Don't Slow the Ethanol!

Written by Brian Hicks
Posted March 8, 2006

Dear Wealth Daily Reader,

A few years ago my neighbor's eight-year old son left his front gate open, resulting in the family dog running away. For days the kid was in tears. As would any child who lost his dog, especially knowing that it was his fault for leaving the gate open. Fortunately, the dog was found by the end of the week. And today, that kid is borderline obsessive compulsive when it comes to securing the lock on the front gate.

This is a very typical story of a child learning an important lesson. He made a mistake, acknowledged that the mistake was made, took responsibility for it and has since ensured that the mistake never happens again.

Now my question is - will Washington act with the same level of responsibility and foresight as an eight-year old child?

Well my friends...we may soon find out.

You see, it's been more than six months since Hurricane Katrina devastated New Orleans. And in typical bureaucratic fashion - Washington egos and seasoned spin doctors are still playing the blame game while scientists are warning us that our next hurricane season will be just as bad.

Will the Gulf Coast be ready?

Your guess is as good as mine.

But as Mother Nature gears up once again to show us 'who's the boss' - there's another potential disaster looming.

Though this one is not an act of God.

It's manmade. And while it doesn't pose the same kind of threat to human life as a category five hurricane - it could still deliver the nation a serious economic beat-down with results mirroring the losses racked up after Katrina touched down in the Big Easy.

Katrina's Wrath

After Katrina pounded Louisiana and Mississippi, barge traffic along the Mississippi was shut down - with no tankers or other cargo ships moving in or out of the Port of New Orleans.

But because it was critical to have barges available during peak grain harvest season, those barges had to be quickly unloaded so they could be reloaded with newly harvested grains.

As a result, the Agriculture Department had to spend more than $10 million on private contractors to unload more than 100 barges over a two-month period.

The agency also had to pay incentives to store excess corn and wheat and reroute nearly 300,000 metric tons of corn, wheat and soybeans through ports in the Great Lakes and Pacific Northwest.

There's no doubt that disruptions in agricultural shipments from Katrina became very costly, very fast.

But if serious measures aren't taken soon, even more agricultural shipments could be disrupted within the U.S.

And not only could that mean costly consequences for farmers and exporters - but for ethanol producers as well.

Don't Slow the Ethanol!

It's estimated that over half of the U.S.'s corn exports originate in states bordering the Mississippi and Illinois Rivers and move via these transport arteries to lower Mississippi River ports. And over the 1998-2002 period, corn, soybeans and wheat comprised about half of the tonnage moving on the upper Mississippi and 40% of the tonnage on the Illinois waterway.

With so much domestic agriculture reliant upon these transport arteries, you'd expect the lock and dam infrastructure on the Upper Mississippi and Illinois River systems to be top-notch.

But that's simply not the case.

The fact is, these locks are more than 75 years old. Yet were built with a life expectancy of only 50 years. And today, in order to accommodate modern barge tows, modernization through new, 1,200-foot locks on the Mississippi and Illinois rivers is desperately needed.

Existing locks are only 600 feet long, making them unable to meet capacity of modern barge tows of 1,100 feet - thereby creating significant and costly delays through a 'double-locking' process.

Back in 2002, Northwestern University economist, Michael Evans, found that the cost of transporting corn and soybeans could increase by 65% due to greater congestion if the locks are not updated. That would be an average increase of $0.17 per bushel by the year 2020.

The current system, which was built in the 1930s, slows down grain transportation at an increased cost to U.S. producers.

And certainly, that cost gets passed on.

The last thing the ethanol industry wants right now is increased production costs caused by outdated lock and dam systems. Especially at a time when Washington is so 'gung-ho' about pushing the renewable fuel.

The Water Resource Development Act of 2005 (WRDA)

On Monday I received word that during a joint meeting of the National Corn Growers Association and the American Soybean Association, Agriculture Secretary, Mike Johanns gave assurance that the administration would not oppose the Water Resource Development Act (which includes modernization on locks and dams on the Upper Mississippi and Illinois rivers).

However, the WRDA still has to be in the Senate so action can take place. Currently, 81 senators have written Senate Majority Leader, Bill Frist, to ask that he schedule a vote on WRDA.

But it still gets a little tricky here.

You see, while Secretary Johanns assured the corn and soybean growers that the administration would not oppose the WRDA, the President's budget for 2007 did not contain money for the modernization of locks and dams. And last month, Johanns defended the Bush budget and noted that the budget did include money for maintenance on the locks and dams.

Not surprisingly, the National Corn Growers Association had serious issues with this. Especially after the President promised to support the modernization in his campaign statements.

So as you can's politics as usual.

Now I'm not bringing this up to call out the Secretary of Agriculture or the President. That's definitely not my intention here.

But the economic implications of disregarding the improvements needed to our lock and dam systems are quite significant.

Failure to modernize these systems will result in costly delays that could impede the ethanol industry's ability to help wean the country off foreign oil.

And we all know how imperative that is at this point.

Of course this goes far beyond just ethanol too.

The nation's river system continually contributes to the nation's economic well-being, bringing nearly $718 billion to the nation's gross domestic product while ensuring domestic and international trade opportunities. And the fact is, if modernization is not done, the country could lose more than 30,000 jobs in corn growing and non corn-growing states in addition to environmental, facility and continued waterway damage, according to the National Corn Growers Association.

Granted, outdated locks and dams on the Upper Mississippi and Illinois River system may not have all the intensity and fear of a category five hurricane crushing the Port of New Orleans - but the economic impact is still a devastating one.

Now I also realize that there's some opposition to the passage of the WRDA as well.

Some have identified environmental concerns spawned from the Mississippi River being used primarily as a navigation highway. With the river providing habitat for 300 bird species and 260 species of fish, there is concern that these species could be threatened by the WRDA.

However, Senator Russ Feingold has proposed under the Corps of Engineers Modernization and Improvement Act, measures that would ensure that the project would be environmentally sound.

Though who knows if these measures will even be considered.

Nonetheless, before you send me an e-mail criticizing me for my environmental concerns or criticizing me for talking up the economic benefits of the WRDA over the environmental risks (this, obviously depending upon which side of the fence you call home), my intention here is not to persuade or dissuade anyone in regards to the WRDA. I'm simply putting this information out there so you, as an investor, are aware of how this legislation can affect the ethanol industry. That's it.

The fact is, the outcome of the WRDA will have an impact on the ethanol industry in one way or another.

And as we've certainly seen in the past - renewable energy momentum can clearly be linked to decisions made on Capital Hill.

For more on legislation that is helping us profit from renewable energy momentum, visit

Until next time...

Jeff Siegel
Managing Editor, Green Chip Stocks