Iowa economist computes ethanol contribution at just $1 billion

By Susanne Retka Schill | January 12, 2012

Taking issue with the ethanol industry’s “overstating its net contribution to the nation’s and the individual state’s economic accounts,” Dave Swenson, Iowa State University associate scientist in economics, released his own calculations of the ethanol industry’s contribution to Iowa’s economy.  

Iowa’s ethanol industry added $1 billion to the state’s economy in 2011, he said in a recently released four-page paper. The model he used documents the net addition to Iowa productivity associated with ethanol production, although it did not include corn inputs because, as the paper argues, the 1.15 billion bushels of Iowa corn used for ethanol production was already in the state, and should not be factored in the analysis. Any conclusions regarding corn price and farm profit contributions would also need to incorporate the impact on Iowa’s corn users who have been negatively impacted by high corn prices. “Rolling overall farm‐level profits into a conclusion about the impact of the ethanol industry on Iowa’s economy is, therefore, a dicey process fraught with offsets, adjustments, caveats and significant debate among agricultural economists,” the report suggests.

Swenson’s calculation is a fraction of the numbers recently cited by others. “A recent story by a Des Moines Register reporter parroted an Iowa Corn Growers ‘ethanol facts’ claim that the industry accounted for $12 billion of the state’s GDP, and a Farm Bureau spokesman was quoted as saying on Market Place, the National Public Radio program, that the ethanol industry added $13 billion to the state’s economy,” Swenson said. “Wish it were so.”  He added that the entire Iowa chemical manufacturing sector, where ethanol production is located, and which is dominated by the ag chemicals area, is estimated at $3 billion to $3.6 billion in gross domestic product impacts annually in the last three measurement years. Such overstatement is not uncommon, he added. “Ethanol promotion is just one of the many likely overstatements, like wind and solar energy, hog feeding, tourism. It’s my job to evaluate those claims.”

Swenson’s paper lays out the approach taken to figure ethanol’s economic impact. While the ethanol industry doesn’t create more farm production jobs, it does have “very strong input requirements for skilled maintenance and facilities management, chemicals, fuels, utilities and transportation.” Iowa’s 43 ethanol facilities employ 1,650, with an average earnings an estimated $65,000 per year per working, using Bureau of Labor statistics for 2010 and adding estimated employer-paid benefits. (With no new facilities added, it was assumed the 2010 employment number would remain steady in 2011.) Total worker earnings are calculated at $92.4 million. Total value added, which would include all payments to labor, payments to investors and indirect taxes of $11.25 million would be $750 million. The total value added assumes that 20 cents in net profit was generated on 3.2 billion gallons of ethanol produced in Iowa in 2011. The net profit number was based on the Iowa Ag Marketing Resource Center’s profit/loss calculations that show a monthly average net return per gallon of 15 cents for ethanol. “Rounding to 20 cents per gallon to include coproducts is therefore a conservative, but reasonable, assumption on plant profits,” according to the report. The total jobs in the Iowa economy associated with ethanol numbers 5,995, providing labor income of $280 million, which is a subset of the total value added of $1.06 billion.

While the corn ethanol industry is not expected to grow any in the next few years, Swenson does note in the report that two cellulosic ethanol plants are scheduled to begin production in 2013. The ISU economist suggests the state will need to follow its impact closely. “As there has yet to be a successful commercial‐scale advanced ethanol production facility in the U.S., one must cautiously monitor the industry’s potential growth and the value of that growth to the state of Iowa. If that industry does take off, it will involve a completely different analysis than the one just completed, as cellulosic ethanol will require a substantial amount of net‐new economic activity up the feedstock supply chain. If the industry is able to grow, it will have a very robust impact in the immediate feedstock supplying area.”