IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v32y2010i6p1221-1227.html

Using a spark-spread valuation to investigate the impact of corn-gasoline correlation on ethanol plant valuation

Author

Listed:
  • Kirby, Natasha
  • Davison, Matt

Abstract

Corn ethanol plants have been criticized for a number of reasons in recent years. This paper provides another ground for criticizing these plants. Historical corn and gasoline prices are uncorrelated, but widespread adoption of corn ethanol production might reasonably lead to future correlation between these prices. We present a real options -- like valuation of an ethanol plant as a spark spread between the corn price and the gasoline price. This analysis shows that the value of an ethanol plant monotonically decreases with increasing correlation and the optimal production schedule greatly depends on the correlation. Even relatively small new correlations can result in a significant proportional value decrease; a 50% correlation between corn and gasoline causes ethanol plants to lose 10% of their value. The limiting case of full correlation would lead to a 30% value loss.

Suggested Citation

  • Kirby, Natasha & Davison, Matt, 2010. "Using a spark-spread valuation to investigate the impact of corn-gasoline correlation on ethanol plant valuation," Energy Economics, Elsevier, vol. 32(6), pages 1221-1227, November.
    • Handle: RePEc:eee:eneeco:v:32:y:2010:i:6:p:1221-1227
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140-9883(10)00028-9
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Shapouri, Hosein & Duffield, James A. & Wang, Michael Q., 2002. "The Energy Balance of Corn Ethanol: An Update," Agricultural Economic Reports 34075, United States Department of Agriculture, Economic Research Service.
    2. Tad Patzek & S.-M. Anti & R. Campos & K. ha & J. Lee & B. Li & J. Padnick & S.-A. Yee, 2005. "Ethanol From Corn: Clean Renewable Fuel for the Future, or Drain on Our Resources and Pockets?," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 7(3), pages 319-336, September.
    3. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nunes, Luis Eduardo & Lima, Marcus Vinicius Andrade de & Davison, Matthew & Leite, André Luis da Silva, 2021. "Switch and defer option in renewable energy projects: Evidences from Brazil," Energy, Elsevier, vol. 231(C).
    2. 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.
    3. Maxwell, Christian & Davison, Matt, 2014. "Using real option analysis to quantify ethanol policy impact on the firm's entry into and optimal operation of corn ethanol facilities," Energy Economics, Elsevier, vol. 42(C), pages 140-151.
    4. Ghoddusi, Hamed, 2017. "Blending under uncertainty: Real options analysis of ethanol plants and biofuels mandates," Energy Economics, Elsevier, vol. 61(C), pages 110-120.
    5. Davison, Matt & Merener, Nicolas, 2023. "Equilibrium and real options in the ethanol industry: Modeling and empirical evidence," