BUFFALO LAKE, Minn. – On a cold winter day, white mist swirls above the smallest ethanol plant in Minnesota — a sign that it's back in business.
Built two decades ago at the dawn of Minnesota's ethanol industry, the plant in the past four years has been idled, mothballed and restarted — only to be shut down again as it stumbled through U.S. Bankruptcy Court.
Now, a new owner has it running once more, and is confronting a core problem facing small plants in an era of larger, efficient ethanol producers. "The economics don't work," said Joe Winckler, an ethanol industry veteran who manages Buffalo Lake Advanced Biofuels.
It's a persistent challenge in the industry. Most vintage ethanol plants, including Buffalo Lake, expanded over the years, but that isn't always enough to stay competitive. Now, some of the smallest are looking to new technologies — and new products — to stay alive.
"It's innovate or die," said Randall Doyal, chairman of the Renewable Fuels Association and chief executive of Claremont, Minn.-based Al-Corn Clean Fuel, one of the state's first ethanol plants. "There is a lot of competition out there. If you stop trying to grow or innovate, you are really dying."
Winckler said it's hard to make a profit on older ethanol plants with a capacity less than 40 million gallons per year. The Buffalo Lake plant, which restarted last October, can produce 18 million gallons annually, he said.
With Wall Street financing and Midwestern innovation, the Buffalo Lake plant is taking short- and long-term steps to survive. It temporarily turned away from corn, and has instead been fermenting ethanol from cheap, government-surplus sugar.
When the plant resumes corn-based production this year, it will be the first ethanol producer to apply an energy-saving technology from Yield and Capacity Group (YCG) of Clear Lake, Iowa, that promises to cut electric and natural gas bills by more than $800,000 annually.
"It is a huge savings," said Jed Latkin, CFO of West Ventures, an affiliate of Platinum Partners, the New York hedge fund that was a lender to the Buffalo Lake plant, but ended up owning it after the plant's 2012 bankruptcy. Latkin said the fund has invested $28 million in the plant.
The new technology, called Low Energy Separation System, eliminates equipment traditionally used to dry grains left after distilling. Every corn-ethanol plant sells distillers' grains as cattle feed. Even a small plant like Buffalo Lake produces 60,000 tons of feed a year, and drying the material is a big expense.
"You are using all this extra energy and heat," said Mike LoCascio, co-founder of YCG, which developed the polymer-based water-separation technology. "The heat destroys amino acids and proteins. Since we are not using any heat, the feed has more digestible energy for the animal."
Innovate or fail
The Buffalo Lake plant, 80 miles west of the Twin Cities, was built with farmer investment during the first wave of ethanol plant construction in the mid-1990s. In the early days, it was one of nine plants that produced just 15 million gallons of ethanol per year or less.
Over the next decade, larger plants were built and the early ones expanded. Four of Minnesota's 21 ethanol plants now can pump out 100 million gallons or more per year. The nation's largest is Minnetonka-based Cargill's 195-million-gallon-a-year ethanol plant in Blair, Neb.
Most Minnesota plants have a capacity of 50 million gallons per year or less. Two of the small plants — in Luverne and Little Falls — have looked beyond ethanol to stay competitive.
In December, British biotech company Green Biologics purchased the ethanol plant in Little Falls that produces 21 million gallons per year, and will shift production in 2016 to renewable chemicals after a $60 million to $70 million upgrade. It will process corn with bacteria, rather than yeast, to make normal butanol, also called n-butanol, and acetone. They are used in paints, adhesives, cosmetics and other products.
"It is not an expansion," said Tim Staub, vice president for business development. "We will be leveraging the existing fermenters, which will be modified. … We also are putting in a lot of advanced product recovery and distillation equipment."
Yet the shift to new technologies can be risky. Gevo Inc., based in Englewood, Colo., has struggled for more than two years to produce isobutanol — a higher-value alcohol that can be used as fuel or a chemical ingredient — at the Luverne plant. Amid slow progress last year, the company resumed making ethanol in part of the plant, and in January cut 23 headquarters employees to save money.
Larry Johnson, a Cologne, Minn., ethanol consultant who helped raise capital for early plants, said it has long been an industry goal to transform ethanol plants into multi-product biorefineries. He expects such efforts to continue, even if some fail.
"We are replacing some petroleum-based plastics and chemicals with products from biomass," Johnson said.
Experiment with biodiesel
In another push beyond ethanol, Al-Corn, the 45-million-gallon-per-year ethanol plant in Claremont, is expanding into biodiesel.
Biodiesel has long been made from soybean oil, although industrial corn oil produced at ethanol plants is an increasingly common raw material. By law, biodiesel is blended with regular diesel at rates of 5 percent to 10 percent in Minnesota.
Doyal, Al-Corn's chief executive, said the farmer-owned plant still will make ethanol, but this spring will add a modular biodiesel production unit recently developed by Revolution Fuels of St. Louis Park. Corn oil produced by Al-Corn will be turned into biodiesel on site.
It is the first commercial deployment of Revolution Fuels' proprietary technology. It fits in a unit about the size of two shipping containers, and is tailored for small to midsize ethanol plants, said Ronni Phillips, Revolution Fuels' vice president for business development. The process will use a little of Al-Corn's ethanol, replacing another alcohol commonly used in biodiesel production, she said.
Changing ethanol investment
One reason for the interest in non-ethanol investments is that U.S. supplies of corn-based biofuel currently exceed the demand. While the market is sure to change, the current slim profit margins in the ethanol business make it a risk to expand production.
"It is probably going to be a losing proposition," said David Peters, an Iowa State professor of rural sociology who has studied the economics of ethanol plant upgrades.
Poet Inc., the nation's No. 2 ethanol producer with four Minnesota plants, has in the past two decades upgraded all of its 27 plants. Most recently, it has focused on investments that reduce water and energy use, said James Moe, president of design and construction and plant management for the Sioux Falls-based company.
"These plants are more efficient than they have ever been," Moe added. "They have had to incorporate efficiency improvements over time just due to the level of competition in the industry. What that has really done is driven a lot of efficiency in the industry that wasn't there eight or ten years ago."
Large producers have some built-in advantages. Poet constructed, manages and co-owns plants with local investors, and does research and development. Its business model allows it to try new technologies in one or two plants before deploying them widely, Moe said.
Poet and the nation's largest ethanol maker, Archer Daniels Midland (ADM), also have a size advantage when marketing their products. Smaller ethanol plants are combining efforts to to copy that approach. Renewable Products Marketing Group, a Shakopee-based company owned by smaller ethanol makers, now sells 1.7 billion gallons of ethanol per year, the second largest marketer behind ADM, Doyal said.
At Buffalo Lake, the push to stay competitive directly affects 33 employees whose jobs are at stake. Latkin, of West Ventures, said preserving jobs has always been a concern of the New York hedge fund.
"Unlike an investor who comes in and seeks to break up or send things overseas, our role has always been in the different deals we've done to foster local growth, build businesses and see them thrive and survive," Latkin said.