Corn Farmers Respond to Ethanol Plant Siting

Land use shifts seen in up to a 286-mile radius
By Yehushua S. Fatal | September 11, 2012

Corn production in the United States has increased significantly in the past several years as result of the rapidly growing ethanol industry. Corn production rose from nearly 9.5 billion bushels in marketing year 2002-’03 to more than 13 billion bushels in 2010-'11. This increase can be attributed to two factors: higher corn yield and more acres of planted corn.

According to the USDA, corn yield increased from 129 bushels per acre in 2002-’03 to 152 bushels in 2010-’11 as a result of a number of technological improvements, including new seed varieties, fertilizers, pesticides and machinery, together with better production practices such as reduced tillage, irrigation, crop rotations and pest management systems. Increases in corn acreage on the other hand, came about as a result of shifting land from other crops and the use of additional nonfarmed lands for corn production. The sources of previously farmed land according to the USDA included pasture, fallow and acreage returning to production from expiring Conservation Reserve Program contracts. As a result, planted corn increased from almost 70 million acres in 2002-’03 to more than 80 million acres in 2010-’11.

Siting Effects
While no one can miss the increase in ethanol production that led to the surge in corn production, there is a question regarding how corn farmers respond to ethanol plant siting. How does corn supply change in a region where a new ethanol plant is introduced? Previous research is silent on this issue, but recent analysis at North Carolina State University by my colleague, Walter Thurman, and me begins to unravel this effect.

One rational expectation would be that when a corn-based ethanol plant begins to produce, it changes the corn supply and demand balance in its region. Craving for corn to produce ethanol, the plant increases local demand for the grain, thus high corn transportation costs from distant locations can be avoided. As there was no corresponding increase in corn supply, this excess demand by the new plant would raise the local corn price. Farmers will capitalize on this opportunity, however, by growing more corn in the next planting season.

What is unknown, beyond this general tendency for farmers to produce more corn in response to a plant’s siting, is the size of the effect. In the Fatal and Thurman study, we conclude that an additional 1 million gallons of annual ethanol capacity increases planted corn by 5.21 acres in the county in which the plant is located. Furthermore, the ethanol capacity effect on planted corn in surrounding counties depends on distance between the plant and the county. The effect diminishes linearly to zero as the distance between the plant and other counties approaches 286 miles. The study employs advanced spatial econometric methods and uses county-level data for 48 contiguous states for the years 2002 to 2008. The results suggest that when new ethanol plants start up, their need for corn triggers an increase in planted corn up to 286 miles away.

Applied Results
To illustrate the application of the results, consider Advanced Bioenergy’s corn-based ethanol plant in Fillmore County, Neb. This 100 MMgy plant started production on October 2007. There are 348 counties within a 286 mile radius from the plant. We estimate that the plant stimulated a total of 64,623 acres of planted corn for all these surrounding counties.  Assuming an average yield of 150 bushels per acre, these additional acres resulted in almost 10 million additional bushels of corn. Putting this reaction into context, 10 million bushels of corn account for approximately 26 percent of the plant corn needs to operate full capacity. Equivalently, the Advanced Bioenergy plant stimulated about one-fourth of its corn needs, which means the other three-fourths were shifted from other corn uses.

Why Does This Matter?
Understanding how ethanol plant siting affects planted corn is important for several reasons. First, knowing the local corn supply adjustment to the introduction of new ethanol plants provides useful information to ethanol producers as they plan capacity, coordinate logistics, project future corn procurement costs and evaluate the consequences of a competitor plant’s market entry on their business. Further, understanding where future corn will come from has its own advantage. The shorter the distance between corn source and plant, the lower the transport costs and the smaller the uncertainty of having corn in time for ethanol production. 

Second, the results help other corn users besides ethanol producers, such as feedlots owners and corn exporters, to better position their business when competing with ethanol producers for corn. U.S. policymakers can use these results to better understand the effects of their biofuel production and incentives policies. Understanding the relationship between ethanol and corn production is vital when enacting new agricultural and energy policies in order to avoid conflict of interests.

Finally, using the results from this study, together with a study evaluating the spatial effect of ethanol plant siting on corn prices, can reveal the implications for corn farmers’ revenue. This in return, can be used by policymakers to update crop insurance programs and subsidies.

As a closing thought, as location patterns for ethanol plants change, so do corn demand locations, spatial corn price patterns, and the movement patterns of corn within the United States. Because corn accounts for 50 to 70 percent of ethanol input cost (depending on corn price), understanding the reaction of corn growers to an ethanol plant siting is crucial in understanding plant profitability.

Author: Yehushua Shay Fatal, PhD
Research Project Manager
North Carolina State University – Solar Center
ysfatal@ncsu.edu

 

ON THE WEB
“The Response of Corn Acreage to Ethanol Plant Siting” by Fatal and Thurman, 2012, can be found at the following link: 

http://www4.ncsu.edu/unity/lockers/users/v/vukina/AG_ECO_Workshop/Fall_2011/Shay_Fatal.pdf

 

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