Pioneer Press, MN
09-15-06
Farmers, politicians, big business — everyone's cashing in the age of ethanol
What started as a way to wean the nation from foreign oil and help rural America
has turned into a subsidy-fueled gold mine.
BY TOM WEBB
Pioneer Press
The ethanol industry wasn't born, it was built, one government act at a time.
During the 1970s energy crisis, turning corn into fuel seemed like a cool idea, but
it wasn't economical. So the subsidies began. Then protection from foreign
imports.
During the 1980s farm crisis, Minnesota officials hoped ethanol could lead a rural
revival and offered subsidies so generous that farmers could build ethanol plants
practically for free.
Still, ethanol struggled. So the 1990s brought laws encouraging ethanol use.
Then laws requiring it. Then more laws, requiring more ethanol.
Today, at long last, ethanol has entered its golden age, thanks to three decades
of government help and the more recent run-up of oil prices. But if ethanol's
fortunes have dramatically changed, ethanol politics have not. All across the
Corn Belt, there's scant debate about whether ethanol needs more government
help — only how much more to give.
"Ethanol was always seen as an 8-year-old kid that needed to be taken care of,
but now it's a 27-year-old graduate student with a Ph.D. from Harvard that wants
to live at home with mom and dad," said Michael Swanson, vice president and
agricultural economist at Wells Fargo.
"It's not that little-kid industry anymore," Swanson added. "We see huge venture
capital funds chasing after ethanol right now. It's amazing. To finance a plant,
you used to need 300 meetings (with farmers) in coffee shops, and celebrating
every $5,000 check. These hedge funds wouldn't stop to pick up a $5,000 check.
They're in too much of a rush."
NEW HEAVYWEIGHTS
Farmers are part of the ethanol gold rush, but now the field is dominated by
heavyweights, including agribusiness giants like Archer Daniels Midland and
Cargill and hungry corporate upstarts like VeraSun and US BioEnergy. Even
ethanol novices are getting in, from billionaire Bill Gates to hot-money Wall Street
investors.
"These people probably never saw a corn stalk, might never have seen a farmer;
it's a straight investment deal," said David Morris, vice president of the Institute
for Local Self Reliance, a Minneapolis think tank.
Yet on the Minnesota campaign trail, you'll hear calls for more government
incentives for ethanol from virtually every podium — Republican and DFLer,
challenger and incumbent, state and federal office-seeker.
Gov. Tim Pawlenty, a Republican, wants the nation to follow Minnesota's 10
percent ethanol mandate, to boost incentives for E-85, an 85 percent ethanol fuel
blend, and to make Minnesota "the Saudi Arabia of renewable fuels." At a recent
debate, he boasted, "I've led the nation and the world on ethanol issues. I got
called by the renewable energy association leader, 'The most pro-ethanol
governor in the country.' "
But state Attorney General Mike Hatch isn't cheering. Hatch, the DemocraticFarmer-Labor candidate for governor, faults Pawlenty for stretching out ethanol
factory subsidies and not focusing on farmer-owned plants. "We've done very
well with ethanol," Hatch told a farm audience recently, "but we can do a whole
lot better."
U.S. Senate candidate Amy Klobuchar, a Democrat, wants to see federal laws
that require 10 percent ethanol use nationwide and 20 percent by 2020, along
with new incentives to make, buy and research vehicles that can use either
gasoline or ethanol.
Her Republican opponent, Rep. Mark Kennedy, favors those same things. In
addition, he'd take tax breaks away from oil companies and use them to double
incentives for E-85, ethanol and hybrid technology.
Up and down the ballot, ethanol has become the apple pie of Minnesota politics.
Said Minnesota political analyst Sarah Janecek: "The real economics don't
matter because we have a two-fer here. We can 'Save the environment' and we
can 'Help the farmers,' and that's an overwhelming factor for anyone running for
re-election."
So is any major candidate calling for reducing ethanol subsidies?
"Noooo way," said Janecek, an editor of Politics in Minnesota. "I see no political
drive to change anything. I see a ton of political drive to increase subsidies, even
though the economics would seem to dictate otherwise now."
In its early years, ethanol needed subsidies because of its start-up status and its
inability to compete with cheap petroleum. Today those reasons no longer apply.
So why do Corn Belt politicians keep promoting it? Lawmakers generally cite two
other reasons — the urgency of reducing imports of foreign oil and the economic
benefits that flow from ethanol.
"What Gov. Pawlenty has said is, we need to break our dependence on foreign
oil," said Pawlenty campaign spokesman Brian McClung. "Moving away from
importing petroleum, largely from countries that are often hostile to the United
States, is a major effort. So we believe that the investment in home-grown
renewable energy is a wise one."
MODEST ENERGY GAINS
"All of energy is subsidized," said Hatch. "Oil is subsidized in terms of $30 billion
(a year) in credits and incentives. Ethanol is. Wind energy is."
