Economic Impact of Biofuel Development
AgMRC Renewable Energy Newsletter
Nancy M. Hodur, Research Scientist
Department of Agribusiness and Applied Economics
North Dakota State University
Larry Leistritz, Professor,
Department of Agribusiness and Applied Economics
North Dakota State University
Expanded processing of agricultural products in rural areas has been widely pursued as a strategy for rural economic development. By adding value to farm products before they leave the area, new processing plants can create new employment opportunities and generate economic spinoffs in rural areas. In addition, farmer-owned processing facilities provide a way for producers to integrate forward and capture potential profits from processing and marketing their products. Consequently, the expansion of agricultural processing in rural areas usually receives broad-based support from commodity groups, rural development interests, and state political leaders.
In recent years, the most prevalent type of new agricultural processing ventures in the Midwest and Great Plains states has been corn ethanol plants. Like other types of agricultural processing, these biofuel ventures have generally received widespread support, and numerous studies have addressed their contributions to local or regional economies. The rapid growth of the corn-based ethanol industry shows the potential for biofuels. However for biofuels to make a substantial contribution to the domestic liquid fuel supply, the industry must expand beyond corn-based ethanol. Accordingly, substantial resources have been devoted in both the public and private sector to the research and development of cellulosic biomass conversion. Much work has focused on technical issues, and several studies have examined potential biomass feedstock supplies. However, one aspect of biomass conversion to liquid fuels that has received very little attention is its potential as an economic development stimulus for rural areas with high biomass production potential and how that potential compares to the economic impact of corn based ethanol.
Local Economic Impact of Corn Ethanol Production
Recent studies have shown that the local economic impacts of corn-based ethanol facilities are small. This is because the corn they utilize would otherwise be sold to other markets, so the impact on corn price is modest. Local economic impact effects arise primarily from worker payrolls and other local expenditures for supplies and utilities. To assess this impact, we examined a recently developed corn ethanol plant. One time construction costs were estimated to be $83.3 million of which 15 percent or $12.5 million were payments to entities within the state of North Dakota. The plant had a production capacity of 50 million gallons per year, employed 40 workers, and made annual expenditures (direct impacts) of about $16.8 million to North Dakota entities (Table 1). Purchases of corn were not included in this total, as the corn would otherwise have been sold to markets outside the state. On the other hand, the plant was fueled with North Dakota coal, so the plant’s fuel costs ($8.25 million annually) were included as part of the direct impacts. Input-output analysis indicated that the $16.8 million of direct expenditures would result in $32 million in secondary impacts for a total contribution to the North Dakota economy of $45.8 million annually. The economic activity generated by the plant would support more than 500 jobs in various sectors of the state’s economy.
These impacts are somewhat higher than those reported by other studies. Two factors account for the differences. First the secondary impacts are estimates of the statewide impact. Other studies have often limited the scope of study to the site county. Second, the analysis assumes the plant would be fired by North Dakota lignite coal, coal that would otherwise be unused. As previously stated, the plants’ fuel costs represent a substantial in-state expenditure and a direct economic impact.
Local Economic Impacts of Lignocellulosic Ethanol Production
Biomass-based plants will have substantially greater impacts as the feedstocks will typically be from sources that do not presently have a market such as agricultural residues, wood wastes or biofuel crops grown on lands with limited alternative use such as Conservation Reserve Program (CRP) land. Studies recently completed in North Dakota allow a comparison of the economic impacts of the two types of facilities.
As part of an analysis of the economic feasibility of a biorefinery using wheat straw feedstock, we estimated the economic impact of a 50 million gallon per year facility. The base case facility was analyzed using an update of an economic-engineering model originally developed by the U.S. Department of Energy National Renewable Energy Laboratory (NREL). Plant construction cost was estimated to be $176.5 million of which 15 percent or $26.4 percent were made to instate entities. Annual operating expenditures were estimated to be $74.6 of which $53 million were payments to North Dakota entities. By far the largest expenditure item was feedstock purchases ($36 million). The feedstock purchases represent income for local farmers, custom baling operators, and persons involved in transporting the feedstock to the plant. The plant would directly employ 77 workers with an estimated payroll of $2.7 million (Table 1). Input-output analysis indicated that the $53 million of direct expenditures would result in secondary impacts of $130 million for a total contribution to the state economy of $183 million annually.
A direct comparison of the economic impacts of corn-based and cellulosic ethanol production is shown in Table 1. The cellulosic plant has direct economic impacts (i.e., expenditures to in-state entities) that are more than three times those of the corn-based plant, with nearly twice as many direct employees, five times the number of secondary workers, and double the construction costs.
The difference can be attributed to a couple of factors.
