IDEAS home Printed from https://ideas.repec.org/a/bla/canjag/v64y2016i3p565-587.html
   My bibliography  Save this article

A Variable Cost Function for Corn Ethanol Plants in the Midwest

Author

Listed:
  • Juan P. Sesmero
  • Richard K. Perrin
  • Lilyan E. Fulginiti

Abstract

type="main"> This study estimates a variable cost function for corn ethanol plants, using data from a unique survey of Midwest plants. The objective is to better understand the effect of prices and scale of production on Marshallian shutdown price, input choice, and by-product choice. We estimate a novel specification of a cost function capable of accommodating two distinctive features of ethanol plants’ technology: (1) the production process results in by-products that can be sold in different forms in response to price signals, and (2) decisions on the mix of by-products may be subject to constraints, such as thin livestock markets or imperfect price foresight. This cost function is estimated by nonlinear seemingly unrelated regression with correlated random effects. Constant returns to variable inputs, homotheticity, and proportionality of by-products to ethanol production, assumptions held in previous studies, are strongly rejected by our analysis. Increases in ethanol production require less than proportional increases in corn and other variable inputs when the increases are achieved through increased capacity utilization as opposed to capacity expansion. Moreover, the reduction in input requirements per gallon, reduces both cost and greenhouse gas emissions per gallon. Constraints in by-product marketing decisions seem to slightly increase Marshallian shutdown price. Dans la présente étude, nous estimons une fonction de coût variable à l'aide des données tirées d'une enquête réalisée auprès des usines de production d’éthanol de maïs dans le Midwest. L'objectif de notre étude vise à mieux comprendre l'effet des prix et de l’échelle de production sur le seuil de rentabilité selon Marshall, le choix des intrants et le choix des sous-produits. Nous estimons une fonction de coût spécifiée pour tenir compte de deux éléments distinctifs de la technologie des usines de production d’éthanol : 1) le processus de production génère des sous-produits qui peuvent être vendus sous diverses formes en réaction aux signaux de prix; 2) les décisions concernant l’éventail de sous-produits peuvent être confrontées à des contraintes telles que des marchés du bétail restreints ou des prévisions imparfaites concernant les prix. Cette fonction de coût est estimée à l'aide d'une régression non linéaire sans corrélation apparente avec effets aléatoires corrélés. Certaines hypothèses émises dans des études antérieures, telles que les rendements constants des intrants variables, l'homothéticité et la proportionnalité des sous-produits de la production d’éthanol, sont nettement rejetées par notre étude. L'augmentation de la production d’éthanol nécessite des augmentations inférieures aux augmentations proportionnelles de maïs et autres intrants variables lorsque l'augmentation découle d'un accroissement de la capacité de production comparativement à une expansion de capacité. De plus, la diminution des intrants nécessaires à la production d'un gallon d’éthanol réduit à la fois le coût et les émissions de gaz à effet de serre par gallon. Les contraintes auxquelles sont confrontées les décisions de commercialisation des sous-produits semblent augmenter légèrement le seuil de rentabilité selon Marshall.

Suggested Citation

  • 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.
  • Handle: RePEc:bla:canjag:v:64:y:2016:i:3:p:565-587
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/cjag.12097
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gallagher, Paul & Shapouri, Hosein & Brubaker, Heather, 2007. "Scale, Organization, and Profitability of Ethanol Processing," ISU General Staff Papers 200703010800001439, Iowa State University, Department of Economics.
    2. 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.
    3. Jean-Marc Bourgeon & David Tréguer, 2010. "Killing two birds with one stone: US and EU biofuel programmes," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 37(3), pages 369-394, September.
    4. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    5. Lapan, Harvey & Moschini, GianCarlo, 2012. "Second-best biofuel policies and the welfare effects of quantity mandates and subsidies," Journal of Environmental Economics and Management, Elsevier, vol. 63(2), pages 224-241.
    6. Perrin, Richard K. & Fretes, Nickolas F. & Sesmero, Juan Pablo, 2009. "Efficiency in Midwest US corn ethanol plants: A plant survey," Energy Policy, Elsevier, vol. 37(4), pages 1309-1316, April.
    7. Xiaodong Du and Lihong Lu McPhail, 2012. "Inside the Black Box: the Price Linkage and Transmission between Energy and Agricultural Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    8. Thomas W. Hertel & Wallace E. Tyner & Dileep K. Birur, 2010. "The Global Impacts of Biofuel Mandates," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 75-100.
    9. Mallory, Mindy L. & Irwin, Scott H. & Hayes, Dermot J., 2012. "How market efficiency and the theory of storage link corn and ethanol markets," Energy Economics, Elsevier, vol. 34(6), pages 2157-2166.
    10. Mallory, Mindy L. & Irwin, Scott H. & Hayes, Dermot J., 2012. "How Market Efficiency and the Theory of Storage Link Corn and Ethanol Markets Energy Economics," ISU General Staff Papers 201211010700001537, Iowa State University, Department of Economics.
    11. Chambers, Robert G. & Pope, Rulon D., 1993. "A Virtually Ideal Production System: Specifying and Estimating the VIPS Model," Working Papers 197785, University of Maryland, Department of Agricultural and Resource Economics.
    12. Stefan Busse & Bernhard Brümmer & Rico Ihle, 2012. "Price formation in the German biodiesel supply chain: a Markov-switching vector error-correction modeling approach," Agricultural Economics, International Association of Agricultural Economists, vol. 43(5), pages 545-560, September.
    13. Chamberlain, Gary, 1982. "Multivariate regression models for panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 5-46, January.
    14. Gallagher, Paul W. & Brubaker, Heather & Shapouri, Hosein, 2005. "Plant size: Capital cost relationships in the dry mill ethanol industry," ISU General Staff Papers 200506010700001442, Iowa State University, Department of Economics.
    15. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
    16. Lambert, Dayton M. & Wilcox, Michael D. & English, Alicia & Stewart, Lance A., 2008. "Ethanol Plant Location Determinants and County Comparative Advantage," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 40(1), pages 1-19, April.
    17. Jayson Beckman & Thomas Hertel & Farzad Taheripour & Wallace Tyner, 2012. "Structural change in the biofuels era," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 39(1), pages 137-156, February.
    18. Seth Meyer & Julian Binfield & Patrick Westhoff, 2012. "Technology adoption under US biofuel policies: do producers, consumers or taxpayers benefit?," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 39(1), pages 115-136, February.
    19. Schmit, T.M. & J., Luo & Conrad, J.M., 2011. "Estimating the influence of U.S. ethanol policy on plant investment decisions: A real options analysis with two stochastic variables," Energy Economics, Elsevier, vol. 33(6), pages 1194-1205.
    20. Mahmud, S F & Robb, A L & Scarth, William M, 1987. "On Estimating Dynamic Factor Demands," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 2(1), pages 69-75, January.
    21. Lancaster, Tony, 2000. "The incidental parameter problem since 1948," Journal of Econometrics, Elsevier, vol. 95(2), pages 391-413, April.
    22. Gallagher, Paul W. & Brubaker, Heather & Shapouri, Hosein, 2005. "Plant Size: Capital Cost Relationships in the Dry Mill Ethanol Industry," Staff General Research Papers Archive 12306, Iowa State University, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:canjag:v:64:y:2016:i:3:p:565-587. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley Content Delivery). General contact details of provider: http://edirc.repec.org/data/caefmea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.