[Iowa-dx] ISU Economist says some ethanol economic projections high

Mon, 04 Sep 2006 17:22:42 +0000

Recent article from ISU prof about the ethanol controversy/Bob

http://www.iastate.edu/~nscentral/news/2006/sep/ethanolecon.shtml
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ISU economist gets real with economic impact of corn-ethanol boom

9/01/06
AMES, Iowa -- There is no doubt that Iowa is in the midst of a corn-ethanol boom
-- with 27 plants currently processing corn, mostly for ethanol, and 24 either
under construction, planned, or proposed.

But while ethanol will continue to be good for the Iowa economy, some
projections being reported by farm state politicians and industry advocates --
like one in an essay this year by former South Dakota Senator Tom Daschle that
the current U.S. production of 3.1 billion gallons of ethanol created 200,000
jobs -- look too good to be true. They are according to an Iowa State University
economist's recent study.

David Swenson, an associate scientist and lecturer in economics and community
and regional planning, authored a paper titled "Input-Outrageous: The Economic
Impacts of Modern Biofuel Production." He presented it earlier this summer at
the Mid-continent Regional Science Association and the Biennial Implan National
Users Conference in Indianapolis.

"This was not a paper that was written to be critical of the technology and
efforts in ethanol promotion. Mine was a criticism of the people who should know
better as regional scientists -- the people who do these modeling systems," said
Swenson. "The problem that I saw was that there was a combination of technical
and procedural errors in the way that modeling technology was being used to
analyze the economic impacts in this rapidly growing industry."
A critical analysis of ethanol economics

After describing the magnitude of overly-optimistic economic impact claims and
reviewing some of the more common errors in analysis, Swenson's paper presented
the findings of a modeled ethanol plant configuration in a hypothetical
three-county region of Iowa. He found that new ethanol plants employ, at most,
35 people. And every new ethanol job -- under average rural conditions -- can
possibly lead, on average, to three more jobs in a rural region.

"And we're not sure that's net (in terms of the economic gain of those three
jobs). We just know that it's gross," said Swenson. "And the problem is that
ethanol plants don't really create many new jobs relative to the investment,
since there are only 35 jobs in a modern 50 million gallons per year plant."

Swenson wrote that he doesn't believe the producers of the bloated impact
statistics -- or the uncritical conveyors of them -- are being intentional.
"Instead it looks like there is just a whole lot of input-outputting run amok
going on," he wrote.

He listed the following reasons for the overestimated economic impact:

    * 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," he wrote. "One must exercise serious caution when inferring the effects
of marginal change in the entire economy."
    * Increased corn production. "The most obvious causal reactionis for more
corn to be grown, resulting in all concomitant impacts in the corn industry to
be compiled simultaneously with the ethanol plant," wrote Swenson. "It may come
as a surprise to many, but the corn already had been grown. And if not, the land
was used productively for other uses that were profitable (to the extent that
farming is profitable)."
    * Trucking and transport. "Several modelers factored in a boost to local
trucking companies and their output and employment. In the main, all of the corn
used for ethanol production had to be hauled somewhere in the region prior to
the induction of the plant," he wrote. "It remains to be proven that there are
significant weight and miles-driven trucking differences once a plant is
established."
    * Declining cost industries. "Ethanol industries tap into large amounts of
energy. In particular they need electricity and natural gas," wrote Swenson.
"Both are large, declining-cost industries and the ethanol industry uses large
amount of product. 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 they marketed their corn to
some local buyer. The reason is that transport costs are reduced significantly
by having a local buyer versus the assumed transport costs they would have borne
had the grain been marketed to a buyer at a greater distance," he wrote. "But
there are offsets at work: if returns are higher, then land values increase.
That's good if you're an owner looking at asset accumulation, but bad if you're
a renter, which many farmers are in whole or part. Second, in the current
federal program, higher prices everywhere yield lower federal subsidies. The net
regional gain to boosted commodity prices has not been investigated well, and
assumptions about the price boost need to be modeled carefully if not 
separately."
    * Ignoring other regional offsets. "Competing users of corn, like hog and
poultry producers, will need to pay more for their inputs," Swenson wrote.
"Other grain handling and use will also shift in the region from systems
designed to store and manage the efficient outflow of grain for export. The
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 feedRegardless 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, too,
that only now are being acknowledged. These plants are heavy users of water,
they have high amount of waste discharge, and their air emissions are becoming a
problem," he wrote. "The plants have begun to attract attention of state and
federal environmental regulators."

The verdict is in

"In all, there is enough uncertainty in the ethanol industry both in its current
configuration and in its anticipated future manifestations for prudent analysts
to exercise extreme caution when making claims as to the net economic product in
this country that is attributable to ethanol," he concluded. "Most of the
current efforts grossly overstate the regional, state, and national effects of
the ethanol industry."

That conclusion has Swenson calling for public-policy decisions to be based on
more accurate economic numbers.

"These decisions can be expensive at the local and regional level," he said.
"These (ethanol) plants are being subsidized with the expectation of huge gains
locally. We don't know that those huge net gains will result. So we need to have
a more reasonable perspective during the public-policy process."

Swenson is working with officials from Iowa State's College of Agriculture on a
future research paper determining regional economic values of ethanol production
in Iowa considering different levels of local investment.

ISU's Department of Economics is also planning an on-campus conference for
Friday, November 10, on the economics of the corn-based ethanol industry and its
impact on food and feed markets.

-30-

David Swenson

David Swenson
Quick look

David Swenson, an associate scientist and lecturer in economics and community
and regional planning, reports that some projections about the economic impact
of ethanol are being inflated. He authored a paper titled "Input-Outrageous: The
Economic Impacts of Modern Biofuel Production," which he presented earlier this
summer at the Mid-continent Regional Science Association and the Biennial Implan
National Users Conference in Indianapolis.
Quote

"In all, there is enough uncertainty in the ethanol industry both in its current
configuration and in its anticipated future manifestations for prudent analysts
to exercise extreme caution when making claims as to the net economic product in
this country that is attributable to ethanol. Most of the current efforts
grossly overstate the regional, state, and national effects of the ethanol
industry."

David Swenson
Becoming the Best

Ames, Iowa 50011, (515) 294-4111. Published by: University Relations,
online@iastate.edu.

David Swenson, Economics, (515) 294-7458, dswenson@iastate.edu

Mike Ferlazzo, News Service, (515) 294-8986, ferlazzo@iastate.eduContacts:

David Swenson, Economics, (515) 294-7458, dswenson@iastate.edu

Mike Ferlazzo, News Service, (515) 294-8986, ferlazzo@iastate.edu

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