Ethanol's troubles have sapped the dreams of an Indiana town

Reporting from San Pierre, Ind. — The air smells clean and sweet off the sprawling corn and spearmint fields, but for this unincorporated town of 156, it is the smell of failure: the failure to reap the rewards of the ethanol boom.

Construction crews were scheduled to start digging up the sandy soil next spring to make way for an ethanol distillery plant in San Pierre. The plant promised to revive the town's economy, bring high-paying jobs to one of Indiana's poorest counties and double its tax rolls, a scenario that has played out repeatedly in struggling towns across the Midwest over the last three years.

But last month, the developers of the San Pierre plant announced that the $62-million deal was dead. Banks involved in the project had cut off their lines of credit. Desperate calls to dozens of other financial institutions led to the same answer: No.

Already battered by other market forces, the ethanol industry has been hit hard by the banking world's credit crunch, and the seemingly bright future of corn-based biofuel has been cast in doubt.

In Pratt, Kansas, the grinding mill machinery stands silent inside the Gateway Ethanol plant. It was open for less than six months before running out of money, and there were no bank loans available to keep it going. The firm recently filed for bankruptcy.

In Royal, Ill., developers abandoned efforts to build a plant there and in six other locations, citing an inability to get financing. Plants have been shuttered, or plans for new ones halted, in Mead, Neb.; Belle Fourche, S.D.; Blairstown, Iowa; and Melrose, Minn.

Less than two years ago, the idea of distilling corn into a gasoline substitute won over Wall Street and rural residents alike, with visions of reviving the weakened farm economy and investing in greater U.S. energy independence and renewable energy. Other agricultural businesses -- from local cooperatives to small-town merchants -- saw a boost, as farmers suddenly had money for new clothes, spa visits and farming equipment.

Indiana was slow to join this party, in part because much of the surplus corn grown in the state is shipped to livestock producers in the U.S. Southeast or to Asia, said Chris Hurt, an agricultural economist with Purdue University in West Lafayette, Ind. And unlike states such as Iowa, South Dakota and Minnesota, Indiana legislators didn't provide state subsidies for ethanol production.