Seattle Times
10-15-06
Ethanol demand turns corn into a growing cash crop
By Hal Bernton
Seattle Times staff reporter
STEAMBOAT ROCK, Iowa — Though surrounded by some of the nation's most
fertile cropland, prosperity for this town of 336 people has been elusive. Even as
farmers' corn yields have soared, Main Street has withered, losing two grocery
stores, a hardware store and a cheese plant.
"They're all gone now, and that's a common story, more or less, all over this
area," said Larry Meints, a local corn farmer.
Meints wants to reverse that trend. Joining 400 other farmers and local investors,
he raised $34.5 million to build a distillery that last year began turning corn into
motor fuel. This fall, Pine Lake Corn Processors will double capacity, as rising
demand for ethanol generates a surge of cash and optimism for a new energy
industry based in rural America.
Construction crews are fanning out across the Midwest to install huge cooking
and fermentation tanks, boilers, pumps, heat exchangers and distilling columns
that rise like rocket ships from concrete pads set amid corn and soybean fields.
As of late August, more than 140 ethanol plants were either operating or under
construction in the United States.
The building boom recently reached the Pacific Northwest, where plants —
scheduled to be fed by trainloads of Midwest corn — are being erected in the
Columbia River towns of Clatskanie and Boardman, Ore. Bill Gates invested $84
million in Pacific Ethanol, which is building the Boardman plant.
In Washington state, at least four sites for ethanol plants, including one in Walla
Walla, have been proposed, according to Washington State University
Cooperative Extension Service.
By the end of next year, ethanol production is expected to equal about 5 percent
of U.S. gasoline consumption. About one-third of each bushel sent through these
plants comes out the other end as a high-protein livestock feed.
The new plants signal a convergence of two underpinnings of the American
economy: the food and fuel industries. Grain-processing conglomerates such as
Archer Daniels Midlands, farmers, Wall Street investors and oil companies all are
scrambling to expand their stakes in a corn kernel-to-ethanol industry that
eventually could supply more than 10 percent of the nation's gasoline
consumption.
For some, the expanding ethanol industry raises troubling questions about the
ethics of turning so much corn starch into fuel rather than using it to fatten
livestock or feed humans in a world still rife with hunger.
"We supply 70 percent of the corn that goes onto world markets. And when we
start squeezing down the amount we export, it affects a lot of people in a hurry,"
said Lester Brown, president of the Earth Policy Institute. But a potent political
alliance that includes President Bush, farm-belt Republicans and many
Democrats has embraced ethanol as a way to reduce U.S. dependence on
imported petroleum while generating new economic opportunity in rural areas.
Ethanol also has the potential to help trim U.S. emissions of greenhouse gases
that contribute to global warming, according to University of California
researchers, who note that new technologies — that would convert cellulose
such as wood wastes — could help ethanol make bigger reductions.
Even oil giant BP is touting ethanol. The corporation's public-relations campaign
boasts that its initials stand for "Beyond Petroleum," and, in full-page newspaper
ads, declares that it is time to produce more energy in the Midwest, rather than
the Mideast.
Too much for too long
For most of the 20th century, U.S. corn farmers have struggled with glutted
markets for grain, with most going to livestock feed. During the last three
decades of the 20th century, corn prices barely budged, averaging about $2 a
bushel even as fertilizer, machinery and other production costs soared.
Some farmers left the land, contributing to the decline of towns like Steamboat
Rock. Those who stayed behind, such as Meints, survived by increasing yields,
cultivating more acreage and tapping into government subsidies.
"Most farms probably tripled in size," said Meints, who sought to supplement his
own income with a Steamboat Rock supper club — now shuttered — and a
convenience store.
For farmers, ethanol represents a vast new market that could ratchet up prices,
put more money in their pockets and possibly free them from government price
supports.
But it has proved an elusive market. Though the fuel was tested in the earliest
19th-century internal-combustion engines, throughout most of the 20th century it
could never compete with gasoline. But in recent years, as gasoline prices
soared and corn prices stayed in the doldrums, the economics of ethanol
underwent a radical transformation. Ethanol can be produced for about $1.06 to
$1.20 a gallon, according to industry officials and analysts.
A big federal tax credit — 51 cents per gallon through 2010 — benefits both
those who make the fuel and those who sell it.
In the past, when oil prices were much lower, that tax credit kept the ethanol
industry alive and many plants struggled with losses. This year, it further
increases profits.
