Where corn is king, a new fuel is prince

For a fuel additive, it doesn't get more exciting this.

Ethanol is the darling of investors. Wall Street executives, West Coast venture capitalists, and even Bill Gates are investing in ethanol plants. The CEOs of the Big Three automakers have pledged to double their production of flex-fuel vehicles – which can run on either gasoline or ethanol – by 2010. And the Midwest, which grows most of the corn that gets turned into ethanol, is smiling.

The additive's boom not only represents an alternative to foreign oil, it is pumping big profits into dying rural areas and creating a burgeoning market for corn farmers.

The ethanol industry "is growing much more rapidly than anybody expected," says Dan Basse, president of AgResource, an agricultural research and forecasting firm in Chicago. "It's a gold rush mentality."

All of which, some critics say, could eventually strain the demand on corn and raise food prices – for a fuel that not everyone believes is even a cheaper or better alternative to traditional gasoline.

Reasons for the boom range from the mandated phaseout of a common additive (MTBE) to high oil prices and the current focus on renewable sources of energy. Last year, Congress included a provision in the Energy Policy Act that triples the amount of biofuel that must be mixed with gasoline by 2012. And President Bush further emphasized renewable fuels in his State of the Union address as a way to wean the US off foreign oil.

"I didn't expect the oil companies to convert to ethanol as fast as they have," says Allen Baker, an agricultural economist with the US Department of Agriculture.

While demand is booming, supply has been slow to catch up, Mr. Baker adds. That's because of a transportation bottleneck. Ethanol can't be sent through existing pipelines, and the railroads weren't prepared to haul so much.

Those factors have driven up ethanol's price rapidly. Its price has at least doubled from six months ago, often reaching more than $4 a gallon.

That's bad news for drivers, but yet another reason for the growing interest from investors. There are 101 ethanol plants operating, mostly in the Midwest, and more than 30 under construction. Far more have been proposed.

That's rapid growth for an industry that has languished since a brief boom during the energy crisis of the 1970s. Archer Daniels Midland operated nearly all the early plants, until farmers began cooperatives in the 1990s. Nearly half of today's plants are farmer-owned, but the new ones are more likely to be started by distant investors, says Brian Jennings, director of the American Coalition for Ethanol.

"We knew the ethanol industry was going to grow and expand, but it's fair to say we've been surprised by some of the interest we've seen," says Mr. Jennings.

But he and others say the ethanol boom is benefiting parts of the Midwest far beyond the actual investors, especially in small rural towns that have been losing population and income sources for years.

"The jobs at the plants are relatively good jobs," says Chuck Hassebrook at the Center for Rural Affairs in Lyons, Neb. There's also a small local boost in grain prices near ethanol plants, he says, and there's a big advantage for livestock producers in the area who can use one of the ethanol byproducts to feed their cattle.

"You're seeing a resurgence of family farms doing cattle feeding in eastern Iowa" because of the ethanol production, says Mr. Hassebrook.

That's been one benefit for Bill Couser, a farmer in Nevada, Iowa, who grows corn, raises cattle, and is an investor in Lincoln-way Energy, an ethanol plant in his town that started operating six weeks ago.

"Before I had two options – I could feed the corn to my cattle or sell it to the grain co-op," says Mr. Couser. "Now I can take it to the ethanol plant, and then haul back the distiller's grain to the feedlot and give it to the cattle. We're taking advantage of everything [corn] has to offer in our community. There's nothing being sent out of the state that's not a final product."

The plant also employs 42 people, almost all of whom are from Nevada, and Couser says local businesses he's been tracking have seen a 20 to 35 percent increase in profits because of the plant. "You just can't believe what this has done for a small community," he says.

Others are even more worried that too much reliance on ethanol could have long-term consequences for the nation's food prices – as livestock producers compete with ethanol plants for the corn.

"There's a concern that it's growing faster than what the US corn availability will be in coming years," says Mr. Basse of AgResource.

As more plants come online, demand will only increase, he says, putting pressure on the corn supply. "I think this will require planting 10 million more acres of corn in the next four years [beyond the 80 million acres currently planted], and it's going to cut into the arable land for crops like wheat and soybeans."

Another challenge: It takes energy to produce this energy, although it still is a net plus, experts say.

"One of the major misconceptions out there is that we have to use more oil to grow corn and convert it to ethanol than we capture from ethanol in the end, " says Nathanael Greene, a senior policy analyst at the Natural Resources Defense Council. In reality, ethanol produces about 20 to 40 percent more energy than it uses, he adds, and a gallon of ethanol reduces oil use by about 95 percent.

Still, corn ethanol is just the first step, he emphasizes.

"People get excited about biofuels and see the potential, but they forget you have to get to the advanced technology for it to become a major part of the oil solution."