From a smear campaign funded by the Grocery Manufacturer’s Association to shutdowns and slowdowns of production facilities due to a weak economy, the ethanol industry has seen its fair share of critics. So, we sat down with those who know the ethanol industry inside and out. Members of the POET, LLC board talk candidly about what they’ve learned after experiencing a year like 2008 and what the future holds for ethanol.
About the Board
BOB CASPER, PRESIDENT OF POET ETHANOL PRODUCTS, approached POET with the idea for Ethanol Products in 2000. He has 21 years of experience in the gas and oil industries.
JEFF LAUTT, EXECUTIVE VICE PRESIDENT FOR POET, is responsible for all commercial business units at POET. Before coming to POET he served as President to a Midwestern-based fire truck manufacturing company.
JEFF BROIN, CHIEF EXECUTIVE OFFICER FOR POET, bought a single ethanol plant out of foreclosure in Scotland, S.D. to start POET 21 years ago. The POET network has grown to include 26 ethanol plants, making it the largest producer of renewable fuels in the world.
DAN LOVELAND, CHIEF FINANCIAL OFFICER FOR POET,oversees all corporate finance for POET. He has more than 25 years experience in public accounting and has been a member of national and regional CPA firms.
CRAIG LUDTKE, PRESIDENT OF POET RISK MANAGEMENT, formed POET Risk Management in 1998. Before working with POET, he spent several years in commodities management at Peavey/ConAgra Grain Companies.
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VITAL: On many fronts, 2008 was a very volatile year. What kinds of things has the ethanol industry learned going through a year like 2008?
LOVELAND: I think one of the things we’ve certainly learned in our industry in 2008 is how critical it is to be disciplined in the way you execute your business plan and business strategy. Once we hit the middle of the year in 2008, commodities prices started doing things that we’ve never ever seen before. A lot of people made mistakes by becoming undisciplined in their approach with commodities and that, unfortunately, lead to the demise of a number of different companies in our industry.
BROIN: We’ve spent 21 years preparing for difficult times and certainly technology has played a very important role. But not just on its own, technology combined with risk management strategies and marketing and logistic capabilities. Strategic advantages have given us a definite advantage.
CASPER: I think the model of an integrated value chain company is more valuable in these types of markets. It gets down to being able to perform every value along the value chain really well. That efficiency is what provides the opportunity to generate a return on capital. It shows the model invested in through all these years has proven out.
BROIN: Definitely.
LUDTKE: Foresight going into 2008 was also important. Preserving a lot of capitol in the plants became extremely valuable, probably even more valuable entering 2009. As an industry with good markets, we didn’t show responsible growth. We began to see the effects of that at the end of 2008. The industry overbuilt and now we’re dealing with that. We’ve learned a lot of positive things, but that is one negative. Now, we need the additional regulatory cap relief to go forward.
LOVELAND: I remember the discussions we were having in 2006 in the midst of a very rapid ramp up in the industry. We saw some problems coming. It was too much, too fast and a lot of mistakes were being made. Several plants were located in the wrong places along with a number of other factors. This was going to affect to our industry at some point and time. It was just too much, too fast.
LUDTKE: Our adversaries politicized ethanol way more than we ever thought they were going to – food and fuel, grocery, restaurant, environmental groups and the auto fuel industry. The lack, if you will, of the significant industry response set us back on our heels as far as knowing how to negate the politics of all that. I think that hurt us as well.
LAUTT: I would echo a lot of the things that I’ve heard. Looking at 2008, I think back to a couple things. In the commodities business there is more price volatility than in other industries. As we saw unique prices, Jeff and Bob have commented a few times, don’t assume that this price is here to stay, but it often feels that way. It feels like $7 corn will easily become $8 and that was the new paradigm. As we saw $12 and $14 natural gas, you know, it starts to create business ideas and options that you contemplate. Then you have to remember that $12 and $14 natural gas might not be the norm forever. And here we are, less than a year later with $4.50 natural gas. The lesson in that is, don’t assume the status quo is forever. It can change quickly. One of the reasons why I think we’re weathering this storm pretty well is because we stayed with our plan three or four years ago when the industry dramatically increased its growth rate. We realized on a percentage basis that we would lose some market share but it was the right growth rate. It was the responsible growth rate and we executed it to a tee. Looking at the industry and the overall economy in 2008, we learned that with rapid growth you can almost count on contraction. High prices don’t last forever and neither does growth.
