KAAPA Ethanol's new 40-million-gallon plant near Minden, Nebraska, finished its first full year in December with profits that are several multiples higher than organizers projected in 2002.

"The financials at that time didn't look all that good, maybe $2 million or $3 million a year, $5 million in a good year," recalls Paul Kenney, a corn and cattle producer who is president of the limited liability company.

Near the end of 2004 it looked like returns would be about four times what they expected. Ethanol prices in California peaked last fall above $2 a gallon, way above the $1.15 KAAPA organizers expect in typical years.

It almost seems like a fairy tale. See how KAAPA fits into the ethanol market by reading "A ride on the ethanol train" starting on page 18. There are a lot of reasons for anyone else investing in ethanol to take a hard look at its financial risks, its political risks, and its management risks.

Finding good management will get harder. KAAPA ethanol, which has 34 employees, is fortunate to have it.

"We started off with five people who had any experience, and that's more than most," says the general manager, Chuck Woodside. "A lot of plants start out with one person who has worked in an ethanol plant. "

Woodside is a rookie, but well-suited for his job. He's a Nebraska farm boy with experience in industry (and, at one time, he worked for this magazine). He's a graduate of the Wharton School of finance.

Finding good management for an industrial process business like ethanol is outside of the experience of most farmers and ranchers. I'll bet that some of the most successful plants will be started by feedlot owners and hog finishers. (KAAPA is ahead there, too. Its treasurer, Steve Mercer, is from a solid-as-a-rock cattle feeding family headed by longtime cattle industry leader Dick Mercer.)

Making ethanol is like feeding livestock. You're not trying to make corn the most valuable substance on earth. You're trying to make a margin between corn and other costs and revenue from ethanol and distillers' grains. If your plant succeeds, that's how you'll profit from your investment in most years.

Managing that kind of financial risk is another area where KAAPA seems to have started out on the right foot. The farmer-owned LLC hired the commodities firm, R.J. O'Brien, to do a study of its market risks. Like other processors, KAAPA can reduce its risk by hedging its corn needs and natural gas needs in the futures market. On the selling side, there are gas-plus contracts that peg ethanol to unleaded gasoline futures. Ethanol is normally higher than unleaded, and since 1998 the difference has ranged from about 15¢ to $1.

A chart of Minneapolis rack ethanol less nearby unleaded futures looks like the web of a schizophrenic spider. There is no predictable relationship between gasoline and ethanol prices.

The New York Board of Trade offers an ethanol contract tied to Brazilian sugar. So far it has drawn little interest. Let's hope that a new ethanol contract planned by the Chicago Board of Trade proves useful.

Because ethanol is highly subsidized, its political risks are even greater. The corn is subsidized by the 2002 Farm Bill. Farmer-owned plants get another subsidy for any expansion from the same bill. That paid KAAPA $7.5 million in the last 12 months. Gasoline retailers get a 52¢-per-gallon federal excise tax credit. And, finally, a 54¢-per-gallon tariff protects this whole market from most imports.

So far, commodity groups and Midwestern members of Congress have skillfully guarded all this. Again, let's be careful we're not believing in fairy tales - that it will last forever.

It may be time for commodity groups and the ethanol industry to advertise to the general public. Most consumers I visited with in California are unaware of ethanol. A few are even hostile. The California congressional delegation hasn't always supported ethanol. Advertising could help build public support in populous markets.

Meanwhile, don't expect a repeat of 2004 in the ethanol industry every year. Chuck Woodside doesn't. "Timing is everything," he says. "We started at one of the best times we could have."