Questions Surface Re: Use of USDA Program for Ethanol Facility Refinancing

Published on: 09:41AM Oct 21, 2008

By Jim Wiesemeyer

via a special arrangement with Informa Economics, Inc.

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Livestock producers and others raise equity, other questions

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

Some initial reporting on what USDA Secretary Ed Schafer reportedly said last Friday in Des Moines regarding loan guarantees for ethanol facilities has led to questions about the topic, with a growing number of hog and cattle producers, and others, upset over what they believe is an equity problem in USDA's focus.

At issue: reports that Schafer said USDA may use its rural development money to assist ethanol plants that have suffered losses in the volatile corn futures market.

One wire service (Bloomberg News) began its report by writing, “Ethanol companies that speculated on rising corn prices and lost may be eligible for government refinancing or loans to offset their bad bets, according to Agriculture Secretary Ed Schafer.”

Here are the actual comments Schafer made in Iowa at the World Food Prize Symposium:

-- “There's going to have to be some credit applied to companies to buy some lower-priced corn to blend with their higher-priced corn. This is important public policy for the country because corn-based ethanol is a stepping stone to energy independence through cellulosic ethanol. We're going to continue to support it as much as we can.”

-- Regarding some ethanol firms' market activity, Schafer said: “When they got into saying, 'We're not buying supply for our operations here, we're speculating on commodities to make money,' some people got stretched out pretty thin. There is some pressure out there by companies that have gotten away from their focus on producing ethanol and started speculating on the commodity markets, and that's hurt them.”

-- Schafer said the government could provide up to $25 million per company to refinance through a “guaranteed loan-type program for operating capital.”

-- Schafer also said, “We're not in the market to buy commodities or to provide funding to buy commodities. We have the responsibility to make sure we cement in the infrastructure of rural America and ethanol production has increased the economic opportunities, the jobs and the building of rural America.” Schafer said the ethanol industry is too important to the nation to allow it to fall into more financial difficulty. “We're going to continue to support it and shore it up as much as we can,” Schafer said.

-- Schafer said there was no “litmus test” as to the size of the ethanol company that would qualify for the loan guarantees. They would be available to large and small ethanol producers, he said.

Background on the USDA loan guarantee program:

-- The assistance that Schafer was referring to is through USDA’s Rural Development Agency’s existing Business and Industry (B&I) Loan Guarantee Program, which has been providing loan guarantees since 1974. The loan and the cash for that loan must be secured by a private lending agency – USDA does not make a direct loan.

-- Any rural business or cooperative and in good financial standing could refinance their debt or receive working capital through the Business and Industry (B&I) Loan Guarantee Program. Through this program, USDA guarantees loans made by lenders to rural businesses, which reduces lenders’ risk and can lead to better loan terms for the borrowers. USDA does not guarantee marginal or substandard loans through this program, nor does the program provide direct loans.

-- The B&I program can guarantee loans up to $25 million to businesses, public bodies, or individuals.

-- The B&I program does not guarantee marginal or substandard loans, or provide relief to lenders that have such loans. The credit quality of each B&I application is thoroughly reviewed. In particular, we review the borrower’s cash flow, collateral, equity, and management, and also the status of its industry. Financial statements, insurance, appraisals, business plans, and feasibility studies are also reviewed and analyzed.

The following questions have surfaced regarding this topic:

-- Do Schafer's comments signal a new direction for the B&I program to focus on ethanol facility refinancing?

-- What percentage of B&I loan guarantees in the past have been for refinancing versus new developments?

-- How much actual funding for B&I loan guarantees is available?

Many hog producers have made their comments known to the National Pork Producers Council (NPPC), with emotional emails on the topic to the producer group. Many of the comments note equity issues.

The following comments, used with permission. were made to the National Grain & Feed Association and others, from Bill Bluml, from FAC Cooperative:

“We have heard an overwhelming swirl of disbelief with regard to US Agriculture Secretary Schafer’s comments in Des Moines Friday about providing USDA/RD assistance for ethanol companies that have come on hard times. Some of this pain in the ethanol industry has come from the market (ethanol margins), but some has come from some players trying to outguess the market and possibly staying unhedged on some part of their positions. Why should the US taxpayer have to pay for their mistakes?

“FAC is a feed company. And like many grain and feed companies (FAC) has had to jump through hoops to be sure that we were able to maintain financing though the rock and roll markets of 2008. And our increased costs have come because of the growth in the ethanol industry sucking more corn from the pipeline and in turn pushing prices to record price levels. The wild market ride is likely to continue. No one knows which way we will go. But we have to agree that there should be no 'bail out' for ethanol producers. Why are they any different than any other segment of the marketplace? We have many livestock producers that have continually asked 'Where is my subsidy for providing demand to the corn market?' We are all for a growing demand base. Ethanol markets have been good markets for us to sell into. But where do we draw the line on providing assistance to this sector of the marketplace?

“We believe that the grain and feed industry must take a stand on this issue. I understand that many of the 'ethanol companies' that we are talking about are members of your associations. This will be a political hot potato, but enough is enough. How do we stop this kind of mentality in Washington? How do we get our story out? And most importantly, how do we do it in the politically correct fashion?”

Comments: I will ask USDA to respond to the above questions, and others, regarding this topic.

In my talks with USDA on Monday about this issue it was stressed that the B&I program is a loan guarantee program and that no direct loans are provided. The eligible participant, as noted above, must go to a lender who then would seek a B&I guarantee. But also as noted above, to get a USDA guarantee, the program does not guarantee marginal or substandard loans. Importantly, the credit quality of each application is reviewed, including the borrower's cash flow, collateral, equity, and management, and also the status of its industry. Also, financial statements, insurance, appraisals, business plans, and feasibility studies are also reviewed and analyzed.

Cattle and hog producer complaints about the equity issue continue, especially as they react to some initial reporting on this matter.

And on this issue, I have seen and heard some of the most heated reaction to a topic that I have experienced in a long time.



NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.