Duluth News Tribune, MN
09-16-06
Ethanol seems to be a cash cow, but experts warn not to bet the farm
BY TOM WEBB
ST. PAUL PIONEER PRESS
ST. PAUL - 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 came 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.
Yet 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."
Farmers are part of the ethanol gold rush. But now, the field is dominated by
heavyweights, including agribusiness giants such as ADM and Cargill and hungry
corporate upstarts such as 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.
On the Minnesota campaign trail, you'll hear calls for more government
incentives for ethanol from almost 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 10percent ethanol mandate, to boost incentives for E-85 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 Democratic
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
reasons -- the urgency of reducing imports of foreign oil, and the economic
benefits that flow from ethanol.
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 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 official. "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.
But as the ethanol industry changes, so do its economics, and not in ways that
will help rural areas:
• More outside investors. 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 JOBZ program, which exempts them from property taxes, sales taxes and
state income taxes for a decade.
Amid the ethanol boom, what few politicians say is that more ethanol means
more taxpayer subsidy. Every gallon of ethanol produced costs U.S. taxpayers
51 cents in tax breaks, or $2 billion last year. As production soars, those
subsidies will soon grow to $5 billion a year, and perhaps up to $15 billion.
Today, the energy frontier is cellulosic ethanol, which makes ethanol from waste
plant material such as corn stalks and tree limbs. That technology exists, but it's
not yet economically viable.
To 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.