By Peter Robison
Dec. 16 (Bloomberg) -- Mike Vis hooks a pump to a grain silo in Minnesota and siphons out enough of his corn to feed 91 people for a year. This batch will fuel vehicles in Houston for 21 seconds.
American roads, hungry for corn in the form of the motor fuel ethanol, never figured in the livelihoods of earlier generations of Rock County growers. In the 1930s, some considered it a sin to burn corn in home furnaces.
“They felt it was a food, and there’s always hungry people in the world,” said Andy Steensma, the mayor of Luverne, the county seat.
Today, burning crops like corn, soybeans and sugar cane for fuel is policy in the U.S., Brazil and the European Union -- while almost 1 billion of the world’s 6.8 billion people are hungry, the most in a generation. About 95 percent of what Vis grows feeds vehicles in the western U.S. -- the destination for ethanol produced in his local plant -- not people or animals.
“It does not make sense to put our food into the gas tank,” said Jeffrey Sachs, a Columbia University economist who advises the United Nations on reducing hunger. “It’s not a healthy link, that’s for sure.”
President George W. Bush mandated using ethanol distilled from corn to stretch gasoline supplies in 2005, and President- elect Barack Obama has said he supports the policy.
One Shipment’s Journey
The journey of a single ethanol shipment from America’s corn belt to the concrete beltways of Houston shows what the mandate delivers to American drivers and withholds from a hungry world. Batch 4,516 of ethanol began as grain from fields around Rock County. After being crushed, fermented and distilled at Agri- Energy LLC in Luverne, it traveled by railcar 1,000 miles to the Houston suburbs, where some of it landed in the tank of a Ford Cobra convertible.
When David Kolsrud persuaded 200 Rock County corn growers to chip in $3 million and borrow from local banks to start Agri- Energy a decade ago, the country had fewer than a dozen farmer- owned ethanol plants. There was no federal mandate. Crude oil hovered around $20 a barrel, one-seventh of its peak this year.
Kolsrud, who owns the farm next to Vis, said the distillery was a way to keep money local in a rural area where the average resident made less than $20,000 in 2000.
At the time, Luverne, population 4,600, was best known for a midsummer hotdog festival. Growers joked that every train leaving town had 100 cars, 99 carrying corn and one for departing teenagers.
‘Going Broke’
“We were going broke raising the crops,” said Kolsrud, 60. There was another reason for pushing into ethanol. He kept livestock to supplement his crops, and his doctor told him the animals could make his asthma terminal.
Agri-Energy opened in 1998. By 2001, the operation was purchasing a third of Rock County’s corn supply and paying members $1 a bushel over the market price. The value of a share in the plant soared sixfold, to $60,000, Kolsrud said. As the company prospered, he backed other ethanol plants and a wind- turbine company. Today, there are 180 ethanol distilleries across the U.S.
Homegrown enterprises aren’t the only winners. Exxon Mobil Corp. and other refiners get a 51-cent tax refund for every gallon of ethanol they blend with gasoline, or $4.5 billion this year. Biofuel advocates include Archer Daniels Midland Co. of Decatur, Illinois, the world’s biggest grain processor; Deere & Co. of Moline, Illinois, the largest maker of tractors; and Wilmington, Delaware-based DuPont Co., which makes seeds.
Exports Up
The companies say concern about ethanol’s effect on the food chain is overblown. While ethanol production consumed a record amount of last year’s corn crop, so did exports, said Doyle Karr, a DuPont spokesman.
“In a year when we had as much grain as ever going into ethanol, we had as much export as ever leaving the country to feed people,” he said.
Ethanol has been more reliable for Vis than raising livestock. Just 22 when Agri-Energy opened, he went bankrupt two years later trying to manage the family pig farm for his ailing father. Kolsrud took his young neighbor under his wing. Stocky and slow-moving, with a mop of white hair, the older man had little time to tend his fields. Now Vis works both farms in exchange for use of Kolsrud’s equipment.
Six-foot-four, with tanned arms, Vis resembles a children’s book portrait of a farmer. The farthest he ever traveled from Minnesota was Las Vegas, for his honeymoon.
