Model Advice

Over the past five years, several economists have applied their talents to explaining how renewable fuels production affects agricultural production systems and rural American economies. Now, Iowa State University researchers offer new insight.
By Nicholas Zeman | October 26, 2006
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There was a need in Iowa for baseline statistics that would indicate on a local or regional level what would happen if an ethanol plant was to locate in a particular site. David Swenson, an Iowa State University (ISU) economist, decided his background and expertise fit the bill.

"We have a lot of information that proponents are using—people who are trying to pitch the ‘bioeconomy'—who might be political or affiliated with commodity sectors," says Swenson, author of a study titled, "Determining the Regional Economic Values of Ethanol Production in Iowa Considering Different Levels of Local Investment." Swenson didn't have an issue with the quality of past research. He was more concerned about the claims that were being made about the economic gains that might accumulate.

For example, Swenson estimates that one new ethanol plant can generate 180 to 200 jobs in the multiple sectors, including transportation and maintenance. Its numbers are nearly 10 times less than figures published by John Urbanchuk and the National Corn Growers Association (NCGA), which are somewhere between 1,800 and 2,000. Urbanchuk is director of LECG LLC, a service provider of testimony and analyses for major corporations and government agencies around the world. He could not be reached for comment at press time. The discrepancy is caused not only by the different analytical approaches utilized by Swenson and Urbanchuk, but largely because of estimates, Swenson says, which "double-count" corn production and construction effects.

Monte Shaw, head of the Iowa Renewable Fuels Association, is a proponent of ethanol, and his position is clear. "I'm not an economist, so I can't quote you numbers and figures, but I can walk into a community where new houses are being built," he says. "I can talk to people who have been able to move back to the Midwest and use their degrees in engineering. I do know that ethanol plants create more jobs than just what is specifically on the payroll." He believes the economic impact of ethanol production is obvious and that minutely analyzing numbers or quibbling over details are superfluous tasks. "[Swenson] kind of views his role in life to make these low-end projections," says Shaw. "He's done it for other industries. I don't have a green eyeshade, but I can tell you I think it is funny that we are fighting over how good ethanol is."

An intricate modeling system, however, is not built out of insignificant details. "I had done a short study a few years ago on a 40 MMgy plant, and my results were so much more modest than some of the numbers that I had seen from some of the advocates and proponents, and I was quite distressed," Swenson says. "I put that industry in all of its intricate detail into the regional economy, and the unique thing about that is we hadn't done that very well before."

The Base Model
The baseline for Swenson's study was an ethanol plant with no local ownership in the model. A three-county region in the major corn-producing area of Iowa was used as the study region, which was referred to as TriCo. One of the criteria used in choosing the area was that it didn't currently house an ethanol plant.

"This allows us to literally create a brand-new industry in the area and to concomitantly modify our intra-regional transactions so that they accommodate the presence of this new industry," according to the study. So, what happens when one injects higher levels of local ownership and higher levels of profits accumulating to local investors? According to Swenson's study, "This research demonstrates that there is a discernible boost in local economic impacts associated with higher level of local investment, as compared to a situation where local investment is minimal."

In terms of national research, the study says there was an absence of federal statistics concerning the materials and equipment needed to build ethanol plants. The statistical modeling that Swenson relied on was performed by Douglas Tiffany at the University of Minnesota (UM) and later refined by Robert Jolly, a colleague of Swenson's at ISU. "These people had been doing work at the extension level taking these models out and trying to advise people about different profit/loss scenarios that could be associated with different configurations, costs assumptions, etc.," Swenson says.

Tiffany is a research fellow for the Department of Applied Economics at UM, and is a respected and well-known voice in the industry. Much of his research over the past 10 years has involved the analysis of energy production from agriculture as well as energy inputs required to produce various agricultural products. "I found Swenson's study very thoughtful in terms of describing ways to improve this tool and describing the ways that it might be misused," Tiffany tells EPM. "I won't say that other studies have been wrong, but politicians can sometimes quote a figure to voice their support, and this can be misleading. It requires more thoughtful analysis."

