As RFS debate rages, study shows ethanol's rural impacts

Lawmakers in farm country are rallying behind the current Renewable Fuel Standard after Environmental Protection Agency officials said recently they'll likely look at paring back the biofuels mandate in the next year.

There's consensus among state and federal lawmakers from states like Iowa that lowering the mandate will have both initial and rippling negative economic effects on the future of states where agriculture is the primary economic driver, whether in the form of crop production, grain processing, ag machinery manufacturing, or other ag businesses.

So, what is the ethanol industry's value to the economy of the rural Midwest? A recent study by the USDA Economic Research Service took a look at the first decade of the 21st century and what the ethanol business has meant to those counties in rural America where it's present. While the business does have a positive influence on local employment, there are limits to its economic impacts down the road.

Right now, "unconventional gas drilling" represents the biggest economic boon for rural counties in the nation's middle third, according to the ERS study, while ethanol has "more modest effects," according to ERS economist Jason Brown, who coauthored a report entitled Emerging Energy Industries and Rural Growth along with economists Jeremy Weber and Timothy Wojan.

"We looked at changes in employment in a county one year before and two years after construction of an ethanol plant to estimate the effect of a plant in operation," Brown's report says, adding that analysis used in the report shows 3.2 jobs created in rural communities for every 1 job in a nearby ethanol plant. But there are other factors in play surrounding those numbers.

"This . . . assumes that creation of an ethanol production facility does not cause a decline in employment in the industries excluded from the empirical analysis, either through displacement of lower valued activities or increases in wages or land prices," the report adds. "The largest impacts occurred in the counties with sizable rural and urban areas, with an employment multiplier of 5.6 vs. 3.9 in the rural counties."

The news is brighter for ethanol when compared to natural gas drilling when looking at its longer-term potential. That's because the input resources are essentially renewable for ethanol when compared to natural gas fracking. They have limits, however, that will require the advancement of production technology to sustain ethanol's long-term boon.

"Ethanol may have greater capacity than the natural gas industry to maintain or expand production in the long-term, but the supply of arable land used to produce ethanol feedstocks is largely fixed. Although investments in agricultural research may increase land productivity, a growing global population and rising incomes will likely keep agricultural commodity prices high. An increase in the price of feedstocks larger than the price of oil will reduce ethanol producer profit margins," according to Brown's ERS report. "Of course, technological improvements that allow plants to produce more ethanol with the same amount of feedstock or that increase the feasibility of using lower cost feedstocks, such as corn stover or switchgrass, will improve the industry’s competitiveness."