Last update: September 26, 2006 11:36 PM

The Great Corn Rush

Ethanol is a booming industry in Minnesota and the Midwest. Driven by high gas prices and a mandate for renewable fuels, it's drawing billions of dollars to rural communities that need jobs and money.

Star Tribune Staff

HERON LAKE, MINN. -- The gleaming $110 million ethanol plant is still rising over their cornfields, but locals say it's already the best thing to happen here in decades.

Farmers and other area residents plunked down a minimum of $20,000 each to buy stock in the plant, and the electric co-op kicked in a $740,000 loan. The Hotel Whiskey Bar & Grill fills up on some nights with the plant's construction workers. And Mayor John Hay figures the plant will triple his city's tax base, making it possible to upgrade area roads and fix the leaky roof on the city-owned nursing home.

"If they didn't have that ethanol plant, there wouldn't be much of anything going on here," said Barb Pohlman, who sells vegetables in town from the back of her pickup truck.

Ethanol mania is sweeping through Heron Lake and many towns like it across the Corn Belt. Investors are spending billions in rural communities, sparking a wild rush to secure land, an industry movement to alter environmental standards and a rash of fierce bidding by communities desperate for their own plant.

Two decades after Minnesota farmers began mashing their corn into ethanol, the clear, odorless liquid is seen by many as the best chance for America to lessen its dependence on foreign oil. Few states have as big an investment in ethanol's success as Minnesota, which has funneled more than $300 million in subsidies to plant operators since 1982.

Minnesota, with 16 operating distilleries, ranked fourth last year among all states in total ethanol production. State agencies list seven plants as expanding or planning to do so, and at least a dozen more new plants are on the drawing board.

Nationally, ethanol production has more than doubled in four years and could do so again by 2010. An industry association shows 103 plants operating today and 43 more under construction.

Builder Ron Fagen, whose Granite Falls, Minn., firm is booked with work through 2010, said he has turned down bounties as high as $1 million or more from customers looking to jump ahead on his waiting list.

"The world has changed, and it's changed within the past year," said Malcolm Tilberg, an economic development specialist who is hoping that $1.3 million to $1.8 million in tax abatements will lure an ethanol plant to Springfield, 48 miles north of Heron Lake.

'A perfect storm on the upside'

Most mornings, trucks piled high with corn line up in front of the ethanol plant in Winnebago, Minn. Their loads are crushed into a gooey soup, then heated in steel tanks that convert carbohydrates into ethanol. Nearby business owners say the plant produces a smell as thick and sweet as a bakery, but new facilities mostly succeed at keeping odors contained on plant grounds.

Corn growers call this a golden age for ethanol, but there's nothing radically new about the basic production process. Ethanol is essentially 199-proof vodka mixed with a splash of gasoline to keep people from drinking it. Henry Ford used the fuel in early versions of his Model T. Abraham Lincoln taxed it to raise money during the Civil War.

Ethanol's backers tout the fuel as both renewable -- simply grow more corn -- and a clean-burning alternative to gasoline, but the current frenzy has as much to do with greenbacks as it does a green planet. A federal energy bill signed a year ago mandated a doubling of the nation's renewable fuel supply by 2012, to 7.5 billion gallons. The law also prompted oil refineries to use ethanol as a replacement for a cheaper clean-burning gasoline additive found to contaminate groundwater.

Then oil prices shot to more than $70 a barrel, and General Motors and Ford began spending tens of millions of dollars to promote vehicles that run on fuel containing up to 85 percent ethanol. Even though gasoline prices have since come down, ethanol profits remain high enough in many cases to pay for a new $80 million plant in 18 to 36 months.

"It's been a perfect storm on the upside for ethanol," said David Morris, vice president of the Institute for Local Self-Reliance in Minneapolis, who has been an energy adviser to four presidents.

This year, more than half of all ethanol produced in Minnesota will be shipped by rail or barge to other parts of the country to meet refiners' needs. Minnesota and three other states require the use of renewable fuels, and more are considering such measures. In Minnesota, all gasoline contains 10 percent ethanol.

In the meantime, old money and new money alike are rushing to build facilities to boost ethanol production.

In Lyle, Minn., farmers, small-town business owners and others camped overnight earlier this year to be first in line to buy shares in an Iowa plant. Absolute Energy sold all $64 million worth of stock in a matter of hours, turning away another $3 million in surplus orders.

"People were arriving so fast, it was hard to set up," said Stan Walk, a county supervisor who worked at the event. "Things just went wild."

In Morris, Minn., millionaires sprouted overnight after an Australian company paid $50 million for an ethanol plant originally built at a cost of $20 million. Now two other ethanol plants are in planning stages: one about 7 miles away in Alberta by the same Australian firm and another in Chokio, 13 miles away, by wealthy South Dakotan Bill Welk.

VeraSun Energy, which sold more than $400 million worth of stock to public investors this summer, is planning a 110-million-gallon ethanol plant in Welcome, Minn. Five miles away, in Fairmont, Biofuel Solutions is planning a 118-million-gallon facility with Cargill as an investor.

U.S. BioEnergy of Inver Grove Heights, another ethanol producer, is considering a $300 million public offering. Pacific Ethanol, which is building plants in central California and Oregon, raised $230 million from private investors this year, including $84 million from Bill Gates.

Nevada officials, meanwhile, asked industry consultant Dave Kolsrud of Luverne, Minn., to explore whether their state should import corn for a plant that would be built in that state's northern mining region. "They are looking very seriously at it," Kolsrud said.

