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Midwest towns caught in middle of ethanol-subsidy fight

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The white plume still billows from the smokestack at the ethanol plant off Highway 14, and the 18-wheelers still screech to a stop at the corn unloading station.

Nothing is visibly different at the Al-Corn plant, one of Minnesota’s oldest ethanol makers — except that an era of nearly unwavering government support for the industry seems to be over.

“I had a feeling this was coming,” local corn farmer John Fosness said of the U.S. Senate’s June 16 vote to immediately kill ethanol subsidies.

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Though the measure is part of a broader bill not expected to be approved, $6 billion in federal ethanol incentives are certain to be scaled back as Congress and the Obama administration confront the federal deficit. That has significant implications in Midwestern states that are top ethanol producers.

Fosness said he understands the government’s need to reduce spending. Yet others are not so accepting in Claremont, population 650, where the ethanol plant is the largest employer.

“Why don’t they start cutting big subsidies to Big Oil?” said farmer Michael Berg, who owns shares in the local plant.

Even if the subsidies go away, the plant in Claremont, 80 miles south of the Minneapolis area, is expected to keep running. In a town that has lost its school, hardware store, lumberyard and barbershop over the years, the Al-Corn plant is one of the bright spots in the local economy.

Completed in 1996, it employs 33, buys corn from its 500 farmer-owners and has turned a profit for them. Two years ago, a joint venture it has with five other ethanol makers purchased a larger, bankrupt plant in Janesville, Minn., 40 miles to the west.

“I don’t see a fatal effect,” Chief Executive Randall Doyal said of the potential loss of ethanol incentives, including a small-producer tax credit worth $1.5 million annually to the Claremont plant.

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But in a sign that ethanol hasn’t lost all its friends, the Senate shot down an amendment by Sen. John McCain (R-Ariz.) to prohibit federal spending on new blender pumps and tanks.

Minnesota alone has 21 ethanol plants that produce more than a billion gallons of fuel annually, about 8% of U.S. output. With some exceptions, including two plants that went bankrupt, they have been an economic boost to small rural communities, employing more than 8,000 workers in all.

That probably isn’t going to change if subsidies are dropped, said Doug Tiffany, who teaches applied economics at the University of Minnesota. The bigger, persistent risks to the ethanol industry are corn and fuel prices. When corn prices climb but fuel prices don’t, it can be a disaster.

“It’s an industry that suffers or prospers on the vagaries of the energy markets, and we know that it can be wild,” he said.

Economists say U.S. demand for ethanol is driven by federal requirements to blend it with gasoline, which are not slated for elimination. The federal blender tax credit, now costing nearly $6 billion a year, was originally intended as an incentive for oil companies to mix gasoline with ethanol. Opponents of the tax credit say it isn’t needed if blending is mandated.

Without the tax credit, the U.S. ethanol industry could see a lull in demand for a year or so if oil companies decide to blend only the minimum ethanol required. But some experts say that’s unlikely and would in any case be temporary because the federal mandate increases in the years ahead.

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“If the production falters, either individual plants have to be idled or all plants idled a little bit,” said Bruce Babcock, an economist who has studied ethanol subsidies as director of Iowa State University’s Center for Agricultural and Rural Development.

But in two years, the industry won’t feel any effect from losing the blender credit, he said.

Consumers might notice, though. The tax credit of 45 cents per gallon of ethanol goes to blenders who mix it at a rate of 10% with gasoline. If the tax credit were lost and shifted to the pump price — as some industry officials believe would happen — the bump works out to 4 1/2 cents per gallon of gasoline.

Shaffer writes for the (Minneapolis) Star Tribune / McClatchy.

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