For years, small-town bankers have lamented the impact of depopulation on their communities — and their banks.
But lately they have had reason to be optimistic about the future of rural America, thanks to a surge of interest in alternative fuels — particularly ethanol — that has energized some small Farm Belt towns.
Steve Anderson, a senior vice president with the $132 million-asset Security National Bank in Laurel, Neb., said ethanol plants built in towns east and west of Laurel have each created between 35 and 50 jobs and generated spinoff economic activity. Now Laurel is looking into building its own plant, he said.
Ethanol “is providing strong economic development for rural Nebraska and the rural U.S., which is something we desperately need … as population declines,” Mr. Anderson said.
And ethanol production has a chance to play an even larger role in the farm economy.
In his State of the Union address, President Bush challenged the energy industry to produce 35 billion gallons of fuel a year from alternative sources by 2017. Meanwhile, with current farm policy legislation set to expire in October, Congress is debating what to include in its next farm bill, and observers expect it to include provisions to encourage ethanol production.
Most ethanol is made by grinding corn and combining the mashed-up grain with water and enzymes. That mix is fermented to produce the alcohol that serves as fuel.
Farmers who grow corn support building more ethanol plants, because it would mean more buyers for their crops, driving up prices. (Ranchers, however, are not as bullish on ethanol; they say increased competition for corn drives up the cost of feeding their livestock.)
A surge in plant construction could also be a boon to community banks. After all, plant operators need loans, as do farmers who invest in cooperatives that build ethanol plants. Community banks too small to finance plants on their own share loans with larger banks or join loan pools arranged by bankers’ banks.
More important, though, bankers see ethanol plants reviving moribund communities. In a recent survey conducted by the Independent Community Bankers of America, 78% of bankers said that they had financed or were interested in financing ethanol plants.
“Those kind of projects are vital to the economic health of the communities,” said Dave Reyher, the president of the $487 million-asset Colorado East Bank and Trust in Lamar.
The $7.6 billion-asset First National Bank of Omaha has financed ethanol plants since 1992, and currently has more than $1 billion of loans it either holds or services for other banks as part of participations. Stephanie Moline, First National’s executive vice president of corporate banking, said a community can generally expect a 150% return on its investment in an ethanol plant.
Security National’s Mr. Anderson offered this example of how a 26-million-gallon plant in Plainview, Neb., which his bank helped finance, can generate additional economic activity.
After making ethanol from corn, plants have what is called dry distillers grain. This can be fed to cattle but must be moved quickly before it rots. So a trucking company was started in Plainview to transport it to cattle yards.
In Gothenburg, Neb., a 100-million-gallon ethanol plant under construction is expected provide about 60 jobs.
“When you bring a facility into a rural community of 3,600 people, 60 jobs is significant,” said Matt Williams, the president of the $97 million-asset Gothenburg State Bank and Trust.”
Congress appears to be paying attention. With a new farm bill on its agenda, the House Agriculture Subcommittee on Conservation, Credit, Energy, and Research held a hearing March 7 about financing alternative fuels.
Current farm policy is largely focused on price supports for farmers, but Barry L. Flinchbaugh, a professor of agricultural economics at Kansas State University, told bankers at the ICBA’s annual convention in Hawaii this month that he expected the next farm bill to include more provisions to encourage rural development.
“Rural development has been a poor stepchild for years, but that won’t be the case this time, because we are tying rural development to renewable fuel,” Mr. Flinchbaugh said.
To be sure, lending on ethanol plants comes with risks.
Michael J. Swanson, the agricultural economist for the $429 billion-asset Wells Fargo & Co., said the profit from ethanol depends on the prices of corn, natural gas, and crude oil. Changes in those prices could force the price of ethanol down.
Ms. Moline said First National requires ethanol plants it finances to show how they use futures markets to control commodities price risks.
“In the plants we finance, we want them to have a very good hedge system,” she said. “They hedge their grain, their alcohol, and their natural gas.”
Jamie Dosdall, the loan participation department manager for the $342 million-asset United Bankers’ Bank in Bloomington, Minn., which has participated in about half a dozen ethanol loans, said that as of last month there were 117 plants producing 5.6 billion gallons of ethanol and an additional 76 in construction, which would double the amount produced.
So, one danger is that there may be more ethanol produced than would be absorbed by consumers. But the glut of plants has one advantage for banks.
“Given the sheer number of plants out there, banks can be selective in the plants they are looking at,” Mr. Dosdall said.