A baseline model is essentially constructed by answering the following questions: With a completely externally owned ethanol plant, how many jobs does it take to provide non-corn inputs into that plant? How many jobs would that rural county economy expect because of additional monies spent on Main Street in a typical corn-producing area of Iowa that had never had a plant before? "I took [Tiffany's and Jolly's] very good data and put it into a modeling system that had never had that kind of detail for an ethanol plant," Swenson says. "The modeling system is built out of the regional economy and then I made that economy, acknowledge that industry and start responding appropriately."

Clarify Distortions, Change Assumptions
One of the common mistakes of previous research is the double-counting of corn production because corn is already produced in surplus. "That's where all of the huge jobs are, but they were already there. In my mind, the worst and most egregious of the assumptions that they're making is double-counting corn production and making all of its economic impacts more meaningful."
Shaw feels that Swenson's study directly undermines and contradicts work that has been done by Urbanchuk in association with the NCGA and USDA. "I am totally comfortable with Urbanchuk's numbers and analysis," Shaw says. "His track record is about as impressive as you can get. He's even testified in front of Congress and is probably considered the top in the field."

Swenson maintains that there is a fallacy in double-counting certain gains, and that he has cleaned up and tightened some overarching and generalized statements made in the past. "I tried to make a declaration about the kind of new jobs that we can truly count on versus the pie-in-the-sky total economic effects kind of stuff," Swenson says. "That's not doing me any good in planning."

Swenson's other complaints involve the systematic reporting of construction effects, as if they are more meaningful than they are in reality. "Remember, I'm dealing with this at a local level," Swenson says. "I have to look these people in the eye." Certainly, it is hard to argue with the fact that most of what it takes to make an ethanol plant is not bought locally. The pipes, gauges, grinders, tanks and various other pieces of equipment come from outside most of the communities in Iowa, where most ethanol plants have been built. "Most of this stuff comes from way outside the region from a few specialty producers," Swenson says.

The gains that were made in terms of labor were linkages to rail transportation because Swenson believes that this sector is going to change because of ethanol. "I also let there be some very good linkages to high-value mechanical services, including pipe fitting, electrical and other kinds of high-skill maintenance," Swenson says. "I think that is what those plants are going to link to, and there are a host of other inputs that I think are pretty valuable."

New Handle
Economists are fairly comfortable with data that has been collected upstream, in terms of the inputs involved in producing ethanol. This information helps anticipate what kind of changes will occur as the corn supply tightens, the concentration of corn production changes and farmers start making different planting decisions. "All of the stuff is great to think about and wonder about," Swenson says. "But we don't know diddly about that [downstream factors]."

The number of cattle that might be fed from distillers grains, for instance, or the long-term acceptance of some of these coproducts as animal feeds is not known. What happens if technology starts to change rapidly, and feedstock investment is shifted from corn to a diversity of biomass? "My goodness, it is just wide open," Swenson says. "I worry about people who make claims for gains when the technology or the activity hasn't even shown up yet."

A more common trend is the mixture of external and local ownership. Over time, willingness to be exposed to risk will change, and some risk acceptance will translate into diversification of holdings. Indeed, plants selling out half their shares, as well as reorganizing into different kinds of partnerships or combinations, has already been seen. "Similarly, I hear a lot of people running these things saying, at least rhetorically, ‘We've got this thing going, but we are looking at a 50/50 [investment split]—50 local, 50 external,'" Swenson says. "That tells me these people are doing like everybody else. … They're hedging their bets."

Finally, the last criticism mounted in this new study is against rhetoric. People use the phrase "farmer-owned", and to a certain extent, that is a common pattern. However, in terms of new investment occurring in the past eighteen months, it is a safe bet to say that a majority is not farmer owned. "It's business people in small towns, bankers, teachers, lawyers and anybody else that is looking at an investment opportunity." Swenson says. "So, overlinking this industry to farmers, I think, is a mistake. All of these profits are not being made to farmers, they're being made all over the place. People like to say ‘farmer-owned' because that sounds good, but I know better."

Nicholas Zeman is an Ethanol Producer Magazine staff writer. He can be reached at nzeman@bbibiofuels.com or (701) 746-8385.