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Scale, Organization, and Profitability of Ethanol Processing

  • Paul Gallagher
  • Hosein Shapouri
  • Heather Brubaker

"We analyze the appropriate size and implied profitability of a representative ethanol processing firm. An analysis based on current processing technology and costs with typical conditions in Iowa product and input markets is useful; because unit production costs have declined 30% in current dollars over the last 15 years; and because discovering a suitable size for processing facilities has been an important part of the cost-reducing process. We apply theoretical plant size rules for a conventional processing business, an integrated producer/processor enterprise, and a processing cooperative. We also introduce a spatial dimension for the corn input market, because ethanol processing facilities can be uniquely large among agri-processing enterprises. The analysis supports three conclusions. First, the most appropriate size may still be larger than many of the recently constructed plants. Second, ethanol processing is a profitable enterprise; for instance, we calculate a return on capital of 14% for a processing business with optimal scale, current costs and technology, and typical market conditions. Third, total producer plus processor profits can be improved moderately, about $0.04/bushel of corn processed, with an integrated producer/processor enterprise; the producer enterprise sets the local corn price through processing capacity, in a fashion that offsets some potential monopsony power." Copyright 2007 Canadian Agricultural Economics Society.

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Article provided by Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie in its journal Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie.

Volume (Year): 55 (2007)
Issue (Month): 1 (03)
Pages: 63-81

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Handle: RePEc:bla:canjag:v:55:y:2007:i:1:p:63-81
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