ECONOMIC IMPACTS OF ETHANOL PRODUCTION FROM CORN STOVER IN SELECTED MIDWESTERN STATES

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ECONOMIC IMPACTS OF ETHANOL PRODUCTION FROM CORN
STOVER IN SELECTED MIDWESTERN STATES

• Burton C. English, R. Jamey Menard, Daniel G. De
  La Torre Ugarte, and Marie E. Walsh
• Partially Funded by Oak Ridge National
  Laboratory Contract Number 4500010956.
• Professor, Research Associate, Research Associate
  Professor, and Adjunct Professor, Department of
  Agricultural Economic, University of Tennessee.

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Why Ethanol??

• Net Farm Income
• Agricultural Resource Rigidity
• Oil Prices
• Rural Development

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Net Farm Income

• Net farm income for 2004 is forecasted at 47.6
  billion, a 13.3 percent decrease from 2003s
  level of 54.9 billion.
• The ten year average (1994-2003) for net farm
  income was 48.2 billion.
• Income variation for this ten year average was
  6.7 billion.
• From 1994 to 2003, net farm income ranged from a
  low of 35.3 billion (2002) to a high of 57.8
  billion (1996).

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Agricultural Resource Rigidity

• Unlike other non-farm economic sectors, the
  agricultural sectors resources are not very
  mobile.
• Once the resources are employed by the
  agricultural sector they tend to remain there.
• United States farmers use all of their productive
  capacity regardless of expected commodity prices.
  
• The land usually remains in agriculture
  production even though a farmer quits.
• Historically, agriculture has been plagued by
  surpluses and low commodity prices (Ray et al.,
  2003).

• Other industries would throttle back production
  and/or decrease productive capacity (Ray, p.
  39).

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Agricultural Resource Rigidity
Other industries would throttle back production
and/or decrease productive capacity (Ray, p. 39).

• Other industries would throttle back production
  and/or decrease productive capacity (Ray, p.
  39).

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Oil Prices

• Recent world oil prices have increased from
  22.68 to 33.40 per barrel, a 47.3 increase,
  from January 2000 to May 2004 (Department of
  Energy, 2004d).
• According to the Department of Energys Energy
  Information Administration, the average retail
  price (May 2004) for regular unleaded gasoline is
  2.01/gallon.
• Adjusted for inflation, gasoline prices have not
  been in this range since the fall of 1985.
• Lack of stability in oil prices contributes
  greatly to the difficulty for consumers and
  businesses to plan and budget (Department of
  Energy, 2004c).

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Rural Development

• Public pressure has increased toward establishing
  value-added operations in the rural areas.
• Interest in economic development of rural areas
  has traditionally focused on manufacturing
  opportunities and has neglected agricultural
  value-added prospects.
• Rural communities either shipped raw commodities
  out or fed the raw agricultural commodities and
  shipped livestock from the region.
• Recent contributions to incomes and employment in
  rural areas have occurred through the development
  of an ethanol industry relying on agricultural
  feedstocks.

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Rural Development?

• In a study conducted for NREL, several reports
  were reviewed that analyzed the economic impacts
  of fuel ethanol. In this analysis, if was found
  that These assessments all predicted substantial
  economic benefits from increased production of
  fuel ethanol (Energetics, Inc.).
• A 1993 United States Department of Agriculture
  study -- increasing ethanol production to 2
  billion gallons would create 28,000 new jobs.
• The National Corn Growers Association --
  expansion of the ethanol industry through 2000
  would create over 273,000 jobs throughout the
  United States.
• The U.S. General Accounting Office -- an increase
  of ethanol production to the 2.0-5.0 billion
  gallon level would increase net farm income by
  1.3 percent per year or an average of 415
  million over the 8-year period of GAO's analysis.

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The Process?

• Biomass feedstocks, such as corn fiber (hull from
  a kernel of corn), corn stover (residue left from
  grain harvest), bagasse (residue left from the
  crushed stalks of sugar cane), and rice straw,
  contain cellulose, which can be converted to
  sugars that are then fermented to ethanol. New
  technologies are in process of development that
  will convert corn stover to ethanol more
  efficiently.
• The agricultural producer harvests the corn and
  windrows the residues. Following the harvest,
  the residues are baled, wrapped in a plastic
  mesh, and transported to the edge of the field.

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The Process

• Once at the fields edge, the stover is
  transported to the ethanol production facility in
  such a manner that there is 10 days of inventory
  kept at the ethanol plant.
• This process creates a byproduct for the farmers
  to market.

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The Process

• The total costs of harvesting and transporting
  the crop, plus an incentive payment, will be
  required to entice the producers participation.
  
• The cost of harvesting and transporting the
  residue depends on the per acre residue yield and
  the distance to be transported.
• This does not remove resources from agriculture,
  but is the first step toward establishing a
  dedicated crop for ethanol

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The Market

• Ethanol demand is expected to increase. In 2002,
  U.S. ethanol production, with corn as the primary
  feedstock, was 139,000 barrels per day.
• The Department of Energys Energy Information
  Administration projects production to double by
  2025.
• About 27 percent of the growth will occur from
  conversion of cellulosic biomass (i.e., stover).
  
