So you want to build an ethanol plant?

There is a new free Internet site available to help farmers assess potential price impacts of a new ethanol production plant.

MSU News

The site has been developed by two Montana State University professors, with funding support from Farm Foundation, a publicly-supported, nonprofit organization working to improve the economic and social well-being of agriculture, the food system and rural people located in Oak Brook, Ill.

The Ethanol Plant Analyzer allows farmers to run what-if scenarios on how the size and location of an ethanol plant might impact local corn prices. It was developed by Kevin McNew, associate professor and Extension specialist, and Duane Griffith, assistant professor and Extension Specialist, both in the MSU Department of Agricultural Economics and Economics.

"This project helps farmers, cooperative managers and policy makers better understand the economics of ethanol plants and the role of policies in the future development of the ethanol industry," explains McNew.

"Increased demand for ethanol appears promising, but we already have capacity to produce more than 2 billion gallons per year," adds Walter Armbruster, president of Farm Foundation. "It is important that farmers and managers understand the risks of this business."

As of June 2003, 73 ethanol plants were operating in the United States, with another 13 under construction, according to the Renewable Fuels Association. Many of theses plants are farmer-owned. In Iowa, for example, 9 of the 16 plants operating or under construction are farmer-owned.

While ethanol supplies are currently abundant, the outlook for increased demand is promising. The energy bill now under deliberation by Congress includes a renewable fuels standard that could potentially double the use of ethanol by 2012. The elimination from the nation’s major ethanol competitor, known as MTBE, would also support continued ethanol demand growth.

The Ethanol Plant Analyzer is available on the Web at: http://www.extensionecon.montana.edu/eplantanalyzer/. The user selects a potential location for the plant, as well as the plant size. The program then lists in miles the area impacted by the plant, as well as the maximum impact in cents. The same information is also provided for specific locations around the proposed plant site. For example, a 45 million gallon per year plant located in northwestern Coffey County, Kan., would have a maximum price impact of 14.9 cents across an area of 122 miles. In Atchinson, Kan., 88 miles from the plant, the impact would be 14.9 cents. In Bern, Kan., 108 miles from the plant, the impact would be 4.9 cents. The Analyzer can map its findings–locations with the highest impact are in green, with the least impact in red.

The Analyzer builds on research McNew has done on how big a price impact a new ethanol plant has, and how close to a plant you must be to see a positive impact from it. Here are the major findings of that research, which is based on data from 316 grain markets around 12 ethanol plants that opened in 2001 and 2002:

— Ethanol plants increase local corn prices. The opening of all 12 ethanol plants in the study had a positive impact on corn prices. The price increase averaged 12 cents per bushel, ranging from 5 cents per bushel to 19 cents per bushel.

— Price impact is highest at the plant site. On average some price impact was felt 30 to 100 miles from the 12 plant sites. Markets "downstream" from a plant that are closer to terminal markets tend to have high prices and therefore experienced a smaller price impact from a new plant. More impact was seen in "upstream" markets that are far-removed from terminal markets and generally have lower prices. Knowing if you are in an upstream or downstream market is a crucial factor in understanding how your operation might benefit from a new ethanol plant.

— Size and co-op structure matter. Plant size relative to local corn supplies had some effect on the price impact. If local corn supplies were low, a large-capacity plant caused the price impact to be larger. Grain procurement policies also had an impact. The two plants in the study that were owned by closed cooperatives, with all corn supplied by the farmer-owners, had the lowest impact on prices. The farmer-owners are required to deliver grain to the plant so it does not have to attract grain by offering higher prices, limiting the price impact.

McNew and Griffith are working to expand the Ethanol Plant Analysis to include transportation issues and further details on siting a plant.

Contacts: Kevin McNew (406) 994-7816, [email protected] Mary Thompson, Farm Foundation, (630) 571-9393, [email protected]

http://www.montana.edu/commserv/csnews/nwview.php?article=1250