Booming ethanol plants get large state subsidies - 23 Apr 2006

I'd rather pay millions of dollars to American farmers and ethanol producers than billions of dollars to pacify the Middle East.

posted on Sun, Apr. 23, 2006

Booming ethanol plants get large state subsidies

Minnesota still hands over $26 million a year to industry 'drowning in profits'

BY TOM WEBB

Pioneer Press

Ethanol was just a 98-pound weakling in the late 1980s, when Minnesota officials first decided to muscle it up into a strong and prosperous industry.

Today ethanol is booming as oil prices soar, yet Minnesota taxpayers still are priming the pump. Taxpayers continue to be billed $26 million a year to subsidize 11 privately owned ethanol plants that are now profitable beyond anyone's dreams.

Purdue University economist Wally Tyner calculates that at today's fuel prices, even an ethanol plant costing $100 million can be fully paid off in less than a year. "They're hugely profitable, that's why so many of them are being built," Tyner said.

Yet Minnesotans are funding ethanol subsidies even beyond that. Four times a year, the state sends checks to the farmers who own the 11 plants. The next payday arrives in May, when another $4.3 million will be paid, plus another $2.3 million in IOUs the state promises to pay later.

"The industry itself is basically drowning in profits right now, which I'm happy for, but why would we want to send them (more subsidies)?" said ex-farmer Alan Roebke of Chaska, a critic of current farm policies. "It's absolutely ridiculous."

Some corn growers don't agree. Gerald Tumbleson, a Martin County farmer who has invested in three ethanol plants, has seen benefits sprout across rural Minnesota as ethanol plants generate sales, jobs, energy and optimism.

"For every $30 million invested, they got back $400 million" worth of economic activity in rural Minnesota, Tumbleson said. "It was one of the best investments that Minnesota ever made."

DEMAND IS FEVERISH

In the past year, almost everything has changed for ethanol. Soaring gasoline prices have sent ethanol prices skyrocketing. Demand for new plants is so feverish that construction firms are booked until 2008. Refiners are clamoring for the corn-based fuel, amid worries of an ethanol shortage. But none of that has stopped the parade of state subsidy checks.

Back in 2003, the Legislature did consider scrapping the state subsidy because ethanol, even then, was solidly profitable. But the corn farmers who owned the plants objected. The program stayed.

But back then, oil was under $30 a barrel. Today it has soared to $75 a barrel. Yet now there's virtual silence at the Minnesota Capitol about reworking the ethanol producer payment.

"The Minnesota Legislature made a commitment, and they intend to keep it," said Jim Boerboom, assistant commissioner of agriculture.

But did anyone think that prices for oil would climb so high?

"No, absolutely not," Boerboom said.

Over the years, $274 million in payments have been sent to Minnesota ethanol producers, along with $45 million in IOUs. On every gallon of ethanol, the state pays producers 20 cents — 13 cents quarterly, and 7 cents more in deferred payments — up to 15 million gallons per producer.

Minnesota is now the nation's No. 3 ethanol producer, with 16 plants making 550 million gallons of ethanol a year.

"Without those producer payments, we probably still wouldn't have much, if any, ethanol production in the state," said Ralph Groschen of the state Agriculture Department.

SHUNNED IN '80s

The roots of the subsidy program go back to the ruinous farm crisis of the mid-1980s, when corn-based ethanol offered one glimmer of hope. Officials tried, but no corporation was interested back then in building an ethanol plant in Minnesota. Battered rural banks couldn't take the risk, either.

"We were losing thousands of farmers a year, and a good two-thirds of our corn was exported, unfed and unprocessed, and Minnesota corn prices were among the lowest in the country," Groschen said. "Since the large corporations declined to build here, we helped farmers to build their own plants."

The partnership worked like this: Once local farmers raised $10 million in start-up money for a new plant, the state promised 10 years of payments. A plant that produced up to 15 million gallons of ethanol a year could collect a maximum of $3 million a year.

"When these plants went up in these small towns, my goodness, it was really a shot in the arm for these rural communities," Groschen said. And when the first plants proved profitable, farm cooperatives usually built a second plant, and sometimes a third.

Several Minnesota plants have now collected more than $25 million each through the program. Roebke, a former Minnesota ethanol plant investor himself, does the math.

"FIRST PLANT IS FREE"

'We basically give 'em the first plant for free," said Roebke, who now runs a Web site on farm and energy policy. "The second one, they'll have to pay for, but the first one is free."

During the 1990s, when oil prices were mostly under $20 a barrel, the ethanol subsidy kept the industry profitable. So did the state requirement that every gallon of gasoline sold in Minnesota contain a 10 percent ethanol blend.

Minnesota's producer payment is set to expire at the end of this decade. Gov. Tim Pawlenty, a Republican, proposed ending it in 2003 during the state budget crisis, but rural Republicans strongly objected. The Legislature settled for spreading out the payments instead.

"The rural areas out there are still politically quite powerful, and they do continue to lean Republican," said David Strom, president of the Minnesota Taxpayers League and a foe of all ethanol subsidies. "It's a very powerful and important Republican constituency."

MARKET COULD CRASH

Vern Eidman, a biofuels specialist at the University of Minnesota, has talked to farmers who worry that the volatile commodity markets could crash as quickly as they soared.

"They clearly understand subsidies aren't needed at the current time, but what they're worried about is, what will happen if they're taken away and then they're needed again," Eidman said. "This is a commodity business."

To date there's been very little grumbling about ethanol subsidies as gasoline nears $3 a gallon, but that may be changing. The Wall Street Journal recently editorialized against the "heavily subsidized domestic ethanol industry that is getting rich off U.S. drivers."

And economists like Purdue's Tyner think a rewrite of ethanol subsidies makes sense, so that farmer-owners are protected during times of hardship, not lavishly rewarded during booms.

U.S. taxpayers will pay over $2 billion in federal ethanol subsidies this year, and he doesn't blame farmers for taking the money.

"If I gave you the choice of, 'Would you like $2 billion or not,' what would you say?" he asked. "But is it good public policy?"

Tom Webb can be reached at twebb@pioneerpress.com or 651-228-5428.

$26 million

Amount Minnesota taxpayers pay each year to subsidize ethanol production

$1.10

Typical cost of producing a gallon of ethanol in Minnesota

$2.50

Recent selling price per gallon for Minnesota-produced ethanol

20 cents

State subsidy on every gallon of ethanol produced, up to 15 million gallons