Ethanol subsidy may be a target


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.”