By SCOTT KILMAN

Staff Reporter of THE WALL STREET JOURNAL

NEVADA, Iowa -- Truck driver Dean Rogers made the biggest investment of his life last year. He scraped together $25,000 for a stake in a plant to turn corn into a gasoline substitute called ethanol.
"It's a big chunk of change," said the 61-year-old Mr. Rogers, who has spent a quarter-century driving from farm to farm delivering fuel. Tapping a bandaged finger on his stenciled work shirt, he added, "I'm hoping it will be a big part of my nest egg."
Mr. Rogers is among thousands of farmers, teachers, storeowners, retirees and others who have raided their savings and borrowed money to join the biggest investment movement in rural America in decades. Driven in part by hopes of reviving weak local economies, the investors,
together with rural lenders, are pouring billions of dollars into ethanol plants.
Ethanol -- which is distilled from corn essentially the way moonshine is -- is blended into gasoline, both stretching the fuel's supply and making it burn cleaner. So far, the business is booming. With the price of gasoline up, so is ethanol's, 40% in two years. The Chicago Board of Trade is about to launch a futures contract in ethanol. Midwestern plants built by farmers' co-ops and private companies, at a cost of $50 million to $125 million each, now are showering their hometown investors with benefits.
In Oakley, Kan., population 2,173, a plant called Western Plains Energy has created 30 jobs. Open just over a year, it has already paid its investors $2 million in dividends. The town's lumberyard has reopened, a new bank has come in, the truck stop is remodeling and people are fixing up homes.
Rushing to get aboard, other communities are offering tax deferrals, building roads to plant sites and floating bond issues for construction. Banks eager to support their communities are offering loans to buy stock, sometimes not requiring the investors to put up any money of their own. The result is that 25 new ethanol plants are under construction, adding to an existing 83, a third of which are themselves
less than three years old. In Minnesota, a single builder has 42 more new plants on the drawing board.
"I've never seen people so excited," says LaVon Schiltz, director of the economic-development council in the Iowa town of Nevada. Jeff Broin, who builds ethanol plants from Sioux Falls, S.D., calls it "a bit like a gold rush."
But will it last? Ethanol's price is closely tied to that of gasoline and thus to the price of crude oil - currently high, but volatile and hard to predict. Ethanol plants have little pricing power in case the cost of their raw material, corn, goes up. Because ethanol usually costs more to make than gasoline, its usage depends heavily on federal incentives and clean-air legislation -- which could change. An earlier ethanol boom, in the 1980s, largely fizzled when oil prices fell.
Above all, the frenzy of plant building could outstrip demand, creating a glut that would leave some farmers and townspeople with too little income to pay investment debts. At the current rate of construction, by year-end the U.S. will have the capacity to turn out four billion gallons of
ethanol annually. Energy Department economists don't see the need for that much ethanol for another five years.
"Production is growing faster than demand," says Martin Andreas, a senior adviser at Archer-Daniels-Midland Co. Tellingly, the commodity giant, which is the biggest ethanol producer of all, has no plans to add capacity. Credit-rating agency Standard & Poor's calls the industry "highly speculative."
The idea of running cars partly on corn-derived alcohol has been a dream in the rural Midwest for three decades. The advantages include new markets for corn, reduced dependence on foreign oil and even environmental gains, since it's a renewable fuel (although raising corn burns energy, too). It's a tempting concept to fading farm communities long squeezed by flat grain prices and ever-rising costs, particularly since new technology makes small ethanol plants affordable. At a time when few Americans want a new oil refinery in their backyards, these rural ethanol plants get an eager welcome.
The plants mix corn and water into a mash, add enzymes that turn starch to sugar, cook the batch and then ferment it with yeast. They leave behind liquid ethanol plus solids called distillers' grains. The operators sell the solids for livestock feed and ship the ethanol off to fuel distributors to be mixed with gasoline.
The resulting blend is higher in oxygen and burns more completely, thus polluting the air less.
