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Biofuel imports anger farmers; Tax break irks ag-state lawmakers

Pioneer Press
November 30, 2005
By TOM WEBB

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For U.S. agriculture, the energy gold rush is on, and Minnesota's pioneering biodiesel and ethanol producers are in the thick of it. But suddenly, they have foreign competition.

A ship loaded with South American biodiesel pulled into a Florida port this month, and immediately qualified for a new U.S. biodiesel tax break. For the homegrown biofuels industry, it was a shocking notice that their domestic market had gone global.

The American Soybean Association expressed outrage. Angry farm-state politicians vowed to rewrite tax law. And it stunned soybean farmers, who dreamed that biodiesel would become the next ethanol — a corn-fed economic lifeline across Minnesota and beyond, which has turned crops into homegrown fuel, rural jobs and farmer profits.

Ethanol, too, is confronting import challenges. Latin American nations reportedly are ramping up ethanol production for possible export. Suddenly, U.S. farmers are nervous, just when it seemed that the promised land for biofuels was in sight.

"Why would we want to trade our farmers, our jobs, our communities, our tax dollars and our energy security for another dependence on foreign ethanol or biofuels?" said Minnesota Farmers Union President Doug Peterson.

Free-traders see it differently, arguing that farm fuels have enjoyed years of government protection; they welcome the challenge to become more competitive.

The issue is passionately felt in rural Minnesota, a state so deeply invested in farm-based fuels that industry leaders jokingly call it "the Holy Land." Minnesota has more ethanol plants, more farmer-investors, produces more biodiesel and buys more biodiesel than any other state.

This autumn, the future of farm fuels looked white-hot: Crude oil prices soared, corn and soybeans were cheap and abundant, a lucrative new tax credit for biodiesel became law, and the polluting additive MTBE continued its phase-out, further helping ethanol sales. Moreover, Congress passed a new law requiring a big increase in ethanol use.

It didn't take long for the biggest players in agribusiness to see opportunity and jump in, first Archer Daniels Midland, then Cargill, then CHS. But farmer groups were excited, too — so many, in fact, that Joe Jobe of the National Biodiesel Board said this month that he'd received "dozens, if not hundreds, of calls everyday saying we want to build a biodiesel plant."

Then came the competition: biodiesel from Ecuador, made from palm oil, not soybeans. EarthFirst Americas, the U.S. importer, intends to import 45 million gallons in 2006, and more than 100 million the following year, exceeding the 75 million gallons the entire U.S. biodiesel industry will produce in 2005.

Most galling to soybean growers, the Internal Revenue Service ruled that the Ecuadorian biodiesel qualifies for the new $1 a gallon biodiesel credit just passed by Congress. That means the U.S. biodiesel market is wide open to all comers.

"There's no protection there, apparently," warned U.S. Rep. Collin Peterson, D-Minn. "What started last week with Ecuador, I think we're going to see more of that."

Gary Wertish, agricultural aide to U.S. Sen. Mark Dayton, D-Minn., said that Dayton is among lawmakers who think the IRS ruling is wrong.

"One of the reasons the energy bill was passed was to lessen our dependence on foreign oil," Wertish said. "It wouldn't be the intent of Congress to apply tax credits for foreign-based biodiesel."

Vern Eidman, a University of Minnesota economist who specializes in biofuels, expected that biodiesel's moment had finally arrived. Then he heard of the Ecuadorian shipments.

"While it's hard to argue against competition, this may be a lot of competition to go up against, particularly if their oils are much lower in price than soybean oil," he said.

At Florida-based EarthFirst, chief technical officer Peter Calvert saw it otherwise.

"I don't think the soy guys have that much to worry about, frankly," he said, noting that his firm is delivering palm-oil biodiesel to destinations like Florida, Texas and California, where soybeans are hard to come by. "Where palm oil makes the most sense is where soy makes the least."

Besides, Calvert added, "The Energy Act was meant to diversify fuel supplies, and that's what we're doing. … It was not crafted as a farm bill."

Peterson, the congressman, sees a second threat, this one to the ethanol industry. On his recent travels through Central America, Peterson was concerned to see or hear about dehydrating plants under construction, designed to remove water from Brazilian ethanol.

Under trade rules, watery Brazilian ethanol shipped to the United States must pay a hefty tax. But the if water is removed in Central America, a substantial amount of ethanol can then be imported to the United States with no import tax. Up to 7 percent of U.S. production, or about 280 million gallons next year, could arrive tax-free.

Cargill has dabbled in this practice to a small degree, routing Brazilian ethanol through a plant in El Salvador, to the ire of U.S. farm groups. But with the passage of the Central American Free Trade Agreement, or CAFTA, Peterson sees evidence of someone investing on a much larger scale.

Several Cargill officials denied they had any such activities, beyond their El Salvador experiment. Lori Johnson, a Cargill spokeswoman, noted that Cargill's El Salvador joint venture, "at full capacity, produces about 60 million gallons a year, which is about five days of consumption in the U.S."

By contrast, she noted, Cargill is by far the largest investor in the U.S. corn industry, and this month announced a huge expansion of its own ethanol plant in Nebraska.

Free-traders like to point out that the ethanol and biodiesel industries didn't grow spontaneously; they were planned and encouraged by a web of subsidies, incentives and government mandates. Some sustainable-energy advocates, such as Mike Millikin, editor of the online Green Car Congress, argue that shutting off imports is the wrong reaction to a possible foreign threat.

"With tariffs already in place and demand for ethanol booming, this just seems like a way to continue to shield an industry that has been shielded for 24 years," Millikin wrote. "Where's the competitive pressure to come up with a better, more cost-effective means of producing ethanol? … The global market for ethanol is rapidly increasing; let's get competitive. Let's go get some of that market for ourselves."

But the threat haunts some farm groups, which have seen ethanol deliver profits, jobs and rural development. At the Minnesota Farmers Union's recent annual meeting, union President Peterson told delegates: "Stop foreign ethanol and biofuels, and stand up for energy security, stand up for food security, stand up for rural America, and stand up for rural Minnesota."

Tom Webb can be reached at twebb@pioneerpress.com or 651-228-5428.

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