Construction is under way on the first barley-based ethanol plant in the Southeast, creating heightened interest among grain growers in Virginia and North Carolina.

The Hopewell, Va., plant will produce 55 million gallons of ethanol, plus a high quality livestock feed co-product that is sorely needed by area livestock producers. The plant is being built by Osage Bio Energy, headquartered in Glen Allen, Va.

Osage Bio Energy CEO Craig Shealy says, “Since we broke ground on Oct. 3, we have spent considerable effort procuring major pieces of equipment, engineering and prepping the site for construction.”

“The normal process of construction seems to ramp up for a few days and ramp down the next few days. The economic downturn has offered some advantages in terms of reduced costs of concrete, steel and other building materials, but we have to be careful not to rush construction to try and take advantage of some of these price benefits,” he adds.

“We are still on schedule to be up and running by mid-2010 — that's the goal we keep foremost in mind, rather than hurrying up or slowing down to take advantage of rises and falls in construction costs,” he adds.

If they maintain the current schedule, Osage Bio will be buying barley from the crop which will be planted this fall. Though they would like to buy all the grain they need to power the plant in a 100 mile radius of the central Virginia site, Shealy says that may not be possible in the short-run.

Virginia grain growers polled at the recent statewide Soybean and Small Grain Growers Association meeting all agreed on one critical criteria that will determine how much barley they will grow — price.

Virginia Tech Small Grain Specialist Wade Thomason says he has no doubt Virginia grain growers could produce most of the grain the plant will need to operate. Growing it won't be the problem, he says, handling and storage will be the drawbacks.

“We have the acreage, the growing conditions and farmers with plenty of experience growing wheat. Plus, we have one of the best small grain breeding programs in the country turning out new and improved varieties. So, all the pieces are there, growers just need the incentive to grow barley,” Thomason says.

Osage Bio Energy has a goal of getting farmers in the region to produce 30 million bushels of barley for use in the Hopewell plant. So far, Shealy says the response has been good.

In addition to meeting with farmers on a regular basis, the company recently initiated a barley yield competition. Farmers in Delaware, Maryland, Virginia, Tennessee, Kentucky, North Carolina and South Carolina are eligible to enter the Barley Bin Builder Yield Contest.

“We have a link on our Web site at www.osagebioenergy.com for farmers to provide us feedback — and we look at their comments closely in planning our programs,” Shealy says.

Having grown up on a small, part-time farm operated by his parents, both of whom were school teachers, Shealy understands the risks farmers take in planting a new crop like barley. He radiates a quiet confidence and enthusiasm for the project that hasn't gone unnoticed by Virginia farmers.

“I attended the groundbreaking ceremony back in October. The emotions that Craig and other members of his management team showed at the ceremony are good indicators to me they have their heart and soul in this project,” says Virginia grower Kevin Engel.

Engel has grown barley for a number of years and has ramped his production up to about 1,000 acres this year and has added on-farm storage capacity. As farmers we need more opportunities like the one Osage Bio is offering. Some work and some don't, but we need to try and work with these companies to build new markets for our crops,” Engel concludes.

Knowing storage and handling will be a challenge, Osage Bio provides information to farmers on how to secure low-interest loans for construction of on-farm storage. For example, The U.S. Department of Agriculture (USDA) Farm Service Agency (FSA) Farm Storage Facility Loan Program (FSFL) provides low-interest financing for producers to build or upgrade farm storage and handling facilities.

Shealy agrees storage will be a problem, both on-farm and at grain elevators. He says Osage Bio is expecting to bring grain in from as far away as Canada the first couple of years. In the long-run they want to buy barley from growers in this region.

In the next few years the company hopes to expand their primary procurement area farther north into Maryland, farther south into North Carolina and farther west into Kentucky and Tennessee. They are working with Cameron-Crittenden in Charlotte, N.C., and other entities to develop a contracting program.

“We are almost ready to announce these programs, including how to contract with us through local elevators and Extension agents. Hopefully, we can make these contract announcements sometime in April,” Shealy says.

As of late February, barley was trading for about $2.50 per bushel, compared to $4.05 for corn. Shealy says his company will pay significantly more for barley, but that price will be tied to the price of corn.

The Virginia CEO concurs with Virginia Tech Specialist Thomason that storage will be a bigger issue than price for both farmers and for Osage Bio. Shealy says the 1.2 million bushels of storage capacity planned for the Hopewell plant is only a two week supply.

“We are a processor of grain, not a grain elevator. There are some opportunities for storage that has been built all across the region that can be used for barley. There also are some low cost storage opportunities for soybeans and corn,” he says.

The big problem will come in the fall. If a grower has a big crop of barley being held in his bins, whether on farm or at the elevator, there will be a big push to get corn and beans out of the field in the fall and storage space will be needed for these crops.

“Storage will be a challenge and one we know will take some time to develop.” The solution, he says, will likely come from a combination of expansion of some elevators, and from on-farm storage built for corn or other crops that is not needed.

“Our prices will be target prices on a delivery basis to Hopewell, Va. If you can maximize what you net by utilizing on-farm storage, or if a local elevator can maximize profits by working with farmers to store barley, that's really up to the market to decide.

“In developing a market like this, we can't pay one farmer or one elevator more or less than another. What we have to do is say this is what we intend to pay when we get the barley at our plant. If you can find a better way to get it to me, make higher yields and more money — that's good for the farmer, but buying 30 million bushels of barley a year you can't play favorites,” Shealy stresses.

The same philosophy has to apply in buying hulled versus hulless varieties. While Osage Bio would love to process all hulless varieties, the reality is that yields are not yet comparable — at least not across the wide range of production parameters in the region.

Hulled versus hulless is a tradeoff. The hulled varieties are going to produce slightly higher yields and the hulless varieties slightly higher starch content. At the end of the day, Osage Bio is buying starch and processing hulless barley eliminates some production costs — obvious advantages for hulless varieties.

“Though yields may be lower, higher test weights for hulless varieties may already make them competitive on a total starch to starch basis,” says Virginia Tech Small Grain Breeder Carl Griffey.

“Over time, we hope to publicize a pricing schedule based on the requirements of the grain, which would provide incentives for farmers to grow hulless varieties. In developing this market, right now, we just can't provide a price incentive specifically for hulless barley,” Shealy says.

Through all the talk about pricing and storage, it is clear that Shealey is focused on developing a local source of barley and one that makes it profitable to run the Hopewell plant. However, it is very evident he is doing that with a firm grasp on the farmer's perspective, determined to make the barley ethanol plant a win/win scenario for growers and Osage Bio Energy.