Dollars and Sense

Analyses vary, but ethanol’s economic benefits are clear
By Kris Bevill | March 05, 2012

Multiple economic analyses have been conducted throughout the past several years on the economic impact of the U.S. ethanol industry. Recently, two analyses were released focused on the impact of ethanol on Iowa’s economy in 2011. One of them, prepared for the Iowa Renewable Fuels Association by John Urbanchuk, technical director of environmental economics at Cardno ENTRIX, found that the ethanol industry contributed more than $5 billion to the state’s gross domestic product (GDP) last year. The other, conducted by Dave Swenson, an associate scientist at Iowa State University’s department of economics, found that ethanol contributed about $1 billion to the GDP. Both totals represent a definitive positive impact, but which is more accurate? It all depends on how you calculate it.

No Corn?
When Swenson conducted his analysis, he used a farmgate-forward formula, discounting any contribution of corn production from the state’s agricultural producers. He believes that for policymakers to understand the contribution that value-added production such as ethanol offers to a state’s GDP, it is important to segregate any contributors that may have been part of the economic landscape without it. For him, this includes corn. “We discount the corn inputs from the modeling structure because the corn was already here, and because what we are interested in documenting are the net additions to Iowa productivity associated with ethanol production,” Swenson says in his analysis. Further, he argues that the land used for corn production would be as productive as it could be, even without ethanol. “While plants may up the bid locally for corn, in and of themselves they do not create more crop production in Iowa,” he says in the paper. Therefore, Swenson doesn’t attribute the creation of additional farm-based jobs to ethanol production either. He does, however, note the ethanol industry’s requirements for skilled maintenance and facilities management, chemicals, fuels, utilities and transportation and concludes that Iowa’s ethanol industry was responsible for about 6,000 jobs in 2011, accounting for slightly more than $280 million in labor income.

Holistic View
In his report, Urbanchuk notes that the ethanol industry spends more money on corn than for any other raw material used in its production process. Iowa producers purchase about 1.3 billion bushels of corn annually, resulting in $7.2 billion of revenue for Iowa corn farmers last year, according to his analysis. Therefore, he did give some credit to ethanol’s impact on agriculture because, he says, without it the agricultural landscape would be different. “Without the demand for corn provided by the ethanol industry, Iowa farmers would likely plant fewer acres to corn, purchase fewer inputs and produce a smaller crop, thereby reducing the economic contribution provided by the corn industry,” Urbanchuk says in his report.

The impact of renewable fuels production, specifically ethanol and biodiesel production, on Iowa’s agricultural economy is significant, Urbanchuk says. While the production processes themselves are not particularly labor intensive (the ethanol industry directly provides about 1,900 full-time Iowa jobs), because the industries use feedstocks produced by Iowa farmers, Urbanchuk also attributes up to 28,500 direct farm and farm-related jobs to renewable fuels. “Most of the agriculture jobs supported by the ethanol industry are farm workers and laborers associated with grain production,” he says in the report. “However, a wide range of jobs in support activities related to crop production, ranging from farm managers and bookkeepers to farm equipment operators, are supported by ethanol production. As the impact of the direct spending by the ethanol and biodiesel industry expands throughout the economy, the employment impact expands significantly and is spread over a large number of sectors.” Expanding the view to include indirect and induced agriculture-related jobs attributed to renewable fuels production amounts to an additional 30,900 jobs throughout Iowa, he says.

Visible Changes
Analyses may be useful for policymakers attempting to quantify an industry’s overall impact, but for others, the evidence of ethanol’s impact on Iowa’s economy doesn’t have to be proven on a spreadsheet. They can see it with their own eyes when they look across Iowa’s changing landscape. For example, corn grown by Iowa farmers has historically been delivered to grain elevators after harvest for shipment elsewhere. But as the ethanol industry’s appetite for locally grown corn has increased, farmers have happily grasped the opportunity to keep their product on the farm, constructing grain bins to store their corn and sell to area ethanol plants throughout the year rather than offload in bulk immediately after harvest time. This fact is evident in the increasing number of grain bins being erected throughout Iowa’s farming communities and proven again when examining the soaring sales of an Iowa-based grain storage equipment manufacturer.

