A recent study released by the commercial banking industry's lobbying groups fails to identify the growing capital needs of the nation's renewable fuels producers, focusing instead on downplaying the farmer-owned Farm Credit System's role in the growth of U.S. ethanol. In fact, the banker study confirms that commercial banks alone are unlikely to provide the financial resources needed to meet U.S. biofuels goals outlined in the new energy bill.
Under the energy bill, the biofuels industry must grow dramatically to meet the minimum renewable fuels standard of at least 36 billion gallons of biofuels within 15 years. Most of the new production must be "advanced biofuels" such as cellulosic ethanol that is still being developed and will require even larger capital investments to produce than corn-based ethanol. A conservative estimate of the capital needed by the industry to just meet the 36 billion gallon production target is $105.5 billion, not including transportation and other infrastructure needed to supply the feedstocks to the industry or move the final product.
But the study released this week by the American Bankers Association and Independent Community Bankers of America shows that during the past four years - the ethanol industry's period of most rapid growth - commercial banks and other private institutions generated only about $2 billion of new debt per year for the industry.
"The Farm Credit System has recommended policy changes that will help it address the capital needs of the biofuels industry," said Ken Auer, President & CEO of The Farm Credit Council, the Farm Credit System's national trade association. "Limitations imposed decades ago on Farm Credit's ability to serve farm-related businesses are preventing the Farm Credit System from directly financing many of the new agriculture-based projects that will be needed to meet U.S. renewable energy goals. Congress should act to make these changes.
"It is unfortunate but not surprising that the commercial banking industry's lobbying groups choose to continue to attack Farm Credit rather than work cooperatively to address these needs," Auer added. "Although Farm Credit's efforts are discounted by the commercial banking industry's lobbyists, bankers themselves know that Farm Credit institutions have worked tirelessly to arrange loan syndications, partnering with commercial banks to provide the financing needed to get biorefinery projects going."
In fact, in the first nine months of 2007 Farm Credit institutions reported an increase in their support to the biofuels industry by about $1.2 billion to almost $4.2 billion in loans and loan commitments.
"It is great that banks and others came forward with financing for corn-based renewable fuels once the corn ethanol industry proved itself, but Farm Credit has been there since the beginning," Auer said. "The advanced biofuels envisioned in the energy bill and the Farm Bill involve new technology. Are bankers going to again sit back and wait for someone else to take the financing risk to get the industry up and running before they step up? This picture is further complicated by the credit tightening resulting from the bankers' sub-prime mortgage mess."
Bankers' opposition to changes in Farm Credit's authority is also very shortsighted, he said, because banks and rural communities benefit when Farm Credit brings capital from the nation's money markets to support agriculture-based projects that the typical community bank cannot finance due to lending limits.
Because Farm Credit lenders are cooperatively owned and guided by the agricultural producers who are the System's customers, industry observers acknowledge that Farm Credit better understands how to manage the risks associated with the cyclical nature of biofuels. Unlike commercial banks, Farm Credit also has an historic and congressionally mandated mission to serve U.S. agriculture and rural America through good times and bad.
"Bio-based renewable energy holds great promise for improving America's energy independence and environmental quality, as well as providing new opportunities for agricultural producers and rural communities. The farmer-owned Farm Credit System has been there since the beginning and stands ready to continue to provide financial resources and expertise to help this industry grow," Auer said.