Ethanol plants get back pay

  • Article by: MIKE MEYERS , Star Tribune
  • Updated: August 25, 2007 - 4:26 PM

Makers of the alternative fuel are getting makeup subsidies, in amounts that are to increase and continue for years.

When the state cuts funds for schools, libraries, parks and other programs, the money often is gone forever.

But in the case of ethanol subsidies, money taken away years ago now is being restored with big checks that will get a lot bigger.

The state of Minnesota this month will send $1.8 million in subsidies to 13 ethanol plants for millions of gallons of fuel made as long as four years ago. Another $53 million is slated to be sent to those producers over the next six years.

The money is coming so long after the fact that one check will go to the creditors of a St. Paul ethanol plant that went out of business in 2004.

They're being called "deficiency" payments for state ethanol subsidies that were reduced in 2003 and are being restored retroactively.

To C. Ford Runge, a University of Minnesota economist, it's a "cockeyed way to organize a government subsidy" -- with the incentive coming years after the production the payments were supposed to encourage.

"If the purpose of this program is to lead the duck, they haven't even hit its tail feathers," Runge said. "In a period when resources are being stretched by natural and man-made disasters, it seems odd to give money to ethanol companies that are swimming in profits."

Keeping a commitment

A top state agriculture official said the payments are a matter of government ethics, sticking to a promise to pay 20 cents a gallon in ethanol subsidies for 10 years. In 2003, facing a big budget shortfall, the governor and Legislature reduced subsidy payments to 15 cents a gallon in fiscal year 2003 and 13 cents for the next four fiscal years.

In a compromise, the state promised to restore in the future money lost in the cuts.

"The Legislature and this administration felt that it was important to keep that commitment," said Jim Boerboom, deputy commissioner of agriculture.

But, acknowledging that ethanol plants have made handsome profits in recent years, he added: "Knowing today some of the economic conditions, I'm sure we'd all look for a different model."

The state began subsidizing ethanol production when it was an infant industry. Minnesota first offered subsidies in 1986, but it was 1993 before any new plants were built in the state. Farmers and lenders feared that investments in ethanol plants were too risky, said Ralph Groschen, a state agriculture senior marketing specialist.

In 1996, Minnesota produced less than 100 million gallons of ethanol. This year, 16 ethanol plants across the state are projected to turn out 620 million gallons. Next year, production is expected to climb to 1 billion gallons. Five new ethanol plants are being built across the state.

Most of the state's plants are owned by farmers who do not report their financial results. But Granite Falls Energy, which started production in 2005 and does not qualify for state subsidies, reported an operating profit of 29 percent on sales of nearly $51 million in the six months that ended April 30. Those are fat profits compared with much of Corporate America. The average operating margin is about 18 percent for Standard & Poor's 500 companies.

But state deficiency payments this year are coming at a welcome time for the producers receiving them. Ethanol prices in August are off nearly 30 percent from their peak in March.

Government mandates

In addition to direct subsidies, government has created demand for ethanol.

In the early 1990s, the federal government began ordering "summer blends" of gasoline additives to curb carbon monoxide pollution in urban areas, including the Twin Cities. Later, Minnesota expanded the blend requirement to year-round.

In 2003, Minnesota required that gasoline sold in the state contain 10 percent ethanol. If all goes according to plan, Minnesota will increase the requirement to 20 percent in 2013, if the federal government approves.

A 50-cent-a-gallon federal tax credit for ethanol is due to expire in 2010, but Congress is considering national mandates requiring alternative fuels. The Senate this year passed a requirement for 36 billion gallons of renewable fuel use by 2022. Much of that is expected to come from growth in ethanol production, which currently has an annual capacity of about 6.5 billion gallons nationwide. The proposal is before a Senate/House conference committee.

Arguments pro and con

Alan Roebke, who farmed for 30 years and now runs a government watchdog website called Truepolicy.com, said deficiency payments restore money to a subsidy program that should have been phased out years ago. The deficiency money, he said, is on top of more than $280 million in ethanol subsidies the state made from 1988 to 2006.

Jim Nichols, who as state agriculture commissioner helped design early ethanol subsidy programs in the 1980s, said the payments seem wrong-headed. "This program already has accomplished its goal," he said. "I don't see the point."

But advocates of the payments say the money is available only because standard 20 cent-per-gallon payments are phasing out. The standard payments end after 10 years and as ethanol plants reach their limit, the state has more money earmarked for the program than it will use. That surplus is what pays for the deficiency payments.

The ethanol subsidy program, closed to new entries years ago, ends in 2010, but the ag agency expects to continue "deficiency" payments for years after that.

Doug Tiffany, research fellow at the University of Minnesota's Department of Applied Economics, said the ethanol subsidies could be seen less as money for plant owners than as a way to ensure that their lenders are repaid for providing cash for what once was considered a risky business.

"That was a commitment to the banking community, in particular," he said of the ethanol subsidy program.

It worked out that way for lenders to Gopher State, an ethanol plant in St. Paul that went bankrupt in 2004. Any checks the state sends for past ethanol subsidies won't go to past owners, said David Kreitzer, former president of Gopher State.

"It's going to secured lenders," he said, adding that the deal was worked out in bankruptcy court and approved by the state attorney general's office during the tenure of Mike Hatch.

"We went through all the proper channels to make sure it's payable," he said.

Gopher State's creditors received a 2007 deficiency payment of $73,490, according to an accounting obtained by the Star Tribune.

Mike Meyers • 612-673-1746

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