Corn flops as energy source

Ford Heights Ethanol LLC applied in June 2006 to build a distillery in the Illinois town whose name it bears, promising an economic revival to replace abandoned houses and closed stores. Two years later, no work has begun.

For Ford Heights and other agricultural towns, the “green-collar” job revolution envisioned by federal biofuel mandates is a dream deferred. Knee-high grass and old tires cover the site as record prices for corn, the main ingredient in ethanol, discourage investment in new plants.

The $20.8 billion industry may have itself to blame. Breakneck construction led to 168 ethanol plants, already producing more than U.S. mandates require for the fuel additive this year. The distilleries buy so much corn - as much as a third of the U.S. crop this year - that they have contributed to price increases, the U.S. Department of Agriculture says.

“I kept saying they’re going to kill the golden goose,” said Jim Jordan, president of Jim Jordan & Associates LP, a Houston fuel-consulting company. “We have in fact overbuilt. This thing is pretty devastating.”

President Bush and Sen. Barack Obama, the Democratic presidential candidate from Illinois, have backed ethanol as a way to support American farmers and reduce dependence on imported oil. Ethanol is distilled from corn kernels in the United States and blended into gasoline. One corn bushel yields 2.75 gallons of ethanol.

Initial enthusiasm has given way to concern that diverting crops for fuel is accelerating a rise in food costs. Riots have erupted over shortages from Haiti to Egypt.

Some U.S. food companies, including chicken producer Tyson Foods Inc., formed a Food Before Fuel coalition in June to oppose ethanol mandates.

Sen. John McCain of Arizona, the Republican presidential candidate, has “traditionally been opposed to ethanol subsidies that distort the market,” spokesman Tucker Bounds said.

Ethanol may account for 20 percent of the gain in the rate of U.S. food inflation, said Ephraim Leibtag, an agriculture department economist. U.S. food prices may climb 6 percent this year, the most since 1980, the department estimates.

The overcapacity prevents lenders from financing ethanol plants that distill ethanol from corn kernels, said Mike Tian, an analyst at Morningstar Inc. in Chicago.

“A lot of these towns that hoped to get an ethanol plant probably [won’t],” he said.

Ford Heights Mayor Saul Beck said he was ecstatic in 2006 about having a distillery in his town of 3,300, where the U.S. Census Bureau found that 49 percent of residents live in poverty.

At least three ethanol producers went public that year, including Aventine Renewable Energy Holdings Inc. of Pekin, Ill., VeraSun Energy Corp. of Brookings, S.D., and Green Plains Renewable Energy Inc. in Omaha, Neb. At one point, the American Coalition for Ethanol tracked 500 planned plants, said Ron Lamberty, a vice president at the Sioux Falls, S.D., trade group.

Corn prices rose 58 percent to $5.3675 a bushel in the year through Sept. 10. When Ford Heights Ethanol applied for the permit for its proposed $130 million plant in 2006, producers were pocketing an average of $2.64 on every gallon made. By Sept. 10, rising corn prices had reduced that margin to 57 cents, Bloomberg data show.

Lenders balked at funding the project, said Jonathan Kahn, president of Ford Heights Ethanol: “One of our biggest regrets is that we couldn’t get manufacturing in a community that so desperately needs it.”

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