Ethanol's boom goes bust

WASHINGTON

A descendant of Minnesota's early farmers, Greg Schwarz made a bet on the future last decade, when he plunged much of his corn crop -- and family savings -- into one of the state's first ethanol plants.

"We all stuck our money into it at a time when we were willing to lose everything we invested," Schwarz, 43, said of the heady days of 1995, when farmer-owned Heartland Corn Products in Winthrop started churning out ethanol. "We had no idea if this was going to work," he said. "There was no history."

Back then, it looked like America's energy future would be clean-burning, renewable and, best of all, homegrown on the wide-open expanses of rural Minnesota, where it would turbocharge the Main Street economy.

But ethanol, the corn-based fuel that has spurred a $6 billion industry in Minnesota, now needs its own boost.

While corn producers like Schwarz tidy up after this year's rain-soaked harvest, government regulators in Washington are deciding whether to lift the 10 percent cap on ethanol fuel blends. Such a move could add billions of gallons of ethanol to the nation's alternative energy mix.

The federal Environmental Protection Agency (EPA) should decide by Tuesday. Matt Hartwig, a spokesman for the Renewable Fuels Association, the lobbying arm of the $20 billion ethanol industry, says of the decision, "the future growth of the industry rides on it."

"Every industry goes through its rough spots," Schwarz said. "We're not going away."

One rough spot is the organized array of automotive, manufacturing and environmental groups that have questioned the benefits of the heavily subsidized fuel.

Car and boat makers say existing engines can't tolerate higher ethanol blends; oil companies complain about the complexity of distributing different gasoline blends; and environmentalists say ethanol production presents its own cluster of pollution, land use and food supply issues.

The ethanol industry, which includes 17 plants across Minnesota, calls the criticism unfounded. There has been no clear resolution of conflicting studies and reports, but one thing has become clear: The Corn Belt's gold-rush days are over.

"As any industry grows and matures, you're going to have to take your shots," said Schwarz, whose family has been farming around Le Sueur since around 1875. "You can't always be a media darling and be 100 percent of what everyone wants."

"It validates what we're trying to do," said Minnesota Agriculture Commissioner Gene Hugoson, noting the state's pioneering role in establishing the 10 percent ethanol blend known as "E10."

The request to allow an "E15" blend came at the end of a troublesome year. Grain and oil prices had gone bust after a midyear boom and stuck many producers with high-priced corn stocks just as the ethanol market fell flat. Recession-weary Americans began driving less and the collapsed financial markets tightened credit just when it was needed most.

"What you had a year ago was a perfect storm," Hartwig said.

The storm produced a wave of bankruptcies that rippled across the nation's corn fields like a prairie wind. South Dakota-based VeraSun, an industry giant with two ethanol plants in southern Minnesota, succumbed. Nationwide, 23 ethanol plants accounting for 1.7 billion gallons of capacity were idled.

"Frankly, the industry was overbuilt during the glory days of 2006, when people were making money hand-over-fist building ethanol plants," said Craig Cox, Midwest vice president for the Environmental Working Group, which opposes the E15 waiver. "There's simply much more capacity to produce ethanol than there is a market for ethanol."

Through good times and bad, ethanol has always had friends in Washington, which helped fuel demand with a 45-cent-a-gallon tax credit and government mandates that called for the use of 36 billion gallons of biofuels by 2022.

That's more than triple the current production of ethanol nationwide, which is part of the impetus to raise the cap on ethanol fuel blends from 10 to 15 percent.

"The only conceivable and quickest way of getting there is to get beyond the E10 threshold," Hugoson said.

Looking back, farmers like Schwarz see their political benefactors -- while necessary -- as a double-edged sword.

"Politicians couldn't do things fast enough to get involved in the industry, and maybe some of that is catching up with us now," he said. "In a perfect world, we would have rather grown at a slower, more stable pace."

Now with 900 farmer-investors, Heartland remains on a solid footing, partly because it is guaranteed a stable supply of corn at a set price. Some of the newer entrants in the industry, having built up faster at the market peak, haven't been so lucky.

A certain shakeout was inevitable, said Schwarz, who works a 1,000-acre farm with his 78-year-old father. "As the industry matures, we will weed out some of the weaker plants," he said. "But the strong will get stronger."

Kevin Diaz • 202-408-2753