Charlie Riedel  /  AP file
A tanker truck carrying 7,700 gallons of ethanol leaves the East Kansas Agri-Energy ethanol plant in Garnett, Kan.
updated 2/23/2006 3:41:38 PM ET 2006-02-23T20:41:38

On early mornings at East Kansas Agri-Energy, trucks pack the driveway loop to unload bushels of dry, yellow corn into a hopper. By nighttime, those kernels are ready to transform -- they'll turn into fuel.

"That's the sound of money," said ethanol marketer Steve Rust, against the roaring sound of crushed corn passing through the colored pipes overhead.

"Rust, who works for Colwich, Kan.-based ICM Inc., the nation's largest designer of ethanol plants, says the factory sends streams of patrons to Garnett's tiny supermarket and keeps Kansas farmers in business."

The tiny town of about 3,350 has also become part of a new supply chain, where a small group of fuel distributors and ethanol barons stand to make a mint shipping the alternative fuel from the Midwest, where it's made, to major urban markets on both coasts.

Ethanol plants have attracted hundreds of investors, including Microsoft Corp.'s Bill Gates -- who sunk $84 million into West Coast producer Pacific Ethanol Inc. -- and venture capitalist Vinod Khosla, who is seeding BC International, which will make fuel from switchgrass. But just a handful of companies in the corn belt hold the keys to distributing the fuel, which will prove crucial to making ethanol available at pumps across the country.

"They don't grow a lot of corn in New York or New Jersey. It's going to be a very profitable situation," said Jim Jordan, a Houston-based consultant to the ethanol and transportation fuels industries. "Kansas is obviously pretty well positioned."

The U.S. ethanol industry now has 95 plants nationwide. Analysts say by 2012 it will double in volume, from producing 4.3 billion to 7.5 billion gallons of biofuel. That growth will be aided by the Energy Policy Act of 2005, which gives ethanol producers sizable subsidies, including a federal tax credit for small refiners.

Archer Daniels Midland Co. Chairman and CEO G. Allen Andreas told analysts Tuesday he expects producers will get another bump since ethanol companies' rising demand for American-grown corn will push corn prices higher. ADM, headquartered in Decatur, Ill., is one of the world's largest corn processors.

It's not the first time ethanol exuberance has swept over the Midwest-- a spike in oil prices sparked initial enthusiasm in the early 80s -- but this time analysts think the fuel stands a chance at becoming a viable and accessible alternative amid fresh calls from President Bush to reduce U.S. dependence on foreign oil.

ICM President Dave Vander Griend and his brother developed the country's first fuel alcohol in 1978. He said his company has since grown so large -- earning $200 million in revenue last year -- that it spun off its distribution business. Aventine Renewable Energy Holdings, Inc., an ethanol producer based in Pekin, Ill., has started distributing to major oil companies like ConocoPhilips Co. and Chevron Corp. Agriculture giants ADM and Cargill Inc. are in the shipping business, too.

But as states like California, Texas and New York roll out legislation forcing gas stations to sell a more environmentally friendly energy mix, they may also be tapped to spend public money to help move the fuel to its final destinations.

Kansas, in the heart of ethanol country, is preparing to offer an extra layer of incentives. Last month, the Kansas Select Joint Committee on Energy recommended a legislative package offering biofuel industries public money to build railroad terminals to export ethanol and biodiesel, another renewable fuel made from recycled oil, across the country. One recommendation would offer state-backed financing and a 12-year property tax exemption.

Subsidies and rule changes are probably necessary to get the market going -- after all, it took more than a century to build the nation's underground oil pipelines. Brazil, a major competitor to the U.S. ethanol industry, is considering building a $225 million pipeline to carry ethanol from the country's interior to the coastal state of Sao Paulo to open up new export opportunities for the federal energy company Petrobras.

"Both state and federal support is critical to building a real ethanol industry," said Professor Dan Kammen, an expert on ethanol production at the Goldman School of Public Policy at the University of California, Berkeley. "Real action is needed, and the $150 million per year President Bush promised is wholly insufficient."

American producers are still grappling with how to meet rising domestic demand. Six states have passed laws that require ethanol-blended gasoline, and nine others are considering similar legislation, according to the American Coalition for Ethanol. Kansas and Missouri both are considering proposals to require that all gasoline sold in each state contain 10 percent ethanol by 2010.

As plants rush to pump out fuel, companies like the Wichita-based United Bio Energy, LLC, which employs Garnett plant manager Derek Peine, are in the next phase.

"We're trucking this stuff to Tulsa (Okla.), Springfield (Mo.), Fayetteville (Ark.)," said Peine, as he walked through the hulking warehouse. "It's all corn from local farmers."

Peine says his factory pays growers $0.12 more per bushel of corn than they would fetch on the open market.

But once the fuel leaves Garnett, there's still the question of who will buy it. Of the 170,000 service stations in the United States, less than 600 sell gas blended with 85 percent ethanol, called E-85. Most American-made cars can now run on gas blended with 10 percent ethanol, which is sold at about one-third of the country's gas stations, according to the Renewable Fuels Association.

American automakers, who get a tax break from building alternative fuel cars, want to see that number grow. On Feb. 16, Ford Motor Co. announced it would pay to help install E-85 dispensers in gas stations in Illinois and Missouri.

Several Kansas-based companies are helping drive those changes, too. United Bio Energy and Ethanol Products, which is also based near Wichita, negotiate with major oil companies to get ethanol inserted into their gas. Together they now sell 40 percent of all wholesale contracts for the agrifuel.

Both companies are privately held and reluctant to discuss their financials, but United Bio Energy Director of Marketing Greg Krissek said his firm's sales volume will quintuple in the next five years as the market heats up.

"A lot of the producers don't want to get into marketing and shipping it to the end user, that's not their thing," said Jordan. "But this is a particularly good niche to be in for the next few years. It's going to be unbelievable."

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