The craze for maize
May 10th 2007 | BELMOND, MARCUS AND NEVADA, IOWA
From The Economist print edition
Ethanol is rapidly transforming life in Iowa and the rest of the corn belt
Corbis
YOU might think that the opening of a new ethanol facility in Nevada, Iowa—a town of 6,700 in the centre of the state—would be of interest mainly to the local farmers who supply the corn that the factory turns to car fuel. You would be wrong. Investors in the refinery include the person who delivers fuel to it, a couple of local parts-suppliers for John Deere (a big farm-equipment company) and the local school-bus driver, among 900 or so other small investors. Like many others in the corn belt, the Nevada refinery is seen as a way for the whole rural community to thrive by exploiting America's new craving for ethanol and the corn (maize) that is being used to make it.
Corn-based ethanol is neither cheap nor especially green: it requires a lot of energy to produce. Production has been boosted by economically-questionable help from state and federal governments, including subsidies, the promotion of mixing petrol with renewable fuels and a high tariff that keeps out foreign ethanol. The federal government offers ethanol producers a subsidy of 51 cents per gallon (13.5 cents per litre); and a growing number of states are pushing for wider use of E85, a fuel blend that is 85% ethanol and only 15% petrol. Since oil prices rose above $30 a barrel in 2004 (they are more than double that now), ethanol capacity has grown especially rapidly. And although the country is experimenting with other renewable plant-based fuels of varying feasibility, from biodiesel to (much greener) ethanol derived from trees, the biggest boom has been in corn-based ethanol.
California has helped to lead the way. When the state banned the use of methyl tertiary butyl ether (MTBE) as a fuel additive after 2003, everyone had to use ethanol instead to meet clean-air standards; and local refineries for the product began popping up to cash in on a state subsidy of 40 cents per gallon at the time.
Outside the Golden State, however, the states most eager to subsidise ethanol were those with golden fields of corn. Wallace Tyner, an agricultural economist at Purdue University, points out that states that had introduced subsidies early, such as Illinois, Iowa, Minnesota and Nebraska, were already building lots of ethanol factories before 2004, whereas corn-belt states without subsidies, such as Indiana and Ohio, did not do much until oil prices rose. Since then, rural areas across the region have been swept up in the ethanol craze, with new facilities sprouting all over corn country (see map).
Iowa, in the heart of the region, already has 28 ethanol refineries, producing 1.9 billion gallons of the stuff a year, nearly a third of America's total capacity. Many new facilities and expansions of existing ones are in the works. On consecutive days in Iowa last week there were ceremonies to break ground for a new factory in Hartley and to open a completed one in Corning—where bad weather had grounded the Vanguard Squadron, the world's only 100% ethanol-powered aerobatics fleet.
Although agribusinesses such as Archer Daniels Midland have built many ethanol refineries, farmers' co-operatives and local investors have also been busily building as well. The first local groups to do so were in remoter areas where farmers could not get the best prices for their corn because of the high cost of transporting it to market. In Iowa, that region is the north-western part of the state, which enjoys high crop yields but gets 25-50 cents less per bushel because it is too far from the Mississippi river barges.
The same logic applied in the eastern counties of North and South Dakota, in south-west Minnesota and in other parts of the corn belt where getting corn to market is costly. So long as a refinery can be built near good rail terminals in these areas, says Ken Eriksen, who analyses transport patterns at Informa Economics, a research firm specialising in agriculture, it is more cost-effective to convert the corn into ethanol and send that to distant markets.
All this activity is benefiting rural economies and related industries big and small. Land prices in Iowa rose 10% last year, and are still climbing. Jobs are being created around the factories. In places such as Lakota and Marcus, which built some of the state's first modern refineries and have made a bundle because of high oil prices and subsidies, local investors have ploughed their profits into home improvements, college fees and farm equipment.
Some people in Iowa are also beginning to talk about livestock. Besides extracting corn's starch content to be turned into fuel for cars, ethanol refineries convert the rest of the crop into distillers' grains. These contain the corn's protein and other nutrients and are increasingly being fed to cows, pigs and chickens near ethanol factories around the country. As Dave Nelson, the chairman of an Iowa ethanol outfit who also grows corn and raises swine, puts it, “we take the candy bar out of the corn and then feed the rest to the pig.”
However, though Iowa has lots of pigs, distillers' grains work much better as feed for beef and dairy cows. And, according to researchers at Iowa State University, the state's refineries already churn out more than five times as much of the stuff as its small stock of dairy cattle can eat. Most of those refineries, therefore, have to use a great deal of energy drying the distillers' grains so that they can be shipped to Texas and other cattle states in the South.
Feeding the by-product directly to local animals would cut energy use at the refineries and transport costs for the feed. Iowans and other Midwesterners think this logic will drive a boom in the region's beef and dairy industries. Plenty of investors, however, view it as an excellent reason to start building ethanol refineries in Texas, which has plenty of hungry cattle.
A more serious long-term threat to Iowa's ethanol industry might come from other biofuels. The federal government is already subsidising investments in cellulosic ethanol, for example, which can convert a wide range of plant life into fuel, but is still very inefficient. Iowans do not seem worried. For one thing, even if cellulosic ethanol can be made viable, that feat remains years away. Moreover, even though switchgrass and other plants can be grown in places outside the Midwest, Iowans will benefit from the fact that leftover corn stalks can also be used for cellulosic ethanol. Instead of worrying about the murky future, the state's farmers are planting as much corn as they can—and hoping that oil prices stay nice and high.