[Senate Hearing 107-191]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-191

                  RENEWABLE FUELS FOR ENERGY SECURITY

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   on

                                S. 1006

  TO PROVIDE FOR THE ENERGY SECURITY OF THE UNITED STATES AND PROMOTE 
ENVIRONMENTAL QUALITY BY ENHANCING THE USE OF MOTOR VEHICLE FUELS FROM 
               RENEWABLE SOURCES, AND FOR OTHER PURPOSES

                               __________

                              JULY 6, 2001


                       Printed for the use of the
               Committee on Energy and Natural Resources


                                 ______

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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii              FRANK H. MURKOWSKI, Alaska
BYRON L. DORGAN, North Dakota        PETE V. DOMENICI, New Mexico
BOB GRAHAM, Florida                  DON NICKLES, Oklahoma
RON WYDEN, Oregon                    LARRY E. CRAIG, Idaho
TIM JOHNSON, South Dakota            BEN NIGHTHORSE CAMPBELL, Colorado
MARY L. LANDRIEU, Louisiana          CRAIG THOMAS, Wyoming
EVAN BAYH, Indiana                   GORDON SMITH, Oregon
BLANCHE L. LINCOLN, Arkansas         JIM BUNNING, Kentucky
                                     PETER G. FITZGERALD, Illinois
                                     CONRAD BURNS, Montana

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               Brian P. Malnak, Republican Staff Director
               James P. Beirne, Republican Chief Counsel
                     Shirley Neff, Staff Economist
                    Bryan Hannegan, Staff Scientist
                                     
                                     
                                     
                                     
Note: Senator Bingaman assumed the Chairmanship on June 6, 2001.





                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Alverson, Ron, Chairman, Lake Area Corn Processors...............    26
Campbell, John B., Vice President, AG Processing Inc.............    30
Christianson, Rodney, Chief Executive Officer, South Dakota 
  Soybean Processors and Minnesota Soybean Processors............    22
Guthmiller, Trevor T., Executive Director, American Coalition for 
  Ethanol........................................................    18
Ihnen, Darin, Vice President, South Dakota Corn Growers 
  Association and President of the Board, Great Plains Ethanol, 
  LLC............................................................     5
Johnson, Hon. Tim, U.S. Senator from South Dakota................     1
Metz, Robert, South Dakota Soybean Association and Board Member, 
  National Biodiesel Board.......................................     8
Schaunaman, Kirk, South Dakota Farmers Union.....................    12
Shubeck, Paul, on behalf of the South Dakota Farm Bureau.........    14
Twiss, John, Supervisor, Black Hills National Forest, Forest 
  Service, Department of Agriculture.............................    28

                                APPENDIX

Additional material submitted for the record.....................    43

 
                  RENEWABLE FUELS FOR ENERGY SECURITY

                              ----------                              


                          FRIDAY, JULY 6, 2001

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                   Sioux Falls, SD.
    The committee met, pursuant to notice, at 9:30 a.m. in the 
County Commission Meeting Room, Minnehaha County Administration 
Building, 415 North Dakota Avenue, Hon. Tim Johnson presiding.

            OPENING STATEMENT OF HON. TIM JOHNSON, 
                 U.S. SENATOR FROM SOUTH DAKOTA

    Senator Johnson. Will the first panel for the Energy 
Committee hearing please come up and be seated. The first panel 
is Darin Ihnen, Corn Growers; Bob Metz, South Dakota Soybean 
Association; Kirk Schaunaman, South Dakota Farmers Union; and 
Paul Shubeck, South Dakota Farm Bureau. Can you come on up and 
join us.
    This is an official hearing for the Senate Energy and 
Natural Resources Committee and copies of all written testimony 
will be posted on the Energy Committee website. All testimony 
will be taken back to Washington with us and be examined by 
committee staff and other members of the Senate Energy 
Committee. Anyone who would like to submit statements for the 
record later on, who are not part of one of the panels, you're 
certainly welcome to do so. We will incorporate your statements 
as part of the committee record as well.
    We also hope to have some time at the conclusion of our 
hearing today where anybody who would like to make an oral 
observation, comment, or question for any of us here would have 
that opportunity as well.
    With me today from the Energy Committee are David Toomey, 
who handles my energy issues in Washington D.C., and Shirley 
Neff, who is the staff economist of the Senate Energy Committee 
hearing. Both of these individuals also will be available for 
anyone who would like to talk a little bit about what's going 
on on the Energy Committee's agenda, any ideas that you have 
that you would like to follow up with me and with staff.
    I want to thank everybody for coming today and I realize 
everybody has a busy schedule, but this is the first field 
hearing of the Senate Energy and Natural Resources Committee of 
the 107th Congress. So I'm pleased that here in South Dakota 
we're holding the very first of these field hearings.
    As you all know, there's been a great deal of discussion in 
recent months about our Nation's energy situation, the 
increasing volatility in gasoline and diesel prices which has 
affected us in rural American in particular, but which has a 
great consequence for our entire economy across the Nation.
    We've been discussing the tightness in the oil refining 
capacity as a major factor. The reemergence of OPEC as a force 
in the world oil markets has also been a factor. These in 
combination with natural gas prices this past winter and recent 
electricity problems in California and the West, have caused 
Congress to refocus with some urgency on a national energy 
strategy for our country.
    Frankly, I don't believe that either political party's 
administrations or members of Congress has done an adequate job 
of focusing on the long term of what needs to be done on 
energy. These problems have gone back, at least in recent 
memory, all the way to the Carter administration with the oil 
shortages that we had, and the long gas lines at that time. And 
sometimes Congress's attention has waned as prices have gone 
down and then has increased as prices have gone up, and it 
should be apparent to all that we need now to address these 
issues with some urgency and we need to do it in a bipartisan 
fashion.
    This is the second of several hearings that the Energy 
Committee will be holding relative to fuels in the 
transportation sectors. The first of the field hearings, but 
it's the second of the hearings that have been held relative to 
transportation. On July 17 we will be having a follow-up 
hearing on the demand for oil products in the light duty 
vehicle sector. As a member of the Energy Committee I expect to 
spend the next several months working with Chairman Bingaman 
and other members of the committee to develop an energy 
strategy to mitigate the boom and bust cycles that we have in 
the energy markets.
    We plan to begin a mark-up of energy legislation on July 
25, after holding a series of hearings. We expect that that 
mark up will continue on through the first several days of 
August and following this first field hearing we'll be holding 
additional hearings on conventional fuels, building and 
appliance efficiency, energy research and development, and 
global climate change.
    This past month, I introduced a bill with my friend Senator 
Chuck Hagel, Republican of Nebraska, entitled, The Renewable 
Fuels for Energy Security Act of 2001, S. 1006. The goal of 
this legislation is to ensure future growth for ethanol and 
biodiesel through the creation of a new renewable fuels content 
standard in all motor fuel produced and used in the United 
States. With the help of a great many organizations represented 
here today, including South Dakota Corn Growers, the Lake Area 
Corn Processors, the American Coalition for Ethanol, South 
Dakota Soybean Association, South Dakota Farmers Union and Farm 
Bureau, we have been able to put together what I think is a 
very constructive effort. Senator Hagel and I will be pushing 
for legislation to establish an aggressive growth pattern for 
ethanol and biodiesel production and use in the United States.
    Today, ethanol comprises less than one percent of all 
transportation fuel in the United States. Our legislation would 
require all motor fuel sold in the United States to be 
comprised of a certain quantity of renewable fuels. We think 
ethanol from corn, ethanol from biomass and biodiesel based on 
soybean would be a key component of that renewable fuel 
strategy.
    By 2008, our legislation calls for ramping up to two 
percent of all transportation fuel in the United States, and by 
2016 increasing to 5 percent. We believe that these are 
realistic targets, but obviously they are arbitrary in nature 
and we want to work with the industry, and this may be a 
project in progress, but I think we need at the outset to start 
with ambitious goals to utilize ethanol and biodiesel, 
recognizing at the same time that we may have some 
extraordinary opportunities not just in terms of fuel, but also 
in terms of oxygenate clean air requirements in the State of 
California and elsewhere.
    I'm pleased that the Bush administration recently affirmed 
its support for ethanol when it denied California's request to 
evade the oxygen requirement for reformulated gasoline as 
required under the Clean Air Act. Without the dangers of 
groundwater contamination posed by MTBE, I believe that ETBE 
could play a key role in our clean air strategies in this 
country. We're certainly not all the way there yet, but if we 
work to use ETBE rather than MTBE, in the State of California 
alone this would be a 600 million gallon a year requirement.
    To put that in some perspective, our three plants in South 
Dakota, as proud as we are of them, produce around 30 million 
gallons a year. Now we don't anticipate that South Dakota is 
going to produce all of California's ethanol, but we do believe 
that nationally there is a potential at least for a robust 
ramping up of the demands for ethanol, both through fuel use 
and through an oxygenate use in the country.
    We have several plants in South Dakota now being planned. I 
was recently at the groundbreaking for a new plant in Milbank, 
and obviously we have an opening soon near Wentworth. These 
farmer-owned ethanol plants in South Dakota and in our 
neighboring States, I think, demonstrate a lot of confidence 
with where we're going and offer the hope that we will, in 
fact, have an increasingly diversified economy in our State 
whereby farmers in our State will have additional streams of 
revenue both through higher grain prices in their localities 
where these plants exist, through added jobs in the localities 
and through their stock ownership in their cooperatives, have 
an opportunity to gain income from the value-added product in 
the end.
    Based on current projections, construction of new plants 
will generate $900 million in capital investment and thousands 
of construction jobs in rural communities. Today we have our 
three ethanol plants in South Dakota, Scotland, Aberdeen and 
Huron and, again, those plants produce about 30 million 
gallons. I think an important, but sometimes less mentioned 
component of this overall strategy is biodiesel fuels.
    As we know, unfortunately, the soybean prices are hovering 
near historic lows, but biodiesel production is a small but 
growing steadily part of our energy strategy in this country. 
With new EPA rules requiring dramatically lower amounts of 
sulfur in diesel fuel by 2007, the market prospects for 
biodiesel, an intrinsically low sulfur fuel, I believe, are 
very bright.
    In order to ensure the future for clean renewable fuels we 
also have to continue research and development to bring down 
production costs. I was disappointed with the proposed cuts in 
the renewable energy budget, but as a member of the Senate 
Appropriations Committee and a member of the Energy Committee, 
it's my hope that we can find ways to bring together a joining 
of the minds across party lines and, in fact, make the kinds of 
key investments that need to be made in order for these 
alternative agriculturally based fuels to gain the foothold 
that they need to have.
    The Senate plans to proceed with a comprehensive energy 
legislation later on this summer. We know that as you may have 
noted in the press today, that some of the tax components of 
energy strategy are in some doubt. As we speak, the expansion 
for tax credits for alternative energy using sun, wind, and 
farm waste, and for the purchase of fuel efficient hybrid cars 
using electricity and gas as noted by the media this morning, 
may be in some doubt simply because the January CBO projections 
showed a $96 billion budget surplus, excluding Social Security 
and Medicare for the coming year.
    Now the economic slow down in combination with the tax cut 
package that has already passed, we now look at 2001 budget 
surplus closer to a $16 billion level rather than $96 billion 
with the administration currently proposing an $18.4 billion 
added increase in defense spending and an education bill that 
remains pending as well, which would involve a significant 
additional expenditure level.
    And so we're going through a debate that will be beginning 
very soon in Congress about whether some modifications in the 
recently enacted tax package will have to be made or whether 
there are spending reductions or other combinations of things 
that can be done to accommodate a tax--a greater tax incentive 
than currently exists to boost the development and use of 
ethanol fuels, but our friends in the Finance Committee on the 
Senate side, Ways and Means in the House, of course, are 
dealing with this and we want to work as closely as we can with 
President Bush as well to see what we can do to find a 
comprehensive approach that makes sense in terms of tax 
incentives as well as other public policy options that we have 
to promote the use of these fuels.
    So with that, I'm pleased that we can begin with this 
hearing and to have the quality panels that we have before us. 
I thought what we ought to do is begin with panel one, go then 
to panel two, and then put questions to the panels, so we make 
sure that everybody has the time to give their testimony and 
then we hopefully will have some time for anybody else who 
would like to participate in today's hearing and, again, that 
record will be taken back.
    In order to run this in an orderly fashion and to make sure 
that we accommodate as many people as we have here, the 
committee will use the clock system where we will set it on 5 
minutes for each panel member to make your statement or 
summarize your statement. Your full written statement will be 
received in the record, but if you could summarize it and keep 
it within 5 minutes. If the light goes on there's no cane that 
grabs you off the stage or anything, but we will be trying to 
impose it with some reasonableness, in order to make sure that 
we don't neglect our ability to listen to other people later on 
in the hearing.
    The machinery we have here, I believe, was last used by 
Everett Dirksen from what I can tell here. This is not rocket 
engineering up here, but we will attempt to use this equipment 
during the hearing.
    The first witness we have this morning is Darin Ihnen from 
South Dakota Corn Growers Association. Darin, would you care to 
join us with your statement, summarize it if you choose.

  STATEMENT OF DARIN IHNEN, VICE PRESIDENT, SOUTH DAKOTA CORN 
 GROWERS ASSOCIATION AND PRESIDENT OF THE BOARD, GREAT PLAINS 
                          ETHANOL, LLC

