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Town misses the ethanol boom

The credit crunch has sapped the biofuel industry, and with it the hopes of a tiny town in Indiana.

November 18, 2008|P.J. Huffstutter | Huffstutter is a Times staff writer.

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.

For The Record
Los Angeles Times Sunday, November 23, 2008 Home Edition Main News Part A Page 2 National Desk 1 inches; 49 words Type of Material: Correction
Ethanol industry: In Tuesday's Section A, an article about the credit crunch scuttling a planned ethanol plant in San Pierre, Ind., misquoted a resident who opposed the plant. Dawn Danford said "some people are grateful for anything that helped kill off that ethanol plant" -- not "I am grateful."

In Pratt, Kan., 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.

In 2005, there was only one ethanol plant operating in Indiana. But by the end of 2006, after the state General Assembly pushed through millions in incentives and Gov. Mitch Daniels signed legislation mandating that state vehicles use biofuels when possible, there were plans to build at least 25 more, Hurt said.

But the current credit squeeze, along with other market developments, shut down this Indiana town's ethanol dreams. It is just the latest development in a rocky year.

First, corn prices jumped from around $2.50 a bushel in 2005 -- when ethanol plant construction began to take off -- to nearly $8 this summer on the futures market, before falling to below $4 this week.

The cost of growing corn skyrocketed, as fertilizer and seed costs jumped as much as 40%. Meanwhile, crude oil and gasoline prices -- which determine the value of ethanol on the U.S. trading markets -- have come down, narrowing the difference between the cost of gasoline and ethanol.

And the number of lawsuits -- filed by environmentalists or local residents who don't want their rural community turned into a site for industry -- aiming to block new production facilities from being built has steadily grown.

There were 139 ethanol plants operating in the U.S. as of January and 61 additional refineries under construction, according to the Renewable Fuels Assn., a Washington-based trade group.

But financial woes have led at least 27 plants to close, halt construction or be scrapped, according to DTN, an agricultural news and information service.

"There's been no credit for months," said Todd Neeley, who covers biofuels for DTN. "Even the top ethanol producers are having a difficult time getting financing. For these smaller projects, like San Pierre, they had no chance of surviving in this kind of environment."

Ethanol proponents insist this is just a temporary bump in the biofuel's potentially rich future, and may inspire producers to expand their operations to create ethanol out of other cheap materials, such as crop waste, yard cuttings, or wood and forest products.

"There is a lot of overblown concern," said Bob Dinneen, president and chief executive of Renewable Fuels Assn., the industry's main trade group. "We are not the only industry hurt by what's happening on Wall Street. But there is plenty of room for growth once the credit markets ease."

In the meantime, the dream of a revival is on hold for communities such as San Pierre.

Fewer farm families now work and own the land around San Pierre where, like many Midwestern agricultural towns, residents have slowly left over the decades.

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