The U.S. Clean Air Act requires areas with the worst pollution to use clean-burning blends. Some once used fuel with an additive called MTBE that did the same thing, but several states banned it because of groundwater-pollution concerns -- a boost to ethanol. The U.S. also gives gasoline distributors a partial tax exemption for adding ethanol, and a law in one state, Minnesota, requires its use. In all, ethanol makes up nearly 3% of U.S. motor fuel.
Wall Street has little to do with this decidedly grass- roots investment boom. Residents crowd into firehouses and gymnasiums for presentations, often by farmers, about plants with names like Tall Corn Ethanol and Amaizing Energy. Some listeners never bought stock before. Prospectuses list how long directors have been married, church
affiliations and hobbies. "Enjoys singing in a barbershop quartet," says one.
When a group of farmers here in Nevada (pronounced na-VAY-da) held a meeting about building a plant, the community center filled with a crowd that included Terry Branstad, Iowa's governor from 1983 to 1999. All $38 million of shares in the business, Lincolnway Energy LLC, sold in 53
days. Buyers included a tractor mechanic, a school-bus driver and the ex-governor, who says he invested $25,000.
The businesses aren't publicly traded, but their shares change hands through services that keep track of who wants to sell and who wants to buy. Prices of some shares roughly doubled last year.
Some offerings, organized by farmers' co-ops, are open only to active farmers.
Those who invested in the Midwest Grain Processors plant in Lakota, Iowa, population 255, reaped $5 million in dividends last year. That was a 25% return on their two-year-old investment.
"By raising a bulk commodity like corn, this town had been at the lowest end of the value chain.
Now we're in the energy business," says banker Jim Bollig at Farmers & Traders Savings Bank in nearby Bancroft, Iowa. He says the bank made loans to about 30 farmers, of up to $40,000 each,
to buy ethanol-plant stock.
A little of the new wealth trickled down to Spa Dee Dah in Bancroft, which charges $55 for a men's facial and $45 for ear candling, a wax-removal technique. "Ethanol is great for us," says owner Deb Goche, who launched her spa after the plant opened.
Successes like these are tempting farmers who've just about given up on raising grain in the face of rising export competition from low-cost places like Brazil. The crop subsidies that in some years provide most of farmers' profit also appear threatened. The Bush administration wants to cut some for budget reasons and has also signaled a willingness to curb subsidies to win a World Trade Organization accord on other matters.
"Buying shares in an ethanol plant has to make more sense than trying to make a living on $1.80 [per bushel] corn," said farmer Brian Wrage as he sipped coffee at a truck stop in Lincoln, Ill. He and a group of other farmers are crisscrossing Illinois seeking investors in a plant to be called
Illini Bio-Energy. They hope to sell $33 million of stock in it and borrow $50 million more.
Mr. Wrage, 51, who spends spare time giving out Gideon Bibles outside schools, says he is putting $100,000 in the shares. Of that, $80,000 will come from a loan. He knows he could lose it, and that "would be devastating." But he says farming has accustomed him to taking risks; it costs him $500,000 a year to farm his 1,375 acres, and many things beyond his control can waste his best efforts.
At one of his presentations, 50 farmers filled a golf-course banquet room at Auburn, Ill., on a recent icy night. A banker stood up to say he'd brought forms for people to apply for loans of up to $100,000 to become investors.
The room fell silent as Mr. Wrage laid out the forecast: a 19% return on stockholders' investment in the second year of plant operation, rising to 24% by the fourth year. "This is not a fairy tale," he said. Nobody challenged him.
The forecast came from Christianson & Associates, an accounting firm in Willmar, Minn., that has advised more than 35 investor drives for ethanol plants. It compiled the outlook from data the plant organizers supplied, such as 10-year averages of corn and ethanol prices.
