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

1. 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.

2. Why Ethanol?? • Net Farm Income • Agricultural Resource Rigidity • Oil Prices • Rural Development

3. Net Farm Income • Net farm income for 2004 is forecasted at $47.6 billion, a 13.3 percent decrease from 2003’s 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).

4. Agricultural Resource Rigidity • Unlike other non-farm economic sectors, the agricultural sector’s 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).

5. 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).

6. 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 Energy’s 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).

7. 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.

8. 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.

9. 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.

10. 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.

11. The Process • The total costs of harvesting and transporting the crop, plus an incentive payment, will be required to entice the producer’s 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

12. 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 Energy’s 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).

13. 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.

14. Illinois Indiana Iowa Kansas Minnesota Missouri Nebraska Ohio South Dakota Wisconsin Midwestern States Examined

15. Midwestern States Examined:Corn Density

16. National Renewable Energy Lab Report on Lignocellulosic Conversion National Renewable Energy Lab Spreadsheet on Alternative Plant Size Plant Construction Phase Plant Operation Phase IMPLAN Transportation Phase Production Agriculture Impact Phase ORIBAS Estimates on feedstock and transportation costs POLYSYS Estimates on Available Residues Oak Ridge National Lab Cost of Harvesting Methods

17. 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.

18. 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).

19. 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.

20. 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.

21. 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.

22. 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

23. 1.90 1.70 1.50 1.30 $/gallon 1.10 0.90 0.70 0.50 0 2000 4000 6000 8000 10000 Plant Size (MT/day) Two Plant Sizes Studied

24. 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.

25. Results

26. Results

27. Results

28. Results

29. Results

30. 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.

31. 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.