Commentary
Local ownership of biofuel yields
greatest benefit for rural America
Editor’s note: The Institute for Local Self Reliance’s mission is to
provide innovative strategies, working models and timely
information to support environmentally sound and equitable
community development.
he history of biofuel production is one of
local ownership found and then lost. After the
early industry ascent and crash in the 1980s,
and the resulting domination by wet mills
owned by Archer Daniels Midland (ADM)
into the early 1990s, a third era in the ethanol
industry emerged, with farmer-owned ethanol plants. Initially
very small, these plants expanded as corn farmers profited
from investing in a green business, for which they grew the
feedstock and the fortunes of which rose as corn prices fell.
It was a symbiotic relationship, marrying renewable energy
with agricultural and rural development policy and bringing
significant economic benefits to the investing farmers and
their communities.
Up until 2003, these plants owned by farmer cooperatives
and LLCs were the mainstay of the industry. About half of all
ethanol refineries and up to 80 percent of all new ethanol
plants that year were majority farmer-owned.
Then, in 2006, a combination of rising oil prices and a
rapid phase-out of ethanol’s octane-enhancing alternative,
MTBE, led to soaring profits in the ethanol industry, catching
the eye of Wall Street. The entry of investment firms resulted
in dramatic changes in the industry. Wall Street firms built
large, absentee-owned ethanol plants with highly leveraged
dollars.
These plants dissolved the traditional relationship between
farmer and ethanol producer, erasing the hedge advantage —
where farmer-owned ethanol plants benefited if
corn prices were low or high — and the connection between
value-added agriculture industry and sustainable rural
development. Wall Street, unlike farmers, was more interested
in the short-term appreciation of its capital investment via
quick sales of new plants, rather than long-term dividends
from producing ethanol.
The entrance of Wall Street conferred one advantage,
however. It brought the political power needed to pass an
ambitious Renewable Fuel Standard that called for 15 billion
gallons of corn ethanol by 2015 and for an entirely new
cellulosic ethanol industry to produce at least 100 million
gallons by 2010.
But at the beginning of 2009, plummeting oil prices and
still relatively high corn prices curbed Wall Street enthusiasm
and led to a wave of acquisitions, industry concentration and
plant closures. At the same time, federal incentives and
mandates have attracted substantial investment in ethanol
produced from new, non-food and cellulosic feedstock.
The time is right to redesign public policy to re-establish
the intimate and beneficial linkage between energy and
agricultural objectives that was present in the early years of
this century. To achieve this, the federal government should
redesign the federal biofuels incentive in the way Minnesota
did 20 years ago.
Minnesota converted a pump credit similar to the present
federal incentive into a direct production payment for each
gallon produced by an in-state plant up to 15 million gallons a
year. The incentive lasted 10 years. That policy intentionally
fostered small-scale plants that lent themselves to farmer
ownership. It also led to increased competition and innovation
for many producers.
The current federal biofuel tax credit, unlike the Minnesota
incentive, favors large-scale plants. Ethanol plants are
increasingly large and the average size of an absentee-owned
ethanol plant is twice that of a locally owned one: 62 million
vs. 37 million gallons.
Most recently built plants have a capacity of 100 million
gallons or more per year. The economies of scale in ethanol
plants larger than 30 million gallons are very small and any
cost reductions are unlikely to appear at the gas pump. In a
report, “Rural Power,” ILSR found these savings to be less
than 6 cents per gallon.
Encouraging modest-scale production facilities will not
raise prices at the pump, but it will encourage local ownership
through cooperatives or other business forms and will
dramatically increase the economic benefits generated in the
communities in which the feedstock is cultivated or harvested.
Given two identically sized ethanol plants, a locally owned
plant provides a 10- to 30-percent greater economic impact in
its community than an absentee-owned plant. Unit price
scales with size (to a point), but economic impact scales with
local ownership.
The federal credit for biofuels should be redesigned to
have two tiers: a higher direct payment to smaller, majority
locally owned plants and a lower payment to absentee-owned
larger plants commensurate with their social benefits.
By John Farrell, Research Associate
Institute for Local Self Reliance (ILSR)
