Fool's gold

The ethanol boom has burnished the price of corn, but its impact on the economy might not be all that glittery.

By Edward Martin

March and April brought the first signs of change. More of the seedlings than usual that pushed through the black soil of the Coastal Plain sprouted slender blades, unlike the blunt leaves of cotton and soybeans. The change spread inland as the growing season progressed. Now, with a scorching August wind rattling dry stalks in a field near the geographic heart of the state, Ronnie Burleson climbs down from his dual-wheeled farm truck. Through a cloud of dust, his nephew guides a six-row Case combine alongside, and its auger gushes golden kernels.

"Probably 125 bushels an acre," Burleson, 58, says, nodding. "Not bad for dryland corn" - grown without irrigation. Despite a spring freeze and summer drought, this field might yield 6,000 bushels. At about $400 an acre, that could gross $20,000 for Thurman Burleson & Sons Farm, near the Stanly County crossroads of Millingport.

"We got lucky. Corn is water-dependent, specifically at certain times. Pollen is only viable for about four days. We planted an early variety and got rain. Corn two weeks later and two weeks drier won't make half the yield."

It was more than luck. All four partners in Burleson & Sons - he, brother Dennis and their sons, Andrew and Aaron - have four-year degrees; his, in agriculture, is from N.C. State. They know which of the 3,000-plus acres they farm have deep clay that retains moisture and which have rocky soil that dries out overnight. But like hundreds of other Tar Heel farmers and entrepreneurs, investors and speculators, the Burlesons were gamblers this year.

They bet on corn and, in part, the impact the alcohol that can be distilled from its starches will have on prices. Ethanol, it's called, though many Tar Heels know essentially the same grain alcohol otherwise. "A lot of guys up here and over in Wilkes County have made it for years," Michael Miller, the agricultural agent in Iredell County, says with a laugh a few days later as he watches corn being harvested there. Wilkes was once the moonshine capital of the state.

Demand for ethanol is soaring, as a fuel to reduce dependence on foreign oil and as a substitute for methyl tertiary-butyl ether - MTBE - a gasoline additive that's being phased out because of health risks. Demand will keep rising - the federal Renewable Fuel Standard law requires U.S. consumption to increase to 7.5 billion gallons by 2012. By comparison, the nation burns 144 billion gallons of gasoline a year.

Plans have been floated for five North Carolina ethanol plants that could cost upward of $500 million and create several hundred jobs. Some anticipate an invasion from the Midwest, where the nation's ethanol industry is centered. Researchers at N.C. State and other campuses are searching for better ways to make ethanol - corn now yields an average of 2.8 gallons per bushel, an increase of 0.3 gallon from only three years ago - and for more energy-intense crops to use to make it.

Whether the grand plans for a Tar Heel ethanol industry come true remains to be seen. One thing is for sure: Corn, long relegated to wallflower status, is back in the spotlight. From massive operations such as Open Grounds Farm Inc., an Italian-owned corporate farm in Carteret County that boosted planting from 12,000 to 17,000 acres this year, to 5-acre mountain plots once regarded too small to bother with, 2007 might represent the greatest single-year jump for a mainstream crop. An estimated 1.1 million acres were planted - nearly 40% more than last year, says Brian Long, spokesman for the N.C. Department of Agriculture and Consumer Affairs. The increase amounts to 310,000 acres, about two-thirds the size of Mecklenburg County.

As with most abrupt economic shifts, the bandwagon is rolling down a dark, bumpy road. Some experts see parallels with the dot-com bust of the late '90s or the farm-credit crisis of the '80s, when the government encouraged farmers to plant "fence row to fence row" to meet international needs. Thousands went bankrupt when production exceeded demand and loans for equipment and land went unpaid. "There could be $30 million ethanol plants that 10 years from now will be out of business, taking hundreds of jobs with them," says Sterling Bowen, information manager for the State Energy Office. He's also North Carolina's representative on the 35-state Governors' Ethanol Coalition, which promotes the fuel.

For a change, farmers might be buffered better than the industries they supply. If prices collapse or, as many predict, ethanol production evolves to use such energy sources as wood waste, genetically modified barley or new crops such as switch grass, grain farmers can revert to cotton and soybeans. But those who invest in equipment - a new combine might cost $200,000 or more - or those who buy or lease additional land could be left holding the bag.

