Illinois River Energy’s favorable cost structure, yields, profitability and management of supply chain and commodities combine to guarantee that the company won’t be going away anytime soon, Pam Derringer learns.
A global investment firm focused on alternative energy has teamed up with a consortium of Illinois corn farmers seeking to expand demand for their crops. Together, London-based GTL Resources plc and the farmers have built an ethanol plant that is charting steady growth and earning a profit despite the widely fluctuating, notoriously fickle commodity corn market.
After doubling plant capacity with an expansion in November 2008, five-year-old Illinois River Energy, LLC (IRE) boosted its ethanol and DDGS (dried distillers grains with solubles) production by more than 60 percent last year and its annual revenues by more than 50 percent, swapping last year’s $19 million loss for a $14.5 million profit on annual revenues of $216 million. Its fiscal year ended March 31.
The plant expansion was a significant factor—but not the only one—contributing to the turnaround, according to general manager Neal Jakel.
IRE’s success is no accident. True, the Rochelle, Illinois, plant sits on 81 acres in the heart of the best corn-growing region in the world, with an ample corn supply (300 million bushels annually) within 50 miles and a great trucking network, minimizing transportation costs. But those advantages are shared by a lot of other ethanol plants, many of which closed in the last market downturn.
What sets IRE apart, Jakel explains, is the deep industry knowledge base of its people, its astute risk management and operational excellence, a positive workplace culture, and its exploration of new technologies and opportunities. And, of course, a focus on both frugality and safety.
“Dale Jackson, our commodity manager, has been buying and selling corn and animal feed products for more than 30 years and positioned us to weather the storm,” Jakel says. Jackson’s expertise and IRE’s risk management guidelines are key factors in helping the company optimize its corn supply levels and avoid getting overextended with long-term purchase contracts during a downturn. “We could be more aggressive, but we’d rather pocket a smaller profit than take a larger risk beyond our investors’ comfort level,” Jakel explains.
IRE’s deep knowledge base also comes into play when it comes to production. The fermentation of corn sugars and starches is part art and part science, so the company’s veteran engineers meticulously document each step in its processes to maximize consistency, Jakel adds.
Another critical driver is operational excellence, paying attention to a lot of little things to improve efficiency and yields, he says. The company is undergoing a unit-by-unit debugging effort with lots of little projects to address bottlenecks and boost yield and throughput. All those small savings add up. “It’s the quarter-cents savings that Illinois River Energy thrives on,” he says.
Those quarter cents of increased efficiency or higher-value products each add to the bottom line. For example, IRE achieves higher yields, averaging 2.78 gallons of undenatured ethanol per bushel of corn compared with the industry average of 2.72 gallons per bushel. And it sells 20 percent of its product as distillers grains, which are exported to Asia and fetch a higher price than ethanol, Jakel says. By comparison, the industry average is 15 percent.
Running a $200 million, highly mechanized plant 24/7, 350-plus days a year also requires a proactive maintenance program to minimize breakage and stoppages, which is another key priority at IRE. In addition, IRE’s 65-employee workforce receives extensive training, which empowers operators by teaching them problem-solving and decision-making skills, and showing them how key pieces of equipment work to deepen their understanding. The company is two months into a year-long program on skill development, all of which matters because a workforce of highly trained, motivated employees positions Illinois River Energy for growth, Jakel explains.
A well-trained, proactive workforce also is critical because ethanol is just the beginning of IRE’s foray into alternative energy. “We don’t want to be a standard ethanol plant,” Jakel says. “We want to be making additional biomass products, with less emphasis on ethanol in the long term.”
IRE already is working on several pilot projects with the University of Illinois and Prairie Gold Inc., including the extraction of zein protein from corn and corn oil from the kernel. These projects potentially have very high value and could substantially boost growth and revenues in the future, Jakel says.
Safety is another key priority that is reinforced from the top down, Jakel says. If a manager sees a piece of trash, he picks it up as an example to others. IRE also reinforces safety and cleanliness with award dinners and cookouts, all of which drive home the message that safety depends on the actions of each employee and that safety matters, he adds.
Logistically, IRE couldn’t have chosen a better location, with the corn that represents up to 75 percent of its costs coming from the surrounding four counties and all shipped in by truck, which is cheaper than rail. All the ethanol is trucked an hour east to Chicago, and the distillers grains are trucked to a facility three miles away, which loads them in containers and ships them to the West Coast for transport to Asia, Jakel says.
Several challenges remain, however. First of all, rising ethanol prices have resulted in the reactivation of shuttered plants, increasing supply and decreasing profit margins. In addition, Jakel says, the EPA is working at cross-purposes on ethanol. On the one hand, the EPA caps ethanol at 10 percent of US fuel supplies, but on the other hand, the EPA’s Renewable Fuel Standard (RFS) mandates the addition of 12.6 billion gallons of ethanol into the US fuel market this year. The problem is that 12.6 billion gallons is more than 10 percent of the fuel market. The way to solve this is for the EPA to increase the maximum ethanol percentage to 15 percent, Jakel explains.
Whatever the EPA decides, the resulting political uncertainty won’t be a show-stopper for Illinois River Energy.
“Some plants that are less profitable, less efficient and not as focused on operational efficiency won’t be able to compete at lower margins,” Jakel says. “But our cost structure, yields, profitability and management of supply chain and commodities is a huge differentiator for us and sharply lowers our costs. We will survive.”