Its forecasts don't account for how the plant-building boom might drive prices and profits down by increasing supply. "We take their price data and put it into our model," says John Christianson, 44, principal of the firm. A one-page disclaimer in the 108-page stock offering says the firm didn't
evaluate underlying assumptions. "We aren't going to the level of examining or giving an opinion on the forecast," Mr. Christianson says.
Mr. Wrage says organizers use the forecast "to show farmers why we think it is a good investment.... I honestly, truly believe in the forecast. I see it as a minimum."
Also guiding the Illinois farmers was Jack Porter, a professional ethanol-stock pitchman who books meeting rooms, places ads and prints handouts. A former seed-corn executive, the solidly built 64-year-old from Omaha, Neb., knows his audiences. He tells them homegrown ethanol is good both for their bank accounts and for America, whose oil thirst entangles it with unfriendly nations.
Mr. Porter is on retainer for a builder deeply involved in the ethanol boom:
Minnesotan Ron Fagen, who sits atop a network of ventures that do everything from building and running plants to working on financing and
marketing. A bear of a man with a droopy mustache, Mr. Fagen, 56, operates from an office next to the only stoplight in Yellow Medicine County in southwest Minnesota. At opening ceremonies for new ethanol
plants, he often buzzes the scene in his World War II-era P-51 Mustang
fighter plane.
Mr. Fagen says he's currently building 12 ethanol plants and planning 42
more, and his business's annual revenue has grown fivefold in four years to $300 million. He admits there's a chance all the expansion could create a glut. But he says he's been hearing that warning "ever since I built my second plant," and it hasn't come true.
Scouts help Mr. Fagen find new places to build. Albert City, Iowa, population 709, has long been shrinking. Despite an upbeat sign on the road into town -- "Visit Albert City: How Swede it is" -- the town's farm-equipment dealer went out of business last year and the high school closed. Crops grow in an industrial park that didn't attract a single tenant.
But to a Fagen scout, Albert City had the essential elements for an ethanol plant: productive corn farms all around, a tall grain elevator, a railroad line and a natural-gas line for energy. Now Mr. Fagen is about to start building a $125 million investor-owned plant that will bring in 45 jobs paying an average of $40,000 a year, higher than the town average. Officials hope young families will move in and build what would be the first new houses in town in decades.
Says Mr. Fagen: "We're changing the economy of the Corn Belt."
It's true in more than one way. Ethanol plants will consume about 12% of the corn harvested by U.S. farmers last fall. An ethanol plant can draw in most of the corn grown for tens of miles around. That means farmers don't haul it to the local grain elevator for marketing, and a grain elevator that doesn't get grain is in trouble. Fighting back, the farmer-owned elevator in Nevada decided it would be the one that built an ethanol plant here, before somebody else did.
The country's largest farmer-owned cooperative, however, sees mostly risk when it comes to ethanol. At the co-op, CHS Inc., Chief Executive John Johnson says, "I think it is very likely the Midwest will be overbuilt soon."
A bill that nearly cleared Congress in 2003 would have required the oil industry, by the year 2012, to use five billion gallons of ethanol annually. But that level of production may be reached in as soon as two years. Now, some ethanol-industry lobbyists are floating the idea of a federal mandate to use eight billion gallons a year. Oil-industry officials are leery, and it isn't clear whether lawmakers can resolve differences that sunk the previous legislation.
David Nelson, a farmer who's chairman of the two-year-old Midwest Grain Processors ethanol plant in Lakota, Iowa, is well aware of the overexpansion threat. "It's starting to get crowded around here," says Mr. Nelson, 52, sipping a Corona in the smoky bar of Cattleman's Steak & Provisions near his Belmond, Iowa, farm. "In the back of our minds, we know there is to be a day of reckoning."
But his solution isn't to cut back. It's to grow big enough to survive a shakeout. Midwest Grain Processors sold about $17 million more stock in January to double the size of its plant. That means this plant alone will be able to make 100 million gallons a year. And its farmer owners are already thinking about where to build a second plant.