Testimony of Roger Johnson
Agriculture Commissioner
Senate Bill 2222
House Agriculture Committee
Peace Garden Room
March 13, 2003

Chairman Nicholas and members of the House Agriculture Committee, I am Agriculture Commissioner Roger Johnson. I am here today in support of SB 2222, which would provide production incentives for ethanol production plants constructed in the state after July 31, 2003 and continue incentives for ethanol production plants that were constructed in the state prior to 1995.

SB 2222 has been twice amended. The major changes from the original legislation to the version before this committee can be found on:

Page 3, line 9 - The Ethanol Production Incentive Fund will now receive 35% of all registration fees collected on farm vehicles, rather than the initially proposed 50%.

Page 3, lines 26-31, Page 4, lines 1-3 - Provides incentive payments for ethanol plants that were in operation prior to July 1, 1995, and which have a production capacity less than 15 million gallons to receive up to $500,000 of incentives per fiscal year. Plants which have a production capacity of more than 15 million gallons will be eligible for incentives up to $250,000 per fiscal year.

The main part of the legislation provides a "counter-cyclical" mechanism for payments, providing payments to production facilities when corn prices are higher than $1.80 per bushel and eliminating the payments when corn prices fall below $1.80 per bushel. An additional "counter-cyclical" mechanism in this bill also provides for payments to be made to production facilities when prices for ethanol fall below $1.30 per gallon.

High corn prices and low ethanol prices both diminish the profitability of ethanol production plants. These state incentives will provide some stability and predictability to the ethanol industry as new production facilities come on-line. The North Dakota Corn Growers are to be commended for recommending the "counter-cyclical" mechanisms as part of production incentives. This legislation is good public policy - it provides an appropriate level of support when the industry needs it and saves tax dollars when economics are more favorable.

Ethanol is a Growing Industry

North Dakota's two existing ethanol plants have a combined annual production capacity of approximately 34 million gallons per year and plans are in the works to construct a third plant in east-central North Dakota. Other groups are also considering plans for ethanol plants in central, northwestern, and southwestern North Dakota.

The North Dakota Corn Growers Association estimates that 26% of the fuel sold in North Dakota is an ethanol blend - that compares with 65% in South Dakota and more than 90% in Minnesota.
South Dakota provides an at-the-pump 2¢ tax incentive, which can sometimes make ethanol-blended gasoline as much as 6¢ cheaper per gallon than regular unleaded gasoline.

Ethanol is a Huge Success in Minnesota

These statistics beg the question - why is ethanol consumption at 90% in Minnesota? In 1980, Minnesota passed legislation that defined "agricultural alcohol" and created a 4¢ per gallon tax credit on blended gasoline as an incentive for retailers to blend ethanol in gasoline. Five years later, after creating a significant ethanol market, the tax credit was reduced to 2¢ per gallon. A 20¢ per gallon ethanol production payment was created in 1986 to provide incentives for constructing new ethanol plants in the state.

Minnesota also took steps during this time to provide public education across the state and to promote the growth of the ethanol industry. The 1990 Federal Clean Air Act Amendments provided the next impetus for additional legislation relating to ethanol. The Twin Cities Area was found to be out of compliance with EPA carbon monoxide standards and as a result was required to begin using oxy-fuel beginning in the winter of 1992.

In 1991, the Minnesota State Legislature passed legislation requiring a year-round 2.7% minimum oxygen content for gasoline sold in the Twin Cities by 1995, with the entire state meeting the requirement by 1997.

Today, ethanol replaces almost 10% (240,000,000 gallons) of the gasoline sold in Minnesota. Further, two new ethanol plants came on line in 1995 and since that time ten additional facilities have either been built or expanded. Twelve of the fourteen existing ethanol plants are designed in a cooperative fashion and are owned by over 8,000 farmers.

North Dakota Can and Should Do More to Promote Ethanol

Minnesota's ethanol success story should serve as a lesson to us in North Dakota. The 58th legislative assembly also earlier considered legislation that would have provided for a requirement that all 87-octane gasoline contain 10% ethanol. This assembly killed both of those pieces of legislation - SB 2027 & HB 1493. While I support this legislation and the incentives it provides, I would argue that we can and should provide both incentives and an ethanol requirement in gasoline.

Elected officials on both sides of the aisle continually pledge their support for and speak to the benefits of value-added agriculture. I believe that it is time to put action behind the words. If we are truly looking to add value to agricultural products in this state and to encourage new markets and new products, we in government have to be willing to play an appropriate role to foster that process. I believe that increased production and use of ethanol in North Dakota and throughout the United States will provide additional value-added opportunities for our farmers and increase local demand for corn. We need to provide incentives to produce and incentives to consume ethanol.

According to the "Ethanol and the Local Community Study" conducted by AUS Consultants/SJH & Company, "…a 40 MGY ethanol plant will generate…additional revenue for local grain farmers by increasing demand, which in the case of corn, in most circumstances results in an increase to the average local basis of an estimated 5 to 10 cents per bushel."

And according to the Minnesota Department of Agriculture, processing corn products instead of exporting raw corn doubles the value of each bushel. In addition, ethanol plants not only produce fuel ethanol, they also produce a large quantity of co-products which can benefit other sectors of our economy. Livestock can be fed the high-protein feed that is a major co-product in ethanol production. Other co-products include: carbon dioxide, starch, sweeteners and industrial ethanol.

Ethanol Can Help Decrease Dependence on Foreign Oil

I also believe that we must do more as a state and as a country to decrease our dependence on foreign oil today. The United States currently imports 57% of our oil supply versus approximately 45% during the energy crisis of the 1970's (Source: Energy Information Administration/Annual Energy Review). The following table shows the leading exporters of oil to the United States:

The stability of these imports seems questionable, especially during this time of crisis in the Middle East and other major oil suppliers such as Venezuela, where there is continuing civil unrest and the threat of strikes in their oil industry.

We can and must do more to promote the production and usage of renewable fuels such as ethanol and biodiesel. The US marketplace is too often overlooked by agriculture as we focus on acquiring new international markets. Biodiesel and ethanol are great examples of new demand as opposed to displaced demand often resulting from new international markets. Both are important, but new demand results in a bigger pie, not just a bigger piece of the old pie.

Conclusion

Ethanol is a renewable, domestic source of fuel. We should be producing and using more of it to lessen our dependence on foreign oil. Ethanol production provides a value-added opportunity for our farmers and an environmentally-friendly choice to consumers at the fuel pump. Chairman Nicholas and committee members, I urge a do pass on SB 2222. I would be happy to answer any questions you may have.