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Janesville Ethanol: Rationalizing Economic Development Investments

August 06, 2009 By Lee Egerstrom, Economic Development Fellow
News announcements in the past week regarding ethanol and new owners for a southern Minnesota ethanol plant offer hope that a more rational approach to economic development will emerge from the current recession.

At the ground level, the good news is that a new ethanol plant built at Janesville, Minn., but never brought online, is being acquired by a consortium of farmer-owned ethanol companies and could be up and running this fall.

There are two benefits that go right to the heart of economic development. First, the plant will create an estimated 50 jobs in the Waseca County community. Second, its 100-million gallon ethanol production capacity will provide a local market for corn and will bring additional value-added benefits to Minnesota corn farmers.

At a more distant, hazy level, the Janesville ethanol experience becomes something of a case study for economic development theory that should guide how communities and states encourage development. Important research emerged in the past year that shed light for understanding market factors and thus rationalize value-added economic development investments.

Let's summarize the research, look at this week's Janesville plant announcement and deduce what they suggest for public economic development policy at the state and local levels.

On July 31, the Agricultural and Applied Economics Association professional group presented its 2009 Quality of Communications Award to three Purdue University professors who researched and wrote What's Driving Food Prices?, a major study commissioned by the Chicago-based Farm Foundation.

That report in July 2008 by Wallace Tyner, Philip Abbot and Chris Hurt laid out three major drivers of food prices that include world consumption exceeding production growth, the value of U.S. dollar that is used in world commodity trade, and a new linkage that has emerged since 2006 between energy and agricultural markets. In March of this year, the three revisited the study and found the latter linkage was still intact even though farm commodity prices had fallen sharply from 2008 highs.

Since then, Minnesota 2020 issued a research report by former Macalester College student Aparna Bishap, now a graduate student at Columbia University, that showed how Minnesota corn farmers have added $1.22 to the value of their corn crop the past few years through value-added processing at their ethanol plants and by avoiding the discounts (basis points) for exporting their crop out of the region.

Neither report addresses controversial issues about whether the U.S. should have an ethanol policy or the use of subsidies. Rather, both examine the economic realities of our renewable fuels program and its economic impact on rural communities and incomes.

Subsequent reports by Minnesota 2020 built on those two studies to look at how investments in ethanol production has aided Minnesota's rural economy even when it didn't made sense for outside investors. An employment gain for Janesville does nothing for impassive investors on Wall Street; neither does raising the value of the corn crop in southern Minnesota.

That brings us back to Tuesday's announcement from AgStar Financial Services at Mankato and newly-formed Guardian Energy LLC at Shakopee. The latter is the holding and operating company for the Janesville plant formed by nine farmer-owned ethanol plants, six of which are located in Minnesota.

AgStar Financial Services, a regional banking unit of the cooperative AgriBank FCB of St. Paul, bought the Janesville and five other ethanol properties in bankruptcy proceedings from their parent, VeraSun Energy at Sioux Falls, S.D. AgStar president and CEO Paul DeBriyn said from the beginning it was AgStar's goal to get the processing enterprises back in the hands of farmers.

Sales of other Minnesota, Iowa and North Dakota plants held by AgStar are imminent, the co-op bank said in its announcement.

Going Forward
Working our way through the current recession, state and local officials should follow the logic shown by DeBriyn. For whom does an investment make sense?

It does make sense for farmers who may be looking for processing profits to bolster improved crop prices, thus producing two streams of income for their farms. And it makes sense for communities that will gain from increased employment and increased economic activity upstream and downstream from the plant. 

States and local governments, however, should remain aware that market-distorting tax subsidies used to locate plants not tied to local economic activity do not make sense. These investments are not likely to prove sustainable over time in the face of changing market conditions.

When retooling programs like Minnesota's JOBZ tax subsidy system, lawmakers here and in other Midwest states should study spatial connections between resources and markets. An ethanol plant in Janesville makes sense; placing one in abandoned bank property in Manhattan would not.

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