Biofuel Advocates Want to Loosen Rules for Farm Credit

Iowa renewable fuel industry leaders call for expanding Farm Credit System's lending authority.

A group of leaders involved in Iowa's renewable fuels industry is calling for expansion of the Farm Credit System's lending authority. They want a change in federal law so Farm Credit would be allowed to make loans to build ethanol and biodiesel plants that do not have a majority of farmer-stockholders as owners.

The group has sent a letter to both of Iowa's U.S. Senators, Chuck Grassley and Tom Harkin, and to other senators. The letter asks them to support expansion of Farm Credit's lending authority because of difficulties in expanding the renewable fuels industry and maintaining its profitability. An amendment has been proposed to add to the new farm bill being debated in Congress.

Trying to preserve farmer-ownership

"The current economic climate is challenging, to say the least," says Sam Cogdill, president of Amaizing Energy LLC, an ethanol plant at Denison in western Iowa. He is one of eight people representing ethanol and biodiesel plants across the state who signed the letter.

"We understand the struggles of expanding the ethanol and biodiesel industry and trying to keep it profitable in changing economic times," he adds. "Rising input costs and other factors are creating increasingly smaller margins for ethanol and biodiesel producers."

Farm Credit has been making farm loans for over 90 years and understands the challenges of agriculture, the letter points out. Because of that experience, the system has the ability and capacity to structure loans that account for the variables in the renewable fuels industry.

More capital needed for bigger plants

Furthermore, as the size and cost of construction for new plants continues to rise, lenders who are able to take a leadership role in providing financing become fewer and fewer. "Farm Credit's experience and ability to structure credit that meets the industry's needs makes them a competitive source of financing to which we need continued access," says Cogdill.

Under current regulations, for Farm Credit to lend to a start-up ethanol or biodiesel plant, 50% of the plant must be farmer-owned. The renewable fuel leaders say this requirement was reasonable in the early days of the renewable fuels industry when 25- and 30-million-gallon-per-year plants were being built, but now the rule needs to be changed.

Today, the industry standard for ethanol plants is 120 million gallons at a cost of approximately $200 million per plant making it impossible to achieve 50% farmer ownership. This trend is also evident in biodiesel plant construction. Thus, the industry could potentially lose an important financing option.

Cogdill wants to preserve the opportunity for farmers and local people to be able to invest in and retain ownership of plants. "The rise of the ethanol and biodiesel industries in Iowa has had a significant, positive impact on farmers and rural communities," he says. "As our country looks to decrease its dependence on foreign sources of energy, ethanol and biodiesel have a tremendous role to play."

Bankers bristle at the idea

Should the Farm Credit System's federal charter be expanded to allow that farm lender to make loans to ethanol plants that don't have a majority of farmer investors? Commercial bankers say "No".

The Farm Credit System was created under a federal charter years ago and operates as a cooperative. "As a government-sponsored lender, they have certain advantages we don't have," says Jim Schipper, president of American State Bank at Osceola and current chairman of the Iowa Bankers Association.

The Farm Credit System has preferential tax treatment and access to funding at interest rates a commercial bank is not eligible to get. "That's fine as long as Farm Credit lenders are within their mission--providing credit to farmers," says Schipper. "But this expanded horizons idea goes way beyond that. If they want to finance enterprises that are not farmer-owned projects, then they should have to discontinue their federal support."

There are a lot of unanswered "what ifs" regarding the proposal to expand Farm Credit's lending authority. Would Farm Credit be allowed to finance enterprises such as those owned by big corporations like ADM or Waste Management Inc.? Or Pacific Ethanol, which is 25% owned by Microsoft founder Bill Gates? "Those are the kinds of enterprises Farm Credit could go into business with, if they are allowed to do this," says Schipper.

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