‘Make More Money’
As a vacuum sucked the corn he’d grown into a semi tractor- trailer in July, he marveled that he worked harder going bankrupt. He estimated he would gross a record $500,000 this year, about two-thirds more than usual.
“I can sit down and do nothing and make more money than getting out in the field every day,” he said, shaking his head.
The U.S. mandate will only increase demand. Almost a third of the 2008 U.S. crop will be used to generate the required 10.5 billion gallons of ethanol from corn next year, or 7.5 percent of U.S. motor fuel consumption, government estimates show. By 2015, the mandate rises to 15 billion gallons. The EU, China and Brazil all have their own biofuel targets.
Meanwhile, global inventories of corn, wheat and soybeans will shrink to a 67-day supply before next year’s Northern Hemisphere harvest, about half the peak in the 1980s and close to the lowest level in 45 years, according to U.S. data.
At the Luverne plant, where silver vats and pipes rise from the fields like an overgrown chemistry set, rotating mechanical hammers pounded Vis’s corn into a fine flour. After being mixed with water and enzymes, the sugary mash dropped into a fermentation tank at 1 a.m. to stew with yeasts and be converted into alcohol.
Obama’s Support
Shawn Davis, 56, monitored the batch on a computer screen. This job saved him when a local meatpacker closed, he said. Luverne Mayor Steensma credits the plant, which has a payroll of 30 and an average salary of $40,000, with keeping the town’s population steady as others decline.
Obama, a former Illinois senator, says he supports the ethanol mandates because they create jobs and reduce U.S. dependence on imported oil. At an April speech in Indiana, he called corn ethanol a “transitional technology” as the U.S. develops advanced biofuels from non-food substances.
Ethanol also lowers pump prices. The U.S. Department of Energy said on June 11 that a gallon of gasoline, then more than $4, would have cost as much as 35 cents more if it didn’t contain the biofuel.
Farming has changed since his grandparents refused to burn corn, Steensma said. Back then, farms yielded fewer than 50 bushels of corn per acre. Brown stalks mingled with green in mid- season. Now, identical rows of green stalks yield 175 bushels or more. Growers needed a way to profit from their abundant corn, he said.
Pig Farmers’ Costs
“I really like to see nice cars and new pickups and good houses,” said Steensma, 66, reclining in an armchair in his home near a newly renovated city baseball diamond.
Kolsrud opened a suite of offices last year in nearby Brandon, South Dakota, stocked with complimentary sodas and golf towels for visitors.
“Not bad for a bunch of poor, dumb dirt farmers,” he said.
A few miles across the border in Iowa, pig farmer Rick Moser pushed back his cap and exhaled at the mention of the plant in Luverne. Corn makes up 60 percent of the diet for his 6,000 sows and with higher feed prices, Moser figured he’s losing 2 cents to 4 cents a pound on every pig.
About 6,200 miles away, Park Ho Kon, who raises pigs near Seoul, saw feed costs jump 70 percent this year.
‘Powerful Country’s Logic’
“The rest of the world is suffering from famine, but the U.S. is making fuel from corn,” Park said. “Well, isn’t that a powerful country’s logic?”
The average person needs 1.57 pounds of grains a day for a healthy life, said Seeva Ramasawmy, a statistician with the UN Food and Agriculture Organization in Rome. By that standard, Vis’s 52,360 pounds of corn might have fed 91 people for a year. Instead, it satisfied 0.00024 percent of Houston’s average daily gasoline demand, based on estimates by Larry Padfield, vice president at U.S. Development Group LLC, which handles ethanol shipments in Houston.
“There’s nothing we seem to be gaining,” said Anne Krueger, former deputy managing director of the International Monetary Fund in Washington. Policy makers who mandated corn ethanol “weren’t realistically looking at what would be involved.”
U.S. food prices may climb 6 percent this year, the most since 1980, the Department of Agriculture has estimated. Without biofuel production raising costs of corn-fed animals that supply meat, milk and eggs, food inflation might be 0.7 percentage points lower, the USDA has said.
Distillers’ Grains
Higher prices are a larger issue in developing countries, where the poorest spend as much as 70 percent of their incomes on food, Krueger said. In the U.S., the average is 10 percent. She estimated biofuels might cut caloric intake 8 percent in Africa.
