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ag copy-322economists

By Janet Kubat Willette

jkubat@agrinews.com

The success of ethanol plants has created friction between farmers who grow corn and farmers who raise livestock.

It will be interesting to see how many small producers continue their livestock operations when faced with higher feed prices, said Doug Tiffany, a research fellow in the University of Minnesota’s Department of Applied Economics. These farmers are typically getting older and are raising livestock in older facilities, he said. They used to make money selling their grain on the hoof, which added resiliency to the agricultural economy and more balance to their operations.

Ethanol has changed the profitability of feeding corn to livestock by creating another stable, year-round market for corn.

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"Ethanol alone isn’t responsible for higher corn prices, it is a function of many things," Tiffany said, listing higher incomes of people, particularly in China and India; a weaker dollar and higher crude oil prices as other contributing factors.

He’s seen a little resurgence in Midwest dairying, long on the decline as other states outside the Midwest built larger dairies and purchased feed. Midwest dairies, with their ability to produce high-quality forages, may start to grow as feed prices rise.

Great regional shifts in livestock production are possible as a result of ethanol, said David Swenson, an associate scientist in Iowa State University’s College of Agriculture Department of Economics.

Expansion in ethanol production may detract from other uses of corn, primarily feeding livestock, he said, and rural areas may have to live with an economic development offset.

Swenson said a 100-million-gallon-per-year ethanol plant will create 47 jobs at the plant and consume about 33 million bushels of corn, which is about equal to the number of bushels produced in Cerro Gordo County, Iowa, in 2007.

Imagine, he said, if half of that corn was fed to hogs and poultry and how much labor would be involved in managing that production. Livestock can’t compete with ethanol on price, so there will be tradeoffs in rural areas. It remains to be seen if ethanol will be a net addition to rural productivity or lead to a smaller rural economy long term, he said.

Ethanol does have a co-product, distillers grain, that is useful for cattle feeding, but large cattle operations typically aren’t located near corn production, Swenson said. Hogs, poultry and corn are co-located.

High grain prices

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In the meantime, grain farmers are doing well because grain prices are high. But those high grain prices are causing significant stress for ethanol plants by raising input costs and the price of ethanol is weighed down by an industry that is producing more ethanol than the nation wants to buy, he said.

Minnesota’s ethanol industry was nurtured by the Minnesota Legislature to help clean the air in the Twin Cities while at the same time creating economic development in rural areas that were just emerging from the 1980s farm crisis. The federal Clean Air Act of 1990 and enforcement of that by the Environmental Protection Agency set a base for using ethanol as a gasoline additive, Tiffany said. Ethanol was an octane enhancer, helping gasoline burn more completely.

Today, with federally mandated usage levels, ethanol has become more of a substitute on a BTU basis for gasoline, he said. The Energy Act passed in December mandates 15 billion gallons of ethanol usage, which would put the entire nation at a 10 percent ethanol blend.

The federal government also subsidies the use of ethanol through the volumetric ethanol excise tax credit, which gives petroleum companies a 51 cent tax credit per gallon of ethanol used as an incentive to use ethanol in gasoline.

Ralph Groschen, senior agriculture marketing specialist with the Minnesota Department of Agriculture, said the federal investment is justified.

Ethanol adds value to gasoline by increasing the octane and ethanol reduces the price of gasoline because it is cheaper, Groschen said. Gasoline without ethanol is 87 octane. When gasoline is blended with ethanol, which has an octane of over 110, the octane of gasoline rises.

The federal government has also invested billions into petroleum research and development and making petroleum into products people wear and use every day.

"If it’s good for petroleum, it’s good for ethanol," he said.

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Ask Groschen if ethanol is rural development that’s worked for Minnesota and he responds unequivocally: "There’s no doubt in my mind."

Wells Fargo agricultural economist Michael Swanson would agree ethanol is a good form of rural economic development because it requires an investment to get federal support.

On a national scale, ethanol’s contribution to the economy is irrelevant, he said, but on a local scale it’s a big deal with both positives and negatives. On the plus side, it’s contributed to increases in land prices and crop prices, but on the negative side, it’s raised feed costs for livestock producers.

Shining star

Ethanol has been somewhat of a shining star in rural areas, Swenson said, bringing good manufacturing jobs to regions that have been losing jobs for decades and generating jobs in the regional economy.

His research has shown that a 50 million gallon plant would create 35 manufacturing jobs, an additional 75 indirect jobs and another 23 jobs when those workers spent their paychecks. If there is local ownership, there would be a much better rate of return in good years and more hardship in poor years.

"There’s an upside and a downside risk to local investment," he said.

Concerns have emerged about ethanol plant water usage and their carbon footprint, but plants are becoming more efficient, Tiffany said. The Winnebago plant is using syrup that is a byproduct of production and combusting that to fuel the operation. Little Falls is working with wood and other plants are investigating different types of biomass to fuel plant operations.

There used to be a red herring argument that it takes more energy to run ethanol plants than the energy delivered, but Tiffany said "that’s just not true."

"There aren’t any perfect fuels out there," Tiffany said. "They all have some drawbacks. Ethanol is the fuel we know how to handle today."

There are some excellent fuels in research and development, including biobutenol and hydrogen, he said, but they aren’t ready for prime time.

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