Ethanol’s Days of Promise and Prosperity Are Fading

Backed by government subsidies and mandates, hundreds of ethanol plants rose among the golden fields of the Corn Belt, bringing jobs and business to small towns, providing farmers with a new market for their crops and generating billions of dollars in revenue for the producers of this corn-based fuel blend.

Those days of promise and prosperity are vanishing.

Nearly 10 percent of the nation’s ethanol plants have stopped production over the past year, in part because the drought that has ravaged much of the nation’s crops pushed commodity prices so high that ethanol has become too expensive to produce.

A dip in gasoline consumption has compounded the industry’s problem by reducing the demand for ethanol.

The situation has left the fate of dozens of ethanol plants hanging in the balance and has unsettled communities that once prospered from this biofuel.

“It’s a more somber mood,” said Todd Sneller, the administrator of the Nebraska Ethanol Board. “The growth opportunity that existed some years ago is still out there in theory, but the reality that it’s going to take an awful lot of time, money and political battles to realize that opportunity” is causing consternation.

Thousands of barrels of ethanol now sit in storage because there is not enough gasoline in the market to blend it with — and blends calling for a higher percentage of ethanol have yet to catch on widely in the marketplace. Advanced biofuels from waste like corn stalks and wood chips have also yet to reach commercial-level production as some had predicted they would by now.

Referring to the plants that have been idled, Eric Lee, a commodities expert at Citibank, said: “Is that going to be temporary or permanent? It’s hard to say.”

Not only do the plants employ residents of these small communities, but they also provide a market for farmers to sell their crops and buy grain to feed their livestock. They attract a steady flow of trucks whose drivers use truck stops and patronize other local businesses. Contractors visiting the plants stay in local hotels. And the plants hold large accounts with local banks.

“It’s been quite an ordeal, honestly,” Mayor Christopher Jackson of Walhalla, N.D., said of the closing of an Archer Daniels Midland ethanol plant there last April.

About a dozen families who had moved to Walhalla, a town of about 1,000, to work at the plant have left, he said. Many of the 61 people who worked there have since found new jobs, but the salary and benefits are not nearly as good, he said. Mr. Jackson manages his family’s bar in town, and he said Friday end-of-week gatherings did not happen as much because people had less to spend.

“It’s been hard on every business up and down Main Street,” he said. “I don’t know that people realized how big of an impact that plant closing had on the community. Now we’re a year into it; everybody’s feeling the pinch.”

Congress set out to create an ethanol industry that would produce enough to make up 10 percent of every gallon of gas pumped into a car, but the lawmakers assumed that demand for fuel would grow. Instead, it has shrunk to 8.7 million barrels a day from 9.7 million in 2007, said Larry Goldstein, an economist and a director of the Energy Policy Research Foundation. And with corporate average fuel economy rules now in place to double the number of miles that the average car gets per gallon by 2025, “you know we’re on a trend,” he added.

As the gasoline market got smaller, so did the amount of ethanol it could absorb, because most service stations are set up to sell fuel with an ethanol content of only up to 10 percent. Owners’ manuals of most cars call for fuel blends of no more than 10 percent ethanol. The industry calls this the “blend wall,” and it has won Environmental Protection Agency approval for some cars to run on blends of up to 15 percent, but thus far that fuel has not caught on with consumers.

Millions of cars are “flex-fuel vehicles” and can run on blends of up to 85 percent, known as e85, but that fuel is not popular and is not even widely offered outside a few corn-producing states.

But the ethanol producers were encouraged to build because the federal government had mandated that refiners use their product, and it established a tax credit of 45 cents per gallon of ethanol. The tax credit was allowed to expire on Dec. 31, 2011, but not before it had stimulated construction of ethanol plants.

The value of ethanol has also sagged. Its price is created in part by the price of the gasoline it displaces, and gasoline prices have been relatively modest for the past few months.

Mr. Sneller and others in the industry remain optimistic that technological innovations and sound public policy will keep the industry afloat.