The story of ethanol in the United States proves that policies undertaken to nurture or protect an industry can just as easily undermine it.
The goal, decades ago, was noble and necessary: Invest in a means to end our dependence on imported oil. If we'd established a renewable fuels mandate then, instead of waiting until 2005, we might have made a lot of progress toward that goal.
What we got instead is an industry reviled by economists, environmentalists and consumers for its reliance on the pampering embrace of government protectors, a fact only underscored by the ethanol industry's recent political triumphs in Washington.
The spoils of those victories -- carefully erected mandates, tariffs and tax credits -- can actually distort the market for alternative fuels. Just ask the farmers and other investors near Fergus Falls, who plowed more than $44 million into an ethanol factory that went bankrupt within a year of opening. Bids for the 55-million-gallon facility, built at a cost of $126 million, are due with the U.S. Bankruptcy Court on Friday.
Meanwhile, accountants have inserted "going concern" language in the most recent annual report for the Heron Lake ethanol plant, which opened late in 2007. Management has until March to raise an additional $4.5 million to avoid defaulting on $54 million in debt. BioFuel Energy Corp., which owns an ethanol plant in Fairmont, Minn., also warned of a bankruptcy filing unless it is able to raise more money.
Wait, aren't these supposed to be happy times for U.S. ethanol producers and American corn farmers? Federal mandates require gasoline blenders to buy 12.6 billion gallons of corn-based ethanol this year, and industry lobbyists just won one-year extensions for punitive tariffs that insulate the industry from lower-cost, foreign competition. Tax credits that cost taxpayers more than $6 billion a year will also continue for another year.
The Renewable Fuels Association (RFA) rightly counters that its subsidies pale next to those received by the oil industry. Still, spokesman Matt Hartwig isn't willing to go so far as to say that the industry would support legislation that ended subsidies for all energy companies. "Remember, the oil industry has a century head start on us," Hartwig said.
The ethanol industry is still struggling to absorb the glut of new ethanol factories built during the corn rush of 2006-2008, when production capacity doubled and soaring corn prices helped send big operators, including VeraSun, Aventine and Hawkeye Energy, into bankruptcy. The biggest players, including Archer Daniels Midland and South Dakota-based Poet, got bigger, often by gobbling up struggling plants.
Lower corn prices helped some producers recover in 2010. Granite Falls Energy, a plant owned by farmers and other investors in that city, lost $7.7 million in the year ended Oct. 31, 2008. Two years later, Granite Falls made $8.4 million and distributed $9.2 million in dividends to its 980 shareholders.
Even so, the RFA estimated that 5 percent of industry production was idled as of November 2010. And with new construction and planned expansion in 2011, the ethanol producers face the unsettling prospect of having enough capacity to meet mandates for three years from now.
The industry hopes it solved that problem last month, after it successfully lobbied the U.S. Environmental Protection to increase the allowable amount of ethanol blended into gasoline from 10 percent to 15 percent for all passenger vehicles made in 2001 and later.
But the latest concession to the industry may not provide quick relief. First, it's not clear how quickly or widely gasoline blenders (or drivers) will embrace the new limits. If they do, it could stimulate additional demand for corn, even as the price for that commodity is again soaring. Since the end of May, corn prices have risen more than 71 percent, while the price of ethanol has gone up about 45 percent.
Looked at another way, the profit margin on corn-based ethanol has shrunk by 26 percent since the summer.
The EPA waivers also drew the ire of a number of food industry groups, who insist it will mean higher prices at the grocery store. Last week, the United Nations Food and Agricultural Organization said biofuel demand was one of four factors pushing global food prices to record highs, and on Wednesday the U.S. Department of Agriculture said corn reserves were at their lowest level in 15 years, in part because of ethanol demand.
The RFA argues that ethanol's growth has actually helped farmers become more productive and efficient, and that corn reserves would actually be much lower without a robust ethanol industry. "Ethanol has spurred the development of corn-growing technologies," Hartwig said. "Its impact on food prices is far less than what people are suggeting."
U.S. ethanol producers now consume about 30 percent of the total U.S. corn crop. In Minnesota, 21 ethanol plants consume about 34 percent of the state's corn harvest. To suggest this has little or no impact on food prices is to argue that the laws of supply and demand don't apply to the ethanol industry.
But I guess we already knew that.
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