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Scale, Organization, and Profitability of Ethanol Processing

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  • Paul Gallagher
  • Hosein Shapouri
  • Heather Brubaker

Abstract

"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.

Suggested Citation

  • Paul Gallagher & Hosein Shapouri & Heather Brubaker, 2007. "Scale, Organization, and Profitability of Ethanol Processing," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 55(1), pages 63-81, March.
  • Handle: RePEc:bla:canjag:v:55:y:2007:i:1:p:63-81
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    References listed on IDEAS

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    1. Gustafson, Cole R., 2002. "Potential Corn Acreage Expansion For Ethanol Production: Western North Dakota," Agribusiness & Applied Economics Report 23593, North Dakota State University, Department of Agribusiness and Applied Economics.
    2. Gustafson, Cole R., 2002. "Potential Corn Acreage Expansion For Ethanol Production: Western North Dakota--Minot," Agribusiness & Applied Economics Report 23582, North Dakota State University, Department of Agribusiness and Applied Economics.
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    Cited by:

    1. Paul W. Gallagher, 2009. "Roles for evolving markets, policies, and technology improvements in U.S. corn ethanol industry development," Regional Economic Development, Federal Reserve Bank of St. Louis, issue Apr, pages 12-33.
    2. Juan P. Sesmero & Richard K. Perrin & Lilyan E. Fulginiti, 2016. "A Variable Cost Function for Corn Ethanol Plants in the Midwest," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 64(3), pages 565-587, September.
    3. Cai, Xiaowei & Stiegert, Kyle W., 2014. "Market Analysis of Ethanol Capacity," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association (IFAMA), vol. 17(1).
    4. Henderson, Jason R. & Gloy, Brent A., 2008. "The Impact of Ethanol Plants on Cropland Values in the Great Plains," Working Papers 51080, Cornell University, Department of Applied Economics and Management.

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