Ethanol lull temporary, analysts say

CLAREMONT, Minn. —The white plume still billows from the smokestack at the ethanol plant here, and the 18-wheelers still screech to a stop at the corn unloading station.

Nothing is visibly different this week at the Al-Corn plant, one of Minnesota's oldest ethanol makers — except that an era of nearly unwavering government support for the industry seems to be over.

"I had a feeling this was coming," said local corn farmer John Fosness of last Thursday's lopsided but largely symbolic vote in the U.S. Senate to immediately kill ethanol subsidies.

Though the subsidy-killer measure is part of a broader bill not expected to be approved, $6 billion in federal ethanol incentives are certain to be scaled back as Congress and the Obama administration confront the federal deficit. That has significant implications in Midwest states that are top ethanol producers.

Fosness, who sold his stake in the farmer-owned plant last year, said he understands the government needs to reduce spending and is resigned to it. "Congress is getting the message from the public," he said.

Yet others are not so accepting in Claremont, population 650, where the ethanol plant is the largest employer.

"Why don't they start cutting big subsidies to Big Oil?" asked farmer Michael Berg, who still owns shares in the local plant, as he stood chatting with Eve Myers, the sales clerk at the only convenience store.

Even if the subsidies go away, the plant in Claremont, 80 miles south of the Minneapolis area, is expected to keep running. In a town that has lost its school, hardware store, lumber yard and barber shop over the years, the Al-Corn plant is one of the bright spots in the local economy.

Completed in 1996, it employs 33, buys corn from its 500 farmer-owners and has turned a profit for them. Two years ago, a joint venture it has with five other ethanol makers purchased a larger, bankrupt plant in Janesville, Minn., 40 miles to the west.

"I don't see a fatal effect," CEO Randall Doyal said of the potential loss of ethanol incentives, including a small-producer tax credit worth $1.5 million annually to the Claremont plant. "It is going to pinch, probably, but I don't know."

In a sign that ethanol hasn't lost all of its friends, the Senate last week shot down an amendment by Sen. John McCain, R-Ariz., to prohibit federal spending on new blender pumps and tanks.

"It's an industry that suffers or prospers on the vagaries of the energy markets, and we know that it can be wild," said Doug Tiffany, an assistant extension professor of applied economics at the University of Minnesota.

Economists say U.S. demand for ethanol is driven by federal requirements to blend it with gasoline, which are not slated for elimination. The federal blender tax credit, now costing nearly $6 billion a year, originally was intended as an incentive for oil companies to mix gasoline with ethanol. Opponents of the tax credit say it isn't needed if blending is mandated.

Without the tax credit, the U.S. ethanol industry could see a lull in demand for a year or so if oil companies decide to blend only the minimum ethanol required. Some experts say that is unlikely to happen, and in any case would be temporary because the federal mandate increases in the years ahead.

"If the production falters, either individual plants have to be idled or all plants idled a little bit," said Iowa State professor Bruce Babcock, an economist who has studied ethanol subsidies as director of the university's Center for Agricultural and Rural Development.

Even so, Babcock said, in two years the industry won't feel any effect from losing the blender credit.

Consumers might notice, though. The tax credit of 45 cents per gallon of ethanol goes to blenders who mix it at a rate of 10 percent with gasoline. If the tax credit were lost and shifted to the pump price — as some industry officials believe would happen — the bump works out to 4 1/2 cents per gallon of gasoline.