Saturday, July 22, 2000

Ethanol industry's future iffy

By James Pilcher
The Cincinnati Enquirer

        Ethanol showed its volatility — literal and figurative — during last month's gasoline price hikes.

        Literal because the unstable nature of the gasoline additive made from corn gave refineries fits when it came time to make a new version of reformulated gas required in many cities to keep air clean. (Oil companies pointed to this production slowdown as a key reason for the supply shortage that jacked up prices).

        And figurative, because the crisis renewed questions about the future of the ethanol industry, the farming industry that supplies the raw product, and the federal subsidies that help keep both afloat. Many say that ethanol is here to stay, but at a price to taxpayers.

        “Ethanol is not today nor has it ever been economically feasible without subsidies,” says Wallace Tyner, an agricultural economics professor at Purdue University. “And in the future, it will be very difficult to make feasible without subsidies.”

        The ethanol industry produced about 1.5 billion gallons last year, using about 400 million bushels of corn, or about 5 percent of all domestic corn.

        “This is an immediately renewable resource compared with how many thousands of millions of years it takes to make oil,” says Ken Davis, who grows about 700 acres of corn on his Leesburg farm in Highland County about 60 miles east of Cincinnati. “And we farmers have got thin margins as it is, so this only makes sense to keep ethanol going.”

        Wholesale ethanol prices recently ranged from $1.25 to $1.40 per gallon in the Midwest. The cost to produce it depends greatly on the cost of corn — currently at near 10-year lows of about $1.60 a bushel, or 56 pounds of shelled corn.

        Dr. Tyner estimates the cost of manufacturing a gallon of ethanol is $1.20 based on a $2 bushel of corn — one bushel of corn yields about 2.5 gallons of ethanol.

        Helping create profits is a 5.4 cent federal tax credit for every gallon of gas sold that includes at least 10 percent ethanol. The credit goes to refiners who blend the ethanol with the gas, providing them with an incentive to buy the ethanol. With the tax credit, a gallon of ethanol then costs about 70 cents, compared with about 50 cents a gallon wholesale for regular gas. Ethanol proponents point to the price disparity to when arguing for the tax incentives - otherwise, they say, ethanol wouldn't even be considered.

        According to Monte Shaw of the Renewable Fuels Association, which represents ethanol makers, the tax credits create a market for manufacturers such as Decatur, Ill.-based Archer Daniels Midland, which leads with about a 30 percent market share.

        “The subsidy does not go directly in our pockets, but it does help create a market for ethanol,” Mr. Shaw says. “We've never said it doesn't help us.”

        Ethanol makers, the argument goes, then pass on the benefit to farmers in the way of higher corn prices created by higher demand. But they also have made companies such as ADM very rich, says Dr. Tyner.

        “With gas prices where they are now, and corn prices where they are now, somebody out there is making out like bandits,” he says.

Environmental impact
        Also creating demand is the need for reformulated gas (RFG), or gas that includes oxygenates to reduce harmful emissions. Several cities around the United States such as Atlanta, Los Angeles and Chicago are required to use the cleaner burning gas in the summer to help keep smog levels down.

        Oxygenates are additives that add oxygen and diminish carbon monoxide from car emissions, and a major oxygenate is ethanol, meaning that there is a natural market for the product created by environmental regulations.

        The Ohio portion of Greater Cincinnati is not required to use RFG because Ohio instead opted for emissions checks on cars. Ethanol-blended gas is still sold in the area — Ohio ranks in the top five nationally for ethanol use.

        Kentucky regulations call for the sale of RFG in Northern Kentucky as well as Louisville during the summer.

        The flap over another oxygenate, MTBE, could also fuel ethanol demand.

        The man-made chemical has been found to have contaminated ground water near underground gas storage tanks. Even though the substance is still in use, the controversy has sent some refiners looking for for other oxygenates such as ethanol.

        ADM, in fact, recently announced it would be opening an ethanol plant in California — which has previously used MTBE as its main oxygenate — to help provide a substitute to oil refineries there.

Not all making money
        But even with the subsidies and increased demand, farmers say they're not among those making a killing. Many say they spend about $2 for each bushel of corn, making profit margins non-existent.

        The fact that ethanol keeps corn prices that high alone makes the tax credits worth it to Jack Fisher, executive vice president for the Ohio Farm Bureau.

        “We either pay that subsidy over here or continue to send our troops to the Middle East to defend our dependence on foreign oil,” says Mr. Fisher. “Not only that, but it helps keep Ohio and American farmers on an even keel with the rest of the world.”

        Most of the corn grown in Ohio, Kentucky or Indiana is used to feed livestock in the Southeast or overseas, with little or no area corn devoted to ethanol production.

        But officials from each state say ethanol helps local markets anyway by taking corn from Iowa and Nebraska off the market.

        “We used to say that ethanol means about 10-25 cents more per bushel in the southern Ohio market,” says Mr. Davis. “Even though we don't have a plant, there is an additional value that wouldn't be there otherwise.”

Past experience
        Ohio's last entry in the ethanol market ended when the South Point Ethanol Plant in Lawrence County closed in 1995 after 13 years of operation.

        A joint venture of the Ohio Farm Bureau, Ashland Oil Co., Publicker Industries, and United Gas Improvement Co., the plant was designed to produce 60 million gallons of ethanol annually and use 24 million bushels of corn.

        But farm bureau officials say the facility never turned a profit, despite federal subsidies.

        “It was an old refinery that had been converted to make ethanol,” says Mr. Fisher, who was not with the farm bureau when the plant was operational nor when the decision was made to shut it down. “It needed a lot more capital investments to make it efficient.”

What's ahead
        The nature of ethanol limits the market, however. Unlike gasoline or oil, it cannot be transported through pipelines because it evaporates and can dissolve seals.

        That leaves tanker trucks, and transporting ethanol to the East and West Coasts can be cost-prohibitive. (The Midwest, where the corn is grown and most ethanol is made, is the prime market for the stuff.)

        And Ohio State University agricultural economics professor Luther Tweeten says some environmentalists are starting to question ethanol's benefits and are wondering if the liquid's evaporative gases are harmful as well.

        “The meaning of subsidizing ethanol in gas would kind of get lost if we don't have any environmental benefits,” says Dr. Tweeten.

        If ethanol's status as a more environmentally-friendly alternative to gas continues, however, demand for the substance should grow, experts say.

        But even though that should create more demand for corn, experts don't expect subsidies to be eliminated soon or even in 2007 when they are set to expire.

        “When the ethanol lobby and industry gears up to get favorable rulings, they usually win,” says Dr. Tyner. “No politician wants to go up against all the corn farmers in America.”

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