FIRING UP: VeraSun boss talks about company's growth, opportunities
HANKINSON, N.D. -- The 110 million-gallon VeraSun Hankinson plant is about to fire up this month. It is one of the farthest-north plants of its size to be put in place and is twice the size of the two plants in Underwood, N.D., and Richardton, N....
HANKINSON, N.D. -- The 110 million-gallon VeraSun Hankinson plant is about to fire up this month. It is one of the farthest-north plants of its size to be put in place and is twice the size of the two plants in Underwood, N.D., and Richardton, N.D., in the past two years.
It'll take some six months to ramp up the Hankinson plant and within six weeks is expected to be at 100 percent, consuming 39 million bushels of corn per year, officials say. The construction employment peak of up to 250 workers gradually will shift to 50 employees, running the plant on an ongoing basis.
Recently, Danny C. Herron, the president and chief financial officer of Brookings, S.D.-based VeraSun, made
a visit to meet his new staff and with North Dakota Gov. John Hoeven, who spoke with the new crew, many of whom had been displaced from the Imation plant in nearby Wahpeton, N.D.
The VeraSun Hankinson plant that had been part of a merger/acquisition of US BioEnergy Corp. of St. Paul (originally of Brookings). Herron runs the combined company, the largest ethanol company in the nation and soon the world. VeraSun's current capacity is 1.1 billion gallons, slightly larger than Archer Daniels Midland. By June the company will be up to 1.4 billion gallons and by the end of the year, they'll be at whopping 1.64 billion.
Q- Agweek: How has the merger with US BioEnergy affected your company?
A - Herron: "The deal reduced the VeraSun debt on a per-gallon basis and increased the number of gallons for each share of stock. VeraSun's debt went from 93 cents a gallon to 89 cents a gallon. We have a very low debt, relative to the rest of the industry. One company on the scene has a debt of $3.50 per gallon."
US BioEnergy used Provista, a partnership between US BioEnergy and CHS, to market ethanol, while VeraSun does that internally. Shareholders of US BioEnergy received 8.1 shares of VeraSun shares for every 10 shares of US BioEnergy shares they'd owned.
VeraSun will have 16 plants up and running by the end of the year. Fourteen are 110 million-gallon Fagen-ICM plants, referring to the common contractor and the operating system.
Q- Agweek: What aspect of the current ethanol economics are you focused on?
A - Herron: "In the end, what matters to us is the relationship of corn to ethanol. If you look back last October, the difference between corn and ethanol, expressed on a per-gallon basis, is 33 cents. Ethanol was selling at about $1.70 a gallon back then and corn at its price, using a 2.8 yield, calculated to about $1.30, so the spread between the two was 33 cents per gallon.
"Now it's at 58 cents a gallon. It's been as high as 80 to 85 cents. The real answer is with $6 corn and $2.70 ethanol, the industry is still fine. The industry is still in the black at those levels.
"Right now, ethanol is selling at about 60 cents below the wholesale price of unleaded gasoline, and then they get a 51-cent blenders credit on top of that, so the refiners and blenders are now making $1.10 per gallon."
Today's cost of turning a barrel of crude oil into gasoline is about $2 per gallon. "On ethanol alone, they can make $42 a barrel. A barrel is 42 gallons, so for every gallon of ethanol they use they're making $1 off of it."
More and more refiners are converting to blending for ethanol. "We're very encouraged that the demand is out there. Last October, ethanol was $1.70 a gallon. This year, it's priced at $2.60 to $2.70 a gallon. So it is improving." Demand should begin to outstrip supply.
Q- Agweek: Are you planning to announce any new corn-ethanol production?
A - Herron: "We have four or five 'greenfield' construction sites that are ready to go if the economics are such that we should build on those. I will say that in the current environment, the acquisitions are a better opportunity for your shareholders than a 'build' opportunity. The build cost is $2 to $2.25 per gallon and the acquisition costs are in the $1.35- to $1.50-per-gallon range.
"You also get a plant that is up and running and producing cash. As long as the market values are as depressed as they are now, your best result for your shareholders is to pursue acquisition."
VeraSun prefers Fagen-ICM plants of 100 million gallons or larger and would be "less inclined" to go with other models, although "at a price you will incur a little operational pain."
Q- Agweek: You talk about availability of existing plants for acquisition. Are these primarily the co-ops in Minnesota and surrounding states?
A - Herron: "People are looking for liquidity. A lot of the cooperatives that have been put together -- we call them the "gymnasium fund raisers" -- where you could raise $50 million in a week and the bank would loan you the other $80 million and you could go build one of these plants, those days are past.