    Mr. Ihnen. Thank you, Senator Johnson. My name is Darin 
Ihnen and I am the vice president of the South Dakota Corn 
Growers Association. I also serve as president of the board of 
Great Plains Ethanol, LLC, an ethanol plant that will be 
constructed east of Chancellor, South Dakota. I am here today 
to provide the views of the South Dakota Corn Growers on S. 
1006, the Renewable Fuels and Energy Security Act of 2001. We 
appreciate this opportunity to provide testimony on the 
important issue of energy security and rural economic 
development that are addressed in S. 1006.
    South Dakota Corn Growers has been participating in the 
National Corn Growers Association's Ethanol Task force since it 
was formed earlier this year. The task force was charged with 
developing policy options that would at least triple the amount 
of corn growing for ethanol by 2011. One of the policy options 
brought forward by the task force was the introduction of a 
renewable fuels standard in the energy bill now being debated 
by this committee. We believe S. 1006 meets the goals of the 
task force recommendation.
    You and Senator Hagel have shown great vision by 
introducing this bill because it makes a serious attempt at 
addressing the critical issue of our Nation's energy security 
and our dependence on imported oil and petroleum products. It 
is particularly meaningful that you've called this hearing 
during the week in which we celebrate our Nation's Independence 
Day.
    Our forefathers were rebelling against the taxation being 
imposed from powers across the sea. Now as we enter the 21st 
century the American people are again being taxed by foreign 
powers. This tax is in the form of high oil prices that are 
controlled by a cartel that uses monopoly power to increase 
prices and restrict supply. It's time for us to declare our 
energy independence.
    Transportation fuels are necessary and essential to a 
healthy economy. In no small measure, we need adequate supplies 
of transportation fuels to produce and meet the demand for food 
and fiber here in the United States and throughout the world. 
S. 1006 takes a giant leap in assuring that alternatives to 
petroleum will play a significant role in our transportation 
fuel market. Your bill recognizes that ethanol and biodiesel 
produced from grains, oilseeds, biomass, and agricultural and 
municipal waste can and should be used to transform the 
transportation fuel market into one that is truly diverse and 
sets the stage for the future.
    South Dakota Corn Growers is currently working with the 
National Corn Growers to analyze the effects of S. 1006 on 
ethanol demand and on the farm economy. While our analyses are 
not complete we do not have--we do have some very good numbers 
on how S. 1006 affects the demand for ethanol and, in turn, the 
demand for corn.
    The bill is focused on replacing energy used to power 
highway vehicles with renewable energy. The results of our 
analysis are presented in table 1 of our testimony.* Our 
analysis assumes that as S. 1006 takes effect most of the 
ethanol production will come from corn. However, as time 
passes, more and more ethanol production will come from 
alternative feedstocks including other grains and cellulose 
from trees and grasses. Even so, the amount of corn needed to 
meet the requirements of the bill grow steadily from about 700 
million bushels in 2003 to 1.9 billion bushels in 2011 and 
almost 2.5 billion bushels in 2016. As you know, Senator 
Johnson, this is a substantial increase over our current corn 
baseline and represents a tremendous opportunity for corn 
farmers.
---------------------------------------------------------------------------
    * The table has been retained in committee files.
---------------------------------------------------------------------------
    The ethanol industry in South Dakota is in a growth spurt 
right now. There is tremendous interest in building ethanol 
plants right now because of the high gas prices and low prices 
of corn. Currently, South Dakota ethanol plants have the 
capacity to produce 30 million gallons of ethanol per year. A 
fourth plant--of the three existing plants that we have. A 
fourth plant in Wentworth is projected to become operational in 
August and will produce an additional 40 million gallons a 
year. There's over 1,000 producer owners from South Dakota who 
will use over 15 million bushels of corn.
    There are also six other ethanol plants in progress at 
various stages of development in various parts of the State. In 
Rosholt, a 15 million gallon plant is under construction that 
will use 6 million bushels of corn annually. In Milbank, a 40 
million gallon ethanol plant is under construction that has 
over 650 producer owners and will use over 15 million bushels 
of corn. In Watertown a 40 million gallon ethanol plant is in 
progress and under construction with over 800 producer owners 
that will use over 15 million bushels of corn.
    In Chancellor, I'm board president there, and that plant we 
have already raised over $14 million in the first 2\1/2\ weeks 
of our equity drive, and that is going to be a 40 million 
gallon plant that will use over 15 million bushels of corn. In 
Pierre a 15 million gallon plant is in progress that will be 
integrated with a livestock feedlot and use the ethanol 
byproduct from the plant.
    In total, 150 million gallons of ethanol will be produced 
from these six plants. When this figure is added to South 
Dakota's existing ethanol production, 220 million gallons of 
ethanol will be produced in South Dakota, generating 
employment, expanding the tax base of these local areas, and 
giving producers increased corn prices.
    In my testimony is a chart of what one 40 million gallon 
ethanol plant will provide for a local economy. It will produce 
annually 40 million gallons of ethanol. A market for 14.3 
million bushels of corn or roughly 40,000 bushels per day. 33 
quality employment positions with an annual payroll of $1.3 
million. $6 million in energy costs. $55 million in total 
expense with $48 million plus in capital and start-up costs. 
Over 25 years, a plant of this stature will generate 1 billion 
gallons of clean burning ethanol. A market for 358 million 
bushels of corn. $32.5 million annual payroll with a total 
economic impact of over $6 billion.
    Can American agriculture meet the demands of S. 1006? We 
believe the answer to that question is a resounding ``yes.'' 
USDA has projected in their annual commodity baseline a corn 
crop for the current marketing year in excess of 10 billion 
bushels. Using current assumptions about corn use, USDA 
predicts corn production will increase more than 1 billion 
bushels over the next 10 years. However, the potential for 
increasing corn production is significant if there is an 
associated increase in corn demand from activities like 
additional ethanol production.
    The requirements can be analyzed by considering the 
additional demand for corn that is likely if this becomes law 
and ethanol production increases. This extra demand will result 
in price effects that will bring extra inputs into corn 
production, mostly land, fertilizer, and irrigation, with only 
small increases in yields because these currently being 
projected, we can expect the corn crop to increase 
significantly.
    Moreover, the additional demand for corn in ethanol 
production would likely increase the amount of acres planted to 
corn. The effect of more planted acres and higher yields can 
easily result in corn production topping 13 billion bushels by 
2011.
    In addition, the price effects that are likely to result in 
additional production are likely to result in slightly lower 
exports of corn. We believe that the USDA's current baseline 
overestimates corn exports by several hundred million bushels 
in 2011. Thus, with increases in production and a small 
adjustment in export demand, more than 1 billion bushels of 
corn could be available for ethanol production in 2011. With 
750 million bushels of corn for ethanol built into the current 
USDA baseline, we believe the 1.2 billion additional bushels of 
corn needed for ethanol production is easily attainable while 
maintaining our ever slightly increasing projected corn stocks.
    We believe this bill will triple the corn-based ethanol 
production by 2011 and lead to a more than four-fold increase 
in all grain production by 2016. Aside from the additional 
amount of resources needed on farms to produce this additional 
demand, a four-fold increase in grain-based ethanol industry 
would represent a tremendous opportunity for investment in 
ethanol production infrastructure in rural America. In terms of 
ethanol plant and equipment alone, it represents an investment 
of more than $10 billion dollars.
    However, the economic activity generated by this investment 
by the additional employment and investment opportunities would 
be like a Marshall Plan for rural America. Thus, S. 1006 holds 
the potential to address our dependence on imported oil and 
holds the promise of economic independence for rural America.
    The family farmer is America's original small business. 
With 75 percent of America's farms earning under $50,000, 
producers need to move from price takers to price makers. 
Considering that on average only about 15 to 20 percent of a 
typical grocery bill finds its way back to farmers, it is very 
important that we find new opportunities for farmers to invest 
in their futures. Opportunities to capture some of these 
profits in value-added agriculture are very evident today. 
Ethanol has been a value-added success story for Midwest 
agriculture and we believe this bill will not only mean more 
opportunities for farmers in South Dakota, but also all across 
the country.
    My friends who produce oil seeds will provide their 
particular perspective on this bill and ethanol producers will 
also provide their insight. However I would like to take this 
opportunity to close my testimony by saying that this bill will 
offer significant opportunities to farmers. We believe that 
fully half of the ethanol needed to meet the requirements of 
this bill will come from cellulose. Some of that cellulose will 
come from agricultural wastes like rice straw in California or 
sugar bagasse in Florida and Louisiana.
    Some of the cellulose will also come from dedicated energy 
crops like hybrid poplars or switchgrass. All of these 
feedstocks will be produced by farmers or associated with 
agriculture production. A major advantage of this bill as a 
policy instrument is the vision of growing a diverse ethanol 
industry with a broad-based constituency that will bring 
agricultural producers from across the Nation together in a 
common cause.
    From the perspective of a farmer and investor in value-
added ag enterprise, the potential that is laid before us is 
beneficial for corn growers and the ethanol industry. That's 
why South Dakota Corn Growers supports this bill and why we 
will work for its passage.
    Senator Johnson. Thank you Darin, excellent statement. Next 
on our panel is Bob Metz, the South Dakota Soybean Association.

STATEMENT OF ROBERT METZ, SOUTH DAKOTA SOYBEAN ASSOCIATION AND 
             BOARD MEMBER, NATIONAL BIODIESEL BOARD

    Mr. Metz. Thank you, Senator Johnson. I am Bob Metz, a 
soybean, corn and wheat producer representing the South Dakota 
Soybean Association. I also serve on the board of directors of 
the American Soybean Association and the National Biodiesel 
Board.
    I appreciate the opportunity to come here today and talk 
with you regarding the need for a national comprehensive energy 
policy that includes meaningful renewable fuels, components for 
biodiesel and ethanol. South Dakota soybean growers appreciate 
your support and leadership in advancing the use of renewable 
fuels. You have been a strong supporter of biodiesel for many 
years and we thank you for your commitment to development of a 
viable biodiesel industry.
    These are times when prices for our commodities are at 
record lows and energy and other inputs are at record highs. 
This causes great concern across the countryside and producers 
are reviewing both options for reducing inputs and also the 
opportunity to increase prices of what we grow.
    While in the short term there's little we can do to 
completely alleviate this situation, the American Soybean 
Association believes that the development of a comprehensive 
national energy plan would avoid this crisis situation in the 
future. We also feel strongly that a national energy plan 
should include a renewable fuels component that includes both 
biodiesel and ethanol and that is why we strongly support the 
renewable energy legislation you and Senator Hagel introduced 
last month, S. 1006.
    We believe this legislation provides achievable goals for 
both biodiesel and ethanol, while helping to decrease our 
dependency on imported petroleum. As I understand the bill, it 
requires a small percentage of renewable fuels, biodiesel and 
ethanol, to be incorporated into motor fuels. We believe that 
this is a program that is flexible and user friendly. We 
commend you and Senator Hagel for this bold and innovative step 
in moving our country toward homegrown energy sources.
    As you know, Mr. Chairman, for the last 8 to 10 years the 
U.S. soybean growers have invested their research and 
development and commercialization money in biodiesel. Biodiesel 
is a cleaner burning fuel produced from renewable resources 
such as soybean oil. It contains no petroleum but can easily be 
blended with petroleum. Biodiesel is typically blended at a 20 
percent level or as low as a 2 percent level. It can be used in 
compression ignition diesel engines with little or no major 
modifications.
    Biodiesel in its neat or pure form is biodegradable and 
non-toxic and it is the first and only alternative fuel to meet 
EPA's Tier I and Tier II health effects testing standards. 
Biodiesel has the highest Btu content of any alternative fuel, 
very similar to Number 1 diesel.
    This year, EPA finalized regulations that would require 
reduction in sulfur content in highway diesel fuel of over 97 
percent from its current level of 500 parts per million. 
Currently, the industry methods to decrease sulfur in diesel 
also negatively impact the fuel's lubricity. Biodiesel has no 
sulfur or aromatics and tests have documented its ability to 
increase fuel lubricity significantly when blended with 
petroleum diesel even as low as one percent.
    While biodiesel offers environmental, energy and security 
and economic development benefits, it is not yet competitive in 
the United States on a pure cost comparison. Public support 
will be necessary to help the industry develop. Our culture and 
our policies are focused on petroleum products, most of which 
are imported. I do not want to imply that the soybean growers 
are opposed in any way to the use of petroleum products. In 
fact, agriculture is a major user of petroleum-based products. 
However, I would make the challenge that our country needs to 
have an aggressive energy policy that includes clean renewable 
fuels as well as significant domestic production of both oil 
and gas.
    The current biodiesel market is relatively small, but has 
grown rapidly. Based on a recent national biodiesel board 
industry survey, approximately 5 million gallons of biodiesel 
were produced in fiscal year 2000, up from a mere 500,000 just 
a year ago. 20 to 25 million gallons are expected for fiscal 
year 2001. 100 million gallons of biodiesel requires 760 
million pounds of feedstock including vegetable oils, recycled 
grease and animal fats.
    If only oil were the feedstock used, it would take 100 
million gallons of biodiesel and it would reduce the current 
surplus of 2.1 billion pounds of soybean oil by about one-
third. Reducing the soy oil supplies by this amount would 
increase the U.S. oil price by an estimated 1.5 cents per 
pound, put 11 pounds of soy oil in a bushel of soybeans, this 
would raise the U.S. price of soybeans by approximately 16.5 
cents.
    Mr. Chairman, even with low feedstock prices, biodiesel is 
not yet competitive with petroleum diesel. To be so assistance 
with market development and tax incentives are needed. Senators 
Dayton and Hutchinson have introduced tax legislation that 
would provide a partial exemption to the diesel fuel excise tax 
for those who use low blends. The amount of exemption would be 
three cents for diesel fuel containing 2 percent biodiesel, and 
20 cents for those containing 20 percent or greater. This is 
similar to the ethanol exemption for gasoline that contains 10 
percent ethanol. Biodiesel and ethanol are complimentary 
renewable fuels since they are sold in separate fuel markets.
    Mr. Chairman, I think it is time and the timing is right 
for major proposals to promote the use of biodiesel. We look 
forward to working with you on this agenda and other issues of 
mutual interest. I will be happy to answer any questions at the 
appropriate time.
    [The prepared statement of Mr. Metz follows:]
Prepared Statement of Robert Metz, South Dakota Soybean Association and 
                 Board Member, National Biodiesel Board
    Thank you Mr. Johnson. I am Bob Metz a soybean corn, wheat producer 
representing the South Dakota Soybean Association. I also serve on the 
Board of Directors of the American Soybean Association and the National 
Biodiesel Board.
    I appreciate the opportunity to come here today and talk with you 
regarding the need for a national comprehensive energy policy that 
includes a meaningful renewable fuels component for biodiesel and 
ethanol. South Dakota soybean growers appreciate your support and 
leadership in advancing the use of renewable fuels. You have been a 
strong supporter of biodiesel for many years, and we thank you for your 
commitment to the development of a viable biodiesel industry.
    These are times when the prices for our commodities are at record 
low and energy and other input costs at record highs. This causes great 
concern across the countryside and producers are reviewing both options 
for reducing input costs and opportunities for increasing prices of 
what we grow.
    While in the short term there is little we can do to completely 
alleviate this situation, ASA believes the development of a 
comprehensive national energy plan would help avoid these crisis 
situations in the future. We also feel strongly that a national energy 
plan should include a renewable fuels component that includes both 
biodiesel and ethanol and that is why we strongly support the renewable 
energy legislation you and Senator Hagel introduced last month, S. 
1006.
    We believe this legislation provides achievable goals for both 
biodiesel and ethanol while helping to decrease our dependency on 
imported petroleum. As I understand the bill, it requires a small 
percentage of renewable fuels, biodiesel and ethanol, to be 
incorporated into motor fuels. We believe this is a program that is 
flexible and user friendly.
    While some may consider the objectives of the proposal ambitious, 
we feel they are achievable and reasonable. Our organization, as well 
as the National Biodiesel Board, believes these goals will create a 
significant market for biodiesel. We commend you and Senator Hagel for 
this bold and innovative step in moving our country to ``homegrown'' 
energy sources.
    As you know, Mr. Chairman, for the last 8-10 years U.S. soybean 
growers have invested in the research, development and 
commercialization of biodiesel. Biodiesel is a cleaner burning fuel 
produced from renewable resources such as soybean oil. It contains no 
petroleum but can easily be blended with petroleum. Biodiesel is 
typically blended at the 20% level with diesel or at the 2% or lower 
levels. It can be used in compression-ignition, diesel engines with 
little or no major modifications. Biodiesel in its neat or pure form is 
biodegradable and nontoxic, and is the first and only alternative fuel 
to meet EPA's Tier I and II health effects testing standards. Biodiesel 
has the highest BTU content of any alternative fuel, similar to Number 
1 diesel.
    This year, EPA finalized regulations that require a reduction in 
sulfur content of highway diesel fuel of over 97% from its current 
level of 500 parts per million. Current industry methods to decrease 
sulfur in diesel also negatively impact the fuel's lubricity. Biodiesel 
has no sulfur or aromatics and tests have documented its ability to 
increase fuel lubricity significantly when blended with petroleum 
diesel fuel even at one percent or lower.
    According to Department of Energy tests, biodiesel has an 80% 
lifecycle reduction of CO2 compared to petroleum diesel. 
This means that it offers the best opportunity for greenhouse gas 
reduction of any heavy-duty vehicle and equipment application. 
Biodiesel has the highest energy balance of any alternative fuel, which 
means that it offers some of the most promising benefits for 
conservation efforts. Additionally, biodiesel offers significant 
reductions in virtually all regulated emissions, and a 90% reduction in 
EPA-targeted air toxics. With the Chairman's permission, I will include 
additional information regarding the environmental benefits of 
biodiesel for the record.
    Soybean growers began to invest in biodiesel almost a decade ago 
not because we wanted ``our own'' ethanol. Instead we were driven by 
the economics in the soybean industry. Soybeans are widely produced for 
the protein source in soybean meal. It is the plant protein of choice 
in the pork and poultry industries, leaving soybean oil as a valuable 
but abundant co-product. Because of large supplies of vegetable oils in 
the world market, we have a surplus of soybean oil, which depresses the 
price of the oil and the whole soybean.
    Several years ago, ASA recognized that the traditional means of 
riding out a depressed market by storing surplus soybean oil until 
better times was not going to work during this situation. The industry 
had to do more. It needed to be proactive and aggressive in market 
development. Soybean growers through our state and national check off 
programs began investing in the development of new uses of soybean oil. 
Several of the products are widely accepted in the marketplace, such as 
soy ink, and others are just receiving acceptance such as biodiesel, 
solvents, lubricants and other fluids.
    While biodiesel offers environmental, energy security, and economic 
development benefits, it is not yet competitive in the U.S. on a pure 
cost comparison. Public support will be necessary to help the industry 
develop. Our culture and policies are focused on petroleum products, 
most of which are imported. I do not want to imply that soybean growers 
are opposed in anyway to the use of petroleum products. In fact, 
agriculture is a major user of petroleum-based products. However, I 
would make the challenge that our country needs to have an aggressive 
energy policy that includes clean renewable fuels as well as 
significant domestic production of both oil and gas.
    The current biodiesel market is relatively small, but is growing 
rapidly. Based on a recent NBB industry survey, approximately five 
million gallons of biodiesel were produced in fiscal year 2000, up from 
approximately 500,000 the year before. Twenty to twenty-five million 
gallons are expected for fiscal year 2001. One hundred million gallons 
of biodiesel requires 760 million pounds of feedstock including 
vegetable oils, recycled grease or animal fats. If only soybean oil 
were the feedstock used, 100 million gallons of biodiesel would reduce 
the current surplus of 2.1 billion pounds of soy oil by about one-
third. Reducing soy oil supplies by this amount would increase the U.S. 
soy oil price by an estimated 1.5 cents per pound. With 11 pounds of 
soy oil in a bushel of soybeans, this could raise U.S. soybean prices 
by as much as 16.5 cents per bushel.
    Mr. Chairman, even with low feedstock prices biodiesel is not yet 
cost competitive with petroleum diesel. To be so, assistance with 
market development and tax incentives are needed. Senators Dayton and 
Hutchinson have introduced the tax legislation that would provide a 
partial exemption to the diesel fuel excise tax to diesel fuel 
suppliers who use low blends of biodiesel. The amount of the exemption 
would be three cents for diesel fuel containing two percent biodiesel 
and 20 cents for blends of 20% or greater This approach is similar to 
the partial tax exemption for ethanol, which provides a 5.4 percent 
exemption for gasoline that contains ten percent ethanol. Biodiesel and 
ethanol are complementary renewable fuels, since they are sold in 
separate fuel markets.
    Of course, one of the first concerns with excise tax exemptions is 
the lost revenue to the Highway Trust Fund. We are very sensitive to 
the needs of the highway users. So, we are proposing to reimburse the 
trust fund with USDA's Commodity Credit Corporation (CCC). The cost to 
the CCC would be offset at least initially by the savings which 
increased biodiesel use would realize in the form of reduced outlays 
under the soybean marketing loan program.
    Although it is my understanding the Hutchinson/Dayton bill does not 
have an official score, we believe it is a cost-effective investment. 
For example, if 100 million gallons of biodiesel were used under this 
program, it would be blended at two percent per gallon into five 
billion gallons of diesel fuel. At a cost of three cents per gallon, 
the cost of the program would be $150 million.
    Earlier in my testimony, I outlined how increasing biodiesel use 
would reduce soybean oil surpluses. Reduced soybean oil surpluses will 
result in higher soybean prices, and raising soybean prices in the 
marketplace would reduce CCC outlays under the soybean marketing loan 
program. If soybean price increases 13 cents per bushel due to 
increased demand for biodiesel, the cost savings on this year's 
estimated 3.0 billion bushel soybean crop would be $390 million. The 
proposal will save more than two dollars for each dollar its costs.
    Mr. Chairman, we think the timing is right for these major 
proposals to promote the use of biodiesel. We look forward to working 
with you on this agenda and other issues of mutual interest.
    I will be happy to answer questions at the appropriate time. Thank 
you.

