What Happens If Your Local Ethanol Plant Would Close?

No one will argue that ethanol has not had a significant impact on the corn economy in the US. It has not only consumed an additional 4 billion bushels of corn, but also buoyed corn prices, while farmers increased production.

But what happens to the local corn economy when an ethanol plant closes, as some did because of low oil prices, high corn prices and the lack of profitability?

Economists from North Dakota State University and Montana State University examined the potential impact of the closure of eight ethanol plants in Minnesota, North Dakota and South Dakota on local corn prices. Their report indicates that such shutdowns cause changes in the local supply and demand of corn, and corn prices decline as a result. Their study was spurred by the chance that either federal subsidies for ethanol might be withdrawn or the lesser state subsidies might be eliminated for various reasons.

The economists looked at the eight older plants and how closure would affect the extent of price impacts in response to production shortfalls, disruptions in grain transportation flows, and changes in the demand for corn. Those plants and 65 others are within a 200 mile radius that encompasses nearly 900 cash markets for corn. The researchers found that corn prices would drop anywhere from 5¢ to 18¢ per bushel in the immediate area of the plant. However there would only be a 1¢ change in price at the neighboring ethanol plants.

For the individual corn grower, whose local ethanol plant was no longer a buyer for his corn, the economists say it must now be transported further, the local basis will be wider, and that decrease in price will cause some producers to reduce their corn production and increase production of other crops. Subsequently, lower corn prices are realized for the corn that will continue to be produced around the shuttered ethanol plants, forcing a lower net farm income for those corn growers.

In a domino effect, the 14 nearby ethanol plants whose prices drop 1¢ per bushel because of the changing market will be paying out smaller checks to the farmers in their region. That would be $9.4 million according to the economists, which represents 0.25% of the total value of corn production in Minnesota, the Dakotas, and neighboring Iowa.
1) The loss of state subsidies in MN would cause some plants to have negative returns over variable costs and 5 may close, reducing corn demand by 1.2 million bushels and reducing MN corn revenue by $5.7 million.
2) In ND, there is a potential for 2 plants to close and reduce the corn demand by 400,000 bushels and put $1.8 million less in farmer pockets.
3) In SD, one plant may close with a 240,000 bushel decline in demand and a $1 million loss in net farm revenue.
4) In Iowa, three ethanol plants would have less competition and likely reduce their corn bids by an average of 1¢, which would reduce farm income by $700,000.
The economists believe that such an impact would reduce corn production by 2 million bushels in the region, but the corn that still needs a home would become an increased burden on the transportation system to haul it further. They also suggest that a loss of the 45¢ federal ethanol tax credit would disrupt the business of even some of the newer and more efficient ethanol plants. They say that would cause significant reductions in national corn prices and local basis changes.

Summary:
Even with federal subsidies and some state subsidies, the ethanol industry has a fragile economy and the loss of either of those would cause some older plants to close as well as some newer plants. The closure of an ethanol plant reduces the competition for corn, reduces the local price and reduces the local net farm income. But it also reduces the overall value of corn in a wider region.

Source: Stu Ellis, University of Illinois, cattlenetwork