Warsaw Times Union, IN
11-02-06
Researcher Sees Flaws In Ethanol Economic Analysis
BY JOHN DeGROFF, Times-Union Correspondent
Editor’s Note: This is the second in a series of articles on ethanol production.
Whenever local concerns are raised regarding a particular industry or facility moving into a region, it’s not long before battle lines become clear.
The proposed ethanol refinery at Milford is an example of an industry wishing to move into new territory, and the pros and cons of ethanol usage and production are being debated.
Milford area residents, organized as the Northern Lakes Area Concerned
Citizens, have expressed their concern and opposition to the refinery.ÊThey have met with local town councils, school boards, and have had some contact with county officials.ÊTheir efforts include a petition drive, yard signs and local meetings.
VeraSun, the company proposing the refinery site at Milford, has avoided contact with the general public. They have made presentations before county officials, but these were not in a public forum. They have been unresponsive to inquiries from Milford area citizens, and have failed to return calls for this series.
While the issue of ethanol use as an alternative fuel can’t be denied as valid, experts say some of the numbers presented (such as a current television commercial featuring Sen. Richard Lugar), are questionable.
David Swenson, a scientist and economics lecturer at Iowa State
University , presented a paper titled “Impact-Outrageous: The Economic Impacts of Mo dern Biofuel Production” at the Mid-Continent Regional Science Association and Biennial Implan Users Conference in Indianapolis earlier this year.
“This was not a paper written to be critical of the technology and efforts in ethanol promotion,” Swenson said.Ê “The problem that I saw was that there was a combination of technical and procedural errors in the ways that modeling technology was being used to analyze the economic impacts in this rapidly growing industry.”
In the paper, Swenson discusses the number of jobs provided by an ethanol refinery.Ê“The problem is that ethanol refineries don’t really create many new jobs relative to the investment,” he said.Ê “There are only 35 new jobs in a modern 50 million-gallon-peryear plant.”

In the paper, Swenson lists the following reasons for the overestimated economics of ethanol refineries:
Cause and effect: “The most common error is the assumption of cause and effect
– that if the economy does this, then the economy automatically does that.ÊOne must exercise serious caution when inferring the effects of marginal change in the entire economy.”
Increased corn production: “The most obvious reaction is for more corn to be grown, resulting in all economic impacts in the corn industry to be compiled simultaneously with the ethanol plant ... it may come as a surprise to many, but the corn already had been grown ... if not, the land was used productively for other uses that were profitable.”
Trucking and transport: “It remains to be proven that there are significant weight and milesdriven trucking differences once a refinery is established.”
Declining cost industries: “Ethanol industries tap into large amounts of energy.ÊIn particular, they need electricity and natural gas ... meeting the needs of a new plant does not yield average utility industrial output, job, or earnings income; instead, they yield marginal outcomes which can be very meager, if not nearly zero.”
Producer premium estimates: “Corn producers and sellers in the region receive a better price than if they would have had to market their corn to some local buyer.ÊThe reason is that transport costs are reduced significantly by having a local buyer versus the assumed transport costs ... to a buyer at a greater distance.ÊBut there are offsets at work:ÊIf returns are higher, than land values increase.ÊThat’s good if you’re an owner ... bad if you’re a renter, which many farmers are in whole or part.ÊSecond, in the current federal program, higher prices everywhere yield lower federal subsidies.Ê The net regional gain to boosted commodity prices has not been investigated well ...”
Ignoring other regional offsets: “Competing users of corn, like hog and poultry producers, will need to pay more ... other grain handling and use will also shift in the region from sy stems designed to store and manage ... grain for export.ÊThe byproducts of ethanol, distillers’ grains, are currently not suitable for feeding to swine and poultry and can be used only as a limited supplement for dairy cattle.Ê
Regardless of claims to the contrary, there is competition for local grain that is impacting the margins of hog and poultry producers.”
Unacknowledged or emerging externalities: “There are external costs ... these plants are heavy uses of water, have high amount of waste discharge, and their air emissions are becoming a problem.ÊThe refineries have begun to attract attention of state and federal environmental regulators.”

Swenson goes on to say “... there is enough uncertainty in the ethanol industry both in its current configuration and in its anticipated future manifestations for prudent analysis to exercise extreme caution when making claims as to the net economic product in this country that is attributable to ethanol.ÊMost of the current efforts grossly overstate the regional, state and national effects of the ethanol industry.”
Swenson’s research was, in his own words, “... done to address two dimensions: first, there was a fair amount of misinformation about the potential job gains that an ethanol refinery would yield. Some researchers were claiming that modern refineries would yield, literally, hundreds of new jobs to a region.Ê I confronted those bloated claims headon.ÊSecond, I wanted to model the different economic impact comparing a locally owned refinery and an externall y owned refinery.ÊAs you might guess ... locally owned ... given robust returns, yielded a higher local economic impact.”
By organizing, Milford area residents hope to influence public officials’ decisions regarding what will and will not impact their local economy.