Hatch says the state should promote local ownership, which provides the
greatest local benefit. "If the outsiders are coming in, they're coming in because
it's profitable — they don't need a subsidy."
Klobuchar cites both national security and local economic benefits to ethanol. "Oil
still has a near-monopoly on fuel," she said, adding, "I don't believe ethanol
deserves special treatment, I believe it deserves a fair shake, and it's not a fair
shake when there are 185,000 gas stations, and only 650 have E-85 pumps."
Kennedy notes that ethanol is still a newer fuel and energy markets are quite
volatile, so he thinks it's important to preserve ethanol's tax breaks. In a
statement, Kennedy added, "Increasing taxes (on ethanol) now would send the
wrong message to our farmers and rural communities who are investing in the
many new ethanol plants appearing across our state."
Nowadays, U.S. energy security is widely touted as ethanol's primary benefit.
Ethanol does produce some energy gains, but they're relatively modest. A recent
University of Minnesota study found that ethanol yields about 25 percent more
energy than it takes to produce.
The economic gains have been dramatic, however, as dollars began flowing into
oft-neglected areas of the rural Midwest. Today, Minnesota has 16 ethanol plants
in rural areas, with more to come. Iowa already has 26 plants. South Dakota has
11.
"If you're in rural Iowa right now, there is no other industry that can bring along a
$125 million plant," said Swanson, the Wells Fargo economist. "We're seeing
quarter-billion-dollar plants put into rural Nebraska. There's nobody else willing to
put that kind of money in rural development, no way, no how."
Those factories rely on ethanol's recipe for success: Take low-priced corn, turn it
into high-priced fuel, reap the profits and enjoy government protection, too. That
recipe wasn't so lucrative when oil prices were low, but it is now.
At current prices, a $2 bushel of corn can make about $7 worth of ethanol fuel,
so even with today's higher costs, it's highly profitable.
Yet as the ethanol industry changes, so do its economics, and not in ways that
will help rural areas:
• More outside investors. Once, almost all of Minnesota's ethanol plants were
owned by local farmers, who delivered their corn, collected any profits and spent
much of the money locally. Now, almost all of the new plants are owned by
distant investors and corporations, and most of those profits will leave the
community.
• Fewer jobs: New factories do provide jobs, but ethanol is not a labor-intensive
industry, and it's becoming less so. A massive new plant producing 100 million
gallons a year — twice the size of any plant now operating in Minnesota — would
need only 50 to 55 employees, according to an Iowa State University study.
• More tax breaks: Minnesota's new wave of ethanol plants enjoy subsidies under
the state's JOBZ program, which exempts them from property taxes, sales taxes
and state income taxes for a decade.
Minnesota is hardly unique in its embrace of ethanol. Just look around the Corn
Belt.
In Illinois, the Democratic governor wants to spend $225 million to finance 20
new ethanol plants but faces criticism for not pushing ethanol harder by his
Republican challenger, who has a $500 million energy plan.
In Iowa, the Republican gubernatorial candidate wants sweeping new ethanol
mandates, but faces criticism from Democrats — for not doing more for ethanol.
In Nebraska, the Republican governor saw his state become the No. 2 ethanol
producer and crowed, "Look out, Iowa, we're going to pass you by, too!" His
Democratic challenger faults him for not focusing on locally owned ethanol
plants.
PRICE TO TAXPAYERS
Amid the ethanol boom, what few politicians say is that more ethanol means
more taxpayer subsidies. Every gallon of ethanol produced costs U.S. taxpayers
51 cents in tax breaks, or $2 billion last year. As production soars, those
subsidies soon will grow to $5 billion a year, and perhaps up to $15 billion
eventually.
Writing in the New York Times, Morris, with the Institute for Local Self Reliance,
proposed reworking the subsidy to take oil prices (and hence, ethanol profits) into
account and direct the benefits to farmers. That way, farmers still would be
protected from ruin if oil prices plunged.
But Morris says not a single lawmaker has endorsed his idea — in fact, he
ruefully notes that pro-ethanol forces in Congress immediately ramped up their
efforts to make the subsidy permanent.
Today, the energy frontier is cellulosic ethanol, which makes ethanol from waste
plant material like corn stalks and tree limbs. That technology already exists, but
it's not yet economically viable.
To Wells Fargo's Swanson, it's a reminder that economics — not just politics —
will ultimately decide ethanol's fate. Ethanol may be enjoying record profits and
government subsidies now, he says, but those will only make alternatives to corn
more enticing.
"You'd better watch out, because there are a lot of new technologies on the
horizon, and a lot cheaper feedstocks than corn," Swanson said. "So be careful
what you wish for. You might get it."
Tom Webb can be reached at twebb@pioneerpress.com or 651-228-5428.