Sheffield, Iowa-based Sukup Manufacturing Co. was established in 1963 by Eugene Sukup after he invented a system for in-the-bin grain drying. The company successfully produced various grain-related storage tools for years, evolving its products to meet the sector’s changing needs. About 12 years ago, the company began developing expanded product lines including grain bins and tower dryers to provide products to meet the growing needs of the biofuels and agricultural sectors. As a result, business at Sukup has tripled in the past 12 years, according to Steve Sukup, company vice president and chief financial officer, who attributes the company’s stellar performance to booming demand from renewable fuels producers and their direct impact on agriculture. “We enjoy working with the ethanol companies at their locations,” he says. “What also really helped us is that each of the farmers or ranchers around the ethanol plant became a customer because they now control their marketing. Before the ethanol industry, it was just ‘get the grain to the river,’ and your marketing opportunities seemed fairly limited. Now, each farmer is able to market. They need grain storage because ethanol plants need grain 365 days a year and it takes on-farm storage to be able to meet those needs.”

Sukup Manufacturing has offices in several states and provides products to customers throughout the entire U.S., servicing growers of soybeans, wheat and rice, as well as corn, along with various agricultural-related manufacturers. But Sukup doesn’t hesitate to declare that the company’s growth over the past decade—doubling in size to total about 400 employees currently—is directly related to agriculture and ethanol and he has no doubt that ethanol production is directly responsible for revitalizing rural economies. “It’s given them [farmers] more markets,” he says. “The dollars stay in the community. When you sell your grain, you’re either selling it to the local co-op that’s selling it to the ethanol plant or you’re selling it directly to the ethanol company. And those dollars are staying in the same radius as the ethanol plant.”

Future Changes
Analysts may disagree on the exact indirect effects of ethanol production, but they agree that the industry has had a positive direct effect on jobs and GDP over the past year. Whether that same conclusion will be reached next year, however, is another source of debate. Growth in the corn ethanol sector is expected to remain stagnant throughout 2012 as existing producers continue to meet or beat demand for their product, so this year’s GDP could end up being similar to the 2011 total. Swenson says that as any industry matures, and he considers the ethanol industry to be mature, job multipliers go down as more efficient technologies are introduced. “Any mature industry over time uses fewer jobs per unit of output and requires fewer jobs per unit of input over the long haul,” he says. “Everyone is chasing the same efficiencies, the same reductions in cost, the same technologies, to make sure they’re as close to their neighbor as possible.”

One segment that could change all that is cellulosic ethanol production. Both Urbanchuk and Swenson predict little significant growth in the ethanol industry until cellulosic facilities begin to come online. Urbanchuk believes any future growth in ethanol will be through the use of non-corn feedstocks. Swenson is keeping a close eye on the small number of cellulosic facilities that are expected to begin operating in Iowa in the next few years, and says their commercialization will spur substantial activity in the feedstock chain, which can be factored into future analyses. He’s willing to acknowledge cellulosic ethanol’s impact on farming economics, because whereas corn has other uses and would probably still be grown and sold by farmers, cellulosic ethanol producers are creating a market for cellulosic feedstocks, he says. Corn stover, for example, will become a new commodity with its own inputs and requirements, he says, allowing him to factor in things like increased farm productivity as a result of ethanol’s demand for the product.

Of course it will be a couple of years before anyone expects the cellulosic ethanol industry to be a factor in any state’s GDP. And while corn ethanol’s contribution is not expected to grow significantly this year, there is a chance that it could decline. By mid-February, several producers were beginning to respond to dismal crush margins by reducing ethanol output. Predicting a year’s worth of crush margins is not unlike attempting to predict a year’s worth of weather conditions, but Monte Shaw, executive director of the Iowa Renewable Fuels Association, offered a word of caution for the industry’s 2012 outlook. “If the current crush margins were to continue for the next several months, you could see plants come offline and actually have production go down for the first time since the mid-′90s,” he says. “I don’t think that will happen. I hope the market brings things back into correlation.”

The effects of a declining ethanol industry would likely be immediately felt in those same rural communities that are just beginning to prosper. A recent example came by way of a corporate decision made by Archer Daniels Midland Co. to close a small ethanol plant in northeast North Dakota. ADM has operated the 30 MMgy ethanol plant in Walhalla, N.D., since the early ’90s, providing about 60 jobs in a town with a population of less 1,000. When the company announced in February that it will close the plant in April, N.D. Gov. Jack Dalrymple immediately reacted, urging the company to consider alternatives and keep employees working. “I spoke with and encouraged ADM management to make sure they pursue all other options before closing the plant,” the governor said in a news release. “I stressed the importance of taking care of the employees and I offered the state’s assistance in finding another company to operate the plant and to evaluate the plant’s other potential uses.” ADM said corn used at the facility was shipped in from other areas of the country, so the plant’s closure may not directly impact the region’s agriculture sector, but in a community of 1,000 people, an ethanol plant is usually a major employer. Without ethanol, where do they work? 

Author: Kris Bevill
Associate Editor, Ethanol Producer Magazine
(701) 540-6846
kbevill@bbiinternational.com