Economist, UK
05-10-07
Ethanol is rapidly transforming life in Iowa and the rest of the corn belt
YOU might think that the opening of a new ethanol facility in Nevada, Iowa—a
town of 6,700 in the centre of the state—would be of interest mainly to the local
farmers who supply the corn that the factory turns to car fuel. You would be
wrong. Investors in the refinery include the person who delivers fuel to it, a
couple of local parts-suppliers for John Deere (a big farm-equipment company)
and the local school-bus driver, among 900 or so other small investors. Like
many others in the corn belt, the Nevada refinery is seen as a way for the whole
rural community to thrive by exploiting America's new craving for ethanol and the
corn (maize) that is being used to make it.
Corn-based ethanol is neither cheap nor especially green: it requires a lot of
energy to produce. Production has been boosted by economically-questionable
help from state and federal governments, including subsidies, the promotion of
mixing petrol with renewable fuels and a high tariff that keeps out foreign ethanol.
The federal government offers ethanol producers a subsidy of 51 cents per
gallon (13.5 cents per litre); and a growing number of states are pushing for
wider use of E85, a fuel blend that is 85% ethanol and only 15% petrol. Since oil
prices rose above $30 a barrel in 2004 (they are more than double that now),
ethanol capacity has grown especially rapidly. And although the country is
experimenting with other renewable plant-based fuels of varying feasibility, from
biodiesel to (much greener) ethanol derived from trees, the biggest boom has
been in corn-based ethanol.
California has helped to lead the way. When the state banned the use of methyl
tertiary butyl ether (MTBE) as a fuel additive after 2003, everyone had to use
ethanol instead to meet clean-air standards; and local refineries for the product
began popping up to cash in on a state subsidy of 40 cents per gallon at the time.
Outside the Golden State, however, the states most eager to subsidise ethanol
were those with golden fields of corn. Wallace Tyner, an agricultural economist at
Purdue University, points out that states that had introduced subsidies early,
such as Illinois, Iowa, Minnesota and Nebraska, were already building lots of
ethanol factories before 2004, whereas corn-belt states without subsidies, such
as Indiana and Ohio, did not do much until oil prices rose. Since then, rural areas
across the region have been swept up in the ethanol craze, with new facilities
sprouting all over corn country (see map).
Iowa, in the heart of the region, already has 28 ethanol refineries, producing 1.9
billion gallons of the stuff a year, nearly a third of America's total capacity. Many
new facilities and expansions of existing ones are in the works. On consecutive
days in Iowa last week there were ceremonies to break ground for a new factory
in Hartley and to open a completed one in Corning—where bad weather had
grounded the Vanguard Squadron, the world's only 100% ethanol-powered
aerobatics fleet.
Although agribusinesses such as Archer Daniels Midland have built many
ethanol refineries, farmers' co-operatives and local investors have also been
busily building as well. The first local groups to do so were in remoter areas
where farmers could not get the best prices for their corn because of the high
cost of transporting it to market. In Iowa, that region is the north-western part of
the state, which enjoys high crop yields but gets 25-50 cents less per bushel
because it is too far from the Mississippi river barges.
The same logic applied in the eastern counties of North and South Dakota, in
south-west Minnesota and in other parts of the corn belt where getting corn to
market is costly. So long as a refinery can be built near good rail terminals in
these areas, says Ken Eriksen, who analyses transport patterns at Informa
Economics, a research firm specialising in agriculture, it is more cost-effective to
convert the corn into ethanol and send that to distant markets.
All this activity is benefiting rural economies and related industries big and small.
Land prices in Iowa rose 10% last year, and are still climbing. Jobs are being
created around the factories. In places such as Lakota and Marcus, which built
some of the state's first modern refineries and have made a bundle because of
high oil prices and subsidies, local investors have ploughed their profits into
home improvements, college fees and farm equipment.
Some people in Iowa are also beginning to talk about livestock. Besides
extracting corn's starch content to be turned into fuel for cars, ethanol refineries
convert the rest of the crop into distillers' grains. These contain the corn's protein
and other nutrients and are increasingly being fed to cows, pigs and chickens
near ethanol factories around the country. As Dave Nelson, the chairman of an
Iowa ethanol outfit who also grows corn and raises swine, puts it, “we take the
candy bar out of the corn and then feed the rest to the pig.”
However, though Iowa has lots of pigs, distillers' grains work much better as feed
for beef and dairy cows. And, according to researchers at Iowa State
University, the state's refineries already churn out more than five times as much
of the stuff as its small stock of dairy cattle can eat. Most of those refineries,
therefore, have to use a great deal of energy drying the distillers' grains so that
they can be shipped to Texas and other cattle states in the South.
Feeding the by-product directly to local animals would cut energy use at the
refineries and transport costs for the feed. Iowans and other Midwesterners think
this logic will drive a boom in the region's beef and dairy industries. Plenty of
investors, however, view it as an excellent reason to start building ethanol
refineries in Texas, which has plenty of hungry cattle.
A more serious long-term threat to Iowa's ethanol industry might come from other
biofuels. The federal government is already subsidising investments in cellulosic
ethanol, for example, which can convert a wide range of plant life into fuel, but is
still very inefficient. Iowans do not seem worried. For one thing, even if cellulosic
ethanol can be made viable, that feat remains years away. Moreover, even
though switchgrass and other plants can be grown in places outside the Midwest,
Iowans will benefit from the fact that leftover corn stalks can also be used for
cellulosic ethanol. Instead of worrying about the murky future, the state's farmers
are planting as much corn as they can—and hoping that oil prices stay nice and
high.