Iowa Researcher Finds Limits to the Economic Impact of Ethanol

In recent years, Iowa, like many midwestern states, has experienced a boom in ethanol production. Iowa's natural competitive advantage in growing and processing corn has helped it to move to the forefront of the emerging biofuels industry. The state provides numerous incentives and assistance programs through its Department of Natural Resources to help spur the creation of ethanol-related companies and jobs. A new report by Iowa State University economist David Swenson, however, argues that even if these programs are successful at building a strong ethanol industry, the overall economic impact of this success would be smaller than predicted.

 

Swenson argues in The Economic Impact of Ethanol Production in Iowa that many projections of the economic impact of corn ethanol suffer from improper input-output modeling and frequently overestimate the number of jobs that could be created by the industry. He found that the ethanol boom that occurred between 2000 and 2005 did not lead to the creation of many construction jobs. Instead, much of that construction work was undertaken by out-of-state firms that brought specialized workers with them.

 

Once an ethanol plant is finished, it rarely requires many workers. A 50 million-gallons-per-year (MGY) ethanol plant requires only 35 direct workers, while the more intensive 100 MGY plants still only require 46 employees. In addition, the number of full-time employees required for these plants is expected to decline as the technology becomes more advanced.

 

Some of the other most frequent errors made in modeling the impact of ethanol pointed out by Swenson include:

• Corn Production – Models often include the corn grown for ethanol as a new activity. In most cases, this corn is already being produced. In cases in which new corn would have to be grown, that land would have previously been used to produce other crops.
• Transportation – Many models include new jobs in transportation and trucking, under the assumption that ethanol plants will need new supply lines. Farmers, however, already use trucking companies to move their corn. In fact, by building local ethanol plants, the state may even see a reduction in the demand for transport services.
• Regional Offsets – Other industries that compete for many of the same input resources, such as hog and poultry producers, will have to pay more for resources and services. Also, the cost of corn-based feeds will increase for these industries.

Since corn production in Iowa – and any other state – is naturally limited by the availability of land and other resources, the number of ethanol plants a state can accommodate is finite. According to Swenson, even if Iowans were able to produce two billion bushels of corn, the state would still only require 55 plants averaging 90 MGY in size. In 2005, the state grew only 400 million bushels. In 2009, 42 ethanol plants will already be operational, and the state appears to be approaching its ceiling for ethanol production and employment.

 

Swenson does not propose ending state support for the biofuels industry, but he does suggest that some of the state’s justifications for its ethanol programs are based on misleading employment indicators. The overall impact may be smaller than expected in the state, even though Iowa has long been a national leader in biofuels production. For other states, with even less land dedicated to corn production and with less focus on ethanol, the employment impact may be even more limited.

 

The Economic Impact of Ethanol Production in Iowa is available at: http://ideas.repec.org/p/isu/genres/12865.html



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