    Senator Johnson. Thank you, Bob, excellent statement. And 
third on our panel is Kirk Schaunaman from South Dakota Farmers 
Union.

    STATEMENT OF KIRK SCHAUNAMAN, SOUTH DAKOTA FARMERS UNION

    Mr. Schaunaman. Morning, Senator Johnson, members of the 
panel and others. I'm Kirk Schaunaman, I'm a member of the 
South Dakota Farmers Union and the National Farmers Union. I'm 
involved in a diversified grain and livestock operation near 
Aberdeen.
    South Dakota Farmers Union has been actively involved in 
the promotion of ethanol for more than 20 years. Today our 
organization remains more than ever committed to the concept of 
renewable farm-based fuels.
    I'm here on behalf of the National Farmers Union, 300,000 
family farmer and rancher members to thank you for holding this 
hearing and to encourage you to continue your strong action on 
the establishment of a renewable fuels standard for motor fuels 
in the United States.
    Farmers across the countryside find themselves faced with 
the dual crisis of low commodity prices and high energy costs. 
Your legislation, The Renewable Fuels for Energy Security Act 
of 2001, has the potential to deal with both problems at once. 
Your bipartisan bill introduced with Senator Hagel of Nebraska 
will provide the opportunity to more than triple the national 
demand for ethanol and biodiesel over the next ten years.
    Let me say clearly at the beginning, South Dakota Farmers 
Union and the National Farmers Union wholeheartedly support 
your bill and other bipartisan legislation that you have 
cosponsored that will establish a renewable fuels standard for 
America and applaud you and Senator Hagel for introducing this 
forward-looking legislation.
    As we would all agree ethanol and biodiesel are 
environmentally friendly alternatives to the MTBE in gasoline 
and high sulfur content in diesel fuel. We should look actively 
for ways to expand their use in the near and long term.
    Aggressive demand policies are needed to improve farm 
income by stimulating investments by farmers in value-added 
processing facilities for ethanol and biodiesel. Let me assure 
you that family farmers here in South Dakota and elsewhere will 
make this investment given a strong and positive long-term 
outlook in terms of demand. And many of us have already made 
this investment.
    As you know the ongoing ethanol versus MTBE debate in 
Congress concerns the relative benefits of reformulated 
gasoline and its minimum oxygen requirement based in the Clean 
Air Act and the water contamination problems caused by MTBE. It 
also concerns the proper role for renewable ethanol as a clean 
fuel alternative essential for America's energy independence.
    The RFG program required a minimum oxygen content in the 
gasoline sold in the country's most polluted cities was passed 
by Congress in 1990 as an amendment to the Clean Air Act. The 
most widely used oxygen additive at that time, MTBE, has caused 
serious contamination of ground and surface water in many 
States.
    As a result several States have asked or have considered 
asking the EPA for waivers from the RFG oxygen requirement in 
order to rid their States of MTBE use and further 
contamination. We all know that ethanol is an environmentally 
sound oxygenate substitute for MTBE. As recently as June 12 the 
EPA denied the State of California's request for such a waiver 
and we support the EPA's decision on this important matter.
    However, farmers recognize the need for a greater demand 
for ethanol use than just the oxygen requirement in the RFG 
program if ethanol production is to be part of the solution to 
low commodity prices and at the same time play a realistic role 
in America's energy needs.
    The Government response to the MTBE problem, whether State, 
Federal or local, should assure the continued maximum growth 
for ethanol production. We think the future of this production 
expansion depends on the development of farmer-owner 
cooperative based ethanol facilities that will spring up 
throughout the Nation. Whatever legislation is passed it must 
account for the needs of both small and large producers of 
ethanol.
    By gradually increasing the use of ethanol and biodiesel in 
the near term we can have a smooth transition from MTBE, spread 
ethanol and biodiesel use over the entire fuel supply, and 
avoid price hikes and disruptions of the gasoline market. This 
approach also provides a solid foundation for ethanol by 
shifting from its declining value as an oxygenate to its 
increased value as a domestic, renewable fuel that will reduce 
our dependence on foreign oil and most importantly boost farm 
income for the long term. Also, if we stay with the status quo 
and do not establish a renewable fuel standard there is less 
incentive for expansion of the gasoline--of the non-gasoline 
renewable fuels market such as biodiesel.
    As a result of your legislation the importance that ethanol 
and biodiesel will play in the Nation's energy security will be 
heightened. Because of the expanded role renewable fuel will 
play in meeting our energy needs, National Farmers Union 
supports, in conjunction with the Renewable Fuels Standard, the 
establishment of a Strategic Renewable Fuels Reserve. This 
Strategic Renewable Reserve would provide on-farm commodity 
storage of corn and other renewable fuel production feedstocks 
reserved only for ethanol and biodiesel production. A Strategic 
Renewable Fuels Reserve would be similar to our already 
existing Strategic Oil Reserve to be used in time of emergency 
and solely for renewable fuel production.
    The Strategic Renewable Fuels Reserve would contain an 
amount of farm commodities equal to one year's production of 
ethanol and biodiesel. These commodities would be designated 
only for the production of renewable fuels at the direction of 
the Secretary of Ag. This reserve would remove a potential 
argument, critical of possible ethanol price spikes that, ``we 
are one drought or one flood away from being a reliable 
supplier'' for renewable fuels. Creation of this reserve would 
ensure a steady supply of feedstock for energy production in 
the event of production shortfalls or increased prices.
    In order to stimulate the viability and growth of the 
renewable energy production sector, it is important that a 
limited commodity reserve be established to stabilize the 
availability of affordable energy feedstock that is isolated 
from the traditional, commercial agricultural market.
    Senator, your legislation will help shift our energy 
consumption away from high priced imported oil and towards 
renewable energy products grown on our Nation's farms. This 
policy is compatible with our national environmental 
objectives; it will strengthen our rural economy and help meet 
our national energy requirements; and more importantly allow 
farmers to participate in value-added production of their 
commodities. We look forward to working with you on passing a 
Renewable Fuels Standard this year in Congress.
    Thank you for the opportunity to testify today and I will 
be glad to answer any questions at the appropriate time.
    Senator Johnson. Thank you, Kirk. Last on this panel is Mr. 
Paul Shubeck from the South Dakota Farm Bureau. Paul.

          STATEMENT OF PAUL SHUBECK, ON BEHALF OF THE 
                    SOUTH DAKOTA FARM BUREAU

    Mr. Shubeck. Thank you, Senator. I have nothing to say. 
Everything has been said and everybody did an excellent job. We 
have very similar testimony to all the testimony that was given 
today. I'm happy to say that we are in agreement with Farmers 
Union on this Senate bill and my daughter who is wanting to 
shop noticed that you very smartly separated Darin and I. She 
was afraid that we would be messing around up here or 
something. Darin and I are on an ethanol--we are directors, I'm 
a vice president of Great Plains Ethanol and a little bit about 
the ethanol industry.
    We started, as Darin said, we have $14 million, we started 
our fund drive for this ethanol plant and we have been getting 
a million dollars a day of producer investment and it shows how 
committed the producers are to ethanol. And in 12 business days 
we had over $12 million from producers and so they are very 
interested in this.
    And one fact that I thought I would bring out here is that 
for every dime increase in raw corn prices paid to the 
producer, farm program outlays are reduced a billion dollars a 
year. And so, you know, think of the tremendous impact that the 
ethanol industry has in rural America, but it also reduces that 
outlay that I think is going to get tougher and tougher to get 
urban Senators and Congressmen to vote for a farm bill and I 
think they can vote for energy and what we're supplying is 
energy and it's not a--we should view it as an energy program 
not as a farm program.
    I guess the only other thing I can say is that I would 
encourage the Senate to put pressure on the commodity credit 
corporation to continue their bioenergy program and that was a 
producer incentive payment and the producer incentive payment 
was very beneficial to these ethanol plants that were getting 
started. I mean, it's a tremendous boost.
    Essentially, they are using a surplus product and they are 
giving a little bit of this product to the ethanol producers 
and it helps ethanol plants get started, it helps fund them, it 
helps banks look at that when we go for bank financing, it has 
a tremendous incentive for getting good loans for these plants.
    So I guess that ends my testimony. My testimony is 
available over there and everybody said what I was going to 
say, so I don't think I need to. So thank you.
    [The prepared statement of Mr. Shubeck follows:]
 Prepared Statement of Paul Shubeck, Director, Clay County Farm Bureau
    Mr. Chairman and members of the committee, my name is Paul Shubeck. 
I am a corn and soybean farmer from Centerville, South Dakota. I am a 
member of the Clay County Farm Bureau Board of Directors.
    Our nation is on a path of continued and increasing dependency on 
energy. This energy comes in many forms, including oil, natural gas, 
liquid petroleum, electricity, and renewable energy sources. Due to 
limited refinery capacities and other problems, energy costs have 
become very volatile. During 2001, American families, industry and 
especially agriculture producers are bearing the consequences of this 
volatile price increase. The cost of manufactured inputs for use in 
agriculture production (such as fertilizer) has increased dramatically. 
Diesel fuel prices have increased on my farm from $0.86 per gallon in 
late 1999 to $1.35 per gallon in the spring of 2001. Prices for 
nitrogen fertilizer have increased $15 per acre, or a 70% increase. The 
cost of LP gas for drying corn has increased 50%. USDA estimates net 
farm income will be reduced 10 to 13% over a 2-year period because of 
increased energy costs.
    All this is taking place when raw prices for the corn and soybeans 
I grow are extremely low. Some feel the combination of low commodity 
prices and higher energy prices are a doom to the agriculture industry. 
I feel the energy crisis and the demand for clean air standards is a 
GREAT opportunity for farmers to lessen our dependence on government 
payments and at the same time, increase net farm income. We need a 
long-term energy policy that provides for reasonable and stable prices 
and supplies of energy. Agriculture must be a part of that solution.
    As an example of how agriculture is prepared to be a part of the 
solution, let me explain how soy oil can be competitive when used as 
boiler fuel. In January 2001, when natural gas costs increased to $8.05 
per thousand cubic feet and #2 fuel oil increased to 95 cents per 
gallon, soy oil was 11.5 cents per pound. The cost to produce 1 million 
BTU of energy from natural gas was $7.75; from #2 fuel oil was $6.90; 
and from soy oil $6.80. Continued research into efficient production of 
fuel from soy oil is ongoing, and I have no doubt that it will become 
even more competitive in the future.
    South Dakota has the widest basis in the nation for corn and 
soybeans. These two commodities are the raw materials needed for the 
production of ethanol and biodiesel. Producers in South Dakota are 
investing in cooperative ethanol plants, giving them an opportunity to 
share in the profits from ethanol production as well as the sale of the 
by-product. The by-product, DDG (dried distillers grains) gives 
opportunity for the development of livestock feeding in South Dakota 
(as opposed to shipping it to the east or west coast). Local use saves 
energy use for shipping.
    In areas surrounding ethanol plants, the increased local demand for 
corn has decreased the corn basis thereby yielding more dollars per 
bushel for producers. This also has a positive effect where LDPs are 
created. For every dime increase in raw corn prices paid to the 
producer, farm program outlays are lowered by about $1 billion per year 
(according to the USDA). Today, the cost of biodiesel energy is very 
competitive. For every one percent of diesel market that biodiesel can 
capture, it is estimated that the demand for soybeans will increase by 
250 million bushels. This could increase soybean prices up to 30 cents 
per bushel, again reducing farm program outlays where LDPs are paid.
    The United States needs a national energy policy. Agriculture must 
play a major role in the production of energy, and stands poised to do 
so. Energy production is part of the solution to challenges we face in 
agriculture. Renewable fuels are cleaner burning than fossil fuels and 
a whole new supply of raw materials to make ethanol and biodiesel is 
grown every year.
    Farm Bureau supports policies that maximize the use of biofuels. We 
support the national phase-out of MTBE. The EPA must not grant waivers 
to states attempting to opt out of the oxygen requirement in the Clean 
Air Act. It is clear farmers have the ability to supply fuels which 
meet the Clean Air Act requirements.
    Mr. Chairman, I believe the current energy crisis is an opportunity 
for agriculture. It is an opportunity for farmers and ranchers to 
increase net farm income and decrease dependence on government farm 
program outlays. We can help decrease dependence on foreign energy 
sources. The American farmer provides safe and abundant food for his 
family plus 130 others every year. We are willing and able to provide 
clean energy, also.

    Senator Johnson. Thank you, Paul. I have just a couple of 
questions for this panel before we move on to the next panel.
    Paul, Kirk raised the prospect of the need for some kind of 
strategic ethanol reserve if we ramp up to the kind of volume 
of consumption that we envision through this legislation. There 
is the prospect of some years production levels may not be all 
that--may not be optimal, that we could have floods, could have 
droughts, whatever. Any thoughts about whether that is a 
strategy that addresses that issue or whether there's other 
things we ought to be doing that address some volatility in 
yields during a given year?
    Mr. Shubeck. Having a grain reserve? Is that what you're 
referring to?
    Senator Johnson. Well, I think the thought was if not a 
grain reserve perhaps even an ethanol----
    Mr. Shubeck. A fuel----
    Senator Johnson. A fuel reserve.
    Mr. Shubeck. A fuel reserve.
    Mr. Schaunaman. Either that or have a grain reserve for one 
year's production and it basically is just to guarantee that 
we're going to be a guaranteed supplier.
    Mr. Shubeck. Sure. You know, typically I think the Farm 
Bureau has been opposed to reserves mainly because--because it 
has in the past held prices down, we felt. If it's directed 
towards ethanol use, I can't imagine why that wouldn't be a 
good idea. We know where it's going, we know that it has that 
ability to be used for fuel. I'm not a policy maker in the Farm 
Bureau but I think there's certainly a degree of reserve that 
would be helpful.
    Senator Johnson. Something to continue to talk about and to 
think about.
    Mr. Shubeck. Sure.
    Mr. Schaunaman. Let me add, Senator, that in no way do we 
want that part of--that thinking to hold up this bill.
    Senator Johnson. It's a separate issue, but it's one that 
we----
    Mr. Schaunaman. Absolutely. We've got to get this passed 
first.
    Senator Johnson. Darin, there's some criticism about 
ethanol production from grain because there are people who 
believe that this is competition for food in this country. It's 
my understanding that making ethanol from corn leaves behind a 
very valuable feed co-product, excellent livestock feed. Can 
you share any thoughts with us about this and anti-food 
strategy that we're developing here or can we have ethanol 
production and livestock feed?
    Mr. Ihnen. It's not an anti-food issue. A bushel of corn 
will create 2.7 gallons of ethanol. It will leave behind 17 
pounds of dry distilled grain, that is a high protein source 
that could be fed to livestock and, who knows, someday it might 
be a food product? These plants that are being built are 
stainless steel so that's something in the future that could be 
looked at, but we're taking the starch out of it and we've got 
a product left that can be fed to livestock and still have an 
energy from the corn as well as a food product.
    Senator Johnson. Bob, in your testimony you talked about 
concerns soybean growers have regarding growing surplus 
vegetable oil. If we don't come up with a viable biodiesel 
market what do you think the expected trends are for vegetable 
oil stocks and what do you think that will do to already low 
soybean prices?
    Mr. Metz. As you know, Senator, there's two major products 
that are produced when we crush soybeans, the meal and the oil, 
both very valuable. Currently the markets are driven by meal 
production, poultry and swine both, it's the protein of choice 
for raising those. So we just keep building this mountain of 
oil and long term I really see no way of working our way out of 
this, the feed that we need to, we've got over 2.1 billion 
pounds of oil out there.
    The soybean industry has changed with South America coming 
on board. We used to be able to move that throughout the winter 
time, now that's their main season. So we really need to have 
an industry to use this oil and bring the price of soybeans 
back up again.
    Senator Johnson. Senator Hagel and I in our legislation 
have not carved out specifically a biodiesel component in there 
with agricultural alternative fuels. Your industry is satisfied 
with that approach?
    Mr. Metz. Yes, we are. We have no problem with that. We 
know we're kind of the new kids on the block here, most of us 
are also invested in ethanol plants, most farmers are corn and 
soybean farmers, so they are both there. This is a long-term 
plan and it didn't start--it is true that probably ethanol will 
take a bigger piece of the pie, but we feel very comfortable 
that if we're in there and especially if we can get some tax 
incentives that we will definitely be a major player in this 
also. Much of the pollution in large cities comes from trucks 
and that, of course, does not compete with the ethanol industry 
so we're very comfortable.
    Senator Johnson. Well, I thank this panel for excellent 
testimony and this will be, again, part of the record. Your 
insights are very supportive and your respective organizations 
have played a key role in helping to craft this legislation and 
I appreciate that as well. So thank you to members of this 
panel.
    We'll move on then to the second panel. That panel consists 
of Trevor Guthmiller of the American Coalition for Ethanol; 
Rodney Christianson of the South Dakota Soybean Association; 
Ron Alverson of the Lake Area Corn Processors; and John Twiss, 
Black Hills National Forest Supervisor. Come and join us.
    Mr. Shubeck. In the interim, Senator, I give you another 
hat.
    Senator Johnson. All right. Well, we have competing hats 
here.
    I appreciate, again, the members of this panel joining us 
this morning and their respective organizations which in turn 
have also played key roles in helping to craft legislation and 
to advance the interests of agriculture and alternative clean 
fuels in this country. We'll begin panel two with Trevor 
Guthmiller who is the executive director of American Coalition 
for Ethanol. Trevor.