The pace of the building binge has environmentalists, regulators and some residents concerned. Hydrologists worry that the boom in plants will drain groundwater supplies.

In Heron Lake, environmental advocacy groups sued unsuccessfully to fully study the effects on the environment from the plant, which will burn coal instead of natural gas. The state Supreme Court said last week it will hear arguments in the case. State regulators are investigating whether Heron Lake BioEnergy is intending to expand the plant immediately, which the company "vehemently" denies.

Meanwhile, a debate is simmering over how much corn will be left for livestock and food -- especially in drought years -- when ethanol plants already are grinding up corn at a rate of 1.6 billion bushels a year. And some ethanol industry veterans fear an eventual "dot-corn" bust that could hurt small investors and possibly leave taxpayers in some counties footing the bill for problem plants.

"We're facing this for at least a couple of more years, the hype and the mania that's going on," said Ed Bosanko, general manager of the Watonwan Farm Service (WFS) cooperative. "We're facing it until somebody goes broke."

A run on sites and corn?

Today's combination of high oil prices, federal mandates, eager investors and a raft of state, local and federal subsidies makes ethanol seem like a can't-miss bet. That hasn't always been the case. When long gasoline lines formed during Jimmy Carter's presidency, dozens of ethanol plants were built in the Midwest, only to go bankrupt. When a drought drove up corn prices in 1996, some Minnesota plants were forced to reduce or suspend production.

Jeff Broin worries that industry newcomers are ignoring those potential risks and building too many plants too close to one another.

"Everywhere we go, there seems to be other plants cropping up," said Broin, whose Sioux Falls, S.D., company manages 18 ethanol plants with nearly 900 million gallons of yearly production. "Without question, good sites are becoming difficult to find."

Mark Willand thought he had a deal that would bring Minnesota's Lac qui Parle County its first ethanol plant. Now he's facing the prospect of two plants within miles of each other competing for area corn.

Willand, the grain elevator manager in Dawson, had persuaded officials from six other Lac qui Parle County grain elevators to join in a cooperative effort to build the plant.

The coalition was undermined, he said, when officials in the county seat of Madison abandoned the joint effort and teamed with Glacial Lakes Energy of Watertown, S.D., to build a plant in their city.

"Out of nowhere we were informed that they were going to build with or without us," Willand said.

Rick Gail, a council member in Madison and publisher of the Western Guard weekly newspaper, acknowledged that there are "some real hard feelings in Dawson."

But in his city of 1,600 there is excitement, Gail said. The project will bring about 200 construction jobs and 30 to 40 full-time positions when the plant opens late next year or in early 2008.

"We need a shot in the arm," Gail said. "They [Glacial Lakes] came to us. What were we supposed to say, 'No'?"

Willand said he and the remaining six grain elevators in the county plan to go ahead with their facility.

Farther south, livestock farmers worry that an abundance of ethanol plants will drive up the cost of feed for pigs and the price of bacon for consumers. Ethanol plants already consume about 30 percent of the corn harvested within a 100-mile radius of Winnebago, according to one local co-op. Some fear that share could grow to 60 or 70 percent with new construction and expansion.

"Over the years we never had any idea that we were going to run out of corn," said Gerald Boler, a retired grain farmer and chairman of the Martin County Board. "But there are ethanol plants going up all over."

Rep. Bob Gunther, R-Fairmont, says fears that ethanol will exhaust the area's corn supply are overblown. About half of the area's corn currently goes to ethanol and livestock, leaving plenty for new plants, he said.

Designs on getting bigger

If anything defines the current ethanol wave, it's the notion that bigger is better. Larger plants can buy more corn at lower prices, ship ethanol economically in 95-car unit trains and employ relatively fewer workers.

Archer Daniels Midland of Decatur, Ill., the leading U.S. ethanol producer, is building two 275-million- gallon plants in Nebraska and Iowa that combined will nearly match the total output of all 16 ethanol plants operating in Minnesota.

VeraSun, which has teamed up with Ford and General Motors to promote ethanol sales in the Midwest, plans to have 560 million gallons of production in the region by early 2008.

The first generation of corn ethanol plants in Minnesota were owned by farmers and built to produce 15 million or 20 million gallons of fuel a year. The state's oldest operating ethanol plant -- Melrose Dairy Proteins of Stearns County -- is even smaller. Built in 1986, it processes lactose instead of corn. Its annual capacity is still only 3 million gallons a year.

Ethanol's sudden popularity with Wall Street is both gratifying and a little disconcerting for Merle Anderson, 85, who was growing potatoes in Climax, Minn., when he founded the American Coalition for Ethanol in 1988.

Anderson worries that big-money investors may crowd out rural owner-operators. "A community that attracts an ethanol plant is going to benefit either way," he said, "but it's two or three times more beneficial if the plant is under close, local ownership."

In Heron Lake, few seem to care that the company building their ethanol plant is privately owned, rather than a farmer-owned cooperative.

On a summer night, construction workers packed the Hotel Whiskey Bar & Grill, a former bowling alley that owners Tom and Deb Block refurbished into a bar, restaurant and dance hall.

By nightfall, the mood was festive. A construction worker serenaded a younger woman to the sound of Johnny Cash's "Folsom Prison Blues," while the bartender plucked an invisible guitar. A group danced under the disco lights.

"People say they don't feel like they're in Heron Lake anymore," Deb Block said, as she poured a glass of beer. "With the ethanol plant going, it's beginning to feel like a real city."