Ethanol subsidy may be a target

ethanol_plant_worthington.jpg

When he unveils his plans for closing the projected $5.2 billion budget deficit, Gov. Tim Pawlenty will be hard-pressed to leave one of the state’s sacred cows unscathed — ethanol. And few of its backers will talk about the possibility today.

Ethanol, of course, has been hailed in Minnesota as the economic future for rural Minnesota farmers, and an answer to an evolving energy crisis. And the state has been among the leaders in supporting it, not only with a mandate for ethanol in gasoline sold in the state, and tax-free zones where ethanol plants are likely to be built, but also direct — and somewhat controversial — payments to ethanol producers.

In 2007, Minnesota paid over $15 million to ethanol plants as part of a per-gallon subsidy. Gov. Pawlenty has argued that it’s a worthy investment with a large return. The state, however, cut the payments during the last budget crisis in the state (although it cut sizeable checks more than a year ago to make up for the cut), and seems likely to target the subsidy again. Nobody in the State Agriculture Department today, however, would speak to the possibility.

If the subsidy is targeted, it couldn’t come at a worse time for rural Minnesota. Because the demand for gasoline is down, so is the demand for ethanol. Last month, one of the largest ethanol producers — VeraSun — declared bankruptcy after betting the price of corn would keep going up. The price of corn fell sharply, though, and VeraSun is out of cash. The producer payments can help secure private lending, but the tight credit markets remain in a deep freeze.

Last week, an ethanol plant in Iowa closed up. “We were still chewing through $6 corn (recently) and ethanol was around $1.50,” Pine Lake Corn Processors president Larry Meints Meints said. “Hedging, that did not go well… It’s very disappointing.”

  • Bob Moffitt

    Ethanol subsidies are ALWAYS at target, Bob.

    Generally speaking, the state’s ethanol industry is in better shape than others. While all are on the commodity price rollercoaster, many of the 19 refineries in Minnesota are older, locally-owned plants that don’t carry a large debt load.

    Last week, a gas station near my house closed up. That doesen’t mean the we are end of America’s oil dependence. Likewise, the closing of a plant in Iowa isn’t a sure sign of the “death of ethanol.”

  • Bob Collins

    Nobody mentioned anything about the death of ethanol, Bob, so you’re rebutting an argument I’m not making. The question is whether the industry can sustain a withdrawal of state assistance during this perfect storm of economic woes?

    If they can, doesn’t that mean they don’t really need it? If they can’t, then where does that leave us?

    the discussion, of course, comes at a time when we’re nationalizing so many industries and talking about the economic function of “stimulus” packages. What is the line between a stimulus and just throwing money at losing propositions?

    It’s a far bigger philosophical debate than “is ethanol good?”

  • In a DFL controlled Legislature up against a Republican Gov, I can’t say where ethanol will fall. However, I’m pretty sure it won’t be about a rational choice.

    The question to me is whether the urban DFLers will every team up with rural ones on issues like this, at the detriment of the suburbs. I hope that doesn’t happen because I’m a DFLer and I want them to work the suburbs, not write them off. But that rural/urban axis has yet to materialize.

    My hunch is that it’ll be everyone out for themselves unless Spkr. Kelliher can continue masterfully herding cats. I agree that without order AND support from the leadership, ethanol is a target Not only has it been of dubious value, the support for it is easy to isolate. That’s what’s important when it comes to killing projects

  • Bob Collins

    It’s not going to be a DFL vs. GOP thing. It’s going to be a rural vs. city thing.

    I can’t imagine anyone in the Legislature not being out to protect their individual district interests when this all hits the fan.

  • Bob Moffitt

    “The question is whether the industry can sustain a withdrawal of state assistance during this perfect storm of economic woes?”

    That’s a good question. I have no idea what the answer is.

    “Nobody mentioned anything about the death of ethanol, Bob, so you’re rebutting an argument I’m not making.”

    Point taken. Rebuttal withdrawn.

  • Bobby

    Cut away Mr. Pawlenty, cut away.

    If ethanol is so great, it’ll have no problem surviving without the tax-payers’ constant bailout (subsidies).

  • rob

    15 million cut it and you budget deficit of 5.2 billion is solved!

  • Paul

    Ethanol was bad public policy, it was not energy efficient, and unlikely to ever work economically. More faith based economics. You don’t put your food in your gas tank and expect things to end well. Once again farmers were led down the wrong path by poorly thought out public policy.

  • sherry

    i agree paul. the farmer & farming communities lose once again. ethanol = boondoggle

    no one wants to admit that. but they know. i only hope a little more thinking goes in to wind farms before we get too much further down that road.

    tax dollar = subsidy

    tax dollar = bailout

    and who is it that keeps yelling “no new taxes”?

    how about “no new bailouts” and “no new subsidies”

  • GregS

    “Ethanol was bad public policy, it was not energy efficient”

    Given the choice between “energy efficiency” and importing oil, most Americans will take the inefficient conversion of natural gas to something they can put in the tank, which is what Ethanol is.