STATEMENT OF TREVOR T. GUTHMILLER, EXECUTIVE DIRECTOR, AMERICAN 
                     COALITION FOR ETHANOL

    Mr. Guthmiller. Thank you, Senator Johnson. I appreciate 
the opportunity for providing testimony this morning on the 
advantages of establishing a renewable fuels requirement for 
our nation's fuel supply such as you and Senator Hagel have 
introduced.
    It is significant that we are having field hearings here in 
South Dakota, that's quite an accomplishment to have an 
official Energy Committee hearing. We appreciate the fact to 
get some of the information out there on ethanol and biodiesel. 
So often when we talk about energy issues it's in the context 
of oil and gas and petroleum production and we want people to 
know that there's another side of this issue, a renewable fuel 
side. And I think the people of South Dakota as well as the 
people of the Nation want to see renewable fuels and renewable 
energy included in this energy debate, so we appreciate the 
opportunity to be part of it in that context.
    As you know our Nation's dependence on imported oil has 
grown from just over 30 percent during the energy crisis of the 
1970s to just under 60 percent today. This poses problems for 
our county's economic health as well as our national security. 
I'm going to use my opportunity this morning to explain why we 
believe that a nationwide renewable fuel standard is both good 
economic and energy policy for the United States.
    The American Coalition for Ethanol is a nationwide, 
nonprofit membership association based in Sioux Falls, South 
Dakota. Our members include ethanol producers, rural electric 
cooperatives, public power districts, commodity organizations 
and businesses and individuals that want to see the ethanol 
industry grow and move forward.
    The oil industry has made a point of trying to blame 
ethanol for the gas price increases throughout the United 
States. The facts, however, clearly show that ethanol is the 
solution not the problem.
    In 2000, last year, about 1.6 billion gallons of ethanol 
were produced and sold in the United States. With a petroleum 
industry--refining industry that is running at 94 percent 
capacity according to the America Petroleum Institute, it would 
be hard for the petroleum industry to replace that large an 
amount of ethanol without having even more supply disruptions 
and gas price spikes. Contrary to the rhetoric, reducing or 
eliminating ethanol use would actually increase gas prices 
across the country.
    As we can tell from the Sioux Falls gasoline marketplace, 
which is fairly competitive, ethanol actually helps lower the 
cost of gasoline to the consumer. The 10 percent ethanol blend 
has been consistently saving drivers 3 to 4 cents per gallon 
the past year. That is money that stays in the taxpayer's 
pockets and helps other segments of our economy.
    The oil industry has tried to blame environmental 
regulations, including those that require cleaner burning fuels 
like ethanol be added to gasoline, for higher gas prices, but 
those regulations have been in effect for a number of years and 
it only seems to be in the last 2 years that there have been 
any concerns about their effect on the marketplace.
    According to the America Petroleum Institute even though 
refineries across the United States increased total gasoline 
production 3.4 percent in April 2001 versus April 2000, the 
production of Midwest reformulated gasoline actually fell by 9 
percent versus the previous year. The underlying cause of high 
gasoline prices is not ``balkanization'' or ``boutique fuels,'' 
it is a lack of supply because the petroleum industry has not 
expanded to meet the needs of their customers.
    On the other hand, the ethanol industry has continued to 
expand in the past decade. While no new petroleum refineries 
have been built in the United States in the past 20 years, 
about 56 ethanol plants, essentially corn refineries, have been 
built across the United States.
    Crude oil imports also continue to be a drain on our 
economy as well. In April 2001 crude oil imports hit an April 
high of 9.643 million barrels per day. April imports of 
gasoline and fuel blending components were up 20 percent in 
April as well, to 684,000 barrels per day. While it may be 
advantageous in the short term to just continue to increase the 
supply of oil and petroleum products, in the long term it is 
clearly in our country's best interest to reduce our dependence 
on imported energy and diversify our energy portfolio.
    South Dakota is particularly vulnerable to increases in 
energy costs due to the importance of agriculture to our 
economy. Agriculture is an energy intensive industry. Fuel and 
fertilizer costs are both very much tied to the energy market.
    While energy costs have been increasing in South Dakota 
during the past years, the value of the corn that South 
Dakota's farmers produce has been declining. Since 1995 corn 
prices have declined 50 percent in South Dakota. Meanwhile, 
just in the last year, average gasoline and diesel fuel prices 
have increased over last year's already high level.
    While gasoline prices have been rising and corn prices have 
been falling, South Dakota's corn production has been 
increasing. In 2 of the last 3 crop years, South Dakota has 
produced over 400 million bushels of corn, much of which is 
exported out of the State.
    This demonstrates South Dakota's ability to be a source of 
increased energy for the United States. We can turn our ethanol 
into--our corn into ethanol and our soybeans into biodiesel. 
This will help us reduce our need for imported energy while at 
the same time boost markets for those agricultural products.
    With little fossil fuel resources in the State and no 
refineries, South Dakota is forced to import virtually all the 
energy that is used in the State. It would make much better 
sense if we continued to increase ethanol production and use in 
South Dakota as a way to reduce the amount of money that is 
leaving the State to purchase energy. This economic philosophy 
should also be applied nationally.
    It all comes down to analyzing our resources and goals. ACE 
believes that it is in the best interest of agriculture and our 
national economy to systematically reduce our dependence on 
imported fossil fuels and increase utilization of domestically-
produced renewable fuels like ethanol and biodiesel.
    Having an energy policy that does not address increasing 
our utilization of domestically-produced renewable fuels would 
keep us on the same road we are already on. The only real 
energy policy is one that tangibly and measurably charts our 
course towards increased utilization of renewable energy 
products like ethanol and biodiesel. This is why we believe 
that a renewable fuel requirement is the best possible way to 
help the United States address concerns regarding our energy, 
economic, agricultural and environmental policies.
    Taking the lead in this growth of ethanol production are 
farmer-owned co-ops. You've heard testimony this morning from a 
couple people involved with these projects. It is something we 
are extremely excited about. In Minnesota 12 of the 15 
operating ethanol plants are owned and operated by farmer-owned 
co-ops. Of the three ethanol plants under construction in South 
Dakota right now, all are farmer-owned co-ops and more projects 
are in the works as you've heard as well.
    In addition, three new ethanol plants in Iowa are under 
construction, all of which are farmer-owned co-ops. Just within 
the last year, two farmer-owned co-op ethanol plants opened in 
Missouri. So that is the segment of the industry that is 
growing, that is the segment that has the opportunity to 
provide the most economic benefit to places like South Dakota.
    More projects will continue to be developed if we can show 
that there will be a growing market for ethanol. This will 
continue to stimulate agriculture and our rural economies by 
creating a market for agricultural commodities as well as 
creating rural economic development and expanding our rural tax 
base.
    The best way that can lead to the further growth of the 
ethanol industry is to establish a renewable fuels requirement 
that would establish a framework for increasing ethanol use 
throughout the country.
    There are currently three bills that have been introduced 
in the U.S. Senate and one in the House of Representatives that 
would create renewable fuels requirements. Our organization is 
supportive of all of those bills. All of these bills in the 
Senate have been referred to different committees. The 
renewable fuels bill introduced by Senators Hagel and Johnson 
has been referred to this committee for action.
    We are extremely pleased by this bill and we would like to 
thank Senators Johnson and Hagel for their leadership. We also 
want to thank Senator Johnson for signing on to be a cosponsor 
of the renewable fuels bill introduced by Senators Tom Daschle 
and Richard Lugar in the Senate Environment and Public Works 
Committee.
    Each of these bills would increase use by requiring that 
every year the oil industry use an increasing amount of 
renewable ethanol. Just like an investor would not want to put 
all of his money into one stock or one mutual fund, our country 
should not put all of its energy needs in the petroleum basket. 
We should diversify our energy mix and a renewable fuels 
requirement would help us do that.
    A renewable fuels requirement would be a fair and equitable 
way to increase our ethanol usage. Essentially it would require 
that an increasing amount of ethanol be used every year, while 
leaving the details of its use to the petroleum companies, so 
that they can utilize it where it makes the most sense 
economically and efficiently.
    Credit trading would also allow petroleum refiners to have 
a level playing field and it would reward those petroleum 
companies that choose to use more ethanol and biodiesel than 
required. We would strongly urge the Senate Energy Committee to 
incorporate the Hagel/Johnson renewable fuels bill into the 
energy policy legislation that it seeks to move.
    We would like to see ethanol move from being considered 
just an oxygenate. First off, we would like to commend 
President Bush for denying California's application for a 
waiver from the reformulated gasoline program's oxygenate 
requirement. This is an important component of the reformulated 
gasoline program that has been acknowledged to reduce all types 
of pollution.
    While ethanol's role as an oxygenate is important and 
beneficial, for the sake of the growth of this industry we need 
to expand ethanol's role to also include a value for it as a 
renewable fuel. As MTBE is banned and phased out around the 
country, as it has been here in South Dakota, ethanol's use 
should continue to grow. However even if California and the 
Northeast States would switch completely to ethanol and away 
from MTBE, it would still only double the market for ethanol. 
While this is positive and we would view such a scenario with 
great favor, we believe that it's time to define a role for 
ethanol that is beyond even a doubling of its use.
    Our country should have a goal of at least tripling the use 
of ethanol in the next decade. From an agricultural standpoint 
we believe this is completely doable. We believe that such a 
goal would spur the development of the biomass ethanol industry 
as well, which would allow other States to experience the 
positive economic benefits of the ethanol industry that we in 
the Midwest are so familiar with.
    Creating a renewable fuels requirement would also provide 
farmers and investors some certainty should ethanol's role as 
an oxygenate be impaired, such as if the Northeast States are 
allowed to opt out of the reformulated gasoline program, which 
they are currently allowed to do in 2004.
    Congress needs to adopt a sound and long-term energy policy 
that reflects our national desire to reduce our dependence on 
imported fossil fuel. Unless we adopt a renewable fuels 
requirement we will find our country continuing down the same 
road of increased reliance on foreign energy that has gotten us 
to the point where we are today, with increasing energy costs 
to consumers and the national economy.
    We would strongly urge Congress to adopt a renewable fuels 
requirement and we urge the Senate Environment and Public Works 
Committee and the Senate Agriculture Committee and the Senate 
Energy and Natural Resources Committee to strongly consider the 
renewable fuels bills that have been introduced, including the 
Hagel/Johnson bill, S. 1006.
    Thank you for the opportunity to present my remarks this 
morning.
    Senator Johnson. Thank you, Trevor. Second on our panel is 
Mr. Rodney Christianson, who is the CEO of South Dakota Soybean 
Processors. Rodney.

  STATEMENT OF RODNEY CHRISTIANSON, CHIEF EXECUTIVE OFFICER, 
     SOUTH DAKOTA SOYBEAN PROCESSORS AND MINNESOTA SOYBEAN 
                           PROCESSORS

    Mr. Christianson. Good morning, Senator Johnson. I would 
like to thank you for this opportunity to speak before you 
concerning S. 1006, Renewable Fuels for Energy Security Act of 
2001. And both from South Dakota Soybean Processors and 
Minnesota Soybean Processors, thank you, Senator Johnson, for 
your leadership as the lead sponsor of this bill.
    I represent not only South Dakota Soybeans Processors, but 
also Minnesota Soybean Processors and together I represent and 
work for 3,200 farm families in South Dakota, Minnesota, and 
Iowa. SDSP is completing our fifth year of operation and in 
that time we have processed and added value to 100 million--110 
million bushels of soybeans and including our projections for 
this year's patronage, our board of directors will have 
returned $15 million in cash to our original members of SDSP.
    MSP is under an equity drive right now which we have $12.5 
million committed to build a new soybean processing plant 
located near Brewster, Minnesota. Our projection is to start 
construction in the summer of 2002 and start operations in 
2003. Our environmental permit at this time is being modified 
to include the potential production of Soy Diesel.
    As you're well aware, the Minnesota legislature was very 
close to passing a soydiesel mandate this year. While both SDSP 
and MSP is strong supporters of all energy bills for 
biorenewable sources and ethanol, we would take the position 
and encourage the Senate to have a biodiesel component.
    Ethanol has a 20-year plus jump start on biodiesel and 
without that we see that the competitive advantage of us 
getting in would be a tough battle to get there so we would 
encourage that as part of your bill. Seldom do we see a bill 
out of Congress such as S. 1006 that not only addresses the key 
component of security for our energy needs in the United States 
and our dependence on foreign oil, but also provides our 
society an improved environment and an economic stimulus to 
rural economies.
    While a lot of opponents may decry the higher price of 
biofuels or the lost revenues of taxes in the highway fund, we 
believe that a true accounting, a full cost accounting, that 
would include the hidden cost of foreign oil, the reduction in 
the farm program payments, and the environmental improvements 
will show that this legislation will be truly a lower cost to 
us as a society.
    We all have experienced over the last couple years the high 
prices, either on heating our home or our cars as we commute to 
work, but I would like to also share to you that impact of a 
farmer-owned cooperative in processing our grain and converting 
it to products we can sell into the market. If we look at SDSP 
fiscal year 1999 compared to fiscal year 2001, which we're 
nearing completion, our energy cost per unit has more than 
doubled.
    Of course, natural gas has been the lion's share of that 
increase. Cash patronage paid this year to our members, if we 
have energy costs of 1999 versus 2001 would be increased $2.1 
million or $1,000 for our average member throughout SDSP. So 
energy cost is a real hit, not only as we drive our cars, but 
in the prices of everything we buy and use throughout our area.
    Because of this we're working very strongly with your--will 
be very strong supporters in other State legislatures that will 
look at that. While I'm in the soybean business and looking at 
the slogans such as, ``The other white meat,'' versus our 
friends on the corn side, I'm going to keep my comments more to 
the biodiesel end, but again we're very strong supporters of 
the ethanol with that.
    The United States is now roughly consuming 30 billion 
gallons of gasoline or diesel fuel annually. A 2 percent 
biodiesel blend would consume 4.4 billion pounds of vegetable 
oil. This represents about 14 percent of the U.S. domestic 
disappearance of fats and oil and as was mentioned by Mr. Metz 
this morning, we have an excess of 2.1 billion pounds of 
soybean oil in the United States.
    I can report SDSP has ownership or storage responsibilities 
for about 8 percent of that oil with it. So we are strong 
supporters and we would like to, again, see that biodiesel 
would be a component in that area. As we look at increasing to 
5 percent, and you brought up the question earlier of what 
happens to the food supply, if we look at a 5 percent content 
we would ask the question is, in 2015, where are we as farmers 
and producers going to consume or market our products? We now 
know Brazil has excess of 70 million acres that are sitting 
idle today. We believe that those acres will come into 
production and compete against the U.S. farmer over time, it's 
only a matter of time.
    Also if we look today, soybean oil is certainly the oil of 
choice within the United States, representing over 80 percent 
of the vegetable oil, about 55 percent of the total fats and 
oil we consume in our food stuff, but at the same time palm oil 
on the world supply, soybeans only represents 22 percent, we'll 
be displaced as palm oil as the number one producer within the 
next decade.
    Palm oil production increases over the next 15 to 20 years 
will be the equivalent of 45 billion pounds. Put that into the 
oil produced from our soybeans, we would need a crop of 4 
billion bushels of soybeans. So in that perspective we believe 
it is important that the United States not only rely on 
increasing the demand to our producers by a level playing field 
and exports, it's more important that we do something towards 
domestic demand increase. Exports move slowly and it will not 
keep up with the productivity increases that we see in the U.S. 
farmer today.
    Bioenergy--not only in that aspect, we would also recommend 
taking a look at bioproducts, replacing petroleum in that 
category. We would like to bring to your attention that South 
Dakota Soybean Processors has been working over the last 2 
years to introduce soybean oil as used in the polyurethane 
market. A study funded by the USB shows that a potential of 1.5 
billion pounds of soybean oil could replace the petroleum-based 
polyoil in the production of polyurethane.
    So along with soydiesel and energy we would like to have 
the Senate look and legislature keep in mind that we can 
replace with the product grown by farmers and several other 
activities in the products that we use each day in that area.
    With that I'm going to just touch lightly on the 
environmental aspect since other panel members haven't done 
that. Rough estimates that we would put out on 2 percent 
biodiesel in the United States that we would reduce carbon 
monoxide emissions by 32 million pounds. We would reduce ozone 
forming hydrocarbon by almost 3.6 million pounds. We would 
reduce acid rain causing sulfur dioxide by 2.8 million pounds. 
Also it has been shown that the burning of biodiesel in 
relative to particulate matter or reduction of harmful and 
cancerous POMs, impacts to our streams, wildlife, and humans 
would be reduced by more than 80 percent.
    And one item, one more plug for Soy Diesel because we've 
heard a lot from the ethanol guys, is that it has often been 
referred to as the liquid solar energy. Biodiesel when you look 
at the life cycle numbers and the carbon dioxide reutilization 
and going into the atmosphere used back into the soil, that it 
has a life cycle number of a balance of 3.2 to 1. Meaning that 
3.2 units of energy are produced for every one unit of energy 
that is needed to produce biodiesel, one of the highest of the 
biodiesel areas.
    So with that I would like to close my comments and 
certainly would like to answer any questions that you may have.
    [The prepared statement of Mr. Christianson follows:]
  Prepared Statement of Rodney Christianson, Chief Executive Officer, 
   South Dakota Soybean Processors, and Minnesota Soybean Processors
    Good morning. I would like to thank you Senator Johnson for the 
opportunity to speak before you today concerning S. 1006 Renewable 
Fuels for Energy Security Act of 2001. And a special thanks to you, 
Senator Johnson, for your leadership as the lead sponsor for this 
Legislation.
    I am Rodney Christianson, Chief Executive Officer of South Dakota 
Soybean Processors (SDSP) and Minnesota Soybean Processors (MnSP). 
Together I work for and represent 3,200 farm families in South Dakota, 
Minnesota, and Iowa. SDSP is completing its fifth year of operation. In 
this time we will have added value to over 110 million bushels of 
soybeans and are projecting with this year's patronage allocation to 
have returned $15 million in cash to our members. At the same time, 
SDSP has substantially increased its financial strength and has 
reinvested another $10 million dollars in our Cooperative. MnSP is in 
the process of raising equity to build a 100,000-bushel per day soybean 
crushing facility near Brewster, MN. To date we have raise $12.5 
million in commitments from producers. MnSP plans to start construction 
in 2002 and commence operation in the summer of 2003. The environmental 
permit for Brewster is being modified to include the potential 
production of Soy Diesel. As you are aware, the Minnesota legislators 
were very close to passing bio-diesel legislation this year.
    SDSP and MnSP are strong supporters of the committee's Renewable 
Fuels for Energy Security Act of 2001. We are also supporting S. 613, 
the Small Ethanol Producer Tax Credit Bill, W. 670, the Renewable Fuels 
Act of 2001 and S. 1058, the Bio-diesel Renewable Fuels Act.
    Seldom do we see a bill out of Congress such as S.1006. While S. 
1006 is drafted to address strategic security needs of the U.S. and our 
growing dependence on foreign energy, as importantly it provides 
society with an improved environment and a domestic economic stimulus 
to boost our rural economies. While opponents may decry an additional 
cost to the consumer for energy at the pump or reduced fuel tax 
revenues, we believe that a full accounting including 1) the hidden 
cost of foreign oil 2) a reduction in farm program payments and 3) 
environmental improvements will show that THE TRUE COST WILL BE LOWER.
    Through out the U.S. we all personally have experienced the 
increased burden of higher energy prices, be it from heating our homes 
to just getting to work each day. A substantial portion of our 
families' budgets was reallocated to meet our basic needs. We have not 
experienced such an occurrence since the last energy crunch in the 70's 
& 80's. Agriculture processing is typically reliant upon energy to 
covert our grains to usable products and is a key component of our cost 
structure. Let me share with you what it has meant for SDSP's business 
and our members. SDSP's energy cost for fiscal year 1999 compared to 
fiscal year 2001 shows:
    1. Per bushel our energy cost has more than doubled; natural gas 
accounts for the lion's share of the increase.
    2. Cash patronage to our members will be $2.1 million less due to 
increased energy prices in 2001 as compared to 1999.
    Without any action the U.S. will continue to subject its residents 
and industries to foreign interest. We believe additional energy 
sources domestically are a key component and are crucial. Supporting 
domestic bio-renewable energy is a logical and important step for our 
long-term energy security. Because I am working in the soybean industry 
I will direct most of my comments to bio-diesel. I would stress SDSP's 
and MnSP's strong support for ethanol but, would also recommend as S. 
1006 does, that all motor fuel would have a content requirement.
    The U.S. consumes roughly 30 billion gallons of diesel fuel 
annually. A 2% bio-renewable requirement would use 4.4 billion pounds 
of vegetable oil. This represents 14% of the U.S. domestic 
disappearance of fats and oil. And today the U.S. has 2.5 billion 
pounds of soybean oil in storage. Certainly this legislative action 
would be important in increasing domestic demand for producers and 
reduce support needed in the farm program.
    Increasing to a 5% bio-renewable content may raise concerns to some 
members. I would be more concerned where the U.S. is going to market 
its fats and oils without this legislation in 2015. Brazil has 70 
million plus acres that sit idle today. It is only a matter of time 
before this land comes into production and competes against the U.S. 
farmer. In the U.S. soybean has been our oil of choice representing 
over 80 percent of the vegetable oil market and 55% of U.S. fats and 
oil production. On the world stage soybean oil constitutes only 22% of 
the fats and oils markets with palm oil to replace soybean oil as the 
leading oil consumed in the next 10 years. By 2015 world palm oil 
production will double to 90 billion pounds. Let me put this in 
perspective. Forty-five billion pounds of oil would require 4 billion 
bushels of soybean more than the total U.S. crop today.
    Some members may have questions concerning bio-diesels' impact on 
diesel fuel ranging from power to engine reliability. In Minnesota, 
these questions were raised repeatability by the opposition. Those 
arguments are non-starters and at best, serve as smoke screens. Bio-
diesel is well tested and ASTM standards have been established. Our 
friends across the Atlantic burned 250 million gallons last year 
compared to U.S.'s consumption of only 5 million gallons.
    We believe that a key component missing in our current farm program 
is increasing demand for the U.S. farmer. Under the FAIR farm program, 
exports, by leveling the playing field, were going to provide the 
driving force towards increased demand. Instead, gridlock over granting 
the President Trade Promotional Authority ``FAST TRACK'' has kept the 
U.S. on the sidelines of many new trade agreements. Also, developing 
new markets is a slow process, which does not keep up with the 
increased productivity of the U.S. farmer.
    SDSP and MnSP will be pressing Congress to explore efforts to 
increase the domestic demand in the upcoming farm program legislation. 
Bio-renewable energy or bio-renewable products replacing petroleum is 
an important step towards increasing domestic demand. One alternative 
that has resurfaced to improve farm prices has been limiting 
production. SUPPLY-DEMAND control. As sensible as this may seem to 
some, we believe it is an impractical move and one that would be 
detrimental to rural economies. Today the U.S. exports roughly 50% of 
its soybeans, 20% of its corn and 50% of our wheat. How many acres need 
to be taken out of production to have strong prices? Do we really 
believe these acres would not be planted somewhere else in the world? 
Would we close our borders to prevent cheaper foodstuffs from entering 
the U.S.'s artificially high priced market? For the sake of argument, 
let's assume this is the route we would choose to limiting production. 
While you achieve your goals of price support at the farm gate we 
devastate rural economies. Growing a crop will circulate an estimated 
$200 per acre in the local economy. CRP payments will circulate maybe 
$25-$50 per acre. If Congress would set aside 30 million acres, rural 
economies would lose an estimated $4.5 billion; 50 million acres--$7.5 
billion.
    S. 1006 would not only keep American farms productively in service 
but would also provide opportunities for new business and jobs in rural 
America to help fill its energy needs. MnSP is including in its 
environmental permit application the production of bio-diesel. SDSP has 
been working over the last two years to indroduce SoyOylTM 
into the polyurethane market. Recent estimates show that soybean oil 
could replace up to 1.5 billion pounds of petroleum based polyol in the 
production of polyurethane products. The U.S. farmer is ready and able 
to fill the production needs that your bill will create.
    On the environmental front, burning just a 2% biodiesel blend in 
U.S. diesel fuel will curtail harmful tailpipe emissions. Annually, it 
will

