Economist: Ethanol exuberance will hit fan

FARGO, N.D. -- An Iowa State University agricultural economist who is famous for criticizing the ethanol fuel industry recently made his third appearance in a row at the annual North Dakota Grain Dealers convention.

FARGO, N.D. -- An Iowa State University agricultural economist who is famous for criticizing the ethanol fuel industry recently made his third appearance in a row at the annual North Dakota Grain Dealers convention.

The entertaining economist, Dave Swenson, says he has no idea whether ethanol will be around in another 10 years, but technological feasibility doesn't necessarily mean economic feasibility, and economic feasibility doesn't necessarily mean environmental, political or social feasibility.

"Politics often leads to sub-optimal programs and policies," Swenson says.

While the industry has been very beneficial for rural capital investment, Swenson continues to wonder "what kind of productivity are we adding to our rural space?"

A specialist in rural economic development, Swenson measures this in rural jobs and notes that while ethanol plants offer a few higher-paying engineering jobs, they also displace larger numbers of workers if the grain were used as livestock feed.


Production, consumption

Swenson notes that plant numbers increased from 50 in 1999 to 120 or so in 2008. He says average production per plant indicates -- as expected -- that plants are getting larger. In 2007, the average production capacity per plant was about 60 million gallons per year, while in 2008, the production was nearly 82 million gallons per plant. He says it takes only about 44 workers to run a 100 million-gallon plant.

"We're making ethanol like crazy," he says, with 9.4 billion gallons made in 2008. He says the old mandate just two years ago was 7.5 billion gallons. "In response to our exuberance, Congress rewarded us by doubling the mandate," he says. "The government wants 15 billion gallons by 2015."

The ethanol industry consumed about 3.3 billion bushels of corn and directly employed about 4,370 people. Eighty percent off those are in the Plains states. Meanwhile, those states saw a 23,494 cut in farmer numbers.

He says it takes about 220,000 corn acres in Iowa to feed an ethanol plant, and nearly 300,000 acres in North Dakota. The plants made an average of 37 cents a gallon on ethanol in 2007 and about 17 cents a gallon in 2008, but produced more gallons.

Partly driven by ethanol, land values that typically increase some every year in Iowa shot up 22 percent in 2007 and 18 percent in 2008.

"Our land is really expensive. Really expensive,"Swenson says.

He says one of the problems ahead for ethanol is that there has been "a lot of siting of ethanol plants where it


wasn't optimal," and some of the main factors are proximity to corn and proximity to competition.

Future concerns

There are several other future concerns for the industry.

The mandates limit corn to 15 billion gallons per year, but the industry hits a "blend wall" before it gets to that point, an issue worsened by fuel use cutbacks or energy policy changes. Ethanol as a percentage of motor fuel use is about 6.1 percent.

Cellulosic ethanol demonstrations seem to have stalled. Only a wood-based project in Georgia is close to operating. The plant is expected to produce 20 million gallons per year with 63 jobs and kick out ethanol at a cost of $1 per gallon.

"Yeah, sure," Swenson says.

Tankers to move ethanol aren't being built as rapidly as volume increases come into play.

There is growing public sentiment and broad resistance to ethanol in "green" circles.


Increased subsidy levels will be required to assure production that policy is expecting.

He says some colleagues have indicated that subsidy levels are needed up to 22 cents to 78 cents per gallon for corn ethanol and $1.97 to $2.90 per gallon for biodiesel and $1.55 to $2.11 for cellulosic ethanol.

Swenson pooh-poohs results from laboratories, including the University of North Dakota's, that 30 percent ethanol blends provide equal gas mileage to 10 percent blends.

"You're going to get less mileage out off the ethanol,"he says.

Grain contracts

David Barrett, Jr., an attorney from Dublin, Ohio, and former counsel to national grain handling groups who also spoke at the conference, says elevators managers and board members that they and farmers today need to take steps to make ensure their trading partners are fiscally strong.

He says lenders who must finance margin calls for elevators are increasingly asking for how those elevators ensure the viability of farmers from whom they purchase grain or customers who buy it.

"Today, you need to know a whole lot about the party you're dealing with -- their financial wherewithal, whether they have financial net worth to make the contracts good. Sometimes you may want to ask for financial statements," he says.


Barrett says grain elevators should create a "master trader agreement" with producers, which spells out how the two will confirm sales agreements in writing and how disputes will be resolved. Elevators entering into long-term contracts with producers may need to know that they have written leases on land.

Barrett guesses that only 20 percent to 25 percent of elevators have adequate agreements in place.

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