demand for corn in recent years.

But corn prices are now hurting the profitability of ethanol.

Since May, the spot price of ethanol has nose-dived 30 percent as corn prices climbed. New plants are surpassing the infrastructure in place to distribute the fuel, further worsening local supply gluts.

Jack Cassidy, a vice president at rural lender CoBank, said the ethanol industry will see some upheaval in the short term and some investors might fall out. Among the nation's top ethanol backers, Greenwood Village-based CoBank has lent money to 90 ethanol plants during the past decade but has turned down several proposals recently.

Cassidy said investor-owned plants would be more likely to be squeezed by rising corn prices, while plants backed by corn farmers like the Lenzes have a better chance of buying crop at a reasonable price.

"We are a little concerned that there are people who have gotten interested in the ethanol business but don't understand the cyclical nature of agriculture and that profits don't go up all the time," Cassidy said. "Plants that don't have the best management or ownership structure will be under pressure."

The proposed Panda Ethanol plant in Yuma has not been able to close financing. Yuma Ethanol, which came online in late August, is projected to pay for itself in six years.

Farmer Brett Rutledge didn't invest in Yuma Ethanol. He stayed away from the "dot.corn" rush, deciding instead to spend corn profits on farm equipment and his kids' education.

It's too early to tell whether Rutledge or the Lenzes have the winning hand in the ethanol gamble. But Yuma has benefited.

"The ethanol plant is filled with local talent; the jobs are good," said Yuma's economic director Andrea Anderson. "It is utilizing local corn and increasing economic activity in the county."

Combine pas de deux

Jim Lenz pushed the brakes, bringing the combine to a stuttering halt in the middle of the field. The bin was filled to capacity.

In what was almost a synchronized instant, hired hand Gary Crites appeared on the horizon, pulling a grain cart with a tractor. Once Crites leveled up, the combine and the cart moved as one, an unloading auger transferring the kernels from the bin to the cart as Lenz continued to mow stalks.

"Gary saw the combine standing and knew he needed to come," Lenz explained of the unspoken simplicity of farm communications.

A slim, soft-spoken man, Lenz, 54, is the second-oldest of the four Lenz brothers, who, with their parents, George and Betty, run the family farm. Recently they inducted two sons-in-law as partners.

The family has a clear division of labor. Jim Lenz manages ethanol investments and corn. Both have yielded rich dividends in the past couple of years, but that could be changing.

Ethanol has dipped from $2 a gallon in 2005 to about $1.55 today. Meanwhile, corn, which accounts for two-thirds of the production cost of ethanol, is riding high, inching toward $4 a bushel - nearly double from two years ago.

Even so, Lenz expects Yuma Ethanol to pay dividends in two years.

For now, he's focusing on what the family expects to be a record corn harvest.

Highest sales ever

Sales likely will touch $2.52 million this year, way higher than the initial forecast of $2.16 million, and last year's $1.62 million.

Lenz expects to get $3.60 per bushel on average this year, 50 percent higher than last year's $2.40 and 80 percent over 2005's $1.95.

"Corn has taken us from loss a couple years ago to profit now," Lenz said.

From his all-terrain vehicle, Brett Rutledge scanned the rolling fields for the calves and young cows - about 280 head, all under 30 months old.

He kick-started the ATV and took off west, leaving his father, Don - on a similar vehicle - to bring up the rear. Within minutes, the duo managed to drive the agitated calves down the hill toward the open gates of a pen.

Rutledge got off the vehicle and jumped over the pen's wooden fence to mind the animals as they mooed and stomped their way through the gates. A semi-truck parked a few yards away made its way forward.

The three men, including the hired truck driver, coaxed the nervous animals up a ramp into the trailer.

"They don't like the truck," Rutledge said, talking above the racket.

The truck will haul the calves to Yuma's Schramm feedlot. From there, they'll proceed to a slaughterhouse, and the high-quality meat ultimately is marked for export, mostly to Japan. The Rutledges buy yearlings in the spring, raise and fatten the calves during summer, and sell them beginning in the fall.

They also raise about 450 Holsteins each year for dairy farmers.

Rutledge usually spends this time of the year harvesting corn; rounding up animals is his brother Roc's task. But since Roc's car wreck this summer, the 39-year- old farmer has been doing both jobs with the help of his father.

Harvest this year will be delayed by a week or two, but that shouldn't harm the quality or quantity of the output. Rutledge contracted 40 percent with silage harvesters for about $4 a bushel and has sold 50,000 bushels to the local co-op for hog barns. He plans to store the remaining 80,000 bushels this winter and next spring, until buyers pay the right price, which he hopes will be $4.

He said he would need the cash to operate next summer.

Fermenting the fuel

Yuma Ethanol's mill gleamed in the pale sunlight, as three enormous "hammers" in its belly crushed 4,500 bushels of corn an hour.