   Reduce poisonous carbon monoxide emissions by more than 32 
        million pounds.
   Reduce ozone forming hydrocarbon emissions by almost 3.6 
        million pounds.
   Reduce hazardous diesel particulate emissions by almost 2.8 
        million pounds.
   Reduce acid-rain causing sulfur dioxide emissions by more 
        than 2.8 million pounds.

    In its recently released low-sulfur diesel ruling for 2006 and 
beyond, EPA also states that certain compounds in diesel exhaust called 
polycyclic organic matter (POM) can have significant negative effects 
on reproductive, developmental, immunological and endocrine (hormone) 
systems in both humans and wildlife. These POMs are found in diesel 
exhaust as gases as well as in deposits on particulate matter.
    EPA states that reducing particulate matter would reduce the health 
effects of harmful POM that ends up in lakes and streams. Not only does 
biodiesel reduce particulate matter as stated above, but burning just 
2% biodiesel in the U.S. would have the following additional impact on 
the 600 million gallons of diesel fuel it would replace:

   Reduce harmful and cancerous POM impacts to streams, 
        wildlife and humans by more than 80% compared to diesel fuel.

    Biodiesel has been appropriately characterized as ``liquid solar 
energy''. Biodiesel is produced from renewable sources grown and 
harvested each year such as soybeans in what experts call a closed loop 
carbon cycle--carbon dioxide is taken up by soybeans as they grow and 
is released back into the air when biodiesel is burned. In a joint 
study, the U.S. Departments of Energy and Agriculture found biodiesel 
reduces Carbon Dioxide 78% over its entire life cycle compared to 
petrodiesel and has a positive energy balance of 3.2 to 1 (3.2 units of 
energy are produced for every one unit of energy needed for biodiesel 
production, while diesel is 0.83 to 1). Therefore, burning 2% biodiesel 
in the U.S. would result in:

   Reducing Life Cycle Carbon Dioxide emissions more than 10 
        billion pounds annually.
   Extending the fossil diesel supply almost four-fold for 
        every gallon of diesel replaced by biodiesel.

    Thank you for your time and attention. I will be happy to answer 
any questions.

    Senator Johnson. Thank you, Rodney. We'll turn next to Ron 
Alverson, who is chairman of Lake Area Corn Processors. Ron.

 STATEMENT OF RON ALVERSON, CHAIRMAN, LAKE AREA CORN PROCESSORS

    Mr. Alverson. Thank you, Senator Johnson. My name is Ron 
Alverson and I serve as chairman of the Lake Area Corn 
Processors, a farmer-owned ethanol facility currently under 
construction 45 miles northwest of here near Wentworth, South 
Dakota. I appreciate the opportunity to appear before you today 
to discuss the effect of S. 1006 on the ethanol production of 
South Dakota. We support the provisions of S. 1006 because we 
feel they will create new opportunities for ethanol production 
in South Dakota.
    Before I discuss the broader implications of this 
legislation I think it would be good to provide for the record 
some basic information about the type of value-added ethanol 
facilities that are being built in South Dakota and throughout 
the Midwest. You will note that these facilities are larger 
than those built during the past decade. Advances in 
processing, technology and the relentless pursuit of energy 
labor and capital cost efficiency in ethanol production have 
been the driving forces behind this increase in plant size.
    In South Dakota, four of these 40 million gallon plants 
will be in operation during the next 3 years, with a total 
farmer producer investment of $200 million. The additional 
ethanol demand created by your legislation will provide the 
opportunity for these farmer-owned facilities to be successful 
here in South Dakota.
    Each of these plants will produce 40 million gallons of 
fuel per year and probably more as efficiency increases. Each 
will produce 120,000 tons of dry distilled grains per year. 
Each will provide a market for 14.3 million bushels of corn. 
Each will provide 33 quality new jobs with an annual payroll of 
$1.3 million. And each of these plants will have about $6 
million in natural gas and electricity expenditures per year.
    Over 25 years each of these plants will produce 1 billion 
gallons of clean burning ethanol. Provide a market for 358 
million bushels of corn. A $32.5 million payroll. $1.2 billion 
in total expenditures.
    There has been and continues to be tremendous interest on 
the part of farmers in investing in ethanol production. That is 
because ethanol is the single biggest value-added success we 
have in agriculture today. In areas where the corn price basis 
is large, like most of South Dakota, one of the ways farmers 
hope to increase net profits from their corn crop is to 
investment in processing.
    The average corn price in South Dakota generally decreased 
in the past 6 years. In 1995, the average corn price was $3.23 
per bushel. In 1996, the average corn price decreased .92 cents 
per bushel to 2.31. In 1997, corn prices decreased again to 
2.15. In 1998, it went down again to $1.61. In 1999, the 
average corn price was $1.54 per bushel. Last year, it went up 
a little bit to $1.60, well below the 3.23 average corn price 
in 1995.
    While there are many reasons for this erosion of corn 
prices, certainly one the main factors has been increase in per 
acre yields here in South Dakota as well as across the nation. 
For example, in the decade of the 1970's, South Dakota farmers 
produced an average of 52 bushels per acre per year. In the 
decade of the 1980's, we averaged 69 bushels per acre. In the 
decade of the 1990's, 92 bushels per acre. And the first year 
of this new century produced a statewide average of 112 bushels 
per acre. Corn supplies have become burdensome. Furthermore, I 
believe corn yields will continue to increase at an accelerated 
rate as well as a result of the biotechnological advances in 
corn hybrids, and improving production techniques.
    It is our hope that ethanol production will provide a 
stable market for these new bushels of production and add value 
to our corn crop right here in South Dakota.
    Ethanol production has also been rampant in the United 
States in the last few years and has huge potential to expand 
in the future. 1995 ethanol production was just under one 
billion gallons. In 1996, 1.05. 1997, 1.25 billion gallons. 
1998, 1.3 billion gallons. 1999, 1.4 billion gallons. And 2000, 
1.6 billion gallons of ethanol was produced in the United 
States. This sounds like a lot of fuel, but 1.6 billion gallons 
only represents 1.3 percent of the liquid fuel in the United 
States this past year.
    Other markets for products produced by corn processors tend 
to be mature markets that exhibit relatively slow growth in 
recent years, while the ethanol market has doubled in the last 
10 years. Because of these factors I believe a significant 
amount of new ethanol production will be in the more cost-
efficient dry mill facilities like those I've described.
    Farmers also know that the ethanol production can be 
synergistic with other farming enterprises like livestock 
feeding. The dry mill ethanol production process is, only the 
starch of the corn crop is utilized. High value nutrients 
including all the protein oil and minerals are condensed in a 
byproduct, called the dry distilled grains. About 45 percent of 
the total value of the nutrients in the beginning bushel of 
corn remains in the DDG. DDG is a very nutritious animal feed 
that is known to work particularly well in dairy and beef 
cattle.
    Additionally, animal nutritionists are finding that other 
types of livestock can also perform well on rations formulated 
with DDG. Thus increased ethanol production may not only have 
the effect of increasing energy security here in the United 
States, but also can bring together traditional value-added 
enterprises like livestock feeding with the new value-added 
fuel ethanol facilities. These type of innovative partnerships 
that bring together new with the old, provide farmers with 
opportunities to diversify their economic activity while 
maintaining agriculture as a core business.
    As you have heard we believe your legislation will increase 
ethanol production from grain to nearly 6 billion gallons by 
2011, with an additional 2.4 billion gallons from cellulose. 
That increases to more than 7.6 billion gallons from grain with 
an additional 7.6 billion gallons from cellulose by 2016. These 
production targets represent a staggering opportunity for 
farmers in South Dakota and throughout the Nation to invest in 
value-added ethanol production.
    The provisions of S. 1006 will help create new 
opportunities for ethanol production in South Dakota and I 
thank you for the opportunity to testify here today.
    Senator Johnson. Thank you. Next on our panel is Mr. John 
Twiss, Forest Supervisor out in the Black Hills National 
Forest. John, we've heard a lot from corn and soybean 
producers, occasionally when I go out West River they say, 
``What's all this alternative fuel stuff have to do with us?'' 
John, thank you for joining us on this panel.

       STATEMENT OF JOHN TWISS, SUPERVISOR, BLACK HILLS 
   NATIONAL FOREST, FOREST SERVICE, DEPARTMENT OF AGRICULTURE

    Mr. Twiss. Thank you for the invitation, Senator. It's good 
to be here, good to be over in this part of the State which I 
don't get over too often enough.
    The Black Hills National Forest is one of 122 national 
forests in the system, we're in the Department of Agriculture. 
It is, as most of you probably know, in western South Dakota 
and eastern Wyoming and I think it's interesting moving from 
soybeans to corn and now we'll talk about wood a little bit and 
how that might relate.
    But first I would like to talk just a little bit about our 
use of biodiesel in our fleet on the forest and we've had a 
pretty successful run as you know, Senator, burned about 20,000 
gallons. We set this up in half of our diesel fleet to kind of 
compare it with the rest of the fleet that is just using 
straight diesel and did an evaluation here.
    We've done this for 3 years now and we like just about 
every aspect of it and the two concerns we've had have been the 
increased cost of the soy oil which sounds like it probably may 
be resolved now, and then the mixing of it and I think John and 
I may have solved the mixing problem last night.
    But we're going to increase our diesel fleet on the forest 
by a third here and most forests in the Nation are doing this 
right now to increase the size of their fire fighting fleet. 
And so I think it's very probable that we'll probably use this 
in 100 percent of our fleet here starting this year and the 
price is where we want it. If we get the mixture issue solved 
so that it comes pre-mixed, I think that's what we'll probably 
do.
    But probably one of the greater advantages that's just now 
becoming apparent to us is the environmental friendliness of 
this product. If you're in the Federal Government and you have 
to dispose or clean up diesel, gasoline, paint, it's just 
amazing what it costs. We're very cautious now about what we 
purchase just because we're just now becoming aware of what we 
have to do to dispose of these kind of products, so this is 
something that really fits well with where we want to go. The 
environmental friendliness of it and it should be a huge cost 
savings, particularly if we ever have a spill as I say.
    The other area that we work on in the forest, Senator, that 
I think pertains to your bill and the administration has not 
taken a position yet, but--and that's in the area of wood 
ethanol which is now, I think, potentially becoming feasible 
and then biomass, the burning of wood products for electrical 
energy.
    Most of the forests in the Western United States are 
overgrown right now, they badly need to be thinned, they are 
very fire prone. There is a tremendous amount of wood product 
tonnage out there on each forest with very little market for 
the small diameter stuff as well as the waste products on the 
ground and a number of the waste products that are coming out 
of the saw mills. We're currently financing two feasibility 
studies off our forest or with products that will come off our 
forest. One for an ethanol plant in either western South Dakota 
or eastern Wyoming, and the other one for an electrical 
generation plant, both using wood products from the Black Hills 
National Forest almost exclusively.
    With the serious condition of our forests right now we are 
very much looking for ways to start this thinning program and 
be able to dispose of these products. Both of these two options 
appear to be viable ways to meet this need if we can make this 
thing economically feasible.
    So I'll end my testimony with that and just plant that seed 
with you. I think that when you think about the fact that we 
have 122 forests out here, the Black Hills being one, and we 
have the potential of supplying those kinds of plants in our 
area, potentially I think the other forests have even greater 
opportunity. Thank you again.
    [The prepared statement of Mr. Twiss follows:]
  Prepared Statement of John Twiss, Supervisor, Black Hills National 
           Forest, Forest Service, Department of Agriculture
    Mr. Chairman and members of the Committee, thank you for the 
opportunity to appear before you today to discuss the Black Hills 
National Forest's experience with bio-diesel fuel.
    On July 1, 1999, the Black Hills National Forest became the first 
forest in the nation to use B-20 bio-diesel fuel. This fuel, which we 
mix, consists of 20% soybean oil and 80% diesel fuel. There are several 
advantages to using the B-20 mix including: decreased emissions and an 
increase in its cetane rating, which makes it a more efficient and 
cleaner burning fuel that is more favorable to the environment.
    Since the beginning of this program, the Black Hills National 
Forest has used over 19,000 gallons of B-20 bio-diesel. The equipment 
has varied from dozers, motor graders, and heavy trucks that are used 
for construction and maintenance of our infrastructure, to lighter 
pick-ups used for firefighting and administration of the Forest. At no 
time during the last two years of use have we noticed any adverse 
effects to the equipment. Our scheduled maintenance has remained 
unchanged.
    The only downside that we have noticed while using the bio-diesel 
fuel is that it costs approximate twenty percent more than conventional 
diesel fuel. I understand the cost of the soybean oil has decreased 
since our last purchase and this may translate into lower prices in the 
future. The Black Hills National Forest will conclude its pilot test at 
the end of this month and so far all results have been very positive.
    This concludes my testimony and I will be happy to answer any 
questions you may have.

