Agriculture official pushes plans for ethanol plant
State board chairman's ties to company raises ethical issues
By LEE BERGQUIST
of the Journal Sentinel staff
Last Updated: April 3, 2001
The board chairman of the state Agriculture Department - an agency that would subsidize ethanol producers - is a founder and investor in a company poised to build Wisconsin's first large-scale ethanol plant.
Agriculture Board Chairman John L. Malchine is vice president and chief financial officer of Badger State Ethanol LLC, a Monroe company that is raising $59 million to construct a plant that would turn corn and other products into ethanol.
As the company gets off the ground, the Agriculture Department is writing rules on how it would manage and pay $3 million in direct subsidies to ethanol producers in the state.
No state money is earmarked for the subsidy now, but farm groups and top officials of the Agriculture Department encouraged Gov. Scott McCallum to include $3 million in the 2001-'03 budget to jump-start the industry by paying new plants that produce ethanol. The Legislature last year passed the subsidy legislation without funding it.
Badger State Ethanol is one of a half-dozen projects that have surfaced as a result.
Malchine said he cleared the matter with the State Ethics Board and has refrained from participating in discussions or votes on the ethanol subsidy. But some people still question the appearance of a conflict, and a former state official has advised Malchine to consider whether to stay on the board if his company gets a subsidy.
Controversial subsidies
A byproduct of corn, ethanol is an additive used to make reformulated gasoline, which reduces pollution. Federal law requires 17 metropolitan areas with high air pollution levels - including southeastern Wisconsin - to use reformulated gas.
Federal ethanol subsidies have been controversial. The General Accounting Office concluded the subsidy cost the federal Treasury more than $7 billion between 1979 and 1997, although defenders say ethanol reduces dependence on foreign oil and that the subsidies are much lower than those received by the oil industry.
Malchine, a farmer and businessman, has been a member of the state Agriculture Board since 1994. He was board chairman in 1997 and 1998, and was elected chairman again in 2000. He also is a member of the state Tax Appeals Commission.
Malchine also owns a real estate development company and serves on the local board of M&I Bank in Burlington and on the board of the southeastern region of Aurora Health Care System.
Like many grain farmers, Malchine said he has been promoting ethanol production in Wisconsin for years because it gives the slumping farm economy an important new market for corn. He owns a 1,100-acre dairy, beef, hog and grain farm with two sons in Racine County.
The U.S. Department of Agriculture estimates that corn prices could jump 20 cents a bushel within 50 miles of an ethanol plant. Farmers also are expected to save on shipping costs as well. The cash price of corn is about $1.88 a bushel, and futures prices range from $2.08 to nearly $2.35 for the rest of the year.
Badger State Ethanol could consume as much as 14.8 million bushels of corn and produce up to 40 million gallons of ethanol yearly. The plant could be running next year.
Ethics Board advice
When he began working to start the company, Malchine said he asked an attorney at the state Ethics Board whether the business and his role at the Agriculture Department would violate Wisconsin's ethics law.
He said he did the same with other business interests that might conflict with his government duties.
"He said it was not a problem," Malchine said, referring to Jonathan Becker, legal counsel for the Ethics Board. "He advised me not to be present during discussions or votes (on the matter)."
Agriculture Department officials said last week that Malchine has stepped out of board meetings when the ethanol subsidy program was discussed. He also abstained when the board voted to direct the agency to hold a public hearing Jan. 24 on the subsidy program.
The board is slated to review the final draft rules for the subsidy on Wednesday.
"I see absolutely no conflict at all . . . I have no input on the policy, absolutely none, and once the policy is established, I have no involvement," Malchine said.
The 'appearance issue'
In an interview, Becker agreed that Malchine's conduct would be proper if he did not participate in discussions or vote on such matters before the board. But Becker also acknowledged that if the Agriculture Department begins doling out subsidies, "certainly the appearance issue becomes more real."
Former Agriculture Secretary Ben Brancel - who left state government March 20 and was named state director of the federal Farm Service Agency - also discussed the situation with Malchine.
Brancel said he advised Malchine he might have to consider whether to stay on the board if his company gets subsidies paid by the Agriculture Department. The agency also would be auditing the company's books.
If Badger State Ethanol starts getting state money, Malchine said he would again ask the Ethics Board for an opinion.
Jay Heck, executive director of Common Cause in Wisconsin, a government watchdog group, said that Malchine made the right decision by going to the Ethics Board.
"But once the money is appropriated to a company in which he is an owner and is also board member of a state agency - and its chair - that would understandably raise eyebrows, and justifiably so, with a lot of people," Heck said. "This is the very thing you want to avoid in government - not only a conflict of interest, but the appearance of a conflict of interest."
Badger State Energy is the furthest along of any ethanol project in Wisconsin that would be built from scratch.
Construction crews have begun site improvements at a Monroe industrial park. The City of Monroe has agreed to pay $1.6 million for sewer, water and street improvements to accommodate the plant.
The company is raising $10 million to $12 million in equity and $45 million in debt funding to build the plant, according to documents filed with the state Office of Financial Institutions.
Badger State Ethanol is also seeking a $300,000 grant from the state Department of Commerce and a $2.3 million loan from Madison-based Alliant Energy Corp. to fund electrical improvements.
Farmers need help
Wisconsin's ethanol subsidy law originally was aimed at helping the owner of the former Heileman brewery in La Crosse. But financial problems plagued City Brewing Co., and as the company's prospects for bottling beer and other beverages dimmed, so did its plans for ethanol.
But with the law in place, and improved prospects of the Legislature funding the program, ethanol projects have begun surfacing in Wisconsin.
Ethanol plants must produce at least 10 million gallons a year and are eligible to receive 20 cents a gallon for up to 15 million gallons. So if a single plant is operating, it could receive the entire $3 million. Otherwise, funds are prorated.
In Dodge County, a La Crosse-based company is proposing a $52 million ethanol plant that would produce about 40 million gallons of ethanol yearly.
"The (subsidy) legislation certainly makes a difference, because of the nature of the industry, it's very hard to finance," said Garry Hayes, a partner in Nesnah Ventures, who added that he has no problem with Malchine's dual role. "But it's not the overriding decision."
That's part of the motivation of Norman Spooner of Gilman, who owns eight feed mills in north central Wisconsin. Spooner said he is looking at ethanol production as a shot in the arm for the farm economy.
Spooner and a partner have formed Ace Ethanol - a $27 million ethanol plant in nearby Stanley, in Chippewa County, that he said could start operating in July 2002.
"But only if we get the financing," Spooner said.
Bankrolling ethanol plants is far from a sure thing, according to Robert Oleson, executive director of the Wisconsin Corn Growers Association.
Even with government subsidies, bankers won't fund ethanol projects unless 45% of the investment comes from equity investors, he said.
Minnesota has attracted 15 ethanol plants with state subsidies that pay each plant as much as $3 million. That's what Wisconsin corn farmers and ethanol producers are looking for.
Oleson, Malchine and representatives of farm groups met with McCallum last week to press the governor to increase the subsidy.
Appeared in the Milwaukee Journal Sentinel on April 4, 2001.
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