For Good or Ill, Boom in Ethanol Reshapes Economy of Heartland

NY Times
ALEXEI BARRIONUEVO

Dozens of factories that turn corn into the gasoline substitute ethanol are sprouting up across the nation, from Tennessee to Kansas, and California, often in places hundreds of miles away from where corn is grown.

Once considered the green dream of the environmentally sensitive, ethanol has become the province of agricultural giants that have long pressed for its use as fuel, as well as newcomers seeking to cash in on a bonanza.

The modern-day gold rush is driven by a number of factors: generous government subsidies, surging demand for ethanol as a gasoline supplement, a potent blend of farm-state politics and the prospect of generating more than a 100 percent profit in less than two years.

The rush is taking place despite concerns that large-scale diversion of agricultural resources to fuel could result in price increases for food for people and livestock, as well as the transformation of vast preserved areas into farmland.

Even in the small town of Hereford, in the middle of the Texas Panhandle's cattle country and hundreds of miles from the agricultural heartland, two companies are rushing to build plants to turn corn into fuel.

As a result, Hereford has become a flashpoint in the ethanol boom that is helping to reshape part of rural America's economic base.

Despite continuing doubts about whether the fuel provides a genuine energy saving, at least 39 new ethanol plants are expected to be completed over the next 9 to 12 months, projects that will push the United States past Brazil as the world's largest ethanol producer.

The new plants will add 1.4 billion gallons a year, a 30 percent increase over current production of 4.6 billion gallons, according to Dan Basse, president of AgResources, an economic forecasting firm in Chicago. By 2008, analysts predict, ethanol output could reach 8 billion gallons a year.

For all its allure, though, there are hidden risks to the boom. Even as struggling local communities herald the expansion of this ethanol-industrial complex and politicians promote its use as a way to decrease America's energy dependence on foreign oil, the ethanol phenomenon is creating some unexpected jitters in crucial corners of farm country.

A few agricultural economists and food industry executives are quietly worrying that ethanol, at its current pace of development, could strain food supplies, raise costs for the livestock industry and force the use of marginal farmland in the search for ever more acres to plant corn.

"This is a bit like a gold rush," warned Warren R. Staley, the chief executive of Cargill, the multinational agricultural company based in Minnesota. "There are unintended consequences of this euphoria to expand ethanol production at this pace that people are not considering."

Mr. Staley has his own reasons to worry, because Cargill has a stake in keeping the price of corn low enough to supply its vast interests in processed food and livestock.

But many energy experts are also questioning the benefits of ethanol to the nation's fuel supply. While it is a renewable, domestically produced fuel that reduces gasoline pollution, large amounts of oil or natural gas go into making ethanol from corn, leaving its net contribution to reducing the use of fossil fuels much in doubt.

As one of the hottest investments around, however, few in farm country want to hear any complaints these days about the risks associated with ethanol. Archer Daniels Midland, the politically connected agricultural processing company in Decatur, Ill., and the industry leader that has been a longstanding champion of transforming corn into a fuel blend, has enjoyed a doubling in its stock price and profits in the last year.

One ethanol producer has already sold shares to the public and two more are planning to do so. And the get-rich-quick atmosphere has drawn in a range of investors, including small farm cooperatives, hedge funds and even Bill Gates.

For all the interest in ethanol, however, it is doubtful whether it can serve as the energy savior President Bush has identified. He has called for biofuels which account for just 3 percent of total gasoline usage to replace roughly 1.6 million barrels a day of oil imported from the Persian Gulf.

New Jobs, New Life

To fill that gap with corn-based ethanol alone, agricultural experts say that production would have to rise to more than 50 billion gallons a year; at least half the nation's farmland would need to be used to grow corn for fuel. But that isn't stopping out-of-the-way towns looking for ways to pump life into local economies wracked by population loss, farm consolidation and low prices from treating the rush into ethanol as a godsend.

