Ethanol's Economic Impact on Rural Communities
AgMRC Renewable Energy Newsletter
Department of Economics, ISU
The number of corn ethanol processing facilities in Iowa and the nation has increased sharply this decade. Growth in the industry accelerated by the end of 2005 through 2006 as fuel prices increased, changes in reformulated fuels standards induced a shift towards ethanol as an oxygenate for motor fuels, and the first of two renewable fuels mandates came into play. From the middle of 2005 through 2006, existing producers realized windfall profits. Windfall profits will attract new investors, and as Iowa is the nation’s leading corn producer, it was a very attractive site for new ethanol plants. Since that boom time operator margins have thinned, and the pace and pattern of ethanol plant growth has changed. Indeed, Vera Sun, one of the nation’s largest ethanol producers, declared bankruptcy recently.
At this writing, the state of Iowa has 31 producing ethanol plants with 11 under construction. Plants in Iowa range in size from as little as six million gallons per year (MGY) to an estimated 260 to 300 MGY. The total ethanol production capacity in Iowa is now in the neighborhood of 2.33 billion gallons per year. Plants under construction will eventually boost the state’s production by 50 percent. In the near term, then, the state can expect at least 43 operating ethanol plants –one for a little more than every two counties. While there are plants located in all quadrants of the state, most of Iowa’s ethanol plants are located east of Interstate 35 and north of Highway 30.
This article takes a look at the extent and the kinds of community and regional economic impacts that can be expected from ethanol plant development. Several of Iowa’s communities are already adjusting to the inclusion of a new plant either in their community or nearby. Several others will look forward to plants opening up in the near future. And another group had already hosted a local ethanol plant for several years. There are great expectations for the state of Iowa from the push to develop more biofuels, as represented mostly in the U.S. with corn ethanol production. Biofuels plants provide jobs that accumulate to rural areas, they create levels of manufacturing activity that help to stimulate regional economies, and they, by virtue of their location, induce higher local corn prices. All told, from a rural development perspective, Iowa’s biofuels plants have a positive and quite measurable economic impact on rural economies and the state as a whole.
Kinds of Economic Impacts
The economic impact from building an ethanol plant falls into three categories.
When an ethanol plant comes to an area it is like any other major new industry. Land must be purchased, cleared, and readied for development. Necessary infrastructure for road and rail access, natural gas, fresh and waste water, and other critical utilities must be constructed or extended. The plant will have to be built, and it will have to have all of its operations machinery, mechanicals, and devices installed. There are, therefore, positive construction effects that accumulate to the community during the duration of the development.
There is an expectation that the construction impacts for a community are substantial. After all, a modern ethanol plant of 100 MGY in capacity may cost more than $200 million to construct. Indeed, the value of the construction is important to the overall economy as the state’s construction industry counts on a regular level of capital investment to maintain its own production levels. For most rural areas, however, the value of the construction impacts is very limited. There are only a few firms that specialized in ethanol plant construction, and those firms are located outside of Iowa. They have their own skilled workers that travel with them, their own equipment, and their own suppliers and subcontractors, to include specialized engineering and architecture firms. Major road and rail improvements will likely be bid to large firms, and most infrastructure upgrades will go to the firms that major utilities traditional employ for their projects. Overall, local regional construction firms may be relied on for basic site preparation, the construction of office or utility and other structures, basic plumbing and electrical, lighting, and fencing. During the duration of the construction there will be some localized employment boosts in construction, and there will be higher local demands for ongoing production inputs like fuels, water, waste disposal, and miscellaneous construction needs, like gravel, concrete and aggregates, that are available locally.
Non-local workers during this phase will need meals, lodging, fuel and other basic retail and service goods that are available locally. If those services cannot be met locally, then they will accrue to the nearest community that can supply them. It is important to remember, though, that those workers will return the bulk of their paychecks to their home communities. A boost in local construction work and a boost in some downtown businesses in the area do not equate to a meaningful boost in area incomes. When the construction period is over, spending in the community will adjust downward.
Finally, it is important for people to realize that the construction activity that does occur in Iowa does not create construction jobs; rather, it usefully employs the construction capacity that the state currently has. Once a plant is finished with that labor, those jobs are then free to move on to the next capital development project. Iowa construction jobs are a function of pace and pattern of all capital development in Iowa.
An economic impact occurs in a circumscribed region when we can demonstrate that some change in area productivity resulted in net increases in value added. Value added has three parts:
- labor income – all payments to workers and to sole proprietors;
- property payments to land and capital – rents, dividends, and interest payments;
- indirect tax payments that are part of the production process – sales, use, excise, property, franchise, and other production-related taxes.
