After a Long Debate, Ethanol May Soon Fill More Gas Tanks

After 30 years of controversy over federal subsidies, ethanol is on
the verge of a major Congressional victory that has South Dakota
farmers counting their winnings and the oil industry fuming.

To estimate the value of the thick green carpet of corn covering his 2,000-acre
farm, Ron Alverson, 50, used to flip open his newspaper to get the market price per bushel. For the
value of corn he fed to his livestock, he looked up the prices for pork bellies and steers.

By JOHN J. FIALKA
Staff Reporter of THE WALL STREET JOURNAL

Now he runs his pencil down the commodity page to the new indicator he
reckons by: futures prices for unleaded gasoline. The booming market for ethanol,
a gasoline additive made from corn, has changed his world.

"You see that field across the road?" he explains, pointing to a 40-acre plot near
his house. "We’ll make 18,000 gallons of ethanol out of that." He’ll truck it a few
miles down the road where he and 950 other farmers are part owners of a
year-old ethanol plant, built amid the corn rows to pump out 49 million gallons a
year. With the help of federal and state subsidies both to fund the plant and prop
up the selling price, the farmers expect their conversion — like dozens of others —
to soup up a local economy where hog barns stand empty and abandoned stores
line the streets.

After 30 years of controversy over these subsidies, ethanol is on the verge of victory. The energy bill on
Congress’s front burner this fall is expected to include a federal mandate — supported by the leadership in
both houses and the White House — that five billion gallons of ethanol a year be added to gasoline within
10 years, up from two billion today. The U.S. now consumes about 125 billion gallons of gas yearly. The
measure also imposes a ban on ethanol’s chief competitor, methyl tertiary butyl ether, or MTBE. Both
products have been added to gasoline to clean up auto emissions in smog-prone cities since 1990, but
MTBE has been found to pollute groundwater.

Even if the complex energy bill fails, the ethanol measure may have the support to pass separately, and
test the promise of its boosters that it will shower hundreds of millions of dollars of economic benefits on
farmers and farm communities. Another big winner would be Archer-Daniels-Midland Co., which has
long lobbied to boost ethanol and continues to dominate the industry. It owns 35% of ethanol production
capacity, according to a recent report by Congress’s General Accounting Office, though new
co-operatives such as Wentworth collectively now own even more.

The ethanol victory would have other consequences. The federal government subsidizes ethanol mostly
by forgiving refiners a portion of their excise-tax payments to the nation’s Highway Trust Fund. So the
more ethanol is used, the less money is available to maintain roads and highways, according to another
GAO study.

That will be felt even here in the land of ethanol. Leon Schochenmaier, director of planning and
engineering for South Dakota’s Department of Transportation, says the state’s 7,839 miles of highways
and small population makes it among the most sensitive to a drop in highway funds. The state expects a
$16 million shortfall next year that will delay about 30 highway projects over the next five years — though
he hastens to add his department doesn’t oppose ethanol.

Ethanol critics warn that food prices will go up as more corn winds up being burned in automobiles,
rather than being processed into corn syrup or fed to livestock. The weather becomes a factor in gasoline
prices; the current drought has raised the cost of ethanol to refiners by 24 cents in the past month.
Motorists along the East and West coasts, where MTBE is widely used, may pay as much as 10 cents
more for a gallon of gas because ethanol is more difficult for refiners to blend with gasoline and more
expensive to ship into areas where little corn is grown.

"This thing amounts to a Marshall Plan for the Midwest," complains Stephen Brown, a lobbyist for Citgo
Petroleum Corp., which opposes the ethanol mandate. A recent study done for the U.S. Department of
Energy found that all the subsidies for ethanol, which vary from state to state, currently add up to about
25 cents a gallon. It costs refiners around $1.37 a gallon before the subsidies.

National Debate

All this is the latest turn in a long national debate about how hard to push ethanol as a homegrown fuel. During the 1970s and 1980s,
Congress found what seemed to be a painless way to provide a federal subsidy for ethanol, exempting gasoline blended with 10% ethanol
from 5.3 cents of the normal 18.4 cent federal excise tax that refiners (and eventually consumers) pay for a gallon of straight gasoline.

In 1990 amendments to the Clean Air Act, Congress went a step further, requiring petroleum refineries to add oxygen to gasoline to help
clear the air in smog-prone cities. The mandate can be met by adding either MTBE or ethanol. Now, because of the environmental worries
about MTBE, 18 states are phasing it out of use.

This spring, after months of behind-the-scenes negotiations, the oil industry’s main lobbyist, the
American Petroleum Institute, reached a deal with farmers. The industry, which opposed the
use of more ethanol, would agree to a federal mandate that would expand the size of the
ethanol industry by 2.5 times within 10 years, if Congress would get rid of the mandate to use
oxygen and let it find other means to reduce harmful emissions.

That has formed a new alliance between farm states and oil states that shifts the political center
of gravity toward ethanol. President Bush demonstrated this on April 29 with a carefully staged
visit to the Dakota Ethanol plant here in Wentworth, saying ethanol support is "good public
policy for America." He praised Senate Majority Leader Tom Daschle, the state’s senior
senator, for his work on the Senate energy bill. That bill is pending before a House-Senate
energy conference committee. Though the House version didn’t contain the ethanol provision,
the support of House Speaker Dennis Hastert — from another corn state, Illinois — means it
will probably be part of any merged bill.