David vs. Goliath
The ethanol industry appears here to stay, with the federal government now
requiring the annual sale of 7.5 billion gallons of renewable fuels by 2012.
More uncertain is the pace of expansion, and who will control the industry. A
recent Iowa State University study concluded that all ethanol plants help their
local economies, but that locally controlled plants contribute substantially more
as owners spend their dividends in their own communities.
"They use the money to buy a refrigerator or put a new roof on their house, just
like they do with a salary," said Jill Euken, an Iowa State University Extension
researcher involved in the study that examined four ethanol plants that had a mix
of outside and local investment.
Currently, the largest player is Archer Daniels Midland. The company launched
ethanol production back in the late '70s in a cavernous plant that — after
numerous expansions — now stretches more than a mile at its Decatur, Ill.,
headquarters.
In Decatur, the company uses a wet milling process that can turn corn starch into
fructose sweeteners or ethanol. Along the way, corn oil, livestock feed and other
products are also extracted. And carbon dioxide, released by fermentation, ends
up in soft drinks or is funneled into industrial uses.
ADM also has considerable strategic advantages, operating a large network of
grain elevators around the Midwest that allow the corporation to buy lots of corn
at market lows, and controls fleets of train cars to haul grain to plants and ethanol
to markets.
ADM earlier this year announced plans to build new plants that will boost the
corporation's annual ethanol production from about 1 billion gallons to more than
1.5 billion gallons a year. Earlier this year, ADM's board picked Patricia Woertz, a
Chevron vice president, as the new chief executive.
Even as ADM expands, farmers have organized ethanol plants in cooperatives or
in alliance with other local investors. Today, more than 40 of these plants are
operating in Iowa and other Midwestern states, representing nearly 40 percent of
capacity, according to the Renewable Fuels Association.
In the western Iowa town of Denson, for example, a group of farmers bought an
ADM grain elevator and turned it into an ethanol plant. It even hired away ADM's
elevator manager.
For farmers, their stake in the ethanol plants are a source of pride as well as
profits. For decades, farmers have had to sell their crops to processors like ADM;
now they have a chance to grab greater control of their own destinies.
When corn prices are low, farmers hope that the ethanol plant can yield a big
return. And, in the years ahead, if rising corn prices eventually erode ethanol
earnings, they figure they will be making good on their crops.
The success of these farmer-owned distilleries has made them attractive targets
for outside investors. And some financial analysts expect that the oil industry also
will be on the hunt for ethanol acquisitions.
Will farmers eventually sell out?
Some already have, reaping big profits from their willingness to invest early on in
ethanol, according to Euken, the Iowa State University researcher.
For others, the lure of ownership remains strong.
Al Meints and his board have received plenty of calls from Wall Street investors
as they try to raise $22 million for their expansion of the plant outside Steamboat
Rock.
"We told them no," Meints said. "We're not interested."
Hal Bernton: 206-464-2581 or hbernton@seattletimes.com
About ethanol
What is it?
Ethanol is 200-proof ethyl alcohol, the same stuff that at lower proof goes into
whiskey. But it must be denatured before being used as a replacement for
gasoline.
How is it used?
• Pure ethanol can be used as fuel in specially designed engines that have higher
compression ratios and other modifications that maximize miles per gallon.
• E85, a blend of 85 percent ethanol and 15 percent gasoline, can be put into
more than 5 million U.S. vehicles that also run on gasoline. These "flex-fuel"
vehicles, however, get fewer miles per gallon on E85. The fuel economy of a
Chevy Tahoe dropped 27 percent when running on E85 compared with gasoline,
according to Consumer Reports magazine.
• E10, a fuel that is 10 percent ethanol, is an octane booster that also helps fuel
burn more cleanly. It can be used in all gasoline-powered vehicles, according to
the federal Energy Department.
Ethanol in Washington:
BP, the state's largest refinery, routinely blends ethanol with gasoline, and
markets the fuel through Arco outlets.
A new state law will require, as of 2008, that at least 2 percent of a fuel dealer's
total gasoline sales be composed of ethanol. That figure could eventually rise to
10 percent if enough fuel crops are grown within the state.
The state law also requires, as of 2008, that at least 2 percent of a dealer's diesel
sales be composed of biodiesel, a figure that could eventually rise to 5 percent.
Federal Law Federal law requires that 7.5 billion gallons of biofuels, such as
ethanol or biodiesel, be sold annually by 2012.
For more information
www.pugetsoundcleancities.org/ethanol.htm