Food crisis provides opening for array of ethanol opponents

The global rise in food prices is giving political ammunition to opponents of the country's ethanol policy and creating some uncertainty for the burgeoning and heavily subsidized biofuels industry.

An informal coalition of oil refiners, environmentalists and food processors is trying to convince lawmakers that increased output of the alternative fuel is inflating food costs by siphoning off corn otherwise fed to livestock and discouraging U.S. farmers from planting wheat, soybeans and other crops.

These strange bedfellows also argue that ethanol distribution constraints are contributing to higher prices at the pump, and that the biofuel is unlikely to reduce greenhouse gas emissions, and may even increase them.

Farmers and other ethanol supporters dispute these claims. But the lobbying blitz appears to be having some impact in Congress, and is putting shares of ethanol companies under pressure, a reflection of investors' concerns about the industry's long-term growth potential.

To help wean the country off oil imports, Congress has helped fertilize the country's budding biofuels industry with a 51 cent-per-gallon tax credit and a federal law mandating a five-fold increase in output over the next 15 years.

But twenty-four Republican senators, including presidential candidate Sen. John McCain from Arizona, last week sent a letter to the Environmental Protection Agency urging it to repeal or roll back ethanol output targets stipulated in energy legislation passed in December. And two weeks ago lawmakers tentatively agreed on a farm bill that would scale back the tax subsidy for corn ethanol to 45 cents a gallon.

On Sunday, both Democrats running for president, Sens. Barack Obama of Illinois and Hillary Clinton from New York, said U.S. ethanol policy deserves a closer look in light of the current food crisis.

"The political climate has radically shifted," said Matt Dempsey, a spokesman for Sen. James Inhofe, R-Okla., a staunch oil industry supporter and one of the senators asking the EPA to use the authority Congress gave it to halt the ethanol mandate. As it stands, oil refiners are required to mix 9 billion gallons of ethanol into the nation's gasoline supply this year, and 15 billion gallons by 2015.

The ethanol industry says it is being unfairly linked to the worldwide rise in food prices. Officials say food prices are going up mainly because of rising demand from developing countries, some weather conditions that have hurt crops and higher fuel and packaging costs.

Despite the wave of second-guesses by many lawmakers, most analysts say Congress is unlikely to alter or drop the ethanol mandate, given the political importance of farm states in an election year and President Bush's support for the industry.

The top ten ethanol producing states account for half the electoral votes needed to win the White House, notes Kevin Book, an analyst at Friedman, Billings Ramsey & Co. Inc.

"Congress has made a strategic decision to support the building up of a biofuels industry" and is unlikely to make a "highly disruptive" about-face, said Mark McMinimy, an agribusiness analyst at Stanford Group Co.

But the increased political scrutiny could nevertheless threaten the industry's growth, McMinimy said. "This creates headline risk and therefore more uncertainty for investors," he said.

In the past two weeks, shares of VeraSun Energy Corp., based in Brookings, S.D., have fallen some 15 percent, while Pacific Ethanol Inc. and Green Plains Renewable Energy Inc. are down roughly 19 percent and 7.8 percent, respectively.

Pacific Ethanol's shares fell almost 3 percent Tuesday when it was revealed that Microsoft Corp. Chairman Bill Gates had reduced his stake in the company, which he holds in an investment vehicle, from 21 percent to 18.5 percent.

The goal of the ethanol subsidy and production mandate is to provide assurances to farmers, ethanol companies and potential investors that there will be a market for corn-based fuel, but also next-generation biofuels made from switchgrass, wood chips and other materials, said Matt Hartwig, a spokesman for the Renewable Fuels Association, an ethanol trade group. The biofuels industry "will be unrecognizable 5 years from now," he said, but needs the foundation set by corn-based ethanol to evolve and thrive.

Ethanol's opponents, meanwhile, take some satisfaction that their complaints are now receiving a wider hearing.

Oil refiners, for example, have opposed the mandate since a milder version was first implemented in 2005 because they argue it increases the expense and hassle of refining oil into gas.

"We have hard evidence now that there are unintended consequences" of increased ethanol use, said Frank Maisano, a spokesman for several oil refiners, including Valero Energy Corp.

Food processors, meanwhile, argue that the consequences will only get worse.

"Food prices are going to get higher, not lower," said Scott Faber, vice president of federal affairs at the Grocery Manufacturers of America, whose members include Campbell Soup Co., Sara Lee Corp., and General Mills Inc. "Inevitably, lawmakers will have to revisit and recalibrate these mandates."

Farmers diverted about 25 percent of their corn crop to ethanol production last year, and are planting more corn at the expense of other crops, such as wheat and soybeans, the GMA says.

That's led to higher prices for grains. Consumers have felt the impact from costlier meat, eggs and milk.

One beneficiary from the political upheaval may be the cellulosic industry, which doesn't compete with food supplies but is still working to produce fuel on a commercial scale.

Congress required that 5.5 billion gallons of cellulosic biofuel be produced by 2017, up from only 100 million in 2010. The current farm bill being considered by Congress would dedicate $400 million to cellulosic ethanol development.