- First, expenditures for feedstock for the plant represent new economic activity. We assumed wheat straw was the feedstock, an agricultural residue with little to no existing market.
- Feedstock collection and transportation were also a major reason why the impact is far greater for cellulosic ethanol. The volume of feedstock necessary to fuel a 50 million gallon plant is substantial. Accordingly, expenditures for baling and hauling the feedstock are also substantial with those expenditures accruing primarily to the transportation sector and to households.
Given the relatively undeveloped state of technology for lignocellulosic biomass conversion, these findings should be considered as somewhat tentative. Further, the results are obviously sensitive to the assumptions incorporated in the analysis. However, the fact that feedstock costs make up a high percentage of total operating costs for cellulosic biorefineries supports the premise that their economic development effects will be substantial.
Rural Economic Development Implications of Meeting EISA Mandates
The recently enacted Energy Independence and Security Act (EISA) of 2007 established a Renewable Fuel Standard (RFS) of 36 billion gallons by 2022, of which 21 billion gallons must be advanced biofuels with a minimum of 16 billion gallons of cellulosic biofuels. If the 16 billion gallon cellulosic mandate is to be met exclusively from domestic production, a substantial number of new biorefineries will need to be developed. If these facilities are assumed to have an annual production capacity of 50 million gallons per year, 320 new plants would be needed. While many questions remain about the conversion technologies and feedstock sources that will ultimately find the greatest success, one aspect of the industry’s development seems virtually assured—the conversion facilities will be located as close as possible to reliable feedstock sources.
The potential development of the cellulosic-based industry can be illustrated by assuming that conversion facilities are located in proportion to potential supplies of major feedstocks. A recent NREL study analyzed feedstock availability and determined that agricultural and forest sources accounted for 97 percent of total biomass resources. Agricultural feedstocks (crop residues and energy crops from CRP land) were estimated to total 241 million tonnes nationwide while forest resources totaled 92 million tonnes, if only the unused portion of primary mill wastes are included. The states of the North Central region account for 60 percent of total available biomass (75 percent of agricultural biomass and 20 percent of wood) (Table 2). If production capacity were developed proportionately to biomass availability, 60 percent of the 16 billion gallons, 9.6 billion gallons, would be built in the North Central Region.
Development of a cellulosic-based industry on this scale could have major rural economic development implications. A 9.6 billion gallons per year industry would be equivalent to 192 plants with 50 million gallons per year capacities. Assuming that the values reported above are representative of likely investment costs and operating expenditures, the initial investment in 192, 50 million gallon per year plants would be nearly $34 billion ($178 million each) and their annual direct expenditures to local and regional economies would total nearly $10 billion. The processing facilities would directly employ nearly 15,000 workers, as well as supporting many thousand additional jobs in feedstock harvest and transportation. Feedstock payments could also represent a substantial income supplement for agricultural producers; nearly half of a plant’s annual operating expenditures were estimated to be for feedstock.
To put the magnitude of the potential development in perspective, if development were to occur proportionally to potential feedstock supplies, North Dakota could be home to 16 plants with production capacity of 826 million gallons per year. If development were to occur on this scale, the cellulosic ethanol industry’s annual contribution to the state economy would be nearly a billion dollars ($800 million) per year and exceed that of the state’s substantial coal mining and conversion industry.
North Dakota and other “biomass belt” states are particularly well placed to capture the economic impact of an emerging biomass industry as plants will undoubtedly be located near the feedstock source. The potential economic development contributions of an emerging biofuels industry are particularly significant because many of the areas where such an industry could concentrate have in the not-distant-past faced adverse economic and demographic trends. The rural, agricultural counties of the western Corn Belt and northern Great Plains have experienced long term trends of farm consolidation, leading to fewer and larger farms. In the absence of major nonfarm employers, many counties have experienced substantial out-migration and population losses.
Farm households have also become more dependent on off-farm employment. In North Dakota, during the period 1993-2007, off-farm wages and salaries of farm households more than doubled, growing from $6,847 in 1993 to over $16,000 in 2007. An emerging biofuels industry could offer new jobs that would help to support rural communities and farm households and provide the kind of economic stimulus many agriculturally dependent areas have been seeking. Further, the sheer scope of the potential development, with capital cost of $34 billion and annual regional operational expenditures of over $10 billion, suggests that a biofuels industry could also substantively change the economic and demographic makeup of some Midwest and Great Plains counties.
This research was supported by the US Department of Agriculture, Cooperative State Research, Education, and Extension Service (CSREES) (Award No. 2004-34524-15152), by the North Dakota Agricultural Products Utilization Commission (ND-APUC), and by the North Dakota Agricultural Experiment Station.
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