Alternative Fuels

In response to a congressional request, GAO examined the feasibility of using surplus federally owned grain to further the development of the ethanol industry, focusing on financing concepts that would allow producers and developers to use surplus grain as either: (1) collateral to obtain financing from lending institutions to either construct new ethanol plants or expand existing facilities; or (2) a free feedstock to produce ethanol, which could induce lending institutions to finance the construction or expansion of ethanol plants or facilities.

GAO found that: (1) declining ethanol prices and weakened demand for fuel ethanol threaten the economic viability of many ethanol producers; (2) federal and state government incentives had a significant role in expanding the industry and in marketing fuel ethanol; (3) surplus grain inventories are large enough to support the financing concepts; (4) producers, developers, and lenders are skeptical about the concepts' usefulness for expanding the industry, given the decreased demand for fuel ethanol; and (5) most producers and developers believe that the financing concepts are feasible, and one-half are willing to participate. GAO also found that: (1) lenders are not interested in the grain-as-collateral concept but are somewhat interested in the grain-feedstock concept; (2) lenders are unwilling to participate in the grain-as-collateral concept if the grain will only be used to produce ethanol in the case of a loan default; (3) the Department of Agriculture has the authority to use surplus federal grain for ethanol, but there are legal restrictions to its use; (4) use of surplus grain to finance additional fuel ethanol plants would not significantly reduce existing surplus inventories and could potentially reduce excise tax revenues; and (5) expansion of the fuel ethanol industry could affect others outside the industry, such as oil companies, farmers, and consumers.