The definition of a benchmark is a standard by which something can be measured or judged.

In its own right, Christianson and Associates PLLP (C&A) has set a benchmark for accounting practices in the ethanol industry. Founded more than two decades ago—and offering ethanol plant-specific services since the early 1990s—the company has grown with the industry, helping producers become more financially efficient and sound. So it's fitting that a company with that background and reputation would capture the opportunity to create a service many U.S. ethanol producers needed and asked for: ethanol plant financial benchmarking.

While developing a financial benchmarking program is a serious undertaking—not only to create, but to maintain—it's not the first time C&A has taken the initiative to develop a tool for the ethanol industry in response to a perceived demand. "All of our services have been driven by the client needs we've experienced over the years," says John Christianson, principal of the firm. "Early on, as this industry was developing, we would identify client needs that we were seeing, and we would ask if there was something we could do to provide a solution."

One of the latest solutions, of course, is ethanol plant financial benchmarking. The program enables ethanol producers to analyze their financial and productivity rankings against that of their peers, all according to specified standards. C&A stands alone as the first in the industry to offer such a program, which it has been doing for about a year now. The Willmar, Minn.-based accounting firm developed the tool in response to requests from producers and industry groups to do so. Since the program's inception, 27 U.S. ethanol plants have signed on, and there are several developing plants scheduled to participate upon start-up. Christianson explains to EPM that the program has had early success because its development, management and evolution have all been carefully implemented based on customer feedback and corporate experience.

Crucial Comparisons

Dry-mill ethanol producers are the only eligible participants in the program, and they are not required to be regular clients of the accounting firm. Participants submit specific data over a secure Web site on a quarterly basis. They are then issued a report showing how they compare to other producers—both average producers and "industry leaders," the top 25 percent of each category. There are over 70 ratios calculated on a per-gallon basis related to revenue, cost of goods sold, profitability and operating efficiencies.

Christianson explains that as the benchmarking program's data set becomes larger, it remains important to compare all participants on a per-gallon basis because that gives each participant a common unit of measure. "We have a cost per gallon on our corn procurement and labor, and we ultimately get down to our net income per gallon," he says.

The collected data is very comprehensive and detailed. Yields, of course, are crucial comparisons. The reports analyze both ethanol and distillers grains yields on a per-bushel basis. Also analyzed are fixed labor and operating expenses, and a number of financial ratios. The financial ratios are related to position, profitability, cash flow and debt service capabilities. In addition, "we take into account the contracting, corn procurement, hedging aspects, corn costs, procurement costs … [and] we are very detailed in chemicals and enzyme costs because those things are controllable," Christianson says, adding that if a particular cost is higher than average, a program participant can utilize the benchmarking data to determine if the problem area is related to usage or price per quantity.

As one participant quoted, "The benchmarking data helps gain insight as to unit costs in the industry." What it does not do, Christianson says, is make decisions for plant managers. "The benchmarking is a tool to assist them in analyzing themselves," he says. "We don't provide answers for the plants. What we do is provide the access to analyze themselves to compare themselves to the industry average, as well as the industry leaders."

Producers can also compare their data over time. Even though the reports are issued quarterly, the last four quarters' averages are also available for query. Christianson says it is important to analyze groups over a period of time because of marketing implications. The query option "will allow the plant managers to produce a trend analysis of their decisions based on industry standards," he says.

The overall analysis is beneficial for any sized plant to determine its specific economic advantages, Christianson points out. Nevertheless, he says a number of producers—both small and large plants—have hesitated to participate because they feel they don't fit into mainstream benchmarking. C&A recognized that analysis of certain categories would be more beneficial if compared with facilities of similar sizes. Therefore, the reports will soon contain additional sections that segment participants by production capacity. The groups will be divided into plants that are 40 MMgy and less, 40 MMgy to 70 MMgy, 70 MMgy to 95 MMgy, and 95 MMgy and up. "You'll be able to compare within the entire industry but also within your group," Christianson says, adding that the firm hasn't implemented the segmentation feature yet because the number of participants has yet to make it statistically viable. For example, there would be some groups with only a couple of facilities, and others with several. Christianson explains that there must be eight to 10 plants within a segment to make it practicable.

Producer Input Key to Success

The firm will roll out segmentation reporting in response to customer feedback, which has been of utmost importance throughout the development and ongoing operation of the program. In fact, C&A gathered input from potential participants before any plants had signed up, just to ensure that it would be a useful tool. "The benchmarking service is evolving," Christianson says. "We want to continue to improve, evolve and provide more concise information. We want feedback. When we get ideas, we share those with others that are already participating. If the majority wants to see those services enhanced, we schedule them to be enhanced. The people who are participating have a say in how this is going to be evolved."

One such evolution now gives participants their rank within the group. This can show a plant the categories in which it is strong, or efficient, and in which categories it should further evaluate. Christianson notes that once the production capacity groupings are implemented, the ranking will be particularly useful.

Probably the most important feedback came in the initial stages, when plants requested total confidentiality because all financial data is recorded. Therefore, the accounting firm invested in a secure Web site, which also provides ease in entering and accessing the data (one participant described the site as "smooth and user-friendly"). Christianson also emphasized that neither participation information nor data is for sale or use by any company, association or individual other than participating plants.

Launching this program took a "calculated risk" from the firm, according to Christianson. "No one is going to sign up unless they can see the product and know it will work," he says. "So we made a substantial investment in software development to make sure it was easy to participate and easy to submit client data. We did this without knowing if anyone would sign up for it."

Confidentiality and a solid database of participants were the key ingredients to getting additional participants. "No one wants to be the first plant. … A few people stepped up to the plate early on after we started the program," Christianson says.

The success of C&A's benchmarking program lies in it being comprehensive, confidential and interactive. Participants have appreciated the opportunity to contribute to the contents of the program. "It's great to see the process up and running," said a participant shortly after start-up. "We look forward to working with [C&A] to make the result increasingly useful."

Christianson does have advice for those in the growing industry, based on his experience and data analysis. "It's not reasonable to expect an industry based on commodities to grow with significant linear growth," he says. "There are going to be bumps in the road with shortages and excesses, so plants need to analyze how to operate efficiently."

What really matters, of course, is that participating ethanol plants continue to operate as efficiently and financially sound as possible—and Christianson says there are still many efficiency gains to be made and benchmarked. In addition, Christianson points out, the U.S. ethanol industry is currently experiencing ideal market conditions, but if and when the situation changes, producers must be ready to survive in the valleys. "In good times, plants still need to maximize their efficiencies, so they can see where they can improve their production and be ready for a downturn," he says. "You'll need to be an efficient, low-cost producer. It will be significant to mitigate as much market risk as possible. This industry is no different than other industries."

Anduin Kirkbride McElroy is an Ethanol Producer Magazine staff writer. Reach her at amcelroy@bbibiofuels.com or (701) 746-8385.