"These projects are bringing 100 new jobs to our town," said Don Cumpton, Hereford's director of economic development and a former football coach at the high school. "It's not as if Dell computer's going to be setting up shop here. We'd be nuts to turn something like this down."

That the United States is using corn, among the more expensive crops to grow and harvest, to help meet the country's fuel needs is a testament to the politics underlying ethanol's 30-year rise to prominence. Brazilian farmers produce ethanol from sugar at a cost roughly 30 percent less.

But in America's farm belt, politicians have backed the ethanol movement as a way to promote the use of corn, the nation's most plentiful and heavily subsidized crop. Those generous government subsidies have kept corn prices artificially low at about $2 a bushel and encouraged flat-out production by farmers, leading to large surpluses symbolized by golden corn piles towering next to grain silos in Iowa and Illinois.

While farmers are seeing little of the huge profits ethanol refiners like Archer Daniels Midland are banking, many farmers are investing in ethanol plants through cooperatives or simply benefiting from the rising demand for corn. With Iowa home to the nation's first presidential caucuses every four years, just about every candidate who visits the state pays obeisance to ethanol.

"There is zero daylight" between Democrats and Republicans in the region, said Ken Cook, president of Environmental Working Group, a nonprofit research policy group in Washington, and a veteran observer of agricultural politics. "All incumbents and challengers in Midwestern farm country are by definition ethanolics."

The ethanol explosion began in the 1970's and 1980's, when ADM's chief executive, Dwayne O. Andreas, was a generous campaign contributor and well-known figure in the halls of Congress who helped push the idea of transforming corn into fuel.

Ethanol can be produced from a number of agricultural feed stocks, including corn and sugar cane, and someday, wheat and straw. But given the glut in corn, the early strategy of Mr. Andreas was to drum up interest in ethanol on the state level among corn farmers and persuade Washington to provide generous tax incentives. But in 1990, when Congress mandated the use of a supplement in gasoline to help limit emissions, ADM lost out to the oil industry, which won the right to use the cheaper methyl tertiary butyl ether, or MTBE, derived from natural gas, to fill the 10 percent fuel requirement.

Past Scandal

Adding to its woes, ADM was marred by scandal in 1996 when several company executives, including one of the sons of Mr. Andreas, were convicted of conspiracy to fix lysine markets. The company was fined $100 million. Since then, ADM's direct political clout in Washington may have waned a bit but it still pursues its policy preferences through a series of trade organizations, notably the Renewable Fuels Association.

Some 14 months ago the company hired Shannon Herzfeld, a leading lobbyist for the pharmaceutical industry. But she is not a registered lobbyist for ADM and said in an interview that the company was maintaining its long-held policy that it does not lobby Congress directly.

"Nobody is deferential to ADM," contended Ms. Herzfeld, who says she spends little time on Capitol Hill.

But ADM has not lost interest in promoting ethanol among farm organizations, politicians and the news media. It is by far the biggest beneficiary of more than $2 billion in government subsidies the ethanol industry receives each year, via a 51-cent-a-gallon tax credit given to refiners and blenders that mix ethanol into their gasoline. ADM will earn an estimated $1.3 billion from ethanol alone in the 2007 fiscal year, up from $556 million this year, said David Driscoll, a food manufacturing analyst at Citigroup.

[And the company may be concerned by the recent statement by Energy Secretary Samuel W. Bodman, who suggested that if prices remain high, lawmakers should consider ending the ethanol subsidy when it expires in 2010. "The question needs to be thought about," he said on Friday.]

ADM has huge production facilities that dwarf those of its competitors. With seven big plants, the company controls 1.1 billion gallons of ethanol production, or about 24 percent of the country's capacity. ADM can make more than four times what VeraSun, ADM's closest ethanol rival, can produce.

Last year, spurred by soaring energy prices, the ethanol lobby broke through in its long campaign to win acceptance outside the corn belt, inserting a provision in the Energy Policy Act of 2005 that calls for the use of 5 billion gallons a year of ethanol by 2007, growing to at least 7.5 billion gallons in 2012. The industry is now expected to produce about 6 billion gallons next year.