    Senator Johnson. Thank you, John. Last on our panel here 
today is John Campbell. John I got to know when he was a high 
ranking official in the Department of Agriculture when I was in 
the House of Representatives, but he's currently vice president 
of Industrial Products and Government Relations with Ag 
Processing, Inc. John, welcome.

        STATEMENT OF JOHN B. CAMPBELL, VICE PRESIDENT, 
                       AG PROCESSING INC.

    Mr. Campbell. Thank you, Senator. Being the last person I 
kind of feel like there's not a lot left to say so I'll just 
try to address the points that maybe haven't been talked about 
by other folks.
    You know about AGP, a lot of people only know of us as the 
largest farmer-owned soybean processing and refining co-op in 
the world, but our board really wanted to do more in the way of 
value-added and we jumped into the ethanol business in 1995 
with a 30 million gallon plant that expanded to 50 million, and 
then in 1996 we completely lost our minds and got into the 
biodiesel business.
    The farmers were investing millions of dollars in research 
and development and there wasn't a reliable reasonably priced 
supplier of biodiesel. So we talked our board into setting up a 
plant in Sergeant Bluff, Iowa, and we've been kind of on pins 
and needles for the last few years about whether that was a 
good idea, but thanks to you and others, the CCC bioenergy 
program has tremendously helped us with customers like the 
Forest Service because it's allowed us to make prices more 
competitive.
    We have about 250 local co-op and regional co-op members 
who own our large regional, about 25 of those members are in 
South Dakota. So even though I'm not a native South Dakotan we 
have a lot of farm families who do rely on our patronage to 
keep the local co-ops viable.
    Just a few points on the criticisms about this bill and 
others. You and Senator Hagel, Senator Daschle, Senator Lugar 
have taken a lot of heat because you promote an energy source 
that requires subsidies. And the people who make those 
arguments labor under the illusion that we have a free market 
in energy. It wasn't so long ago we had the Secretary of Energy 
going around telling OPEC ministers to get the price of oil up 
because $9 oil was bad for the world economy. And then a few 
short months later we went around with tin cup in hand saying, 
well, $30, we didn't mean to go that far. $30 is too high, can 
you get the price down?
    So we don't have a free market in oil and we shouldn't 
apologize for the incentives that we need. We think of these as 
playing field levelers. These are consumer incentives so that 
people can afford to buy our products in a market that's 
already heavily tilted towards oil and gas.
    Senator Harkin recently released a report by the General 
Accounting Office that stated that the oil and gas industry 
received $82 billion in percentage depletion deductions, $43 
billion through expensing of exploration and development costs, 
$8.4 billion in tax credits for production of non-conventional 
fuels, and over that same period ethanol received $11 billion.
    So we don't have to apologize for those incentives. We're 
not anti-oil. We're pro-oil. We just want to make sure that 
there's room somewhere for renewables and it would be a crime 
for the Congress to report out a national energy strategy that 
didn't have something in it that is real for renewables and 
this bill is the most aggressive bill that I know of that's 
been introduced.
    Just a quick note because we do have our foot in both 
camps, both the ethanol and biodiesel. We've been in this 
battle for over 2 years about MTBE, oxygenate, RFG, RFS, and 
it's kind of like the two immovable forces. The waiver has been 
denied, we're not going away, people like you have stood in the 
gap and said, they are not going to get the waiver. But 
likewise they have 54 members in the House, the Northeast has 
18 Senators, they are not going to go away either.
    We need to arrive at some sort of a consensus, and the 
Energy Committee, the Environment Committee, the Tax Committee, 
the Agriculture Committee, all have to have an integrated 
approach that settles this issue. And the reason it needs 
settled is because it's very difficult from our perspective to 
make investments in this industry not knowing if there really 
will be a market.
    And in our view the excise tax exemption for ethanol kind 
of guarantees at a minimum you'll be a gasoline extender, but 
we've seen markets for gasoline extenders trade at 30 cent 
discounts to gasoline and that might work with $2 corn, but it 
doesn't work with $2.50 or $2.60 corn, which is where we would 
rather see corn. So we need something else and the RFS, in our 
minds, is the answer.
    Just quickly again to finish up. There's a lot of 
environmental benefits to renewables and those are all great, 
but they are not accounted for and they are not given credit in 
our current accounting. But what we do account for is our trade 
deficit and there's a recent draft report that came out from 
the DOE which talks about these costs and this report, quote, 
says, increasing the market share of alternative and 
replacement transportation fuels would have significant energy 
security and oil market benefits for the United States. Some of 
these benefits will occur even if the use of fuels is induced 
by regulations, subsidies or demonstration programs.
    It goes on to say, if the United States were to achieve the 
10 percent replacement fuel goal of the EPAC, oil prices would 
be reduced by approximately $3 a barrel. At current U.S. oil 
consumption levels of 6.8 billion barrels, this would save us 
$20 billion a year.
    Keep in mind the ethanol program only costs 11 billion 
over, like, a 15-year period. Maybe it's a billion dollars a 
year, we could save $20 billion a year by doing this. While 
some people have criticized the Hagel/Johnson bill as being too 
aggressive, but the goals in this bill are only half of what 
the goals of the bill were in 1992 that was passed after the 
Persian Gulf war was fought. So I don't think they are 
unrealistic and just to conclude, we commend you, we hope 
you'll just keep the pressure on and get something done this 
year. Thank you.
    [The prepared statement of Mr. Campbell follows:]
        Prepared Statement of John B. Campbell, Vice President, 
                           Ag Processing Inc.
    Thank you and good morning Mr. Chairman. On behalf of Ag Processing 
Inc. and Ag Environmental Products LLC, I appreciate the opportunity to 
testify and commend the Committee for holding this hearing. We 
especially appreciate the efforts of Senator Hagel and you upon the 
introduction of S. 1006, the Renewable Fuels for Energy Security Act of 
2001. I know your time is short and that you have many witnesses so I 
will highlight this testimony and ask that the complete text be entered 
for the record.
    Mr. Chairman, you know about the many aspects of AGP but most 
people only associate AGP with the regional cooperative that crushes 
more soybeans and refines more soybean oil than any other farmer-owned 
cooperative in the world. While that may be nice bragging rights, our 
farmer and local cooperative manager Board of Directors wanted to go 
farther and do more.
    Popular buzzwords in rural America today are ``value-added'' and 
``farmer-owned''. Other than sounding nice, what do these phrases 
really mean? For our cooperative it means doing what we have always 
done but also striking out in new directions. In 1986 it meant building 
our first soybean oil refinery so that we could add value to soybean 
oil. Throughout the years it has meant expanding our overseas and 
domestic customer base. It has meant expanding plants and building new 
ones to keep up with the growing soybean and livestock industry. It has 
meant introducing the first and only component pricing program for 
soybeans.
    More specific to this hearing, our Board decided in 1995 to build a 
grain ethanol plant in Hastings, Nebraska. That particular plant 
started out as a 30 million-gallon plant and has been expanded to 50 
million gallons. A year later we jumped into the biodiesel market by 
building the first dedicated soydiesel plant in the Midwest at Sergeant 
Bluff, Iowa.
    The preceding is given as background not to toot our own horn, but 
to let the Committee know that ``value-added'' and ``farmer-owned'' are 
not just cliches at AGP. We have put our money where our mouth is. Many 
in the soybean industry thought we had lost our senses when we started 
into the biodiesel business. There was no biodiesel industry. There 
were no customers. Nobody in the government had even heard of 
biodiesel. All there was back in the early 1990's was a small group of 
farmers in Missouri, a couple of academics, a couple of entrepreneurs 
and AGP.
    Today, as you can see, things have sure changed. Biodiesel and 
ethanol are the flavors of the week. Renewable and green energy have 
gained credence as energy costs soar. America is reawakened to our 
reliance on energy and our vulnerability to supply and demand changes.
    I am not here to claim that renewables can alter fundamental energy 
balance issues. I am here to say the renewables can make a difference. 
If we add up a lot of small differences--be they slightly larger 
domestic oil production, slightly larger refinery capacity, slightly 
more conservation and a small portion of the market reserved for 
renewables--we can begin the process of reversing the trend toward ever 
increasing dependence on unstable and sometimes hostile regions of the 
world for our economic well-being.
    S. 1006 sets a goal of reserving 3 percent of the transportation 
fuel market for renewables in 10 years and 5 percent in 15 years. This 
might not sound like much at first. But consider that ethanol has been 
around since the 1930's and only accounts for less than 1 percent of 
the gasoline market today. As fuel consumption grows, 3 and 5 percent 
of those markets represent huge increases in ethanol and biodiesel 
demand.
    The benefits to agriculture are obvious. More demand equals higher 
prices. Higher prices mean less government spending on price and income 
support programs. More domestic demand means less reliance on fickle 
export markets. More plants in rural America mean more jobs, more 
schools and more churches.
    Critics will trot out the ``mandate'' argument and correctly point 
out the need to subsidize renewables. They will argue that these energy 
sources are not economic and that government is interfering with the 
market.
    We must not shrink to these arguments. We must instead bring some 
reality to the debate. Do critics think that we have a free market in 
energy today? It was only a few short months ago that the previous 
Administration encouraged OPEC members to get crude oil prices up when 
they plunged to less than $10/barrel. That same Energy Secretary was 
then sent around with tin cup in hand asking for OPEC members to get 
the price of crude down when they rose above $30/barrel.
    Do critics believe citizens have a choice in the Pentagon program 
to spend around $9 billion per year defending the Persian Gulf supply 
lines? Have we forgotten that the Energy Security Act of 1992 was 
approved in the wake of the Persian Gulf War? The Persian Gulf War was 
fought because our ``national security'' was at stake. Read--we need 
the oil.
    To the subsidy question: Yes, ethanol and biodiesel need a consumer 
incentive to compete in a marketplace that is heavily tilted toward oil 
and gas. This consumer incentive is a playing field leveler. The 
General Accounting Office recently released a report stating that the 
petroleum industry has received $82 billion in percentage depletion 
deductions, $43 billion through expensing of exploration and 
development costs and $8.4 billion in tax credits for production of 
non-conventional fuels. For comparison, the ethanol excise tax 
exemption ``cost'' $11 billion over the same study period.
    Be assured that we are not anti-oil. We are pro-oil. We just want 
to make sure there is room in an already distorted market for 
renewables.
    Mr. Chairman, a few concluding comments on the current ethanol and 
biodiesel situation. Both fuels rely on politicians like you for 
support. Absent that support our industries will crumble.
    For nearly 2 years the battle has raged over MTBE, the RFG oxygen 
standard and ethanol. Many bills have been introduced in Congress--most 
aimed at giving one side or the other what it wants. Finally, a 
decision was made on the California waiver that, for a brief moment, 
seemed to settle the issue once and for all.
    Not so. The state of California spokespeople say they are 
``reviewing their options'' including a delay in their MTBE ban. The 
California Congressional delegation has reintroduced their legislation 
to grant California an oxygen waiver. Not to be outdone, one group is 
even challenging the right of California to ban MTBE in the first 
place. EPA officials have openly questioned the need for the RFG 
program when the Clean Air Act comes up for reauthorization. Some 
environmental groups go so far as to question the environmental 
benefits of ethanol.
    Mr. Chairman, this is no way to build an industry. How can we be 
expected to make production investments when things are always so up in 
the air for renewables? Biodiesel does not even have an excise tax 
exemption. We are constantly relying on the good fortune of having a 
few powerful Members of Congress in the right place at the right time 
to keep renewables afloat.
    The time has come to integrate renewables into a national energy 
strategy and set a course so that investors can, with confidence, build 
a renewable industry.
    The petroleum industry, renewable fuels industry and 
environmentalists are going to have to work things out. We must forge a 
consensus to move forward. We must be willing to cross jurisdictional 
lines in Congress to forge a comprehensive policy. The Energy 
Committees, the Tax Committees, the Environment Committees and the 
Agriculture Committees all have a role to play in an integrated 
approach.
    S. 1006 defines and reserves a market for renewables. Biodiesel 
will need a consumer tax incentive in order to take advantage of the 
legislation.
    In the end it is our view that the justification and rational for 
S. 1006 lies not so much the environmental benefits of ethanol and 
biodiesel, which are many, but the need to reserve a small--but growing 
segment of the transportation fuel market for renewables.
    I would like to quote from a draft U.S. Department of Energy 
analysis on the Oil Price Benefits of Increasing Replacement/
Alternative Fuel Market Share.
    ``Increasing the market share of alternative and replacement 
transportation fuels would have significant energy security and oil 
market benefits for the United States. Some of these benefits will 
occur even if use of the fuels is induced by regulations, subsidies, or 
demonstration programs.'' Mr. Chairman, the DOE draft report states 
that there is a total of 3.6 percent of the gasoline market supplied by 
alternative and replacement fuels. MTBE accounts of 2.6 percent, 
ethanol 0.7 and all the others 0.3 percent.
    Even these modest levels of alternative and replacement fuel uses 
are providing some energy security benefits.

   The present 3.6 percent market share of alternative/
        replacement fuels produces an approximate $1/barrel reduction 
        in oil prices. At current U.S. oil consumption levels of 6.8 
        billion barrels, this level of alternative/replacement fuels 
        use results in a savings of approximately $7 billion on an 
        annual basis.
   If the U.S. were to achieve the 10 percent replacement fuel 
        goal of the Energy Policy Act of 1992, oil prices could be 
        reduced by approximately $3/barrel. At current U.S. oil 
        consumption levels of 6.8 billion barrels, this level of 
        alternative/replacement fuels use results in a savings of 
        approximately $20 billion on an annual basis.

    Mr. Chairman, the Energy Policy Act was passed just after the 
Persian Gulf War. It set out a goal of 10 percent petroleum 
displacement. However, it was only a goal. The bill fell short of 
actually setting policies to make sure the goal was more than just 
words on a piece of paper.
    The Hagel/Johnson bill is about making good on the promise of 1992. 
Some will argue that the Hagel/Johnson bill sets unrealistically high 
targets. However, these targets are half the levels already approved in 
1992. The difference today is that we are more dependent on foreign oil 
than ever. We owe it to ourselves and to future generations to get 
moving on the goal of freeing America from the clutches of cartels and 
the whims of dictators.

