The effects of assembly costs and other factors on the profitability of dry-grind ethanol plants in the Midwest
Abstract
The ethanol industry’s rapid expansion since 2002 has arisen from a variety of factors, including higher oil prices, MTBE bans, state level producer incentives, and federal legislation mandating renewable fuel standards. As the ethanol industry approaches a “blend wall” or upper level of demand, it may face excess capacity. Understanding exit barriers must be a priority for the industry when excess capacity exists. If the industry is unable to downsize due to asset fixity and specificity, excess production will change the competitive structure of the industry. In turn, processors, farmers, and investors must reconsider plant viability and understand the plant characteristics that affect profitability. This analysis examines the effect of corn assembly costs and identifies plant characteristics that contribute to Midwest ethanol plant profitability. First, assembly price and other cost variables are identified for 159 dry-grind ethanol plants in 12 Midwestern States. Second, these variables are used in a spreadsheet ethanol plant profit model to estimate profitability for plants during March and June 2008. Third, regression models are estimated with SAS to identify variables that significantly contribute to plant profitability. Variables expected to affect profitability include corn price, plant age, capacity, draw area, and local competition for corn. Results show that the five variables are statistically significant to ethanol plant profitability. Corn price was most vital to profitability, while draw area and local competition had the least influence in both scenarios. Signs and magnitudes of the variables were consistent between the two extremely different scenarios, suggesting the model has validity and can be used to estimate profitability under any circumstance.
Degree
M.S.
Advisors
Dooley, Purdue University.
Subject Area
Agricultural economics|Agricultural engineering
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