Animal plan incites pork-barrel politics

Doug Cameron in Chicago

Financial Times. June 20 2007

Any future market for bio-fuels will depend on the stance of the US, the world's biggest consumer of transport fuels. But Washington's propensity for pork-barrel politics means that the push for biofuels must negotiate a complex array of tax breaks and subsidies.

The response to a plan by ConocoPhillips and Tyson Foods to produce "renewable biodiesel" from animal fats is emblematic.

Conoco and Tyson's plan would use new technology to process and blend animal fats from the food group's herds and flocks with conventional diesel to produce an initial 175m gallons a year of fuel. However, its commercial viability hinges on a $1 a gallon tax credit in part of the 2005 Energy Act, which opponents maintain was not intended for Conoco and Tyson's programme.

"Every place in the world, you lose money without a credit," said Lou Burke, the US energy group's head of alternative fuels last week after Lloyd Doggett, a Democratic congressman from cattle and oil-rich Texas, introduced a bill that would repeal the tax break and ruin the economics of the programme.

The plan has managed to upset just about everyone bar its backers. Animal rights activists claim it would push more cows towards Tyson's abattoirs. The National Biodiesel Board argues that the entry of oil groups such as Conoco would spell doom for dozens of small producers. Even the Soap and Detergent Association has weighed in, saying that the diversion of its core feedstock could make the industry extinct.

Biodiesel remains a tiny fraction of US alternative fuel output but the pattern of subsidy and support can be seen across the industry. The 2005 Energy Act and its once-lofty targets for renewable fuels, as well as more ambitious goals in the president's State of the Union address this year, have unleashed the worst of pork-barrel politics.

"The subsidies have created demand for something that wouldn't have been there," said Mark Williams, an energy expert at Boston University.

The ethanol sector already benefits from a 51 cents-a- gallon federal subsidy, as well as assorted state benefits and 54 cents-a-gallon import tariffs which keep the flow of less expensive sugar-derived ethanol from Brazil to a trickle.

Ethanol is expected to swallow a quarter of US corn production this year and food producers - led by Dick Bond, Tyson chief executive - warn of a ripple effect on global prices as animal feed prices increase and farmers substitute grain for other crops to take advantage of high prices. While $4 a bushel corn still leaves the new breed of plants - producing 100m gallons of ethanol a year - in profitable territory, equity investors can no longer expect the 40-50 per cent returns forecast last year when the crop was trading at between $3 and $3.50.

The ever-larger plants producing ever more ethanol, and the scale of external investment - much of it from private equity funds - also highlight how control of the rural economy is continuing to drift away from farmers.

Economists at the Federal Reserve Bank of Kansas City estimate that 70 per cent of ethanol plants built from 1998-2005 were farmer-owned, with communities clubbing together to build facilities producing about 50m gallons a year apiece. By last year, however, this had fallen to just 10 per cent.

Copyright The Financial Times Limited 2007

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