LUDTKE: And as you mature, industry consolidation is a typical outgrowth. We’ve been such a fledgling industry and now we’re starting to see that consolidation that just about every other industry goes through at one point.
CASPER: On the execution, just one thing, it’s easy to talk the soft and fuzzy stuff, that people are the source of our ability to do our job well. They are critical to the business and that sounds really good. But when you’re under this type of environment where execution is critical, you’re executing because of the people, and the planning is because of the people. It demonstrates that bringing the right people into the business with the right business model creates quite a bit of value in the market.
VITAL: Craig, you mentioned that the industry underestimated the opposition from our competitors. What will we need to do to counter these attacks?
LUDTKE: Well, since we’ve seen prices come down, the food and fuel argument is starting to show some balance. I think what we need eventually is to show responsible growth avenues going forward. The indirect land use and the food and fuel arguments are not going away. So, as we look through these regulatory caps, we want to be responsible with our views on growth such that we are defendable to these other groups. Otherwise, it’s going to happen to us again. We’re going to fight the battle, we’re going to win it, we’re going lose it again, then we’ll fight it again. We need to have responsible growth coming out of this in the way we want to grow and the pattern in which we do it.
BROIN: Another thing really solidified in 2008 was how important government, public relations and advertising are to this industry. We’ve always known government was extremely important, but I think we’re finding out today that we certainly didn’t have the resources to win in that arena. The combination of public relations and government working together was a bit of an eye opener for me – how much they have to work together. It just hasn’t been done before in this industry. Those two pieces really are important going forward and they’re going to be important forever. We’re in such an arena that we will play with the big boys from here on out and it will never go away. It will be very expensive and it will be a very large concerted effort to be on the offense. It’s going to be huge.
CASPER: Let’s think about it, if ethanol wasn’t successful we wouldn’t be a threat. The industry wouldn’t threaten anybody else’s way of life, any other established industries. Just like Jeff and Jeff mentioned, we’re changing things. So it’s really concerning for people who aren’t part of the change, who are a part of being changed. That’s what we’ll continue to see as we advance and prove our economic viability. As an industry, we’ll see more and more attacks against ethanol. It’s just inevitable. We’re changing the world with ethanol today and there are a lot of people in the world that aren’t interested in that change.
BROIN: The issues of food and fuel and environmental issues are a smokescreen. They’re dealing with phony science and false numbers to slow or stop the growth of their competitors, which are grain-based and cellulosic ethanol. They want to stop us in our tracks. There may even be some companies that use agricultural products that go along with it because they want cheap grain. There are a lot of people that want to see the status quo, that don’t want to see a change in the future. There are things that are imperative to maintain at this point, one of them being the VEETC (volumetric ethanol excise tax credit known as the blender’s credit). The tariff is extremely important to maintain for our industry and the renewable fuels standard is critical to remain in place for the growth of this industry long term. And, of course, we need to move the regulatory cap from E10 to E15 or E20 sometime in the near future. That needs to happen in the next year actually to make an impact. It has to happen very quickly to help farmers in the future.
LOVELAND: It’s really simple. We are importing somewhere in excess of $400 billion per year from outside this country to supply our fuel transportation needs. Some of this is going to countries that certainly don’t have the best interest of the U.S. at heart, by a long stretch. Here we have an opportunity to keep these dollars in the U.S to provide jobs and to benefit our agricultural economy. It’s sitting here just waiting for us to take advantage of it while we’re dealing with smokescreens and made up issues. It’s time for us to move forward and become energy independent instead of just muddling along as we’ve done for decades.
LUDTKE: Think about the U.S., we’re the tech leader in ethanol and in crop agricultural development. We can do this and compete with the number one driver of an economy — energy. It’s all here in the U.S. To me, that’s the future of ethanol.
BROIN: We’re going to get there by beating them at the public relations game. Because the public sentiment influences the government and the government influences our industry. That’s job one. That’s what we’ve been doing for the last seven months.
LAUTT: I’d like to quote you, Jeff. “The truth is on our side.” I think about that a lot. The truth is on our side. We just need to tell it more often.
LUDTKE: Disseminating that information is critical.
LOVELAND: When you’re David taking on Goliath it certainly is comforting to know you have the truth and facts on your side.
VITAL: How is the overall situation of the national and global economies affecting the ethanol industry, if at all?
LAUTT: There’s a flip side to this as well. I think the difficulty of the overall economy is somewhat masking actually, because we’re thrown right in with everyone else. If the economy were still strong, there’s no question in my mind that the ethanol industry would still be going through its struggles. So in some respect, we are blending in a little bit with some of our struggles.
