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Edward Lotterman: Demand for ethanol, imports trickles through economy

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 that serve container ports.

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 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.

This means more traffic for railroads, 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.

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 and construction managers. Some must raise pay levels as a result.

This shows how increased demand for one product works through the economy as a whole.

Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.

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