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Why Cutting The Ethanol Mandate May Not Ruin The Rural Economy

The EPA wants to roll back the amount of ethanol mixed into the fuel supply for 2014, worrying farmers across the Corn Belt. Ethanol supporters warn that if the EPA follows through, the rural economy will take the fall. But many economists predict a soft landing.

The ethanol boom was driven by the Renewable Fuel Standard, passed by Congress in 2007 to jumpstart production of renewable fuels like ethanol. The law’s original schedule required oil refiners to mix 14.4 billion gallons of corn ethanol with gasoline this year. But that’s more than the normal blend of gasoline can handle. So the EPA is proposing to roll back the standard.

Ethanol supporters accuse the EPA of gutting the RFS and putting the rural economy at risk. At a rally in Des Moines, Iowa, Republican Rep. Steve King compared cutting the ethanol mandate to the farm crisis of the 1980s.

“We can’t allow this to happen again,” King said. “We can’t go through another set of the ‘80s. We can’t be put into another downward spiral by a decision made at the top of the executive branch in the United States.”

Central City, Neb., is the kind of rural town that has benefited from the ethanol boom. Grain trucks rumble down U.S. Route 30 to the Green Plains Energy ethanol plant on the east side of town.

On the west side is Grosshans Inc., the Case-International machinery dealer. Inside the repair shed, diesel exhaust and country music lingered in the air as Kent Grosshans explained why ethanol is important for Nebraska corn farmers.

“The ethanol plants have really increased the flow of grain,” said Grosshans, who is the sixth generation in his family to sell farm equipment in Central City. “It’s allowed somebody else to compete with the local elevators, the Cargills and the Aurora Co-Op in our area. So it’s brought competition.”

That competition equals higher corn prices and a big payoff for farmers and the Midwest economy. Seventy percent of ethanol production in the U.S. happens in six states – Iowa, Nebraska, Illinois, Minnesota, South Dakota and Indiana.

According to an analysis from Iowa State University economist, Dave Swenson, ethanol supports 45,934 jobs across the country including 10,140 workers at plants like the one in Central City.

Industry figures tend to be much higher, but it’s fair to say ethanol has generally grown rural jobs and incomes. If some of those gains were lost, rural businesses like Kent Grosshans' dealership would feel it.

“Everybody notices, from the restaurants to the hardware stores,” Grosshans said. “Everyone’s going to notice a slowdown.”

At least that’s what many are concerned about as the EPA considers the U-turn in ethanol policy. But Iowa State’s Dave Swenson doesn’t see economic devastation around the corner as many ethanol advocates have claimed.

“To relate the reduction in the RFS that’s been proposed to the farm crisis of the 1980s suggests to me that the people making those claims haven’t read the proposed revisions to the RFS and don’t know what happened in the 1980s,” Swenson said.

Swenson says the EPA is calling for about a 6 percent reduction in ethanol demand, back to 2012 levels. And it’s just a proposal, they haven’t made a final decision yet.

If it happens, Swenson agrees cutting the mandate would have some negative impact on the rural economy.

“But how big of an impact has probably been overstated by many of the stakeholders,” Swenson said.

Scott Irwin, an ag economist at the University of Illinois, agrees. For farmers, Irwin says, the EPA proposal means lost potential. Ethanol plants won’t use more corn this year, but they won’t use less either.

“The minimum level of corn that we’re going to be using in ethanol is someplace around 4.8 or 4.9 billion bushels and the EPA rules stop us from going to 5.5 billion,” Irwin said. “That kind of change is not going to cause a disaster in farm incomes.”

And if you ask Kent Grosshans in Central City, he’s feeling optimistic. While times have been good, farmers have put money in the bank. So he’s not that worried about what the EPA decides, at least in the short run.

“We’re not planning on it slowing down,” Grosshans said. “As a matter of fact, I just hired a salesperson in our store because we’re going to go after it.”

But after 2014, things are less certain thanks to a big drop in corn prices. The EPA’s proposal to cut the ethanol mandate came as farmers brought in a record crop last fall. Prices are now down around break-even and, Grosshans says, as the boom years end farmers are anxious about what comes next.

“Here we go, now they want to reduce the mandate. Other countries have started producing more corn. They’ve opened up more land. Here we go again, we’re having an oversupply,” Grosshans said. “I think (farmers) all feel that their world’s kind of tightening up on them right now.”

But in the end, whether the farm economy takes a turn for the worse may have more to do with the weather in Nebraska or Iowa than which way the wind blows in Washington.

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