    Senator Johnson. Thank you, John. Let me just ask a few 
questions of this panel. I would ask Trevor, one of the 
criticisms we hear about significant increases in ethanol as 
fuel or even as an oxygenate is getting it from the Corn Belt 
to California, getting it around the country, and we've 
sometimes run into criticisms about, how are you guys going to 
transport all this stuff? And we hear all the criticisms about 
the lack of pipeline suitability and so forth.
    What are your views in terms of being able to produce, 
obviously we produce more ethanol in South Dakota that we can 
possible consume here and we want to produce a lot more than we 
can consume here, what are the prospects of moving this to 
other parts of the country or would you have to produce ethanol 
at the open marketplace?
    Mr. Guthmiller. Well, I think the logistical and 
transportation issues will resolve themselves as demand spreads 
around the country. We now sell ethanol in Alaska in the winter 
time to help them meet their clean air program requirements and 
we get ethanol there pretty economically and pretty 
efficiently. We'll be able to get ethanol to California a 
variety of ways; rail service is crucial to this part of the 
country, and we've got to work for that, and that will be 
important to getting ethanol to California as well as other 
parts of the country.
    Some of the ethanol production along the Mississippi and 
Illinois Rivers will be able to be transported via barge and 
ship to California where it will be off loaded at their 
refineries and terminals and shipped throughout the State of 
California by pipelines out there. We've worked with some of 
the petroleum companies out there to familiarize them with 
material compatibility and things such like that. So I don't 
think we'll have any problems taking ethanol from the Midwest 
and distributing it to whatever part of the country the demand 
is at.
    Senator Johnson. For Trevor and Ron, either one of you on 
the ethanol side, we can burn up to about a ten percent blend 
right now with no reconfiguring of the mechanics of the 
vehicle; is that about right?
    Mr. Guthmiller. Legally, that's the most that the EPA will 
allow to be blended with gasoline for general consumption is 10 
percent. Technically, you can burn higher amounts.
    Senator Johnson. What kind of penetration do we have in 
terms of gasoline station sales of an ethanol blend?
    Mr. Alverson. Very good here in South Dakota, Midwest.
    Senator Johnson. We are one of the leading States.
    Mr. Alverson. But on both coasts it's pretty limited.
    Mr. Guthmiller. We're strong in the Midwest, actually where 
we have a familiarity with the product and consumers accept it 
and prefer it in most cases. In other parts of the country it's 
used sometimes to meet their clean air requirements, Denver and 
Las Vegas, for instance, will use it in the wintertime. Chicago 
and Milwaukee use it all year long, State of Minnesota 
virtually every gallon of gasoline is ethanol blended. So it 
varies from region to region, but it is used in some cases in 
most every State in the Nation.
    Senator Johnson. Recently there was some criticism in the 
national media about our incentives for the auto industry to 
develop dual use vehicles, that is, using ordinary gasoline or 
E-85, which is 85 percent blend, which does require some 
additional modifications, not enormous, but it does involve 
some modifications.
    Turns out that the problem is not really E-85, the problem 
was there was not a single station in the entire west coast 
selling E-85, so you continue to have a little bit of this 
chicken and egg problem where we've got a product that is 
proven, but no one wants a vehicle if they can't buy the fuel 
and you don't want to create the fuel if there's no one to buy 
the product. So any thoughts about how we crack this?
    Mr. Guthmiller. Well, I think we need to make sure that E-
85 goes beyond just being a vehicle program incentive for the 
auto makers to produce vehicles that can run on 85 percent 
ethanol, but there also needs to be something done on the fuel 
side as well to spur the development of that infrastructure. 
It's essentially creating a whole new fuel product and getting 
it out there.
    We've got E-85 pumps in, I think, six or seven towns in 
South Dakota right now. There's fifty towns in Minnesota with 
E-85 pumps, but problem-wise the people are on the east and 
west coast and as I understand it there's going to be probably 
$2 million in appropriations coming out of Congress this year 
to help develop infrastructure for E-85 in places like 
California and that's, I think, part of what needs to be done 
to make sure that we make this transition from E-85 being just 
a vehicle program for the auto makers, to a fuel program. We 
make sure it carries over to markets for these corn producers 
as well.
    Mr. Christianson. If I may on that, Senator Johnson, as the 
technology, General Motors, Ford, Volkswagen, all were 
supplying ethanol run vehicles in Brazil in the mid-1980's, so 
the technology is there.
    Senator Johnson. It's just not rocket science technology. 
Rodney, let me ask you on the soydiesel side of things, the EPA 
is requiring sulfur consent to come down radically in diesel 
fuel by 2007, I believe it is. What other strategies are 
available for diesel consumers other than to go to soydiesel? 
What are we competing with?
    Mr. Christianson. Well, certainly soydiesel provides the 
lubricity, and you have even made the comment soydiesel blended 
with ethanol in race cars shows tremendous lubricity brought to 
the top of the cylinder. Certainly the petroleum industry is 
going to have their components out there that will be adding to 
the lubricity, so we're going to compete, I believe, against 
the petroleum industry, against the lubricity additive to 
diesel fuel that does not contain the same sulfur level as we 
have today.
    Senator Johnson. Fair to say that the oil industry will 
always favor fuel strategies that they control entirely as 
opposed to----
    Mr. Christianson. The normal businessman would do that.
    Senator Johnson. So it shouldn't raise any eyebrows or 
shock anyone at that. On the soydiesel side, it's a roughly 2 
percent blend that's typically used, did I understand that?
    Mr. Christianson. And John may help out on that, but 
certainly the B-20 is approved as an alternative fuel, so I 
think in the United States today that burns about 5 million 
gallons of soydiesel a year ago, even though Europe burns 250 
million gallons. Now a lot of that went into the alternative 
fuel that qualifies as alternative fuel for enpavement barriers 
and they don't have to go to the compressed gas and take the 
capital cuts with that. So we see it in those large fleets with 
that and then some government agencies have been working on it.
    Senator Johnson. John, you talked a little bit of an 
initial problem you had with blending of biodiesel with your 
Forest Service fleet, you can't just buy it brought to your 
shops pre-blended, you have to blend it at the site? How do you 
do this, what's the problem here?
    Mr. Twiss. Yeah, we've been mixing barrels of diesel with 
barrels of--well, barrels of soy oil with the diesel we get and 
John has said we may be able to get it pre-blended which makes 
it a lot more convenient, which means we can spread it 
throughout our different diesel tanks throughout the forest and 
we have our own mixer at one site there where about half of our 
diesel equipment is. So just more of a convenience thing, if we 
can solve it I know I could sell it a lot easier to our 
employees.
    Mr. Campbell. It's kind of a chicken or egg thing. If you 
don't buy very much then the fuel jobber isn't very interested 
in servicing a couple hundred gallons here and a couple hundred 
gallons there, but this summer, again because of the CCC 
program, we had tremendous uptake in the Midwest, South Dakota 
being one of them, for co-ops that would come in or independent 
fuel jobbers, they would come in with their tanker, fill up at 
our plant, they take that tanker, blend it off into a rack 
situation and then they would go from there and that's the kind 
of--we need those kind of volumes to get the efficiencies up so 
that the consumer isn't paying and messing with all these drums 
and fiddling around and that sort of business, but we're 
getting there.
    Senator Johnson. John, I appreciate your observations on 
subsidy issues as well. Yes, we do provide some tax breaks on 
alternative fuels. On the other hand, the oil industry gets 
significant tax relief as you note in depletion allowances and 
production tax grants, not to mention the cost of keeping our 
fleet halfway around the world patrolling the oil flow from the 
Middle East among other places, and so I think the question is 
not that they are a free market and we are not.
    We're trying to get to that critical mass of usage where 
hopefully we can minimize subsidies, but at the same time stay 
on a fair level playing field with oil and that there's a lot 
of good public policy and reasons why we ought to be doing 
that, from the environment to balance of trade, as you know.
    I also appreciate your observations earlier relative to a 
little bit of a chicken and egg problem in terms of willingness 
to invest in this--in the ethanol industry or biodiesel for 
that matter, that we're calling for a substantial ramping up of 
demand.
    But unless there's some assurances to that, and it has to 
be a fairly long term kind of assurance, your board of 
directors is obviously going to be willing to do the good thing 
up so far, but it's going to get to be a point where they say, 
my gosh, with all this ethanol coming on line, how confident 
are we that there's going to be a market?
    And I hope that this Senate legislation will create a 
framework where you and other investors, whether it's from a 
cooperative or whoever they might be, will be able to with some 
certainty say, yes, in fact, this is part of our national 
energy strategy, it's here to stay and we can make these very 
significant costly investments that are required for soy use in 
our ethanol.
    I think it's amazing that we've had the response that we've 
had in terms of ethanol plant biodiesel investment given some 
of the uncertainties that are out there. But you do reach a 
point where if we're going to get to this massive use, doubling 
the use of ethanol and going beyond that, to get there and to 
have the investors willing to do that they've got to know that 
that demand is going to be there not just tomorrow but years on 
down the road and that's why I think, again, you can't do this 
transition, you can't break this chicken and egg problem unless 
you have Federal legislation which essentially sets out a fuel 
requirement saying, this is national policy, this is the way it 
is. And so again I applaud all of you in your work working with 
us to get us to this point.
    Because we're running a little short on time let me thank 
this panel again for their contributions they've made with 
their testimony here, and for purposes of closure for this 
hearing I would like to invite anybody who has a comment or a 
question not just to me, but to any of the panel members of 
panel one or panel two that are still here, we would be glad to 
take those.
    For people who have a point of view but haven't made it 
quite formulated in their head quite yet that would rather just 
submit a written statement, the record for this committee 
hearing will remain open for 10 days. So for anybody who would 
prefer just to share their observations with us or data with 
us, we'll leave it open for that amount of time. You can 
contact the committee directly, but the easiest thing to do 
would just to get it to my office right here in Sioux Falls or 
send it off to Washington and we'll see to it that it gets in 
the record.
    With that, are there any questions or comments from the 
general public? Yes?
    Audience member. What is the cost of ethanol at $1.50 corn 
compared to $3 corn?
    Senator Johnson. How does the--how does the cost of ethanol 
correlate to the cost of corn basically?
    Mr. Christianson. Take your additional dollar and a half 
and divide it by 2.6 and you've got your increased cost.
    Mr. Alverson. It would go up accordingly, so actually you 
take that number times .45 and that would be the increase in 
cost per gallon.
    Senator Johnson. But does the viability of the ethanol 
industry depend on cheap corn? I mean, is that----
    Mr. Alverson. It depends on the price of gas.
    Senator Johnson. It depends on the price of gas. It would 
seem to be that one of the benefits of South Dakota in the 
ethanol side of things is that we turn what historically have 
been disadvantages into advantages in the sense of we're at the 
western end of the Corn Belt, we tend to have lower cost corn 
frankly, and in the case of California we're about the closest 
part of the Corn Belt to at least the west coast consumers. 
Which is contrary to what historically has been our problem, 
low cost and far from the consumers.
    Mr. Guthmiller. The technology and efficiency in processing 
ethanol has also increased dramatically in the last decade. So 
the plants that we see now in places like Minnesota and South 
Dakota and Nebraska tend to be the most efficient, most 
economical, in terms of ethanol production as well. So that 
will hopefully allow for increased costs of corn to be paid to 
farmer producers as well as keeping ethanol economically 
viable.
    Senator Johnson. What has been your experience in your area 
in terms of consequences on the price of corn per bushel for 
your members? Has it had an upward push on the price of corn?
    Mr. Alverson. As far as what?
    Senator Johnson. Well, in terms of the people who provide 
corn.
    Mr. Alverson. For the plant? See, we're not going yet.
    Senator Johnson. Well, but the projection would be----
    Mr. Alverson. What we're hoping if you look at a long term 
average in terms of what's been traditionally what ethanol has 
been sold for and the traditional cost of corn over the last 10 
years average, we're looking at about 50 cents per bushel to 
the price of corn.
    Senator Johnson. Fifty cents a bushel isn't really--and 
that's a 40 million gallon plant?
    Mr. Alverson. Right.
    Senator Johnson. Yes.
    Audience member. I wanted to ask you if your ethanol 
planning if it restricts any crops or vegetation or anything 
from it, no matter what they could make ethanol from, whether 
it's an ag product or whatever.
    Senator Johnson. It's my understanding you can make ethanol 
from virtually kind of----
    Audience member. Any ethanol?
    Senator Johnson. Any biological product.
    Mr. Guthmiller. Essentially, starch or sugar or cellulose.
    Senator Johnson. And that corn is one of the most 
efficient, but there is rice and you can make it out of wood 
chips for that matter and obviously it requires some changes in 
the plant.
    Mr. Alverson. Technology is in its infancy and currently 
the cost of production per gallon of ethanol is quite high out 
of cellulose, but with more technology and increases that are 
in design, things like that, it should be competitive.
    Senator Johnson. Yes.
    Audience member. I have a question for Trevor. With the 
increased focus on greenhouse gases in the world, is there an 
estimate as to how much ethanol helps the cycle of not 
releasing additional carbon dioxide into the air versus 
petroleum, seeing as we do just keep relocking that carbon into 
the plants versus releasing?
    Mr. Guthmiller. That's one of the beauties of ethanol 
production versus fossil fuels, is essentially with fossil 
fuels we're taking the carbon out of the ground, combusting it 
and putting the carbon into the air, the greenhouse gases into 
the air. With ethanol why it's considered renewable is 
essentially we're using the energy from the sun to grow the 
corn, the corn recycles a lot of that carbon that's in the air 
and combusts some of it with the gasoline that you burn it 
with, but it becomes essentially neutral.
    We've got a lot of that information that quantifies that on 
our website which is just www.ethanol.org and we have a button 
there called Reports and Studies. So I guess I would refer 
people who are interested in getting the details of how all 
that works to check out some of those reports and studies, but 
those have been reported by some pretty, very knowledgeable 
scientists and others that quantify how much that we can reduce 
greenhouse gases both using the 10 percent ethanol blend as 
well as using the 5 percent blend and they are quite 
significant.
    Senator Johnson. This is an important issue and, in fact, 
the Senate Energy Committee is going to be taking up a hearing 
on July 24 focusing on climate change. One of the components of 
that climate change debate and hearing we're going to have is 
going to be the role of these alternative fuels.
    Audience member. Senator, do you have someone from the EPA 
working with you on the, like, the revapor pressure, those type 
of things, that ethanol brings to a product?
    Senator Johnson. Well, not directly, but we do consult----
    Audience member. But you have a resource?
    Senator Johnson. And try to work with them on those issues, 
right.
    Audience member. Is there any standardization going on for 
the country so we don't have, like, 40 different kinds of 
product to choose from throughout the country?
    Senator Johnson. Well, Trevor, in terms of ethanol, is 
there any standardization?
    Mr. Guthmiller. Yeah, I guess when we look at fuel products 
we see conventional gasoline and we see reformulated gasoline 
and they all have their certain specs and those specs are 
pretty consistent throughout the country. We like the clean air 
regulations, we think that they make a lot of sense and we 
think that they have done what Congress said they were going to 
do and the EPA said they were going to do.
    There's a lot of talk about these boutique fuels and 
balkanization, but in reality it's a lot of rhetoric. There's 
reformulated gasoline and there's conventional gasoline and 
both of them have to meet certain specifications, whether they 
are sold in Chicago or whether they are sold in Sioux Falls, 
they all have meet those guidelines and the oil industry knows 
what those guidelines are and they've been able to, you know, 
understand them, use them for a number of years now.
    So we think it's time to move away from the rhetoric of 
balkanization and boutique fuels and talk about an energy 
policy in terms of a national energy strategy that finds a role 
for renewable fuels in with a mix of fossil fuels that we're 
currently using.
    Senator Johnson. Senator Bingaman, who is chairman now of 
the Senate Energy Committee has indicated that he wants to take 
a good look, hard look, at this whole fuel debate going on and 
see if there is a need for some additional streamlining or is 
it more a fiction than fact and so that is going to be part of 
what we're going to be looking at here this summer.
    Yes.
    Audience member. First of all, thank you very much for 
being the keynote speaker at Northern Growers Ethanol 
groundbreaking a week ago and I think we've covered a lot of 
ground here today. There's one piece of important legislation 
that hasn't been mentioned and that's Senator Carnahan from 
Missouri's piece of legislation to extend the excise tax 
abatement from 2007 to 2015.
    This would be very, very important to the ethanol industry 
and we hope that that piece of legislation can pass too. And I 
want to say that it's good to see that there are a lot of my 
colleges from the South Dakota legislature here today and we're 
hoping that in the future the State of South Dakota can do a 
little more for the ethanol industry. Thank you.
    Senator Johnson. A little side lobbying there, Jim, but 
thank you. I appreciate your leadership up there in the Milbank 
area. You're right, we do need to revisit this--an extension of 
the tax issue, again we got a little complication now because 
of CBO scoring and how much room is left for additional tax 
breaks and so that concerns me, but we need to do this.
    We did extend it once, you need a fairly long window in 
order to have investors have a high level of confidence in what 
the climate is going to be and we need to keep that in mind. So 
I would hope that before this year is out that we can revisit 
the possibility of a substantial extension on that.
    Yes.
    Audience member. Senator, there's a third co-product from 
this plant that is CO2 and I know Ron has done some 
work on that product and how it would also displace other 
energy. I would like to hear his thoughts.
    Mr. Alverson. Actually it was suggested by a friend of mine 
that's a chemist that said, why don't you use the carbon 
dioxide to make some fertilizer? In the traditional fertilizer 
process hydrocarbons are broke to release hydrogen, and 
hydrogen is combined with nitrogen in the air to create 
anhydrous ammonia. If you treat that anhydrous ammonia with 
carbon dioxide you create dry urea, a nitrogen form of 
fertilizer.
    If you can get the hydrogen from some other source, such as 
water with electrolysis, then you can use the carbon dioxide 
out of this plant to make urea. So in the future if wind 
generation, if electrical costs coming out of wind generator is 
competitive with hydrocarbon fuel, that might be an opportunity 
for it.
    Senator Johnson. Good point. Anything else? Well, let me 
say again that the committee staff and my staff will be here, 
I'll be here for a short while for any further discussion 
people want to engage in. I'm sure some of the panel members 
will try to be around for a bit as well, but I thank both 
panels for excellent testimony.
    I think you've made a very significant contribution to an 
important debate that's going on. We're really reaching a point 
of major decision making in Washington, I think, this summer. I 
think this is going to be an important time and I think when we 
look back in future years I think this year is going to be a 
year where we made some fundamental choices about energy 
strategy in the country and I appreciate your contributions to 
that effort.
    So thank you again. With that the committee hearing is 
adjourned.
    [Whereupon, at 11:25 a.m., the hearing was adjourned.]
                                APPENDIX

              Additional Material Submitted for the Record

                              ----------                              

                             State of South Dakota,
                    House of Representative, District Nine,
                                       Garretson, SD, July 5, 2001.

Senate Committee on Energy & Natural Resources,
U.S. Senate, Washington, DC.