That prospect frustrates ethanol’s longtime foes, such as David Pimentel, a 76-year-old Cornell
University scientist. He first calculated in 1979 that growing the corn, fertilizing it, harvesting it and making it into ethanol consumes more
energy than it produces. "If it’s so damned great, why do we need to subsidize it?" asks Mr. Pimentel, who recently republished his
findings, calling the use of corn-based ethanol "subsidized food burning."

His widely quoted calculations have since been challenged by more-recent studies, including two by the U.S. government. They conclude
that improvements in making ethanol and in growing higher-yield corn produce a net energy benefit.

Among the complainers, who include highway advocates, there is the feeling that the issue is already settled whatever the merits — and
ethanol has won. "You have the three most powerful people in Washington saying there is going to be a five-billion-gallon bill," notes Bill
Fay, president of the American Highway Users Alliance, referring to Messrs. Bush, Daschle and Hastert. "That’s going to mean game, set
and match."

The industry was initially built on the lobbying clout of ADM and the political savvy of former Kansas senator Robert Dole. The company
has generally ranked among the top 10 givers to Congress from the agribusiness sector. This election cycle it moved up to No. 4, from
No. 8 in 2000. So far it has given $613,960.

But as farmers have combined to build their own plants, the political base has broadened to include most farm-state senators. "Everybody
knows why ethanol has been championed," says Robert Litan, an economist who is vice president of the Brookings Institution in
Washington. "You can’t go to the Iowa primaries without supporting ethanol."

Now the cause is attracting others who see ethanol as a way to give the U.S. more independence from the oil-rich Middle East — including
oil firms. "From this, you get the makings of a first-rate coalition, even though from an economic point of view it makes no sense," Mr.
Litan adds. "I don’t know of any economic study that says this is worth it. It would make more sense to spend the money on energy
conservation measures."

Along with ADM, seven other energy and agribusiness companies share more than half the ethanol market altogether. But farmer-owned
co-operatives that sell directly to refiners have made growing inroads. They built 15 of the 16 plants completed in the last four years, and
now control 44% of ethanol production, according to the Washington-based ethanol industry group Renewable Fuels Association.

That’s the trend that tiny Wentworth, population 190, has overcome its skepticism to join. Wayne Backus, the lanky, usually
grease-covered owner of a farm-equipment repair shop here, also functions as the town’s fire chief and its economic development
specialist. He saw the gasoline station across the four-block Main Street from his shop — which used to accept eggs as payment for gas —
close down, along with Wentworth’s lumber yard, its bank, two cafes, the hardware store and the local school. Finally, he decided it was
time Wentworth had an ethanol plant.

Three years ago, he helped organize a committee of farmer-sponsors including Mr. Alverson, who went out and contacted farmers in the
six surrounding counties. They persuaded 950 of them to invest an average of $16,000 and to deliver their corn to the plant.

Tough Sell

Local bankers were a tough sell. But by the time Mr. Alverson and his committee reached them, gasoline prices were soaring, corn prices
were low and MTBE had been banned in California (with makers of rival additives crying foul over ADM campaign contributions to Gov.
Grey Davis). "These things made the bankers look at it a little more favorably," he recalls.

The plant here — built by Sioux Falls-based Broin Cos., which takes a minority stake, consumes up to 45 big trailer trucks full of corn
every day. About a quarter of the plant’s income comes from a byproduct sold as livestock feed. The plant, which has injected 38
relatively high-paying jobs into the community, also has raised local corn prices by as much as a dime a bushel. That helps farmers,
whether they sell their corn to the ethanol plant or not. "Say you’re a farmer with 600 acres of corn. That’s another $9,000," explains Mr.
Alverson.

But Faith Stratton, principal of Chester Area School, which serves Wentworth, says she hasn’t yet seen any increase in the tax revenues
that support her school. "They told us that it would take about five years," she said, for the income from the new ethanol plant to register in
the form of higher property tax intake. "We need to see that effect," she adds, noting that money for school supplies is being cut for the fall
term.

The economics haven’t done anything to change the ethanol industry’s strong appetite for government subsidies. Currently at least 20 states
offer tax exemptions or other incentives for ethanol production. The champion appears to be Minnesota, a big corn state with an active
legislature on the issue. "I don’t think there’s any need to make an apology for that," says Jim King, economic director for Windom, Minn.,
which has one of the state’s 12 ethanol plants. He asserts the plant’s payroll alone creates an additional $10 million of new spending in his
area.

Democrats in both California and New York, where there is relatively little corn grown and where MTBE is heavily used, are outraged by
the Senate energy bill’s mandate, which requires refiners and consumers to pay for credits for ethanol use whether they actually use the
additive or not. Meanwhile, states can allow refiners to use other methods to make their fuel burn cleaner in cities with smog problems.
"This is a ridiculously expensive way to subsidize farmers," Sen. Dianne Feinstein, a California Democrat, complained on the Senate floor.

After years of artful lobbying and overlapping ethanol subsidies and mandates, even the experts appear confused over the true cost of a
gallon of ethanol. According to the GAO study, the U.S. Treasury Department recently overestimated the amount of money in the
Highway Trust Fund because it had not calculated the tax money being exempted for sales of ethanol-blended gasoline, calculations it
called "very complex." Between 1998 and 2001, the GAO estimated, the subsidy removed $3.86 billion. The pending bill would remove
more.

Write to John J. Fialka at [email protected]