The phased removal of MTBE from gasoline, a result of concerns that the chemical contaminates groundwater and can lead to potential health problems, hastened the changeover. Now, government officials are also pushing for increasing use of an 85-percent ethanol blend, called E85, which requires automakers to modify their engines and fuel injection systems.

In the ultimate nod to ADM's successful efforts, Mr. Bodman announced the new initiatives in February at the company's headquarters in Illinois.

"It's been 30 years since we got a call from the White House asking for the agriculture industry, ADM in particular, to take a serious look at the possibilities of building facilities to produce alternative sources of energy for our fuel supply in the United States," said G. Allen Andreas, ADM's chairman and Dwayne Andreas' nephew.

Now, ADM is betting even more of its future on ethanol, embracing a shift from food processing to energy production as its focus. In April, it hired Patricia A. Woertz, a former executive from the oil giant Chevron, as the company's new chief executive.

While ADM has pushed ethanol, rivals like Cargill have been more skeptical. To Mr. Staley, ethanol is overpromoted as a solution to the nation's energy challenges, and the growth in production, if unchecked, has the potential to ravage America's livestock industry and harm the nation's reliability as an exporter of corn and its byproducts.

Threat to Food Production

"Unless we have huge increases in productivity, we will have a huge problem with food production," Mr. Staley said. "And the world will have to make choices."

Last year corn production topped 11 billion bushels second only to 2004's record harvest. But many analysts doubt whether the scientists and farmers can keep up with the ethanol merchants.

"By the middle of 2007, there will be a food fight between the livestock industry and this biofuels or ethanol industry," Mr. Basse, the economic forecaster, said. "As the corn price reaches up above $3 a bushel, the livestock industry will be forced to raise prices or reduce their herds. At that point the U.S. consumer will start to see rising food prices or food inflation."

If that occurs, the battleground is likely to shift to some 35 million acres of land set aside under a 1985 program for conservation and to help prevent overproduction. Farmers are paid an annual subsidy averaging $48 an acre not to raise crops on the land. But the profit lure of ethanol could be great enough to push the acreage, much of it considered marginal, back into production.

Mr. Staley fears that could distract farmers from the traditional primary goal of agriculture, raising food for people and animals. "We have to look at the hierarchy of value for agricultural land use," he said in a May speech in Washington. "Food first, then feed" for livestock, "and last fuel."

And even Cargill is hedging its bets. It recently announced plans to nearly double its American ethanol capacity to 220 million gallons a year. Meanwhile, the flood of ethanol plant announcements is making the American livestock industry nervous about corn production. "I think we can keep up, assuming we get normal weather," said Greg Doud, the chief economist at the National Cattlemen's Beef Association. "But what happens when Mother Nature crosses us up and we get a bad corn year?"

Beyond improving corn yields, the greatest hope for ethanol lies with refining technology that can produce the fuel from more efficient renewable resources, like a form of fuel called cellulosic ethanol from straw, switchgrass or even agricultural waste. While still years away, cellulosic ethanol could help overcome the concerns inherent in relying almost exclusively on corn to make ethanol and make the advance toward E85 that much quicker.

"The cost of the alternative of staying addicted to oil and filling our atmosphere with greenhouse gases, and keeping other countries beholden to high gasoline prices is unacceptable," said Nathanael Greene, senior policy analyst at the Natural Resources Defense Council in New York. "We have to struggle through the challenges of growing and producing biofuels in the right way."

But the current incentives to make ethanol from corn are too attractive for producers and investors to worry about the future. With oil prices at $70 a barrel sharply lifting the prices paid for ethanol, the average processing plant is earning a net profit of more than $5 a bushel on the corn it is buying for about $2 a bushel, Mr. Basse said. And that is before the 51-cent-a-gallon tax credit given to refiners and blenders that incorporate ethanol into their gasoline.

"It is truly yellow gold," Mr. Basse said.