Attn: Democratic Staff

 Testimony Submitted by Representative Clarence Kooistra (R-Garretson)
    As state legislator from South Dakota I strongly recommend passage 
of the Renewable Fuels for Energy Security Act of 2001 as introduced by 
Senator Tim Johnson and Senator Chuck Hagel.
    The piece-meal legislation introduced and passed by individual 
states promoting the use of ethanol may prove to be beneficial for the 
short term but as one views the big picture more needs to be done on 
the federal level.
    The proposed legislation requiring all transportation fuel produced 
in the United States to contain a percentage of renewable fuel such as 
ethanol and biodiesel can benefit from studies resulting in Canada's 
recent development of the alternative fuel industry.
    In summary, it is extremely critical that this legislation be 
passed not only for the rural economic development of agricultural 
states such as South Dakota, but it is a key component in complying 
with the United States ``Clean Air Act'' which satisfies the 
environmentalists of South Dakota and the nation.
            Sincerely,
                                            Rep. Clarence Kooistra.
                                 ______
                                 
                     South Dakota State University,
                                    College of Engineering,
                                       Brookings, SD, July 5, 2001.
Hon. Tim Johnson,
Hart Senate Office Building, Washington, DC.
    Dear Tim: South Dakota State University is positioned to conduct 
research and train professionals, such as engineers, microbiologists, 
food scientists and plant scientists, to work in the bio-based renewal 
fuels and bio-based products industry. A bio-based industry initiative 
has the potential to revitalize rural communities and bolster the 
income of the nation's independent farm families. As SDSU broadens its 
research, teaching, and Extension programs to include renewable bio-
based fuel and energy and bio-based products such as lubricants, 
plastics, solvents, pharmaceuticals, cosmetics and building materials, 
new opportunities will be created for South Dakota's rural communities.
    SDSU is ready to form multidisciplinary teams of plant scientists, 
engineers and others to address effective and efficient means to 
convert solar energy captured by plants to products that meet our 
energy and materials needs. SDSU has scientists that are ready to 
identify species, plant varieties, and develop plant production systems 
that can serve as feedstock for bio-fuels and bio-products. Since the 
beginning of time, the sun has been the ultimate energy source. That 
energy comes to us in renewable form through plant growth.
    Just as one example, a tremendous opportunity exists to utilize 
byproducts from the ethanol industry to produce a wide range of 
products that are both renewable and biodegradable. Dry distillers 
grain provides an excellent ingredient for pet foods because of its 
high protein and digestible energy content. The pet food market has 
rapidly expanded in the past few years. Bio-plastics from corn have an 
equally rosy outlook with uses in fibers, packaging, and coatings that 
could ultimately consume over 1 billion bushels of corn per year. Other 
organic chemicals have estimated markets that would require up to 750 
million bushels of corn. Based on current product demand, a 10% market 
penetration of corn-based products would create new demand for 375 
million bushels/yr, which approximates South Dakota's annual corn 
production.
    Agriculture is the most important engine that drives the economy of 
South Dakota. The opportunity to produce energy for the nation will add 
fuel to South Dakota's economic engine.
            Sincerely,
                            Van C. Kelley, Department Head,
                           Agricultural and Biosystems Engineering.
                                 ______
                                 
  Statement of Hon. John Thune, U.S. Representative From South Dakota
    Thank you for the invitation to testify to the Senate Energy and 
Natural Resources Committee on the current energy crisis. I apologize 
for not being able to attend, but appreciate the opportunity to submit 
a statement for the record.
    In early June, I hosted two energy forums in South Dakota. Because 
of our state's dependence on both agriculture and tourism, it was 
important for me to hear from South Dakotans on the challenges they are 
facing in this crisis. More importantly, I was interested in hearing 
their solutions. A common theme in both of the forums was the need for 
a domestic energy source and incentives for citizens to invest in 
domestic energy sources. I have introduced two bills, H.R. 2423 and 
H.R. 1636, to help with these two goals.
    H.R. 2423, The Renewable Fuels for Energy Security Act, would 
reduce our nation's dependence on foreign oil, while supporting 
renewable fuels such as ethanol or biodiesel made from soybeans. We 
need to tackle our nation's dependence on foreign oil now, so we have a 
bright future, nationally and a strong economy in South Dakota. We can 
begin to do this by increasing the demand for our homegrown energy 
supplies and helping our farmers at the same time. H.R. 2423 is 
designed to increase the demand for renewable fuels by creating a 
national fuel standard by gradually increasing the market share for 
renewable fuel to 2 percent by 2008, 3 percent by 2011 and 5 percent by 
2016. It would not be a gallon by gallon mandate. Senators Chuck Hagel 
and Tim Johnson introduced the bill in the Senate, and I commend them 
for their efforts.
    H.R. 1636 makes changes to the current small ethanol producer tax 
credit in order to provide for a greater incentive for farmers to 
invest in ethanol cooperatives. H.R. 1636 allows ethanol cooperatives 
to pass the tax credit down to its investors. In addition, it changes 
the current 30 million-gallon capacity limit to 60 million gallons. 
This change is needed especially in South Dakota where most of the 
newer ethanol plants are being built to handle 40 million gallons of 
capacity.
    I would like to applaud the Bush Administration for their recent 
decision to deny California a waiver out of the oxygenate requirement 
in the Clean Air Act. The state of California will need approximately 
580 million gallons of ethanol to replace MTBE, representing an 
additional 250 million bushels of grain and adding more than $1 billion 
to a depressed farm economy. This is great news for South Dakota 
farmers and for reducing our nation's dependence on foreign oil. 
Ethanol is South Dakota's greatest value-added success story, and I am 
happy that the Bush Administration is supportive of our state's 
agricultural economy.
    Thanks again for the opportunity to testify. I look forward to 
learning more from today's hearing.
                                 ______
                                 
         Statement of Douglas A. Durante, Executive Director, 
                   Clean Fuels Development Coalition
    The Clean Fuels Development Coalition appreciates the opportunity 
to provide testimony to the Senate Energy Committee on S. 1006, the 
Renewable Fuels for Energy Security Act of 2001. Two distinguished 
members of this Committee, Senator Johnson of South Dakota and Senator 
Hagel of Nebraska, have authored this important legislation that would 
create a long-term, sustainable demand for ethanol and biodiesel.
    Our Coalition has considerable experience with this issue having 
been involved in federal and state fuel quality programs for the last 
15 years. Our membership includes ethanol producers, state agricultural 
organizations such as the South Dakota Corn Utilization Council, U.S. 
automobile manufacturers, and several other design and technology 
development firms. CFDC testified before this Committee in 1989 in 
support of a year-round oxygen requirement as part of the reformulated 
gasoline formula. We did so with the objective of providing a 
sufficient market assurance that would result in plants being built. We 
were concerned then as we are now that a seasonal approach to using 
ethanol is insufficient to grow the industry.
    Clearly, there was an intent on the part of the authors of the 
Clean Air Act to marry energy policy objectives with an environmental 
program and the reformulated gasoline formula provided that 
opportunity. The oxygen requirement in reformulated gasoline and the 
wintertime carbon monoxide program did in fact create ethanol demand. 
During the early part of the 1990s, ethanol production increased by 
nearly 500 million gallons in response to Clean Air Act requirements. 
Despite the now impressive industry total of nearly 2 billion gallons 
per year, ethanol production continues to be a very small part of the 
motor fuel mix in the United States and ethanol production remains a 
far cry from what it could be. The significant returns to the U.S. 
Treasury, the benefits to rural economic development, the boost in 
demand for agricultural products, the reduction of greenhouse gases and 
other harmful pollutants, and the reduction of oil use are all benefits 
that are directly attributed to the use of ethanol.
    The question your legislation poses, and offers as a challenge, is 
why not get more of these benefits? The simple answer is there is no 
reason why we should not strive to double, triple, or even quadruple 
ethanol production so every area ethanol now contributes to is enhanced 
even more. No other program on the horizon offers such a path for 
growth that a renewable requirement such as S. 1006 would provide. In 
fact, relying on reformulated gasoline alone is a declining market. 
Current ethanol usage in the United States consumes more than 700 
million bushels of corn. The program as outlined in this legislation 
would utilize nearly 2 billion bushels by the year 2007, effectively 
tripling demand for the agricultural products used to make ethanol. The 
challenge, however, is to determine how this is best accomplished.
    Ethanol is faced with an obstacle unlike any other commodity in the 
world faces in that it is sold into a market dominated by its 
competitors. Ethanol is not sold directly to consumers but rather sold 
to the petroleum industry whose product is being displaced. It is 
practically a conflict of interest for petroleum companies to voluntary 
purchase ethanol which is the reason for the creation for the partial 
excise tax exemption. This exemption is designed to make ethanol more 
attractive financially which is a key factor in overcoming this unusual 
and difficult situation. The other key part of this puzzle may lie in 
the legislation being discussed here today and that is essentially to 
require renewable fuels, such as ethanol, to be part of our fuel mix. 
Since we have repeatedly established it is in the interest of the 
United States to achieve the benefits ethanol provides, then making 
such a requirement a matter of law should not be a difficult decision.
    There has been some confusion on the part of the media, the public, 
and even some Members of Congress with respect to the addition of 
oxygenates like ethanol to gasoline and how that impacts price and 
supply. Further confusion on the origin and actual presence of 
``boutique'' fuels has caused us to lose sight of several fundamental 
factors. The first of these is that the addition of ethanol, or any 
nonpetroleum product, into the gasoline pool extends gasoline supplies. 
We repeatedly have heard that price spikes and periods of high gasoline 
prices are due to refinery limitations or other problems related to 
lack of supply. Adding ethanol extends that supply.
    Going back to my previous observation that ethanol is sold into a 
market owned by its competitor is a disincentive to create such a 
supply extension. Therefore, this legislation is quite warranted. Many 
would argue that such manipulation of the motor fuel mix needs to be 
left to the so-called ``free market.'' At CFDC we do not believe a free 
market exists with respect to petroleum products and it is extremely 
appropriate for the U.S. Congress to make the kinds of market 
adjustments we need to meet our overall policy objectives.
    There are numerous precedents we can look at from all facets of our 
society that reflect this value, whether it be Buy American provisions 
for U.S. content in defense acquisition; small business preference or 
minority business set-asides; equal employment opportunity programs; 
and handicapped provisions. These are all adjustments the Congress has 
made because if left to their own devices, the free market would not 
have done these things which Congress deemed to be in the public 
interest. Establishing a program under which renewable fuels would have 
the certainty needed for private investment dollars to flow is not only 
justified in my view, but even incumbent on you to enact.
    One of the other issues we continually hear about is the threat of 
ethanol or other oxygenates increasing the price of gasoline. This has 
been a particularly strong battle cry from the State of California 
which has continually opposed the use of ethanol yet they continue to 
have a nearly insatiable thirst for petroleum products. Some of the 
most expensive gasoline in the country is in the San Francisco area 
where there is no oxygen requirement. In Chicago where ethanol was 
being used as an additive in a tightly controlled reformulated gasoline 
recipe, prices were also lower than San Francisco. Therefore, neither 
ethanol, nor MTBE or any other outside product can be blamed for those 
high California prices.
    A final thought with regard to supply and price is the General 
Accounting Office study on the Impact of the Alcohol Fuels Tax 
Incentive conduced in May 1997 (GAO/GGD-97-41). This study concluded 
that the net effect of these incentives was to ``increase the 
production of ethanol, which may cause a small decrease in the price of 
a gallon of gasoline.'' The study also confirmed a position of the 
American Petroleum Institute in 1990 that the presence of ethanol in 
the motor fuel pool reduced the price of gasoline by 0.27 percent.
    Ethanol is a unique issue in that it crosses the boundaries of 
agriculture, energy, and environment and for that reason may take 
thinking that is truly ``outside the box'' in order to come to a 
conclusion that works for all parties. This bill is a great attempt at 
such thinking by creating a requirement that is truly based on energy 
needs. Unlike environmental requirements which have to be aimed at 
particular areas in order to produce results, energy benefits accrue to 
everyone whether they take place in Boston or Los Angeles. Whether 
continued environmental requirements involving oxygenates are 
appropriate is a matter clearly beyond the jurisdiction of this 
Committee. While we strongly believe in the oxygen requirement--and 
have been the most staunch proponent of that requirement of any fuel 
organization in the United States--we also want to look at providing 
flexibility if possible in order to meet the needs of all parties. As 
we have analyzed this legislation, it would result in a significant 
ethanol demand over the next 15 years based on a percentage requirement 
of the motor fuel pool which is then adjusted for BTU content. 
According to our analysis, the bill would create a market for 4.4 
billion gallons of ethanol by the year 2006 and gradually increase by 
.2-.3 percent through the year 2016. Given the fact that we produce 2 
billion gallons today which took 20 years to accomplish, some would 
view this as an aggressive program. On the other hand, I suggest to you 
that given the inconsistencies of our policies with regard to ethanol 
(and I specifically refer to repeated attempts by Congress to repeal 
the very incentive they established), it is miraculous we produced any 
at all. Therefore, having an established, clearly defined program such 
as is proposed through S. 1006 in place, we would provide an incredible 
window of opportunity for sustained growth.
    Another element of this legislation we like very much is the fact 
that a renewable requirement allows ethanol (and other renewables) to 
flourish in all their forms. While the traditional method of ethanol 
usage is in 10 percent blends, this bill would also incentivize E-85, 
dedicated (100 percent) ethanol cars, fuel cells, oxy-diesel, 
biodiesel, and even ETBE.
    I have attached to our testimony and would like to request 
inclusion in the record information previously submitted to the 
Congressional Record by our good friend and your colleague, former 
Senator Bob Kerrey of Nebraska. Senator Kerrey recognized the potential 
contribution that ETBE could make to our motor fuel mix from an 
environmental and supply standpoint and shared this information with 
his colleagues. We remain very interested in the use of ethanol as a 
feedstock for ether production rather than methanol and believe it has 
significant advantages over methanol-based ethers in terms of water 
contamination. ETBE is a high octane, low vapor pressure method of 
using ethanol that combines with natural gas liquids. With potential 
volumes of up to 22 percent, ETBE could make a significant contribution 
to energy security and be an important part of the mix that could 
ultimately result from legislation such as S. 1006.
    In summary then, Mr. Chairman, we believe a renewable oxygen 
standard is appropriate and necessary. It recognizes the approaches we 
have taken in the past have simply failed and for us to create a 
meaningful supply of renewable transportation fuels, we simply must 
require their presence in the motor fuel pool. In so doing, we should 
create as much flexibility as possible and incentivize all forms of 
renewable fuel usage which would be the case under this legislation. 
Ethanol has proven to be an easily integrated motor fuel component and 
presents no unique problems to our motor fuel system. Given the 
complexities of the environmental, agricultural, and energy 
implications of such a policy we recognize the need to fashion 
together, a program that will provide the many benefits that ethanol 
has to offer.
    Thank you very much and I hope we have future opportunities to work 
with you on this important legislation.
                                 ______
                                 
                  Statement of Oris Swayze, Wilmot, SD
    Besides excessive taxes and excessive spending there are other ways 
governments can cause an extortion of wealth from our economy. Lack of 
an energy policy has left SD and the nation's energy consumers with no 
choice other then paying the price fixed by a concentrated oil 
industry. Leaving energy policy to the magic of the market place has 
left the U.S. energy consumers at the mercy of a few petroleum 
companies and a king's influence on OPEC. The greatest generation won 
WWII. This generation has put much of what they fought for at risk 
because we basically cannot produce enough liquid energy from domestic 
resources to drive our 4WD pickups and our Cadillacs to the casinos. 
The U.S. imports 85% of our liquid fuels. Our last energy crisis we 
were 35% dependent on imported oil resources. The U.S. has limited the 
development of alternative energy supplies because at least in theory 
the magic of the market place (along with the king of Saudi Arabia) 
determines our energy policy. Our new secretary of energy and others 
have commented that our dependence on imported oil is dangerous. 
Expensive would be another term describing our dependence on imported 
oil. Nuclear weapons and missile defense systems will do little for 
national security if this nation's imported oil supplies are disrupted. 
Military intervention costs lives and is a symptom of a failed energy 
policy.
    States have a rote in deciding national energy policy. Minnesota 
requires 10% ethanol in all gasoline. Both Minnesota and Nebraska 
support the expanding renewable fuels industry through a producer 
payment more generous then the up to $1 million/year/plant SD producer 
payment. This year SD will again debate the wisdom of maintaining a two 
cents gal. tank inspection fee on SD imported oil products. The tax 
would be dedicated to expanding renewable fuels production utilizing SD 
ag resources. SD can join other states and begin to put some 
competition in liquid fuels markets. 700 mg of petroleum products are 
used annually in SD and the tank Inspection fee raises approximately 
$14 million. Currently 90% of those funds go to water development. Why 
do we tax energy users to develop water projects?
    It is important to put our future SD energy/ag policy in some 
perspective. This year the oil industry fixed the gasoline price spike 
at approximately fifty cents/gal and essentially extorted $350 million 
from SD petroleum consumers. The energy value of our 400 hundred 
million bushel corn crop was not recognized extorting approximately 
another $400 million from the SD economy. Because we have chosen unit 
trains over local energy production basis has widened to record levels. 
The recent 20 cent additional widening of the basis extorts $80 million 
annually from the SD corn producer. The opportunity to utilize the 
superior energy production feed co-products to expand beef and dairy 
production will ultimately surface as our greatest lose.
    We have hope as SD farmers and other entrepreneurs invest in 
innovative energy production facilities. Meanwhile the SD legislature 
risks our energy and ag future by engaging in uninformed debates 
challenging the wisdom of using ethanol in state owned vehicles, the 
wisdom of following the successful Minnesota model and requiring 10% 
blends in all SD gasoline, and they also debate the wisdom of 
maintaining the SD 2 cents/gal tank inspection fee on imported 
petroleum products and dedicating those funds to expanding SD renewable 
energy production. Surely our legislative leadership can do better. It 
is little wonder that nearly every first grade class in our SD 
education system is smaller than the graduating class.

                                    

      
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