As President Bush was signing a bill last week that requires fuel producers to increase their use of ethanol fivefold over the next 15 years, the banking industry and the Farm Credit System were sparring over which lenders are best qualified to finance the construction of ethanol plants.
The Farm Credit System threw the first jab in November when its trade group, the Farm Credit Council, began running advertisements in a Capitol Hill newspaper claiming that community banks do not have the lending capacity, expertise, or willingness to take on the risk for loans needed to build ethanol plants.
Last week, the banking industry fought back, releasing a report saying that it has contributed 56% of the financing for ethanol plants since 2004, or more than $8.4 billion. By contrast, Farm Credit lenders — primarily CoBank in Denver and AgStar Financial Services ACA in Mankato, Minn. — have contributed 8%, according to the study conducted by New Energy Finance Ltd. in Washington.
“We wanted people on the Hill to get an overview of how the ethanol industry has been funded and the role banks have played in it,” said Mark Scanlan, agriculture and rural policy director for the Independent Community Bankers of America, which commissioned the study along with the American Bankers Association.
At least part of the reason behind the study, Mr. Scanlan said, is to dispel claims made by the Farm Credit Council that community banks are not up to the task of financing ethanol plants. The council made the claim in advertisements in Roll Call as it was lobbying to expand the Farm Credit System’s lending ability under the Congressional Farm Bill. Congress approved that bill this month without broadening the system’s powers.
“Ethanol has not just been financed by Farm Credit,” Mr. Scanlan said. “Yet that’s the picture that they have tried to paint.”
But Ken Auer, the council’s president and chief executive, shot back in an interview Dec. 18, the day after the report’s release, calling the report “a ham-handed attempt to demonstrate that the banking industry is supporting the ethanol industry.” Mr. Auer said the report lacks any hard evidence that community banks are financing the plants.
Ethan Zindler, the report’s lead author, said the findings were based on data New Energy has amassed since its launch in 2004. Mr. Zindler said his team studied about 100 ethanol financing deals to see where the funding was coming from. The study found that 56% of the financing came in the form of direct loans from commercial banks or from funds raised in initial public offerings that were underwritten by investment banks. Thirty-six percent came from hedge funds or wealthy individuals, such as Microsoft co-founder Bill Gates, and the remaining 8% came from Farm Credit institutions. Their combined contributions add up to $15 billion and could rise to $22 billion if most of the projects on the horizon come online, according to the report.
“The main thing to take away from the study is that funding comes from many different directions,” Mr. Zindler said.
It is likely demand will only increase. Farm bills that have passed the House and Senate include incentives such as loan guarantees and research-and-development tax credits to encourage increased ethanol production. (The two chambers still have to reconcile the bills before sending the legislation to the president.)
Also, the energy bill President Bush signed last week requires that fuel producers use 36 billion gallons of ethanol by 2022, up from about 7 billion gallons today.
Mr. Auer disputed the study’s findings, noting that his Farm Credit lenders made or committed to make $4.2 billion of loans just in the first nine months of this year.
But the bigger problem with the study, he said, is that the banking slice of the pie does not distinguish between national and international banks or large banks and community banks, thus failing to prove that community banks have the ability to take on the risk.
Ethanol plants cost roughly $100 million to $125 million to build, Mr. Auer said. Loans for those facilities rarely have one institution as the sole backer; rather, the loans are syndicated, with both Farm Credit lenders and community banks often taking a fractions of the deals and risk.
Mr. Auer argued that community banks will be limited in their ability to participate in several syndications because of their size, while Farm Credit can issue debt on Wall Street.
John Blanchfield, the director of the Center for Agricultural and Rural Banking at the American Bankers Association, said that many community banks are already participating in loan syndications, proving that they do have the expertise and capital to help finance the sector.
And if it is not small banks doing deals, then it is large banks and investment banks through public stock offerings.
“The idea that anybody but the banking industry is leading in financing this sector is just plain silly,” he said.
