The Agriculture Department is attempting to shore up the sagging gasohol industry by beginning a major subsidy program that is expected to provide more than $35 million worth of free corn to one of the country's largest agribusiness firms -- Archer Daniels Midland Co.
The program, which critics have attacked as a "giveaway" to a domestic industry, represents a sharp break from earlier gasohol subsidies by providing surplus grain reserves at no cost directly to the producers of fuel ethanol -- corn-derived alcohol that is mixed with gasoline to make gasohol.
Secretary of Agriculture Richard Lyng, who originally expressed strong reservations about the program, said in an interview that the unusual release of free grain to domestic firms was justified because the sharp drop in gasoline prices threatens to force many small ethanol producers out of business. That, in turn, could mean the collapse of an industry that used 250 million bushels of corn last year, he said.
But industry officials say that the principal beneficiary of the program will be Archer Daniels Midland, the multinational agricultural processing and grain-trading firm headed by Dwayne O. Andreas, the noted agribusinessman and campaign financer for Midwest lawmakers. The firm, which reported $163.9 million in profits last year, is the country's largest producer of fuel ethanol for gasohol. It is based in Decatur, Ill.
The details of the program are expected to be published in the Federal Register within the next week, after they are reviewed by the Office of Management and Budget. As the program is currently drafted, if ADM elects to participate, the company likely will receive more than half of the estimated $70 million worth of benefits, according to Earle E. Gavett, director of USDA's Office of Energy.
Under the proposed regulations, ethanol producers would receive special Commodity Credit Corp. certificates that could be exchanged for free grain from government reserves or sold for cash to commodity brokers and grain traders. The program would be in effect until Sept. 30, when the department expects corn prices to fall, lowering the cost of production for ethanol producers.
Department officials say the precise level of benefits that would be paid out will depend on the extent to which ethanol producers participate in the program. But the regulations would provide most of the benefits to the biggest producers: For every 2 1/2 bushels of corn used to make ethanol between May 10 and Sept. 30, a producer would be entitled to a CCC certificate for one bushel of free grain worth about $2.30.
"What this amounts to is corporate food stamps for ADM," said Jack Blum, a Washington lawyer who represents the Independent Gasoline Marketers Council and a critic of gasohol subsidy programs. "It's truly amazing. If these guys ADM can operate profitably without this, why is the government giving them money? . . . Dwayne Andreas has got to be the least likely candidate for food stamps in American history."
To prevent such windfalls to ADM and other big producers, USDA's Office of Energy recommended a "means test" on the program that would limit benefits to the most needy alcohol firms, not unlike the way food stamps are targeted for the poor. But Lyng said he personally vetoed that idea as unfair.
"That didn't make sense to me at all," said Lyng about the means test. "I think the government should treat people equally. . . . The Constitution calls for that."
Although ADM reported a 55 percent jump in earnings during the first three months of 1986, Andreas said in a telephone inteview that his ethanol plants have been suffering severe problems similar to those of the rest of the industry. "We lost several millions dollars last month making ethanol, and we were considering closing some or all of our plants," said Andreas. Andreas said that he told Lyng during a telephone conversation in April that his ethanol plants were in trouble, but did not urge him to take any specific action. "He asked me if it was true we were going to close down our plants, and I told him, yes we would have to," said Andreas. "I did not discuss these other matters" -- the subsidy program.
Lyng, Andreas and Martin Sorkin, ADM's Washington lobbyist, talked again over breakfast at the Madison Hotel in Washington on April 30, two days before Lyng first announced the department would begin the subsidy program. But according to Lyng and Andreas, the meeting was devoted almost entirely to international trade issues and subsidies for ethanol were never discussed.
Lyng said he was not aware ADM would receive most of the benefits under the ethanol program. "I knew they were a very large corn refiner, but I didn't know they were the largest" ethanol producer, he said.
"Dwayne Andreas is a good friend of mine, and we get together from time to time," said Lyng. "I almost never talk business with Andreas."
Farm-state lawmakers, industry groups and farm lobbyists had urged Lyng to invoke a section of the 1985 farm act that empowered him to provide ethanol producers with surplus grain reserves "at no cost or reduced cost." The provision, sponsored by Sen. Edward Zorinsky (D-Neb.) and adopted in November without debate, gave Lyng the authority to implement the program, but did not require him to do so.
David Fischer, an aide to Zorinsky, said the senator sponsored the measure not so much to help the ethanol industry, but as a means of disposing of the growing and unprecedented buildup of surplus grain stocks that were depressing commodity prices. "It's at the point that no grain is moving, and we think the government might as well put some use to it," he said.
In addition to ADM, other large firms that would benefit from the program include A. E. Staley Mfg. Co., also in Decatur; Pekin Energy Corp. in Illinois, a joint venture between Texaco Inc. and Corn Products Corp.; New Energy Corp. in Indiana, which is half-owned by E. F. Hutton; and South Point Ethanol, which is half-owned by Ashland Oil.
The new program represents the latest chapter in a long history of government support for ethanol. Originally touted as a home-grown solution to the energy crisis of the 1970s, the gasohol industry has boomed in recent years, thanks to about $700 million a year in federal and state tax breaks for ethanol and stiff tariffs on lower-cost imports.
Annual production of ethanol soared from 10 million gallons in 1978 to an estimated 550 million gallons last year, helping gasohol -- usually sold as premium or "super" unleaded -- capture more than 10 percent of the national gasoline market. About 300 million of those gallons were produced by ADM's four large ethanol plants, the most efficient in the industry. In an interview last year, Andreas said he planned to expand production to 500 million gallons a year and projected his firm's profits from the busines would soon reach as high as $50 million a year.
Meanwhile, the company has aggressively supported tax exemptions and import relief for the industry on Capitol Hill. Its political action committee has contributed more than $232,000 to political campaigns since 1979, with most of that flowing to Midwest lawmakers and members of key congressional committees that have enacted pro-gasohol laws, according to a Washington Post study last year.
But in recent months, the industry has been decimated by the drop in gasoline prices that has forced producers to lower their own prices by as much as 25 cents a gallon, eating into profit margins, officials said. In addition, a growing number of states, alarmed about the drain on state road funds, have begun phasing out their own fuel-tax exemptions for gasohol, further hurting the industry's chances at recovery.
The result was a major push by the industry for relief. In late April and early May, the department received numerous pleas for federal support from domestic producers, backed up by letters from 11 senators and 17 House members.
But Lyng initially resisted these calls. On April 16, at a meeting with officials of South Point Ethanol, an Ohio firm, he expressed what one department official described as strong "philosophical objections" to the proposed program, citing the "market distortions" and "ripple effects" it would have on other sectors of the agricultural community.
Lyng acknowledged in an interview that he initially had "concerns" about the program, but decided to implement it on May 2 because of the dire condition of the industry.
"The economics were so bad that these plants were right on the verge of going under," Lyng said. "We were going to see a large percentage of these plants close, a lot of people were going to be put out of work, and we were going to have all these problems finding space for all the corn" that no longer would be used for ethanol.
The department's official estimate, based on 1985 production figures, is that fewer than 200 fuel ethanol producers will be eligible to receive certificates for about 30 million bushels of corn worth about $70 million. At such levels, market leader ADM would receive at least $35 million worth of CCC certificates.