Betting the Farm on Ethanol

Corn producers hope Bush will back the fuel additive

Facing a global glut of corn that has brought prices to a 10-year low of less than $2 a bushel, Illinois farmer Laird B. Dart barely breaks even today. But he thinks President Bush may save him--and thousands of other corn growers in the Midwest. Any day now, Bush is expected to decide on a complicated air-pollution question that would force California to use ethanol in its gasoline. If he backs expanded use of the corn-based fuel additive, Bush could double the 1.9 billion-gallon domestic market for ethanol by 2005.

That prospect has Dart hopping. A Bush O.K. means Dart would "invest $100,000--maybe more"--in a $50 million ethanol plant to be run by a cooperative. But it wouldn't be a boon just for folks like Dart. It would also mean a tremendous win for agribusiness backers of the additive, particularly Archer Daniels S. Midland Co. (ADM ) in Decatur, Ill., which provides about half the nation's ethanol.

CLEAN BURN. Problem is, it's far from sure that Bush will give the Corn Belt what it wants. He's caught smack in the middle of a heated battle between the oil industry and the state of California on one side, and environmentalists and ethanol supporters on the other.

The reason? Ethanol adds oxygen to gasoline, helping it to burn more cleanly. Since Congress amended the Clean Air Act in 1990, California and other high-pollution states have been required to add additives to their gasoline to reduce smog. California has long used the oil-based additive MBTE (methyl tertiary butyl ether) rather than ethanol, but MBTE is being phased out because it is a carcinogen. So California will have to switch to ethanol by 2003.

That would be a boon for the ethanol industry, which has been growing by 10% or so in recent years. But gearing up for the $28 billion gasoline market in California and other states, ethanol makers have massive plant expansion under way. They figure demand will rise from 1.6 billion gallons last year to 4 billion by 2005. Agribusiness giant ADM is expanding one of its five plants to produce a further 50 million gallons a year just to meet current demand. "We're waiting for the orders," says Larry H. Cunningham, senior vice-president at ADM, which now produces 850 million gallons a year.

Although it is the largest ethanol supplier, ADM is hardly alone in coveting the California market. All told, there are 56 ethanol plants in the nation, with expansions going on at 34 of them. Most are in the Midwest. Eight other plants are under construction and 40 more are on the drawing board, with construction scheduled to begin either this year or next, according to the Renewable Fuels Assn., the ethanol industry's Washington lobbying arm.

PRICIER GAS. But both California and the oil industry are dead set against making the switch to ethanol. The state argues that the additive is unneeded and will simply make its already pricey gasoline even more expensive. Governor Gray Davis petitioned the federal government for an exemption in 1999 from the federal regulations, and that petition is now on Bush's desk awaiting a decision. "We've proved you can make gasoline as clean as it needs to be without an oxygenate," says Richard W. Varenchik, a spokesman for the California Air Resources Board. Oil producers--for whom the use of ethanol would complicate production and cut into profits--heartily agree. They say they can meet California's stringent air-quality standards by reformulating gasoline to burn cleaner without oxygen additives.

Bush has close ties to both sides of the argument. Sure he's an oil man, but he can hardly risk angering ADM, a big campaign contributor, or the farm belt. With mid-term congressional elections approaching in 2002, Republicans are wary of annoying corn belt interests in such key states as Missouri, Illinois, and Iowa. "I would be surprised if he does something to undermine [the support he has in the Midwest]," says Elisa Lynch, campaign director for San Francisco's Bluewater Network, head of a coalition of 93 grassroots environmental groups. One way or the other, Bush stands to make some people a lot of money--and some others unhappy.

By Julie Forster in Chicago, with Lorraine Woellert in Washington

— With assistance by Lorraine Woellert

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