Chicago Tribune 10-30-06 Ethanol: Blessing or bane? By Greg Burns (MCT) OSCO, Ill. - Gary Asay raises thousands of hogs in this small town near the Mississippi River, and for years he's had nothing much around him but farmland stretching in every direction. Now an ethanol plant will be opening just 25 miles to the south in Galva. Another is coming to Annawan, about 25 miles to the east, and another just 30 miles across the river in Buffalo, Iowa. The town of Fulton, 44 miles to the north, will be getting a big one, too, leaving Asay to wonder if all those factories amount to too much too soon: "Anyone who has looked into it is concerned," he says. "There are too many plants too close together." The ethanol boom is spreading money around the heartland like so much fertilizer. Billions of dollars in new government subsidies have touched off a flurry of private investment at biofuel operations across the Midwest. Tired towns where opportunity has slipped away for decades now see their salvation in the giant distilleries that turn corn into alcohol for the gas tank. Almost every rural hamlet has a plant in its sights, or so it seems. Yet the benefits of ethanol fall unevenly, and some longtime rural interests stand to lose ground even as corn farmers and many others gain. If the local crop gets used for ethanol instead of exports, then grain elevators, loading equipment and barges used to ship corn down the Mississippi could become obsolete. If grain is less readily available for feed, Midwest livestock producers such as Asay could be squeezed out. If ethanol plants emit excessive levels of pollution, their nearby neighbors could be in for a rude surprise. And what if the ethanol boom goes bust? What if oil prices, already down sharply from their summer peak, head back to $20 a barrel? What if some cheaper raw ingredient takes the place of grain? What if ethanol plants really belong near their customers in big cities, instead of small towns in corn country? Already, gasoline prices have plunged, corn has shot higher, and the hype surrounding ethanol investments has fizzled. A pair of ethanol producers that went public this summer have seen their stocks pummeled. In September, a third producer postponed its planned initial public offering amid hostile market conditions. Yet the rush continues to launch ethanol plants as soon as possible in the heartland. Town after town is jockeying for a spot on the forward schedules of the relatively few companies that specialize in designing the rural factories. Big dreams still rule the day. "Gasoline prices have dropped dramatically, and that gives some people cause to wonder, but not me. I don't think there's any place you could build a plant and not make money," says Ron Plain, agricultural economist at the University of Missouri. "Turning farm crops into automobile fuel has the potential to be the biggest change in U.S. agriculture since the introduction of the soybean." Where boosters see vast opportunities, however, David Sykuta sees an "ethanol dream world" based on energy markets that go up but never down. Grass roots ethanol investors accustomed to lavish government crop subsidies will be in for a shock if oil prices keep falling and bailouts fail to follow, he warns. "They're all told they can have it all with no consequences," says Sykuta, who heads the Illinois Petroleum Council. "Some of these towns are going to get a heaping dose of the realities of the energy industry. It's the opposite of what they're used to." Russell Holesinger meets that warning with the serenity of a man accustomed to playing a big role in his small hometown of Fulton. The calm, soft-spoken attorney has built a legal practice specializing in wills, estate planning and real estate transactions, but these days he's the local ethanol man. "It's a little more exciting," he allows. "It's quite a boom right now." The Holesinger boys were the sons of a prosperous entrepreneur who farmed, owned a feed mill and ran the local John Deere equipment store. Three of the four brothers stuck around Fulton, and they started dabbling in biofuel about five years ago. One is trying to turn wood chips into electricity, while another is making biodiesel from vegetable oil. Someday, Holesinger says, the family might try to produce energy from the methane in local manure pits. But now they have their hands full spearheading the plan for a 100-million-gallon ethanol plant less than a mile from downtown. The Fulton project got rolling about a year ago, when a North Carolina architect searching for an investment opportunity tracked down Russell's brother Keith, the wood-chip guy. The Holesingers asked around, and within a matter of weeks, 14 local farmers and businessmen had pledged money. In December, a pair of entrepreneurs from neighboring towns provided the rest of the phase-one capital, and Fulton Ethanol was born. In early spring, the group contacted Agri-Bunge, a joint venture between farmer co-op Agri-Industries and the North American arm of Bunge, a multinational that owns the town's biggest grain facility. As the profit margins for ethanol soared, their inquiry about corn supplies led to a formal partnership between the well- financed company and the local entrepreneurs - one of many blooming around the region. By July, the partners had filed for an environmental permit, lined up bank loans and met with contractors. But they still face a long journey to their ethanol payday, including more than a year for construction. That's a long time to wait, says Holesinger. "Time is of the essence. No one knows how long the window's going to stay open." Asay, on the other hand, thinks it already has shut. The veteran hog farmer and current president of the Illinois Pork Producers Association