When a value-added enhancing firm starts producing in a region there is an additional economic impact. We can calculate the net new demands that firm places on area goods and service providers. These are the production linkages to suppliers that, along with the plant, begin to multiply-through the regional economy. When a new firm requires new inputs, those firms who are supplying those inputs will require more labor and inputs in their own right, as will their suppliers, and so on. That is how we get the “ripple-effect” from a new processor in an economy. That ripple-effect is enhanced further when workers in the new firm and in the supplying firms spend their paychecks regionally. This induces a third round of economic impact that is sometimes called the household effect or the main street effect.
A convenient way to measure the value of production is to calculate the direct (plant level), indirect (production linkages to suppliers), and the induced (household spending related) job values. Research at ISU in 2006 and in 2008 looked at the regional economic impacts of a 50 MGY ethanol plant and a 100 MGY ethanol plant in terms of area job, worker income, and overall value added production in a hypothetical three-county, west-central Iowa region. In Figure 1 just the job impacts are described. We see that a typical 50 MGY plant only needs 35 jobs, but it indirectly stimulates 75 jobs in the input supplying sectors. These jobs do not include the jobs related to the corn production that the plant requires – they were already in the economy. Instead, they are the specialized electrical and mechanical trades required to maintain and repair machinery, some transportation job boosts, marketing and grain origination jobs, and specialized legal, accounting, and other business service jobs. Last, when the direct jobs and the indirect jobs spend their paychecks, they induce another 23 jobs in the regional economy.
Though a plant is adding jobs locally, most of the indirect and the induced jobs will occur in nearby large cities if the firm location is not already a regional trade center. For example, if a plant were to locate in rural Carroll County, most of the indirect job gains might occur in the city of Carroll or perhaps Ft. Dodge or Storm Lake if those are the locations of the specialized industrial and business inputs the firm would require. Smaller nearby towns will likely realize only minimal boosts in economic activity as service or goods suppliers to the firm. That includes housing. Many if not most workers at the plants, especially those with more education and higher salaries, will likely live in the largest nearby community within comfortable commuting distance, not necessarily the community closest to the plant. The same forces that compel the consolidation of services and trade into regional trade centers over the past quarter century will also influence the housing preferences of workers as they seek to maximize their housing choices along with the mix of private and public goods available to them.
Figure 1 reveals another factor as modern ethanol plants come on line: Due to economies of scale, which all large, declining cost industries will pursue, newer plants are much more likely to be 100 MGY in size, if not larger. A plant that size is able to process all of the corn in two of Iowa’s counties, but as the figure reveals, the number of jobs does not double. Where a 50 MGY plant linked to 133 workers, a 100 MGY plant only links to 170 workers, just 28 percent more. Consequently, as this industry becomes more efficient, the amount of labor required per gallon of ethanol produced (or bushel of corn supplied) declines sharply; accordingly, so would the average regional job and labor income impacts.
Corn Farmers’ Premiums
While there have been potent up and down movements of grain prices over the past couple of years, recent corn prices are much higher than they were before the ethanol building boom. These higher prices are a function of the growing demand for ethanol and of higher input costs for farmers. In addition to the ethanol industry’s overall impact on national corn prices, there is an additional localized price impact from ethanol production that boosts corn farmer returns on their operations. The premiums realized by corn farmers locally are a function of reduced transport and handling costs or basis penalties as they satisfy a local demander of corn versus an external demand. In research conducted last year, we measured the economic impacts associated with different localized price savings of between a nickel and a dime per bushel of corn delivered. These savings will vary according to the average distance to an ethanol plant and the average costs of transport locally. If those average savings were translated into producer profits and those profits were spent in the same manner as other returns to producers, then those premiums would yield the values described in Table 1 for the regional economy.
A 50 MGY plant will, nominally, require 18.2 million bushels of regional corn. At a 5 cent per bushel premium there are $910,000 higher returns for area corn farmers, which would, when spent, yield an additional $154,246 in labor incomes accumulating to 6.3 jobs elsewhere in the region. If the premium is as many as 10 cents for a 100 MGY operation, area farmers would see $3.65 million in higher incomes, and that boost in their returns would generate an additional 25 jobs and nearly $617,000 in labor incomes in the rest of the economy.
Table 1. Producer Premium Economic Impact Ranges
|5 Cents Per Bushel Premium||10 Cents Per Bushel Premium|
|Millions of Bushels of Regional Corn Supply Purchased||Labor Income||Jobs||Labor Income||Jobs|
|18.2 million (50 MGY)||154,246.4||6.3||308,492.8||12.6|
|36.4 million (100 MGY)||308,492.8||12.6||616,985.6||25.3|