Not the Burlesons. They're content to go with agriculture's latest economic flow. They diverted only about 330 acres of former cotton land to corn this year - a lot, but they're not betting the farm.

One reason North Carolina has so much riding on the corn crop can be found 125 miles east in Goldsboro. On a September morning, Rick Hart watches numbers gyrate on his computer. At headquarters of Goldsboro Milling Co., one of the nation's largest pork and turkey producers, Norfolk Southern Corp. hopper cars line rail sidings, corn pouring from them. "We can unload a 50-car train in two days," says Hart, chief grain buyer. By the end of this year, Goldsboro Milling will have used about 22 million bushels, more than a third arriving by rail from the Midwest. "Corn went up about $2 a bushel from last fall to last spring," he says, from about $2.50 to $4.50 a bushel in Chicago Board of Trade futures trading. That was about when farmers were deciding what to plant.

Goldsboro Milling buys corn from Tar Heel growers when possible, he says, and many of its turkey and pork producers raise their own rather than rely on the open market. Still, the company will purchase 8 million to 10 million bushels of Midwestern corn this year. Some of its Tar Heel competitors will buy even more. A few cents' fluctuation in price can mean millions of dollars in profits or losses. The U.S. Department of Agriculture says ethanol's demand nationwide has added about 30 cents to the price of a bushel of corn. Export sales - especially to developing nations such as China and India - speculators and other factors have added the rest.

North Carolina's output of hogs, turkeys and chickens makes it one of the nation's top meat producers. It's second in hogs and turkeys and third in other poultry and eggs, with combined sales of nearly $5 billion most years. (Sales of tobacco were only about $400 million in 2006.) Corn is a staple of those animals, yet North Carolina is what economists call a corn-deficit state. Its output - projected at 97 million bushels this year - ranks 15th in the nation, and Tar Heel grain farmers grow only about 1% of the nation's crop. "If we were a country, we'd be about the third-largest corn importer in the world" - trailing Japan and South Korea and possibly a few others, says Nick Lassiter, the state Agriculture Department's marketing specialist for corn.

Ethanol - by driving up the price of Midwestern corn or that produced at home - could stoke costs. "Livestock farmers have been in the driver's seat forever, and now it's time for the grain guys to make a living," says Miller, the Iredell farm agent. But the impact will ripple through the economy. One way is higher food prices. "We don't want to be dependent on foreign oil, but milk goes up." Less obvious might be the cost of clothing as cotton acreage is diverted to corn.

Corn farmers have pushed Congress to mandate greater ethanol use; livestock producers have resisted. Corn-advocacy groups - Ronnie Burleson is a past president of the state corn growers association - insist that ethanol's impact is minimal. A $1-a-bushel increase would cause only about a 1% rise in the nation's $700 billion annual food bill. But when Springdale, Ark.-based Tyson Foods, one of North Carolina's largest poultry producers with 11 plants, feed mills and other operations, announced that its feed bill shot up $113 million in the quarter ended in September, its stock plummeted more than 10%.

Still, the resurgence of corn is a blessing in a state seeking agricultural diversity after its long dependence upon tobacco. "A lot of us planted cotton reluctantly because it was the only thing they could make a profit at," Burleson says. "But it's more work and requires a lot more management. It's just easier to grow a corn crop." No crop comes close to tobacco in gross income per acre - about $4,000 - but farmers say current corn prices will gross about $400 per acre, compared with cotton's $500 to $600. Cotton's labor requirements close that gap substantially. Tobacco? An acre needs about 250 man-hours per year in labor. Corn? Fewer than five.

"And corn works really well for most farmers," Burleson adds. "You can finish planting it before you start cotton, and you finish harvesting it in the fall before harvesting soybeans and cotton." But there are perils. Kent Messick, N.C. Agriculture Department's chief field agronomist, says nearly all the increase in corn this year was on land diverted from cotton. As the drought grew worse, farmers were reminded that corn can't take heat and dry weather. "A lot now remember why they got into cotton," Messick says.

Even that has changed in corn's favor. On parched fields like Burleson's, "10 years ago that 125 bushels an acre would probably have been 10 bushels an acre," Lassiter says. "We didn't have the genetic varieties then that we do now." True, he adds, prices of nitrogen and potash, key nutrients for corn, have soared. But a lot of the world wants Burleson & Sons' corn more than ever, including Mexico, where the government last year imposed a price cap on tortilla flour after it jumped by a third. "I wish them luck in the ethanol trade," he says. "There's going to be a lot of competition out there for that bushel of corn."

