The effects of booming U.S. demand for ethanol and Asian imports work their way backward through the economy.
Economists call this phenomenon “derived demand,” and a textbook example is the humble hamburger. Increased consumer willingness to buy burgers elevates demand for hamburger buns. Increased demand for buns boosts demand for flour. Greater demand for flour causes greater demand for wheat.
The seemingly insatiable thirst for ethanol and Asian imports is increasing demand for locomotives and specialized construction workers. Growth in imports from Asia is enormous. We imported less than $4 billion from China in 1985, but last year the amount was $240 billion; imports from South Korea, Taiwan and Thailand grew 25 percent in the past five years.
Those imports largely arrive in shipping containers that are loaded onto rail cars once they are delivered to ports like Long Beach, Calif., or Tacoma, Wash. This increases business for railroads like BNSF and the Union Pacific that serve container ports. BNSF’s container business has grown more than 15 percent per year since 2000. Such growth requires more equipment.
Gasoline at $3 a gallon is fueling an ethanol boom. New plants are being constructed across the Corn Belt.
Ethanol plants need more than a bushel of corn for each three gallons of ethanol produced. A plant that produces 100 million gallons of ethanol a year — enough for 20 gallons per Minnesotan — needs two 100-plus-car trains of corn per week.
Ethanol’s affinity for water makes it impossible to transport in the existing petroleum pipelines, so it must be shipped to fuel terminals by rail or truck. The same plant would ship more than 60 tanks cars of ethanol per week.
Moreover, the “distiller’s dried grain,” left after the distilling process and used as animal feed, also must be shipped.
All of this means more traffic for railroads, primarily for BNSF and Union Pacific. And that means orders for new locomotives, grain hopper cars and ethanol tank cars.
The combination of growing container traffic and increased hauling for the ethanol industry means good business for locomotive builders General Electric and Electro-motive Diesel. It is also good for fabricators of grain hopper cars and ethanol tank cars.
Alcohol plant construction also is increasing business for the engineering and construction firms that specialize in these facilities. These in turn now have difficulty securing experienced engineers, construction managers and skilled trades workers. Some must raise pay levels as a result.
Similarly, railroads west of the Mississippi are spending large sums to improve their track capacity. While such construction is small compared to that for highways, it is important.
All of this is not necessarily a net addition to the national economy. But it does illustrate how increased demand for one product works through the economy as a whole.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.