RFA: What happens when an ethanol plant shuts down?
The idling of an ethanol plant – even if temporary – sends damaging shockwaves throughout the entire community in which the facility operates, including the immediate loss of a local market for corn and a sudden drop in local corn prices.
According to a new case study conducted by the Renewable Fuels Association (RFA), the idling of an ethanol plant can cause local corn prices to fall by as much as 15-25 cents per bushel, resulting in significant financial losses for area farmers.
The analysis underscores the devastating impact of the Renewable Fuel Standard (RFS) small refinery exemptions recently granted by the Environmental Protection Agency (EPA), which have allowed dozens of oil refineries to escape their legal obligations to blend renewable fuels like ethanol. Due in large part to the demand destruction triggered by the refinery exemptions, at least 18 ethanol plants, representing a combined production capacity of nearly one billion gallons, have permanently or temporarily idled production over the past year.
“Ethanol plants serve as vital economic engines for rural communities across the country, providing good jobs, creating value-added investment opportunities, and developing new markets for crops produced by local farmers,” said RFA president and CEO Geoff Cooper. “When an ethanol plant goes down, the local community suffers. This new analysis shows that the idling of an ethanol plant erodes the local demand base for corn, resulting in an immediate and significant negative impact on corn prices and net farm income. In addition, shutting down an ethanol plant means lost jobs and lost economic output.”
Idled ethanol plant case study
In the new study, RFA chief economist Scott Richman looked at the corn price ramifications of temporarily idling production at an ethanol plant near Fairmont, Minnesota. The facility, which produces approximately 119 million gallons of ethanol per year, was idled for four months spanning from late 2018 to early 2019.
During that time, the local corn “basis” – defined as the difference between the cash price in a specific location and the nearby futures price – weakened immediately and significantly. In the four months while the plant was idle, the local basis averaged 15 cents per bushel less than in the month immediately preceding the idling.
The RFA analysis also compared the corn price at the local Fairmont elevator to a national cash corn price index maintained by DTN. Compared to the month before the plant was idled, the Fairmont corn price weakened by 26 cents per bushel relative to the national index in the four months while idle.
Richman also compared Fairmont prices to the US Department of Agriculture’s southern Minnesota cash corn price average. This comparison found a similar result, with the spread between the Fairmont price and the southern Minnesota average dropping by an average of 25 cents per bushel during the four months when the plant was idled.
The Fairmont facility processes approximately 42 million bushels of corn annually, meaning a 20-cent per bushel price reduction translates to an annualised loss of $8.4 million for the farmers who typically sell their corn to the ethanol plant. But the impact goes far beyond just the amount of corn processed by the plant because the basis erosion affects all corn grown in the local area for all uses.
“Although this case study only reflects the experience in one location, it is a useful reminder of the very real impacts that the idling of an ethanol plant – even temporarily – can have on the local agricultural economy,” Richman concludes.
Economic impacts of a plant closure
While corn demand destruction and price erosion are among the most significant negative economic impacts of a plant closure, there are many others including:
More information on the rural economic impacts of the ethanol industry can be found here.
According to a new case study conducted by the Renewable Fuels Association (RFA), the idling of an ethanol plant can cause local corn prices to fall by as much as 15-25 cents per bushel, resulting in significant financial losses for area farmers.
The analysis underscores the devastating impact of the Renewable Fuel Standard (RFS) small refinery exemptions recently granted by the Environmental Protection Agency (EPA), which have allowed dozens of oil refineries to escape their legal obligations to blend renewable fuels like ethanol. Due in large part to the demand destruction triggered by the refinery exemptions, at least 18 ethanol plants, representing a combined production capacity of nearly one billion gallons, have permanently or temporarily idled production over the past year.
“Ethanol plants serve as vital economic engines for rural communities across the country, providing good jobs, creating value-added investment opportunities, and developing new markets for crops produced by local farmers,” said RFA president and CEO Geoff Cooper. “When an ethanol plant goes down, the local community suffers. This new analysis shows that the idling of an ethanol plant erodes the local demand base for corn, resulting in an immediate and significant negative impact on corn prices and net farm income. In addition, shutting down an ethanol plant means lost jobs and lost economic output.”
Idled ethanol plant case study
In the new study, RFA chief economist Scott Richman looked at the corn price ramifications of temporarily idling production at an ethanol plant near Fairmont, Minnesota. The facility, which produces approximately 119 million gallons of ethanol per year, was idled for four months spanning from late 2018 to early 2019.
During that time, the local corn “basis” – defined as the difference between the cash price in a specific location and the nearby futures price – weakened immediately and significantly. In the four months while the plant was idle, the local basis averaged 15 cents per bushel less than in the month immediately preceding the idling.
The RFA analysis also compared the corn price at the local Fairmont elevator to a national cash corn price index maintained by DTN. Compared to the month before the plant was idled, the Fairmont corn price weakened by 26 cents per bushel relative to the national index in the four months while idle.
Richman also compared Fairmont prices to the US Department of Agriculture’s southern Minnesota cash corn price average. This comparison found a similar result, with the spread between the Fairmont price and the southern Minnesota average dropping by an average of 25 cents per bushel during the four months when the plant was idled.
The Fairmont facility processes approximately 42 million bushels of corn annually, meaning a 20-cent per bushel price reduction translates to an annualised loss of $8.4 million for the farmers who typically sell their corn to the ethanol plant. But the impact goes far beyond just the amount of corn processed by the plant because the basis erosion affects all corn grown in the local area for all uses.
“Although this case study only reflects the experience in one location, it is a useful reminder of the very real impacts that the idling of an ethanol plant – even temporarily – can have on the local agricultural economy,” Richman concludes.
Economic impacts of a plant closure
While corn demand destruction and price erosion are among the most significant negative economic impacts of a plant closure, there are many others including:
- Lost direct jobs: Most ethanol plants directly employ 40-50 full-time employees. When plants shut down, these workers are typically laid off or furloughed, often without pay.
- Lost indirect jobs: An ethanol plant’s impact on jobs goes far beyond the facility itself. For every direct job at the plant, it is estimated that operation of the facility supports an additional 4-6 full-time jobs indirectly, meaning a typical plant supports roughly 300 indirect jobs in the local area. This includes workers involved in farming, trucking, rail transportation, manufacturing and supplying process inputs, legal and administrative services, engineering, maintenance and repair, construction, and many other fields. When a plant shutters, these workers often lose their jobs too.
- Lost local supply of low-cost, high-protein livestock and poultry feed: The ethanol industry is a major supplier of low-cost, high-protein animal feed (called distillers grains), with a typical 120 million gallon plant producing approximately 350,000 tons of feed annually. Livestock and poultry producers rely on their local ethanol plants for a ready supply of low-cost distillers grains. When the plant shuts down, these producers are forced to find alternative sources of feed, typically at a higher price.
- Loss of low-cost feedstock supply for biodiesel and renewable diesel production: A typical 120 million gallon ethanol plant also produces 38 million pounds of corn distillers oil, a high-quality vegetable oil that is often made into biodiesel or renewable diesel. When an ethanol plant goes idle, biodiesel and renewable diesel producers lose access to this high-quality feedstock.
- Lost supply of low-cost, clean, biogenic carbon dioxide (CO2): Many ethanol plants capture CO2 that is released during fermentation and sell it to companies who use it for making dry ice, carbonating beverages, flash-freezing food products, or other manufacturing and industrial purposes. CO2 from ethanol plants is known for its purity and low cost. When an ethanol plant shuts down, users of CO2 have to find alternative sources, typically at a higher cost.
More information on the rural economic impacts of the ethanol industry can be found here.
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