Ethanol plants no panacea for local economies, study finds

Just over a year ago, the U.S. ethanol industry was still in overdrive, fueling a wave of new factories to keep pace with surging demand for the corn-based gasoline additive. But the boom has since stalled amid a deep economic downturn that has stifled demand, one of many threats to the fledgling industry that were forecast in a 2007 study by two University of Illinois researchers.

"Our research found lots of storm clouds that posed risks for ethanol plants, even though the industry was go-go-go at the time," said Andrew Isserman, a professor of agriculture economics and of urban and regional planning. "The last 15 months have proven just how risky it is."

Isserman and U. of I. doctoral candidate Sarah Low studied the ethanol industry in 2007 to gauge what areas might be good locations for ethanol plants and whether factories would provide an economic boost for towns that were then clamoring to hitch onto the ethanol bandwagon.

Their findings, first released in late 2007 on the campus's farmdoc.uiuc.edu Web site and which now appear in the current issue of Economic Development Quarterly, foreshadow an industry downturn that has seen dozens of plants shuttered or forced into bankruptcy as excess production capacity yields mounting financial losses.

The study found that plants are beset with a host of uncertainties, ranging from shifts in federal energy policy and global economics to changing technology that threatens the long-term viability of corn as an ethanol blend.

Although factory growth has been halted by a sour economy, the findings could help guide economic development decisions when the industry rebounds, said Isserman, a member of the U. of I. Institute of Government and Public Affairs, a campus think tank.

"Ethanol plants are a risky business, so communities need to be careful," he said. "And even if a plant is a good fit, community leaders need to realize it's not going to transform their economy."

He says a dramatic shift that cut gasoline prices in half since last summer – closing plants and shelving plans for others -- showcases a key economic peril of ethanol plants.

As gasoline prices slid, so did prices for ethanol, which is tethered to the energy market. But corn prices remained relatively high, netting production losses that put some plants out of business and landed others in bankruptcy, halting several years of robust growth for the fledgling industry.

"The bottom line for local communities is to consider the employment volatility that could occur, not just the employment growth," Low said. "You could end up sitting on a shuttered plant."

Jobs are a big draw for small, rural communities seeking to capitalize on their proximity to cornfields that feed the plants. But the study found that industry forecasts vastly overestimate employment gains.

While the industry projects plants producing 100 million gallons of ethanol a year can create more than 1,000 plant and spin-off jobs, the study found that similar plants would net a maximum of 250 jobs, based on an analysis of ethanol facilities proposed in three Illinois communities and one in Nebraska.

"The critical flawed assumption was that plants create a lot of local jobs growing corn," Isserman said. "But the corn would have been grown anyway. It was just sold to different markets."

Job and economic gains also have to be weighed against sometimes hefty infrastructure expenses, such as water, sewer, road and rail improvements needed to serve plant needs, the study says.

"I think a lot of communities see ethanol as a panacea, but there is no silver bullet," Low said. "Every community needs to think about their own pros and cons, whether they're recruiting an ethanol plant, a manufacturer or any other facility."

Plants also could fall prey to new technology that seeks to make ethanol with less costly cellulosic materials – such as switchgrasses or miscanthus – rather than corn, the study says.

Low says it may be possible to retool existing plants, but suspects many smaller ones would spring up near less-productive land because farmers are unlikely to convert profitable cornfields to lower-grossing cellulosic materials. She hopes the study guides local leaders if technology nets a new wave of plant building.

"I think we're going to see a lot of smaller plants with even smaller economic benefits," she said. "If those communities have the needed infrastructure, a plant may be good economic development policy. But the message of our research is that they need to be realistic about the employment effects and the economic impact of those projects."

The study found that more traditional agricultural-based facilities, such as a plant that makes corn chips, offer economic benefits similar to ethanol plants, without the risks.

"I think what we learned from this research was that even if your community has what it takes to land an ethanol plant, it's not so clear that you want to jump into it," Isserman said. "This is a rapidly changing industry and ethanol plants are not a savior for local economies."

Source: University of Illinois at Urbana-Champaign