has no interest in putting his money into ethanol, he says. "The time to invest probably would have been two or three years ago." Seated at his kitchen table this summer, Asay looked out the window over a fine stand of corn surrounding his farm. He intends to plant corn on every one of his 300 acres from now on, as long as the ethanol factories demand it. Forget about crop rotation, he says. Asay will be dumping on the fertilizer and giving his new industrial neighbors what they no doubt will need in previously unheard-of quantities. "I'm planning on raising corn year after year," he says. Americans will produce almost 11 billion bushels of corn this year, and ethanol will consume roughly 2 billion of it, up more than 20 percent from the year before. Demand will keep rising as new ethanol plants come on line, grain analysts predict. A single factory producing 100 million gallons of ethanol annually will use the corn from about 200,000 acres of cropland. On the surface, ethanol plants look simple. They're basically oversized stills, producing alcohol from corn mash. Grain is ground, mixed with water and yeast, fermented and distilled, just like the moonshine of yore. The alcohol gets blended with gasoline, and the leftover corn mash is fed to cattle. Hogs and poultry can tolerate only a little of those leftovers in their rations, however, leading to speculation that once ethanol gets going, herds of cows might displace the pork trade. For folks such as Asay whose livelihoods depend on pigs, "It's kind of scary," he says. As plants come on line in 2007 and `08, less corn will be available for livestock, export or any other use, predicts C. Phillip Baumel of Iowa State University. "We'll start to see the crunch." Since ethanol plants must operate continuously, their operators will "bid whatever it takes to get the corn," Baumel notes. "It's like chickens. They've got to be fed every day." Many of the hungry new players in the ethanol game look a lot different from the agribusiness giant that overwhelmingly dominated in the past. Archer Daniels Midland of Decatur, Ill., the largest ethanol producer, has done very nicely through a capital-intensive process known as "wet-milling" that extracts additional by-products from ethanol production. But now relatively small and cheap "dry mills" have become much more competitive, giving farmer co-ops and other start-ups dispersed around the countryside a guerrilla entree into the business. Not surprisingly, the newcomers face greater risks, particularly one-plant operations dependent on local corn supplies and a limited distribution network, analysts say. Those small-scale ethanol operators will be especially vulnerable when a shakeout comes. Ethanol rises and falls with volatile oil markets, which determine the price of the product more than any other factor. The potential for drought and disease in the U.S. corn crop makes every year a crapshoot, too. While the National Corn Growers Association has provided blanket assurances that U.S. farmers can indeed supply all the ethanol plants on the drawing board, not everyone's so sure - even after heat and drought failed to dampen this year's crop to the extent many experts had predicted. As analyst Dan Basse of Chicago's AgResource puts it: "They will be sucking so much corn out, prices have to rise." That alone could upset the economics of a marginal operation. Other risks loom. The costs of power, water and natural gas, as well as truck, barge and rail transportation, tend to vary unpredictably over time. And since ethanol producers depend on federal and state incentives, they need to retain the good will of the public. Despite the industry's public-information efforts, some consumers believe firmly that ethanol raises the price at the pump, damages engines and takes more energy to manufacture than it provides. Pollution is a turn-off as well. Ethanol plants have amassed a poor environmental record over the years, prompting repeated intervention from regulators. As of last year, 83 percent of U.S. ethanol producers were operating under federal consent decrees aimed at protecting the environment, according to the Illinois attorney general's office. Even as investment dollars pour into the Corn Belt, some believe the smart money is shifting to other locations closer to customers rather than raw materials. At Memphis, Tenn.-based Lurgi PSI, one of the few design and engineering companies experienced in building ethanol plants, sales executive Vaughan Farrie expects at least some future factories to locate near cattle operations in the southwest or big fuel blenders on the coasts. None of those worries have dampened the gold rush mentality in the Midwest. As of mid-summer, economist and researcher Bill Tierney of John Stewart & Associates had counted 290 announcements of upcoming ethanol projects, nearly all concentrated in the region. Illinois has six ethanol plants in operation, another one under construction and permit applications for 34 more were submitted in 2006. Many rural communities see a greater risk in letting the ethanol dream slip away than in embracing it. In Dyersville, Iowa, site of the "build-it-and-they-will-come" baseball diamond from the movie "Field of Dreams," Mayor Jim Heavens is pushing hard to build a local ethanol plant. From an economic development perspective, he says, it sure beats meatpacking, one of the more common business opportunities for small farm towns. An ethanol plant promises better jobs as well as enhanced incomes for local farmers. "When you're the mayor of a town like ours, you can't really turn something like this down," he explains. At Big River Resources LLC of West Burlington, Iowa, Chairman Raymond Defenbaugh says he's tired of seeing corn exit the