LOVELAND: Certainly from the industry standpoint, the financial markets are more or less closed and have been for some time. This has brought project development for new plant construction to a screeching halt. Ethanol producers, weak and strong, large and small, have had a tremendous amount of difficulty securing or even maintaining their operating or working capital lines. We’ve seen that as a major contributing factor for a number of the bankruptcies over the last several months. They just simply have been unable to secure any kind of bank financing and that has put a tremendous amount of pressure on our industry. But as Jeff indicated, it isn’t just us. Most other industries are feeling the same kind of pressure, the same kind of pain. Even as some of the federal TARP funds are making their way into the banking system, we have yet to see where that has really reflected itself in more available financing funds through our industry or other industries.
CASPER: When we had $140 barrel of oil our demand was dropping. That makes sense because people usually drive within their budget. So, when they fill up, they fill up with $10 or $20 of gas, because that is what they have for a given period of time. When you have the oil price at that level, you don’t get a lot of gallons in your car. So the mileage that was driven was less. We have started to see that since we’ve moved from $140 to $40 oil, or in that range, that demand is starting to slowly come back. I’m thinking that we’ll probably get back to the same level we left the demand curve probably within six months if we don’t have really any major increases.
VITAL: How has the news of the shutdowns, slowdowns and bankruptcies affected the industry?
LUDTKE: The Chapter 11s have really hurt us from a corn contract standpoint. Largely the judges in the Chapter 11s have thrown out the corn contracts that farmers have had. So the ability for a farmer to contract forward in the market place at a value has seriously jeopardized our integrity. The other thing that we’ve seen is that it has exposed a real lack of knowledge in business acumen as to how and where their margins were coming from. It’s evident in people that we’ve talked to that several in the industry didn’t know how and where their margin was being derived.
VITAL: Should grain producers be concerned?
LUDTKE: Elevators went through just as trying of times as we did. Their margins and their cash flow were compromised as well. I think picking your partners is always something that people need to do. Scrutinize how the business is being run.
VITAL: How do you view the future of the ethanol and agriculture industries over the next year? Five years?
LUDTKE: I think the agriculture industry is going to find out that if the ethanol industry is compromised, agriculture will be as well. If we fail to move the regulatory cap or continue with the viability of the ethanol industry causing the 20 percent bankruptcies, agriculture will go through a recessionary phase. And that will affect the farmer in many ways – the price of commodities, land grant price and farm equipment manufacturing rates. We’re right on the edge. Either we’re going to move forward in the agriculture industry or it could start to look like the 1980s. We would hate to see the huge washout in land values and farm bankruptcies that we saw in the 80s. It will become apparent how vital the ethanol industry is to everyone.
BROIN: Ethanol plays a pivotal role in agriculture. As ethanol goes, agriculture goes. The game has become one and the same because of the volume of grain we consume today. I think you’ll see in the future, if ethanol does not do well, farming will not do well. They are very closely, if not exactly interlinked at this point, in my opinion.
LAUTT: Ethanol has gotten to a stage of critical mass where it’s sustainable. We have to remind ourselves that ethanol is the only thing in the history of this country that is a viable alternative to oil. We are quickly approaching 10 percent which by no means is an insignificant portion of our energy supply. I see the next period of managing the growth of the past three years to include some stagnation as we absorb and manage this consolidation phase. Growth into the future is, quite frankly, very viable and very sustainable at a manageable rate. There is a lot of opportunity for ethanol, American consumers and agriculture as we look at continuing technologies, whether in the ethanol industry or in the agriculture sector.
BROIN: The role that ethanol production and consumption of grain plays really determines the growth of agriculture worldwide not just in the US. The opportunity to create agricultural growth around the world is just tremendous. It is really a big factor of the worldwide economic strategy.
LAUTT: I agree wholeheartedly, Jeff. I think we’re also in the beginning phases of another period. We’re making a needed paradigm shift with the food and fuel argument – that corn is only a source for food or feed. We’re proving now, in small ways, soon to be larger ways, that corn and other agricultural products can be sources of many products beyond just ethanol. It will be a source of biotype materials, chemicals or nutraceuticals. We’re just in the narrow stages. In the next one to two decades we’re going to see some significant in-roads as new products and technologies hit the market.
VITAL: Any last topics?
BROIN: Go ethanol.