    ” You don’t put your food in your gas tank ”

    Field corm might be “your” food, but few people I know eat “pig-food”.

    Ethanol has one major purpose – it is an oxygenator and octane booster added to gasoline to meet EPA mandated clean-air requirements.

    Despite the hype, very little ethanol is used for anything else.

    The big question is, without Ethanol, how will we meet clean-air requirements?

    Anyone know?

  • Carolynn

    The big question is, without Ethanol, how will we meet clean-air requirements?

    I’m no expert, but I lived in So.Calif. for several years where there have been clean air requirements for many, many years and I never heard the word “ethanol” mentioned.

    Ethanol is like a credit default swap in my mind – put out there as a viable product, with no thought about the aftermath – just gettting as much money out of it while the going’s good.

  • Ronald S.

    I though that with all the Bob’s and Roberts on this string, it needed a few other names. 😉

    But seriously: a good article, and — apart from GregS’s comment implying that corn is not part of the food chain (what are those pigs who eat the corn, Greg, merely pets?) — a good discussion. Thank you for raising an important issue.

    As Bob (Collins) writes, “The question is whether the industry can sustain a withdrawal of state assistance during this perfect storm of economic woes? If they can, doesn’t that mean they don’t really need it? If they can’t, then where does that leave us?”

    Exactly.

    Back in the first half of 2006, when the price of gasoline was high but the price of corn was still low, ethanol producers were crowing that they could compete with gasoline even without subsidies. Law makers should have called their bluff and pulled the subsidies then and there. But ever since, it has always been the wrong time — according to the industry — to stop the ethanol gravy train.

    Corn ethanol has been heavily subsidized at the federal level in the United States for 30 years. Minnesota’s State Government has been providing support for ethanol for almost as long. Corn ethanol is NOT an infant industry; it only behaves as one. It is time for it to demonstrate to the world that it can stand on its own two legs.

  • Bob Moffitt

    Ethanol isn’t likely to vanish overnight — or at all, GregS. You are correct that there as no other viable gasoline oxygenators now that MTBE (methyl tertiary butyl ether) has been banned in many states, including CA. So ethanol is here to stay.

    Note that Minnesota drivers used 21+ million gallons of E85 (85% ethanol fuel) last year. That’s a fact, not hype.

    Carolynn, all of California is using ethanol now — they are moving to E10, the same blend MN has used for 10 years. They are also finally adding some E85 pumps there.

    To Bobby and other subsidy critics, I offer a simple exercise: change a couple words, and see if you still agree:

    If (Interstate highways, public schools, US military) are so great, it’ll have no problem surviving without the tax-payers’ constant bailout…

    Petroleum fuels have had a near 100% monopoly on the transportation fuel market for about a century. Biofuels have made great progress, but still have a long way to go.

    The question is, what is the ultimte cost of sticking with petroleum as our ONLY choice at the pump? In other worlds, what is the cost of doing nothing?

  • sherry

    it’s a little creepy to have the communications spokesperson for the american lung association minnesota (not connected to the national american lung association) to be advocating for ethanol. how much money do you get from ethanol folk bob moffitt? or does it just go to “clean air choice”? http://www.minnesotamonitor.com/showDiary.do?diaryId=3659

  • Paul

    I’m not against subsidies per se, but subsidies should be directed by good public policy. Last I heard corn ethanol production still uses more energy than it produces, in other words it takes more energy to produce a gallon of E85 than that gallon yields. It also takes a boatload of water which is becoming a scarce resource in it’s own right. E85 is not more economical for drivers either because it yields fewer miles per gallon. As far as food goes it’s not just pigs we’re talking about. The short ethanol boom caused a world wide food crises last year. The price of corn got so high that people in Mexico and other parts of the world couldn’t afford a basic food staple. They had riots over this down in Mexico.

    Someone asked how we could get cleaner air without ethanol? More efficient engines. Cars that get higher gas mileage also produce less pollution, both out of the tail pipe and in terms of gasoline production. If 90% of the vehicles in the US were getting 35 MPG instead of 20 MPG we would be refining a lot less gas and pumping a lot less crap into the air.

  • Ronald S

    Bob Moffit seems to equate ethanol with interstate highways, public schools, US military. While one would probably find differing views among economists as to whether interstate highways should be turned into toll roads (as use to be common for state turnpikes, and is common in many European countries), all economists I know would agree that there are strong public-good elements to education, at least through High School, and for national defense.

    The public good value of ethanol (a private good, consumption of which is both excludable and rivalrous) — to the extent there is any — is tiny indeed. Moreover, to the extent there is one, then there is also for all other alternatives (including bicycles, conservation, telecommuting, etc.) that reduce petroleum consumption. The most efficient way of dealing with the externalities from oil is to charge a tax on it, not pick only certain winners to subsidize.