The magnitude of rail fixed transportation costs on the profitability of dry-grind ethanol production in the United States
Abstract
Transportation is of key importance to the ethanol sector, with a typical 100 million gallon per year (MGY) plant receiving the equivalent of 110 truckloads of corn per day while shipping out 34 truckloads of ethanol and 36 truckloads of dried distillers grains with solubles (DDGS). Unlike truck movements, shipment by rail requires that an ethanol plant either purchase or lease rail tanker cars to ship ethanol or hopper cars for DDGS. Thus, rail dependent ethanol plants incur an additional fixed cost. While ethanol profitability itself is relatively well studied, the effect of rail equipment costs on profitability is unknown. This study examines the effect of rail equipment costs on dry-grind corn ethanol profitability. To estimate the rail equipment cost, linear programming (LP) models allocated flows of ethanol to blenders and DDGS to feeders. The LP model results were combined with plant size characteristics to estimate the number of rail cars required and the associated fixed costs of rail equipment. The number of rail cars depends on the distance to market and whether the shipment is by unit train or single car rail. Rail equipment costs were then added to an ethanol plant profitability model based on Eidman (2007). Results first suggest that rail equipment leasing costs decrease profits by 7.7 percent across all ethanol plants. However, rail dependent ethanol plants most likely factor in this additional cost as part of a bid price to distant markets to recoup the cost. Second, plants in the 51 to 100 MGY size range are more rail dependent than ethanol plants over 100 MGY. On average, 60 percent of plants have a rail requirement for shipping either ethanol or DDGS, while 40 percent of the ethanol plants are truck houses. Finally, results show that 42 percent of ethanol and 48 percent of DDGS move by rail from the six largest ethanol and DDGS producing states.
Degree
M.S.
Advisors
Dooley, Purdue University.
Subject Area
Agricultural economics|Transportation
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