Midwestern towns missing ethanol boom

Industry hit hard by credit crunch

By P.J. Huffstutter
Los Angeles Times / November 23, 2008
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SAN PIERRE, Ind. - The air smells clean and sweet off the sprawling corn and spearmint fields, but for this unincorporated town of 156, it is the smell of failure: the failure to reap the rewards of the ethanol boom.

Construction crews were scheduled to start digging up the sandy soil next spring to make way for an ethanol distillery plant in San Pierre. The plant promised to revive the town's economy, bring high-paying jobs to one of the state's poorest counties, and double its tax rolls, a scenario that has played out repeatedly in struggling towns across the Midwest over the past three years.

But last month, the developers of the San Pierre plant announced that the $62 million deal was dead. Banks involved in the project had shut their doors and cut off their lines of credit. Desperate calls to dozens of other financial institutions led to the same answer: No.

Already battered by other market forces, the ethanol industry has been hit hard by the banking world's credit crunch, and the seemingly bright future of the corn-based biofuel has been cast in doubt.

In Pratt, Kan., the grinding mill machinery stands silent at the Gateway Ethanol plant. It was open for less than six months before running out of money, and there were no bank loans available to keep it going. The company has filed for bankruptcy.

In Royal, Ill., developers abandoned efforts to build a plant there and in six other locations, citing an inability to obtain financing. Plants have been shuttered, or plans for new ones halted, in Mead, Neb.; Belle Fourche, S.D.; Blairstown, Iowa; and Melrose, Minn.

Less than two years ago, the idea of distilling corn into a gasoline substitute won over Wall Street and rural residents, with visions of reviving the weakened farm economy and investing in greater US energy independence and green energy. Other agricultural businesses - from local co-ops to small-town merchants - saw a boost, as farmers suddenly had money for new clothes, spa visits, and farming equipment.

Indiana was slow to join this party, in part because much of the surplus corn grown in the state is shipped to livestock producers in the US Southeast or to Asia, said Chris Hurt, an agricultural economist with Purdue University in West Lafayette, Ind. And unlike states such as Iowa, South Dakota, and Minnesota, Indiana legislators didn't provide state subsidies for ethanol production.

In 2005, there was only one ethanol plant operating in Indiana. But by the end of 2006, after the state general assembly pushed through millions in incentives and Governor Mitch Daniels signed legislation mandating that state vehicles' use of biofuels when possible, there were plans to build at least 25 more, Hurt said.

But the current credit squeeze, along with other market developments, has shut down this Indiana town's ethanol dreams. It is just the latest development in a rocky year.

First, corn prices jumped from around $2.50 a bushel in 2005 - when ethanol plant construction began to take off - to nearly $8 this summer on the futures market, before falling to below $4 this week.

The cost of growing corn skyrocketed, as fertilizer and seed costs jumped as much as 40 percent. Crude oil and gasoline prices, which determine the value of ethanol on the US trading markets, have come down, narrowing the difference between the cost of gasoline and ethanol.

And the number of lawsuits aiming to block new production facilities from being built has steadily grown. The suits were filed by concerned environmentalists or local residents who don't want their rural community turned into a site for industry.

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