• In the high renewable case, all the projected
  growth is from cellulose -- a result of more
  rapid improvement in the technology (Department
  of Energy).

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Objectives

• The objective of this research are to provide
  estimates of economic impacts if ethanol plants
  are established in the current corn producing
  states of the United States.
• The economic impact indicators used in the
  analysis include
• total industry output,
• employment, and
• value-added.
• Analysis includes both the impacts that occur
  with the first most likely plant is constructed
  and in operation and when all feasible plants are
  in operation.

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Midwestern States Examined

• Illinois
• Indiana
• Iowa
• Kansas
• Minnesota

• Missouri
• Nebraska
• Ohio
• South Dakota
• Wisconsin

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Midwestern States ExaminedCorn Density
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Methods
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POLYSYS

• The Policy Analysis System (POLYSYS) modeling
  framework was developed to simulate changes in
  policy, economic, or resource conditions, and
  estimate the resulting impacts for the U.S.
  agricultural sector.
• This model has been presented in an earlier
  session during this conference.

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POLYSYS

• Using the corn yields and acres for 2005 as
  estimated by POLYSYS, quantities of corn stover
  available as feedstocks for ethanol production
  are estimated for each county in the ten states.
  
• Corn acres classified as highly erosive (e.g., an
  erosion index of 8 or higher) are excluded from
  consideration (Department of Agriculture, 2004b).
  

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POLYSYS

• Assumed quantities required to remain to maintain
  soil quality are subtracted from the total
  quantities of stover produced a maximum of 45
  percent of the residues generated are allowed to
  be collected (Lightle).
• In using the model in this manner, the assumption
  that is made is that farmers plant corn for the
  revenue gained from corn and do not incorporate
  the revenue generated from selling residues in
  their decision process.

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ORIBAS

• ORIBAS. The Oak Ridge Integrated Bioenergy
  Analysis System
• a GIS-based transportation model.
• includes a complete road network for each state.
  
• are evenly distributed across each county.
• locates facilities based on delivered feedstock
  costs with the first plant having the lowest
  delivered costs for quantities sufficient to meet
  its feedstock demands.

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ORIBAS

• Subsequent facilities have increasing costs as
  they must either purchase feedstocks from areas
  that are more expensive and/or transport
  feedstocks farther to satisfy their feedstock
  needs.
• The cost of delivering residues is estimated
  along with the location of the stover.

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Agricultural Industrial Complex
Transportation Sector
Motor Freight Transport and Warehousing
Corn Stover
Miscellaneous Plastic Products Farm
Machinery Motor Freight Transport Automobile
Dealers and Service Stations Miscellaneous
Repair Employee Compensation Non land Capital
Costs Other Property Income
Inorganic Chemicals Lime Nitrogenous and
Phosphatic Fertilizers Wet Corn Milling Petroleum
Refining Water Supply and Sewerage
Systems Sanitary Services and Steam
Supply Electrical Services Maintenance and Repair
facilities Insurance Accounting Services Employee
Compensation Indirect Business Taxes
IMPLAN
Plant Operation
Plant Construction
Building Construction Machinery Banking Electric
Utilities
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Two Plant Sizes Studied
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Ethanol Prices

• Analysis conducted using 3 different Ethanol
  Prices 1.15, 1.25, and 1.35 per gallon.
• Based on a prespecified ethanol price, the amount
  the plant could pay for their feedstocks was
  determined.
• Using the feedstock price, the number and
  location of plants that could supply ethanol was
  determined.

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Results
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Results
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Results
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Results
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Results
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Conclusions

• In eight of the states evaluated,
• the construction and operation of an ethanol
  plant provides substantial estimated economic
  impacts for total industry output and employment.
• The number of new jobs ranges from 576 to 910 for
  the 1,000 MT/day plants. In the case of an
  ethanol plant processing 2,000 MT/day, the number
  of jobs created ranges from 1,104 to 2,107.
• The number of feasible ethanol plants in each
  state could vary substantially based on the
  prices of ethanol and corn stover and plant size.
  
• The smaller plant size is much more sensitive to
  the prices of ethanol than to the price of the
  corn stover. In the smaller plant, no plants are
  feasible if the ethanol price is at 1.15/gallon
  and the corn stover is at the breakeven price.
  An estimated 108 plants are feasible if the price
  of ethanol is 1.35/gallon at a breakeven stover
  price.
• The economies of size present in the larger
  plant, 2,000 MT/day, make this plant less
  sensitive to the changes in prices as the number
  of plants ranges from 47 to 72 in the
  corresponding two price scenarios outlined above
  for the 1,000 MT/day plant.

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Conclusions

• If producers are guaranteed 1.35/gallon at a
  breakeven price scenario for a 2,000 MT/day
  plant, an estimated 72 plants would be
  constructed, 8.8 billion gallons of ethanol would
  be produced, 1.0 billion in gross income to
  agricultural producers would occur, and an
  estimated economic impact of 58 billion in rural
  economies of the ten state region would be
  realized.
• While the one time impacts of construction were
  also estimated, these were not incorporated into
  this paper due to space limitations.