WASHINGTON, D.C. -- A plan by Minnetonka-based Cargill Inc. to import ethanol made with cheap Brazilian sugar cane has run afoul of farmers and lawmakers who say it will undermine the fledgling ethanol industry in Minnesota and the rest of the Midwest.

Cargill has announced plans to "become more involved in the global ethanol trade," including a prospective plant in El Salvador, a Central American nation that is exempt from a 54-cents-a-gallon tariff that would apply to ethanol imported directly from Brazil.

The import duties are designed to offset a 52-cents-a-gallon tax exemption for refineries that blend ethanol in their fuel. But by importing Brazilian ethanol through a nation covered by the Caribbean Basin Initiative, Cargill would enjoy the full benefit of the U.S. subsidy.

The move comes as Midwestern farmers have grown increasingly concerned about the role of U.S. agribusiness giants in fostering Brazil's ascendancy as an international agricultural power.

"It really ties my stomach in a knot," said Sever Peterson, a corn and soybean grower in Eden Prairie. "We grow it right here, and the rug is being pulled from right under us."

Cargill executives, under fire in Congress, said many details of the plan remain to be worked out, right down to whether the El Salvador plant will even be built.

"It's in the discussion phase, it's not a done deal," said David Feider, the company's director of media relations.

But on Capitol Hill, the plan has met a chorus of critics -- including Minnesota's two senators -- who worry that U.S. taxpayer subsidies could end up supporting competing sugar-based ethanol imports.

Sen. Mark Dayton, D-Minn., said the proposed El Salvador plant "is another result of bad U.S. trade policies and agreements, which have encouraged foreign production and cost Americans their jobs, their farms and their businesses."

Sen. Norm Coleman, R-Minn., expressed his concerns in a recent telephone call to Cargill executives. "His key point is that ethanol is about a home-grown, renewable fuel," said Andy Brehm, his spokesman. "Secondly, [Cargill's] announcement could have negative repercussions, causing an erosion in farm country for trade, particularly with Latin America."

Ronald Obermoller, president of the Minnesota Corn Growers Association, said the announcement already has sent shock waves through farm country. "For me, as a Minnesota farmer, I'm really disappointed that it's a Minnesota company that's doing this," he said. "We've spent 15 or 20 years developing a market, and now, through a loophole, they're going to walk in and take it."

Minnesota has 14 ethanol plants, producing about 400 million gallons a year.

Bryan Edwardson, Cargill's director for public policy in Washington, said the El Salvador project, even if it goes forward, will do nothing to undermine American farmers. Worldwide demand for ethanol outstrips supply, even as the U.S. ethanol industry is expected to produce a record 3.3 billion gallons of the fuel additive this year. Meanwhile, bills pending in Congress are expected to double ethanol use over the next decade.

Cargill officials noted that they are the third largest ethanol producer in the United States, and one of the largest exporters of corn. "For us to hurt the U.S. ethanol industry is to hurt ourselves," Edwardson said.

Cargill's plans envision a dehydration plant in El Salvador that could process as much as 63 million gallons a year. About 45 million gallons are currently imported duty free under the Reagan-era Caribbean initiative. The cap, set at 7 percent of U.S. domestic production, is currently at about 190 million gallons.

Although the Caribbean duty-free zone has broad support in Congress, some say it is a misuse of the treaty to use it as a pass-through for Brazilian ethanol.

"This is a critical time for ethanol in this country, and the last thing we need is duty-free imports from Brazil slipping in the back door," said Sen. Tom Harkin, D-Iowa.

Cargill has been criticized in the past for its South American imports. In 1997, the National Farmers Union publicly criticized the company for importing soybeans from Brazil, allegedly causing a drop in futures market prices for American farmers.

Senate Minority Leader Tom Daschle, D-S.D., has written two protest letters to Cargill in the past month. One threatens to remove Cargill's Brazil imports from the new ethanol mandate being contemplated under pending energy development legislation.

Cargill officials responded that their imported ethanol could help reduce skyrocketing gasoline prices in the United States, particularly as the nation moves away from petroleum-based fuel additives.

"I do not see how exchanging one form of import dependence for another is the answer to the American motorist's gasoline price concerns," Daschle wrote back.

Still, industry observers said Cargill's move does appear to be driven in part by high U.S. gas prices, which make Brazilian ethanol imports more competitive, even if they pay the 54-cent tariff.

By some estimates, production costs for ethanol in Brazil are half of what they are in the United States.

"You can bring it in, pay the tariff, and apparently still make money, because people are doing it," said Monte Shaw, a spokesman for the Renewable Fuels Association, an industry group.

Ethanol produced in South and Central America also has a big transportation advantage over Midwestern ethanol, benfiting from direct sea lanes to California, the nation's largest gasoline market.

On top of all that, the trip begins and ends with government subsidies.

"Brazil already subsidizes its ethanol, so they increase their advantage there as well," said Rep. Collin Peterson, D-Minn.

Cargill officials said that their plan fits into the long-established purpose of the Caribbean Basin Initiative -- to foster economic growth in Central America -- and that any tax benefits are incidental.

"There was no intention whatever of building this plant to avoid tariffs," Edwardson said.

Kevin Diaz is at kdiaz@mcclatchydc.com

The ABCs of the Caribbean ethanol tax 'loophole'

1. Federal law creates excise tax reductions and other incentives to reduce our nation's dependence on imported oil and create a value-added market for U.S. grain.
2. Among them is the Blenders Income Tax Credit, which allows refiners to claim an income tax credit of 52 cents per gallon of ethanol used to produce ethanol-blended gasoline.
3. To offset the value of this domestic subsidy, imported ethanol is subject to a 54-cents-a-gallon duty.
4. The Caribbean Basin Initiative provides a special exemption from the duty, but only for ethanol imported from Central America and the Caribbean Islands.

Source: Renewable Fuels Association

View All News