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Sugar rush at ethanol plant fuels fight with Nebraska corn farmers

By Michael Hirtzer

CHICAGO (Reuters) - An ethanol plant in Nebraska corn country is pumping out fuel made from sugar beets, and corn farmers are suing to stop it - a small-town dispute that offers an unusual take on the debate over the market-distorting impact of sugar and corn subsidies.

The dispute in Aurora, population about 4,400, brings into conflict two of the largest U.S. farm programs, one promoting sugar production and the other corn-based ethanol. Aventine Renewable Energy Holdings Inc, a privately held Illinois firm, is reaping profits producing ethanol with cheap sugar, thanks to a U.S. Agriculture Department subsidy of beet sugar.

Local corn farmers, who benefit from a government rule that forces oil companies to blend ethanol into gasoline, say in court documents that Aventine's action violates an agreement to use their grain exclusively as a feedstock for the firm's recently reopened plant in Aurora. Aventine denies any wrongdoing, saying it has abided by its contract.

The irony of the situation is not lost on George Hohwieler, president and chief executive of the Aurora Cooperative Elevator Co. that is at loggerheads with Aventine.

"Hamilton County, Nebraska, by any measure is one of the most productive corn-producing counties in the world," he said. "The message being sent to the marketplace is that they're making ethanol out of sugar."

In fact, Aventine's use of beet sugar is the first large-scale production of sugar alcohol in Nebraska since bootleggers used boxcars of sugar to make moonshine during Prohibition in the 1920s and 1930s.

Aventine chief executive Mark Beemer said the farmers' coop was being short sighted in suing the company. "We've been very blunt. This is just a very short-term pathway to get the plant open and then convert back to corn ethanol," he said.

CORN VS. SUGAR

The rare intersection of the two farm programs in Aurora illustrates the unintended impact federal farm subsidies can have on market activity.

One such initiative, the Feedstock Flexibility Program, last year enabled buyers like Aventine to purchase below-market sugar at government auctions, then use it as feedstocks in their ethanol plants, putting the sugar in competition with corn.

Under the federal sugar program, the government guarantees minimum prices for sugar loans, paying processors 24 cents per lb for beet sugar, or 19 cents for cane sugar, if sugar prices fall below those benchmarks. The USDA then must auction the sugar for non-food purposes.

Aventine was the biggest buyer at USDA auctions last fall, purchasing some 660 million pounds of beet sugar.

Beemer said the firm earned up to 50 cents a gallon on each of the 80,000 gallons it churned out daily while burning beet sugar. If the supplies last through August, as expected, that could amount to a nearly $4 million profit for Aventine, according to a Reuters calculation.

Beemer declined to comment on the profitability of the Aurora operation.

The company operates ethanol plants in Nebraska and Illinois. As a publicly traded company, Aventine filed for bankruptcy in 2009 and emerged as privately held in 2010.

Aventine's sugar-fueled profits have come at the price of intensifying a long-running dispute with the Nebraska farmers' coop.

When Aventine booked delivery of the sugar to the Nebraska plant in February, the farmers' cooperative sued. The coop owns the railroad tracks serving the plant, and Aventine had no right to use the tracks for any feedstock except corn bought from the coop, the lawsuit claims.

By that point, the farmers and Aventine were engaged in multiple lawsuits. In one, the Aurora Cooperative claims that Aventine did not live up to a commitment to operate the plant at close to its 110-million-gallons-a-year capacity by July 2012.

The cooperative said Aventine's decision not to purchase corn in 2012, as prices headed toward a record $8 a bushel, cost the cooperative $1.7 million. A National Grain and Feed Association arbitrator denied Aurora's claim for damages on the corn sale. The coop is appealing the ruling.

In court filings, Aventine maintains it met production requirements by operating the plant for two weeks in 2012. It also says it is not required to operate the plant if market conditions make that unprofitable.

Aventine argues the sugar purchase was good for the Aurora area. Cost savings arising from use of the subsidized sugar enabled the company to reopen the plant which, apart from the two-week period in 2012, had lain idle for nearly five years.

Startup of the plant this spring created 50 new jobs, Aventine said, and the company has begun bidding to buy corn to run the plant. But because of the litigation, Aventine is not negotiating to buy corn from the Aurora Cooperative Elevator Co.

(Additional reporting by Chris Prentice in New York and Nick Carey in Chicago, editing by David Greising and Ross Colvin)

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