Land along the Pamlico River is flat, barely above sea level, thinly populated except by mosquitoes and mostly featureless except for its best-known industrial site - a 7,700-acre mine where PCS Phosphate Co. digs and processes ore. "It has everything," says Terry Ruse, chief operating officer of Agri-Ethanol Products LLC. Not from a travel agent's point of view, but everything he and his company's backers think they need to thrust Tar Heel corn into the mainstream of ethanol production.

The Raleigh-based company plans to build the state's biggest ethanol plant here, at a cost of about $220 million and with a capacity of producing 100 million gallons a year. Plans call for breaking ground by the end of the year and production to begin in mid-2009. "It's in the largest corn-producing area of the state, has access to barge traffic and allows easy access to markets up and down the East Coast," Ruse says. North Carolina alone, he adds, will need more than four times his plant's capacity as updated federal mandates kick in. Plus, ethanol production leaves behind a rich animal feed called distillers grain. "There are 169 million head of poultry, 11 million head of swine and 2,500 acres of fish within a short trucking distance."

Distance is critical in ethanol distribution. "Unlike gasoline," Bowen explains, "you can't put it in a pipeline." Ethanol attracts and binds to water in the air. "You're going to have to distribute it by trucks and basically splash it into gasoline at the distributor's site before trucking it on to retailers." That's why Agri-Ethanol's plan is viable, Ruse says, even if it has to import Midwestern corn. Shipping can add 30 to 50 cents a bushel to the price. The company would use about 40 million bushels a year - close to a third of the state's estimated crop this year - and has built a nearly two-mile-long spur to the Norfolk Southern rail line that serves nearby PCS Phosphate. "We're closer to the final market, so it'll balance out."

The flurry of proposals reflects the uncertainty surrounding the industry. Analysts and many industry insiders believe some are trial balloons to bait investors and economic developers. One has already crashed - Seattle-based E85 Inc. scrapped a $200 million project near Fayetteville after residents complained that plants have a reputation for foul odors. Thus far, none of more than 110 plants nationwide has been built in North Carolina.

Ruse says Agri-Ethanol's plant, announced in 2005, was delayed when backers insisted the company double capacity to make it more profitable. Typically, plants cost $2 to $2.50 per gallon of capacity and are financed with about 40% private capital and 60% debt equity. British billionaire Richard Branson recently filed a lawsuit in Wake County to get back $205,000 he advanced.

In Dundarrach, a crossroads near Raeford in Hoke County, Cary-based Clean Burn Fuels LLC is building a plant that will employ about 100 to make 55 million gallons a year. Construction was scheduled to begin in October. Another plant won't use corn but wood waste or other cellulose sources, with the ability to switch from one to another. "With the credit markets and uncertainties, I wouldn't want to be on the hook for a 100-million-gallon plant right now," says Doug McCullagh, general manager of Spring Hope BioFuels, a subsidiary of Xethanol Corp., a publicly traded New York company. It will convert cellulose digesters and other equipment of a former fiberboard plant to ethanol and biodiesel production at a cost of about $28 million. "A $20 million investment is a lot easier to swallow than $200 million."

In St. Pauls, another startup is hedging its bets. St. Paul Bio-Tek LLC, a subsidiary of Marietta, Ga.-based Solv-It Technologies Inc., expects to begin production in the spring at a modest plant with a capacity of 5 million to 10 million gallons a year. It'll fire its boilers with methane from a Robeson County landfill - about 20% of the cost of ethanol production is the energy to make it - and pay the county a 6% royalty on sales.

General Manager Bruce Jones says the plant will buy only locally grown corn. But by being small, it will maintain its flexibility and could use other feedstock. "There's a ton of money being spent on cellulosic conversion. Your cost per gallon will probably drop from $1.50 or $1.75 to 50 cents. Then you're really talking some bucks."

But now is the time many farmers are playing their hands. "Early in the 1990s, grain prices had gotten so low, we were struggling," Burleson says. "We decided to plant 300 acres of cotton. My brother and I had never been in a cotton field in our lives. We got in it at the right time to make decent money." They planted 2,700 acres of cotton last year. The gamble paid off. This year, it's corn.

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