Agricultural Economics Department

 

Title

Understanding Spatial Welfare Impacts of a Grain Ethanol Plant

Document Type

Article

Date of this Version

8-2009

Comments

Contributed Paper prepared for presentation at the International Association of Agricultural Economists Conference, Beijing, China, August 16-22, 2009. Copyright 2009 by Justin Van Wart and Richard K. Perrin.

Abstract

This study inquires into the spatial welfare impacts of a grain ethanol plant established in an area with a beef feeding industry. Beef feeders, corn farmers, and the ethanol plant interact with each other simultaneously in a dynamic market situation. To date, there are no studies which simultaneously analyze the welfare impacts of an ethanol enterprise on the three major players affected by the existence of a plant. In this market situation, some interesting phenomena have been noted which raise some intriguing questions. Why do plants sell ethanol byproduct feed at prices below corn price, even though studies show the byproduct to be a more valuable feed? Why does a plant, which could ship a non-perishable all over the world, choose instead to produce a perishable product? The answers to these questions are affected by the density of corn production, the density of beef production and the size of an ethanol plant in an area. This paper will shed some light on how these and other factors influence welfare and answers the questions posed above.

The answers to these questions are important to the agents affected, but empirical evidence is not available on a sufficiently fine spatial grid to address them. Therefore the approach of this study is to construct a spatial equilibrium model to examine conditions that determine the distribution of welfare benefits from the existence of a plant. The model is driven by the plant’s choice of prices for corn and byproduct so as to minimize net feedstock cost for the plant’s capacity. These prices, and the welfare impacts on corn producers, feedlots and the plant itself, will depend upon transportation costs, the density of corn and beef production and the size of the plant.