"Initially when the markets were good (the co-ops) were returning dividends. Now the dividends are dried up and people don't have a liquidity process. They don't have a way to get out from under it. What they're looking for is someone like a VeraSun, being a public company, where you can put you investment in today and take your investment out tomorrow if you want to. Because of us being a public entity, you can trade it freely. But with a lot of the co-ops, (you) don't have that ability. They trade on the green sheet and it's very little liquidity.
"If you're a co-op, the market is what it is. The market is pricing these at $1.40 a gallon. The question you have to ask yourself is, 'Would I rather have a share of VeraSun stock that's openly traded, or do I want a share of my co-op stock?' If the value is the same, it seems to me that you would rather have a share of the VeraSun stock because it's liquid. You can go trade it."
Through the coming year, there will be 175 operating ethanol plants in the United States. Of those, 45 are 100 million gallons and more. VeraSun owns 14 of those and has others under construction or greenfield sites.
"It's not a large universe of acquisition possibilities of the size we want," Herron says.
Q- Agweek: Does the current perception of poor economic returns in ethanol in fact somehow help your company, as it is in an acquisition mode?
A - Herron: "It certainly helps in the ability to acquire (plants) versus building. It's certainly a market condition that's out there that allows you to do that. But it may be that acquiring isn't our best use of capital.
Q- Agweek: What are some of the opportunities for capital investment, other than new capacity?
A - Herron: "With our size company, if we could improve yield by one-tenth of a gallon per bushel -- go from 2.8 to 2.9 (gallons per bushel) -- at today's corn price, that's worth over $110 million.
"If you can find a way to acquire corn 10 cents a bushel less, and you're acquiring 650 million of them, that's real money."
We need to get more creative with the producer community -- share some risks with them. One of senior management's jobs is to challenge them to change the paradigm, if you will.
"All of our facilities have rail corn available. You could bring rail corn in from low-cost areas that have stranded corn and possibly save money that way. You could provide some level of certainty to a corn producer -- they may be willing to sell you corn today at a price that's under the market because they know they have a home for it. In a year, you could have an oversupply of corn. They would be sold forward, at a fixed price. There are ways to do that. We just have to find more creative ways to do it because of the size we have."
Q- Agweek: What is the status of the so-called "designer" corn -- corn geared specifically toward ethanol production?
A - Herron: "It's happening, but it's more in the collecting data and feeding it back to the producer. There is currently no 'grid,' if you will, that pays farmers more for it. I think, eventually, we may end up something like the cattle industry, where if your animal grades out as 'choice,' there'll be a bigger price than for 'select.' They may talk about it for another five or 10 years before they get it right.
"The big thing right now for the corn producer is the improvement in yields and farming techniques, where you use less nitrogen than you did 10 years ago."
New varieties, that protect crops from stress, are becoming more effective.
Q- Agweek: What are you seeing in the markets for distillers grain, industrywide, or locally?
A - Herron: Export markets have grown over time. Chinese corn requirements for livestock feeding are larger than the U.S. ethanol industry uses for corn. China is more focused on its industrial expansion than its agricultural expansion.
Q- Agweek: What do you see of the impact of anti-ethanol news, especially as it relates to the price of food and fuel?
A - Herron: Ethanol is blamed for driving up world food prices, but is probably accountable for "a couple of percent" of the big picture.
"Cattle being sent to the slaughter plant today are selling cheaper than they were two years ago when corn was $2.50," says Herron, who was chief financial officer for Swift & Co., the pork and beef giant, for eight years. "A box of corn flakes has 5 cents worth of corn in it, but costs $3.50. A $6-per-pound beef steak has 19 cents worth of corn in it. We have a Texas A&M study, and an Iowa State University study that show that 80 percent of the rise in food prices is due to fuel.
"A little-known fact that two economists have stated is that gasoline is 35 to 50 cents per gallon cheaper because we use ethanol.
"We supply 7 percent of the fuel stream today. If that 7 percent wasn't there, and it had to be replaced with pure petroleum products, based on $125-per-barrel oil prices, that's a 50 percent increase in gasoline costs. A lot of people talk about the 51-cent blenders credit (for ethanol), that costs the government $3 billion. But the fact that gasoline is 50 cents per gallon cheaper, is $71 billion cheaper. There's 142 billion gallons of gasoline used in this country."
"I don't hear nearly the question on energy balance that I did two years ago. The real key is that we're extending the liquid fuel supply by eight times. For every gallon of liquid fuel we use we're producing eight gallons of liquid fuel. At the end of the day, we don't use Btus in the country. We use liquid fuel."