Midwest as a raw commodity, instead of being processed into more valuable products like ethanol. Communities suffer when they produce only the basics, he says. "You can't attract business. You can't keep your shops. You can't keep your youth." In Fulton, at the converted bank that serves as City Hall, Holesinger gathers around a table piled high with plans and documents. Together with Mayor Howard Van Zuiden and City Administrator Randy Balk, he pores over a map centered on the open field where Fulton's ethanol plant will go. This town of 3,853 has other plans, too - widen the main highway into town, build a marina on the Mississippi. But this one is really happening, and it could bring the rest along on its coattails, says Balk. "This is going to be the catalyst for economic growth," he predicts. "You need something to jump-start that. If not us, who?" Actually, outside investors are sniffing around the area, too, including agribusinesses, energy firms and private-equity groups. "Overwhelmingly, it is not local farmers," says economist Tierney. Rich Goldstein's family has run a big barge and scrap metal business out of the Quad Cities for decades, but it's better known for its Isle of Capri casino operation. Now the Goldsteins are in the midst of converting a former fertilizer plant along the Mississippi into an ethanol maker. The planning started two years ago, and in part the new venture represents a hedge in case the ethanol boom undermines the family's freight and commodity operations, notes Goldstein. "We won't be shipping so much corn, so we had to diversify." Other investors with big wallets are jumping in, too, as quick profits beckon. Global Ethanol Holdings of Australia bought a majority stake in Iowa's farmer- owned MGP LLC earlier this year, with an eye toward global expansion. "The bigger plan is to have plants worldwide," says Dave Nelson, a Midwest farmer who has stayed on as chairman of MGP since the purchase. Nelson considers himself fortunate to have a partner willing to take his local investors along for the ride, he says. "In discussions with other institutional investors, they want control for the sole purpose of growing it and selling it. They want to buy you lock, stock and barrel." That's exactly what happened in Morris, Minn., where the 345 local investors in Denco sold out to a different group of Australians. By accepting the deal, the locals cashed in on boom times that had boosted the value of their partnership shares, says Gerald Backmeier, chief manager. "The limitation was the ability to liquidate the shares," he explains. "Once you were in, it was hard to get out." Yet where investors see paydirt, Ruth Koelker sees a threat to her Iowa family farm. For generations, the Koelkers have worked the land near the railroad tracks where their hometown of Dyersville has decided to put its ethanol plant, and the 91-year-old is in no mood to sell. Dangling $17,100 in cash, plus a tax abatement, Mayor Heavens thought he was making a sweet offer for the small sliver of property the project needs. "It's four rows of corn, a ditch and some brush," he says. But Koelker told the town to forget it, and it's not because she's some stubborn old lady standing in the way of progress, explains Todd Locher, her lawyer. "Her parents and grandparents had lived on that farm. Productive farm land would have been part of the sale, and she wants that parcel to be used for farming." Heavens briefly considered condemning the property, but he knew that would rankle Iowans already skittish about government abuse of eminent domain. So in the end, the ethanol plant changed its configuration - slightly. "Ultimately, it's going up in her backyard, anyway," Locher says. Koelker's not the only neighbor with reservations about ethanol plants moving in. Just outside the town line of downstate Quincy, ethanol is coming directly across the street from the nice houses along Ewbanks Road. Homeowner Chuck Venvertloh is concerned about air pollution, groundwater contamination and 100 to 200 trucks traveling day after day on the street where his children now ride their bikes. The local banker has formed a neighborhood association aimed at fending off the plant. "We want one in Adams County. We don't want it across the street from my house," he laments. "I could throw a rock and hit it." These not-in-my-backyard disputes can get ugly. In Rockford, Ill., an ethanol-vs.- neighbors dispute has spawned allegations of wrongdoing by public officials and an ongoing legal battle. Just a few miles to the west in Lena, Ill., citizen activists helped prod the local ethanol plant into a costly pollution-control re-fit after complaints about foul odors divided the town. So far, no one in Fulton is complaining, says Holesinger. While not everyone he approached invested money, no serious effort has emerged to derail the project. A family's good name counts for a lot around these parts, and the Holesinger roots run deep. "My house is here," Holesinger says, as he views an aerial photo of the town. "This is where we live. It's really important to us to be a good neighbor. We are the neighbors." This summer, Holesinger parked his silver Buick at the site, where a field of corn his teenage son planted in the spring had grown 7 feet tall. For decades, the Holesinger family has cultivated this same land where the ethanol plant will go, its every shape and contour as familiar as their own backyards. And if all goes according to plan, the family will be working the land in a different way for decades yet to come. Looking over his son's stand of corn, Holesinger says he feels blessed by the ethanol project that promises so much for his family and community. "We feel it's providential," he says. "This was meant to be."