Ethanol loan idea sets off firestorm
October 22, 2008
OMAHA (DTN) – Comments from Secretary of Agriculture Ed Schafer last Friday at the World Food Prize Symposium about opening up USDA Rural Development loans to ethanol plants hit by high corn prices earlier this year have set off a firestorm of criticism. However, USDA officials are stressing that USDA’s loan programs wouldn’t just aid ethanol plants.
In a letter Tuesday to USDA, the National Grain and Feed Association, for instance, stated it was “greatly concerned” with Schafer’s comments. NGFA stated there are always “winners” and “losers” when it comes to buying grain and managing risk. “However, we know of no reasonable justification for USDA, or any other government agency, picking ‘winners’ and ‘losers’ in the market by selectively choosing which commodity markets should be cushioned by an ad hoc inflow of taxpayer money versus those that should assume responsibility for their own actions.”
The NGFA, which represents the nation’s grain elevators, stated that each company needs to be responsible for the risks it takes in competing in commodity markets with other buyers and sellers. The group asked Schafer to clarify his program, “as the unintended consequences would be harmful and the precedent exceedingly dangerous to U.S. agriculture and the free-market system.”
Schafer, speaking to reporters after giving an address at the World Food Prize Symposium in Des Moines, said ethanol companies that speculated on corn prices during the summer and locked in prices when corn was at $7 per bushel or higher could likely use a USDA loan program to buy cheaper corn to blend into operations.
“We’re seeing today some pressure on ethanol capacity or productivity on companies that speculated on buying corn,” Schafer said in a DTN article Friday.
When Schafer spoke, he did not mention any similar loan relief for livestock producers. Schafer said this was part of important public policy because corn-based ethanol is a stepping stone to cellulosic ethanol. Ethanol plants are critical infrastructure for rural America as well, the secretary said, and thus would qualify for USDA Rural Development loan guarantees, Schafer said.
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“We’re going to continue to support it and shore it up as much as we can,” Schafer said. “But there certainly is some pressure out there by companies who have gone away from their focus on ethanol and started to speculate in the commodity markets.”
Schafer’s comments also got the public relations machine against ethanol rolling again. The public relations firm Glover Park Group issued statements from several conservative taxpayer organizations condemning what Schafer said. Glover Park was hired by the Grocery Manufacturers Association last March on a $300,000 retainer specifically to aggressively campaign against ethanol programs.
The Glover Park e-mail included comments from the American Conservative Union, Taxpayers for Common Sense, Citizens Against Public Waste, the Competitive Enterprise Institute and the National Taxpayers Union.
“Many of us have long warned that the ethanol boom was a politically contrived bubble that could be sustained only by ever-increasing government support,” said Marlo Lewis of the Competitive Enterprise Institute. “Now we find that these pampered beneficiaries of special tax breaks, trade protection and Soviet-style production quotas want MORE! They had no intention of sharing with us any of the profits they made as speculators in the corn futures market, yet now they expect us to absorb the losses from their bad bets. Their shameless greed knows no bounds.”
A USDA spokeswoman in an e-mail Wednesday, stated that the loan programs Schafer discussed on Friday are long-standing programs not specifically tied to ethanol production. One program, the Business and Industry Loan Guarantee program, guarantees loans from private banks for up to $25 million. Another program could lend $10 million in assistance from an energy program that focuses on biotechnology. Other companies could qualify for up to $250 million per facility for new operations.
“We have several ways we can help with dollars in rural areas,” Schafer said.
There also would be “no restrictions or litmus tests” on size or ownership of companies that would qualify for such loans, Schafer said.
Schafer pointed out some ethanol plants were speculating on commodities as well as trying to make some money for their own productive capacity. Instead, what happened was some plants “got stretched pretty thin.”
On Tuesday, Dow Jones newswire reported problems ethanol companies, such as VeraSun Energy Corp., were having raising capital because of the credit crunch and losses attributed to high commodity prices. “Record-high corn prices in June sent VeraSun and other ethanol producers into panic mode, as they changed their risk-management strategies, and tried to lock in corn contracts. But when prices sank, the ethanol companies were forced to continue to buy corn above market value,” the Dow Jones article stated.
VeraSun expects a loss between $63 million to $103 million for the third quarter of this year, Dow Jones reported. Besides VeraSun, other companies also have been forced to change construction plans because of tightening credit lines and the commodity prices this past summer.
Schafer said Friday that ethanol plants are starting to balance out their costs, he said. USDA is going to “wade through some pretty difficult situations. There is going to have to be some credit applied to companies to buy some lower-priced corn to blend with their higher-priced corn obligations.”
chris clayton can be reached at firstname.lastname@example.org