A conveyor belt carried the powdered corn to the main plant, just yards away. In the slurry tanks, the corn is mixed with water and enzymes to break down sugars. The mixture is blended with yeast and left in the fermentation tanks for about 54 hours. The product later is distilled to yield raw-grain alcohol, or ethanol. A denaturing agent, mostly natural gas, is added to prevent people from trying to drink it.

The leftover pulp, called distillers grain, is poured into a walled lot. Trucks deliver the gooey substance to nearby feedlots to fatten calves.

John Luciano held a test tube under a tap on the fermentation tank and filled it with an ochre liquid. He fills test tubes every six hours with fluids from different tanks. The fluids are tested in the plant's lab for quality control.

"Last night, there was a spike in fermentation," Luciano reported to plant manager Dave Kramer. "We added more yeast to bring down the sugar."

Less sugar means more alcohol, he explained.

The whole process - from trucks dumping the corn down a shaft to the grain elevators to the distillation tanks churning out ethanol - takes three days. One bushel of corn yields roughly 3 gallons of denatured ethanol.

Like its predecessor plant in Sterling, 40 miles north, Yuma Ethanol has contracted with agri-giant Archer Daniels Midland to market its product - 50 million gallons a year. This arrangement with ADM shields the local plants from some of the economic fluctuations experienced elsewhere.

The Yuma plant has already poured a concrete foundation to increase capacity by 30 million gallons. The fuel mostly will be railed to California, Nevada or Arizona, or trucked to nearby markets including Denver.

"Our business model is very successful," Kramer said. "It is a natural hedge for large corn farmers and cattle feeders - they make money either on the crop or the fuel or distillers grain."

When Kramer first floated the idea of an ethanol plant in Sterling, he had no trouble rounding up two dozen investors and $52 million. The plant took only seven months to build, went online in November 2005 and began paying dividends a year later.

Last year, the 46-year-old former seed salesman found eager investors to build a replica in Yuma.

But the rising price of steel, equipment demand and a freezing winter delayed construction by three months, and the budget climbed to $61 million.

Kramer and others recently broke ground for a new plant in Bridgeport, Neb., and are developing plans for two more. But at least one group of investors - the Lenz family - may not go along.

"Profits in ethanol are not what they used to be," Jim Lenz said. "We may have reached our limit."

Competition on the horizon?

YUMA ETHANOL PLANT

• Plant location: Yuma

• Cost: $61 million

• Construction period: 12 months, ended August

• Investors: 34, mostly farmers and cattle feeders

• Employees: 30

• Corn input: 17 million bushels a year

• Ethanol output: 50 million gallons a year

PROPOSED PANDA ETHANOL PLANT

• Plant location: Yuma

• Cost: Estimated $120 million

• Construction period: Estimated 18 months

• Investors: Dallas-based Panda Ethanol

• Employees: Estimated 60

• Corn input: 38 million bushels a year

• Ethanol output: 105 million gallons a year

Farming families

The Rocky Mountain News began following a pair of families in May. The Rutledges, of Yuma, and the Lenzes, of Wray, plant corn in Yuma County. They have found that the ethanol boom has had a big impact on their livelihoods.

BRETT RUTLEDGE, OF YUMA

Who: Brett Rutledge, born and raised in Yuma, and his wife, Kristy, a track and field and cross country coach at Yuma High School. Two boys, Forest, 2, and Miles, 1.

What: 7,500 acres, with 1,200 planted in corn

History: Rutledge graduated from Colorado State University in 1992 and came back to the family farm. He manages crop cultivation with the help of his father, Don, and hired hands, while his brother, Roc, before he was injured, ran cattle operations. His mother, Judy, usually makes lunch for the men, and his wife visits him at work with the boys.

THE LENZ FAMILY, OF WRAY

Who: George and Betty Lenz, four adult sons-Mike, Jim, Rod and George- Mike's son-in-law, Marty Buoy; and Rod's son-in-law, Brian Meisner.

What: 8,500-acre Lenz Farms, half of it irrigated, with 3,200 acres planted in corn

History: George and Betty first bought 640 acres of grassland in Yuma County in 1973 and later developed it into irrigated farmland. Four years later, three sons joined them to form Lenz Farms. Youngest son George came aboard in 1982. Buoy is the youngest partner. The men work the field, while the women run the office.

About the series

• This is the fourth in an occasional series on the boom in ethanol, a corn-based fuel, and its effect on communities in northeastern Colorado. Today, we revisit the Rutledge and Lenz families during harvest season. Nearly half of the corn crop in the county this year is going to the new Yuma Ethanol plant to be converted to ethanol, but national publications are warily eyeing falling ethanol prices, and some predict an impending bust.

chakrabartyg@RockyMountainNews.com or 303-954-2976

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