Matt Hartwig, a spokesman for the Renewable Fuels Association, a Washington trade group, disputed that assessment. Increased demand, investor speculation and higher transportation costs all had more effect on food prices than biofuels, he said. Ethanol may save U.S. families more than $500 a year when lower pump prices are taken into account, he said.
Critics also ignore dried distillers’ grains, a byproduct of the ethanol process that can be fed to pigs and cattle, he said. Each bushel, or 56 pounds, of corn yields 2.75 gallons of ethanol and 18 pounds of the grains.
“It’s also a food source,” Hartwig said.
Moser, the pig farmer, said he doesn’t use the grains much because the concentrated corn oils make for fatty, yellow bacon.
Bargain for Blenders
Fed to livestock, the corn in Vis’s truck could have supported the production of 5,236 pounds of beef, or 29,920 pounds of chicken, the Iowa Corn Growers Association estimated.
The grain became part of Batch 4,516 instead, a 29,100- gallon shipment of ethanol that arrived in early August in a Pasadena, Texas, rail yard. From there a truck delivered it to a blending terminal owned by Motiva Enterprises LLC, a Houston joint venture of Royal Dutch Shell Plc and Saudi Aramco. Motiva mixes the ethanol into gasoline at a concentration of 10 percent for the city’s Shell stations.
Customers ultimately benefit from the 51-cent tax credit, said Al Mannato, a spokesman for the American Petroleum Institute in Washington. It declines to 45 cents on Jan. 1.
“The real reason for that credit is to make ethanol less expensive and therefore more attractive economically,” he said.
Corn and Oil
Economists worry about longer-term effects. Intended to reduce dependence on oil, the mandates have instead made food prices more reliant on scarce fossil fuels, said Bruce Babcock, a corn grower and an agricultural economist at Iowa State University in Ames.
As the biofuel becomes a larger part of the fuel supply, traders see corn as a commodity interchangeable with oil, said Jim Damask, managing director of BiofuelsConnect LLC, an ethanol broker in Heathrow, Florida.
By one gauge, the degree to which daily corn and oil prices track each other has risen since the ethanol mandates were imposed. The so-called correlation coefficient was 0.67 for the year through Dec. 15, compared with 0.04 in 2004. The scale ranges from 1, when returns move in lockstep, to -1, when they are opposite.
Oil climbed to a record $147.27 in July before falling 72 percent to $40.50 by Dec. 5. Corn reached $7.99 per bushel in June and then dropped 62 percent to $3.05 in the same period.
“I tell corn growers here that if they really want to make money producing ethanol, they should get on a plane to Saudi Arabia and ask them to cut production,” said C. Ford Runge, professor of applied economics and law at the University of Minnesota in Minneapolis.
VeraSun’s Bankruptcy
The global recession may reduce plantings of corn, keeping grain costs higher. Futures contracts on the Chicago Board of Trade show corn will rise 19 percent by mid-2010, to $4.45. At $3.75 yesterday, corn prices were already 44 percent higher than the $2.61 average from 1997 to 2007.
High corn costs backfired on ethanol producers this year. VeraSun Energy Corp. of Brookings, South Dakota, the second- largest U.S. distiller, sought bankruptcy protection in October. Farmers may be in trouble next. After paying more for seeds and fertilizers, Vis sees smaller profits in 2009.
“It seems like once farmers started making a little bit of money, then the rest of the world got pissed off,” he said.
One beneficiary of Batch 4,516 was in Spring Valley Village, Texas, a Houston suburb of gated driveways and brick mansions lined with hurricane-resistant water oaks. The day after the Blalock Road Shell station’s tanks were filled, William Collins, a film producer, pulled up in his restored, blue-striped AC Ford Cobra two-seat convertible.
Driving the Most
Houston’s 2.8 million residents drive 36 miles per capita every day, the most among Americans, according to the Bureau of Transportation Statistics. Collins questioned whether that sort of model is sustainable. “You can’t have 9 billion people living like this,” he said.
He laughed when asked whether he was happy that corn from a Minnesota farm was helping power his car and keeping gas prices lower.
“I prefer to eat,” he said.
(Recipe for Famine: Part 7 of 7.)
To contact the reporter on this story: Peter Robison in Seattle at robison@bloomberg.net.
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