09-01-06

ISU economist gets real with economic impact of corn-ethanol boom

AMES, Iowa -- There is no doubt that Iowa is in the midst of a corn-ethanol boom -- with 27 plants currently processing corn, mostly for ethanol, and 24 either under construction, planned, or proposed.

But while ethanol will continue to be good for the Iowa economy, some projections being reported by farm state politicians and industry advocates -- like one in an essay this year by former South Dakota Senator Tom Daschle that the current U.S. production of 3.1 billion gallons of ethanol created 200,000 jobs -- look too good to be true. They are according to an Iowa State University economist's recent study.

David Swenson, an associate scientist and lecturer in economics and community and regional planning, authored a paper titled "Input-Outrageous: The Economic Impacts of Modern Biofuel Production." He presented it earlier this summer at the Mid-continent Regional Science Association and the Biennial Implan National Users Conference in Indianapolis.

"This was not a paper that was written to be critical of the technology and efforts in ethanol promotion. Mine was a criticism of the people who should know better as regional scientists -- the people who do these modeling systems," said Swenson. "The problem that I saw was that there was a combination of technical and procedural errors in the way that modeling technology was being used to analyze the economic impacts in this rapidly growing industry."

A critical analysis of ethanol economics

After describing the magnitude of overly-optimistic economic impact claims and reviewing some of the more common errors in analysis, Swenson's paper presented the findings of a modeled ethanol plant configuration in a hypothetical three-county region of Iowa. He found that new ethanol plants employ, at most, 35 people. And every new ethanol job -- under average rural conditions -- can possibly lead, on average, to three more jobs in a rural region.

"And we're not sure that's net (in terms of the economic gain of those three jobs). We just know that it's gross," said Swenson. "And the problem is that ethanol plants don't really create many new jobs relative to the investment, since there are only 35 jobs in a modern 50 million gallons per year plant."

Swenson wrote that he doesn't believe the producers of the bloated impact statistics -- or the uncritical conveyors of them -- are being intentional. "Instead it looks like there is just a whole lot of input-outputting run amok going on," he wrote.

He listed the following reasons for the overestimated economic impact:

• Cause and effect. "The most common error is the assumption of cause and effect -- that if the economy does this, then the economy automatically does that," he wrote. "One must exercise serious caution when inferring the effects of marginal change in the entire economy."
• Increased corn production. "The most obvious causal reactionis for more corn to be grown, resulting in all concomitant impacts in the corn industry to be compiled simultaneously with the ethanol plant," wrote Swenson. "It may come as a surprise to many, but the corn already had been grown. And if not, the land was used productively for other uses that were profitable (to the extent that farming is profitable)."
• Trucking and transport. "Several modelers factored in a boost to local trucking companies and their output and employment. In the main, all of the corn used for ethanol production had to be hauled somewhere in the region prior to the induction of the plant," he wrote. "It remains to be proven that there are significant weight and miles-driven trucking differences once a plant is established."
• Declining cost industries. "Ethanol industries tap into large amounts of energy. In particular they need electricity and natural gas," wrote Swenson. "Both are large, declining-cost industries and the ethanol industry uses large amount of product. Meeting the needs of a new plant does not yield average utility industrial output, job, or earnings income; instead, they yield marginal outcomes which can be very meager, if not nearly zero."
• Producer premium estimates. "Corn producers and sellers in the region receive a better price than if they would have had they marketed their corn to some local buyer. The reason is that transport costs are reduced significantly by having a local buyer versus the assumed transport costs they would have borne had the grain been marketed to a buyer at a greater distance," he wrote. "But there are offsets at work: if returns are higher, then land values increase. That's good if you're an owner looking at asset accumulation, but bad if you're a renter, which many farmers are in whole or part. Second, in the current federal program, higher prices everywhere yield lower federal subsidies. The net regional gain to boosted commodity prices has not been investigated well, and assumptions about the price boost need to be modeled carefully if not separately."
• Ignoring other regional offsets. "Competing users of corn, like hog and poultry producers, will need to pay more for their inputs," Swenson wrote. "Other grain handling and use will also shift in the region from systems designed to store and manage the efficient outflow of grain for export. The byproducts of ethanol, distillers' grains, are currently not suitable for feeding to swine and poultry, and can be used only as a limited supplement for dairy cattle feedRegardless of claims to the contrary, there is competition for local grain that is impacting the margins of hog and poultry producers."
• Unacknowledged or emerging externalities. "There are external costs, too, that only now are being acknowledged. These plants are heavy users of water, they have high amount of waste discharge, and their air emissions are becoming a problem," he wrote. "The plants have begun to attract attention of state and federal environmental regulators."

The verdict is in

"In all, there is enough uncertainty in the ethanol industry both in its current configuration and in its anticipated future manifestations for prudent analysts to exercise extreme caution when making claims as to the net economic product in this country that is attributable to ethanol," he concluded. "Most of the current efforts grossly overstate the regional, state, and national effects of the ethanol industry."

That conclusion has Swenson calling for public-policy decisions to be based on more accurate economic numbers.

"These decisions can be expensive at the local and regional level," he said. "These (ethanol) plants are being subsidized with the expectation of huge gains locally. We don't know that those huge net gains will result. So we need to have a more reasonable perspective during the public-policy process."

Swenson is working with officials from Iowa State's College of Agriculture on a future research paper determining regional economic values of ethanol production in Iowa considering different levels of local investment.

ISU's Department of Economics is also planning an on-campus conference for Friday, November 10, on the economics of the corn-based ethanol industry and its impact on food and feed markets.

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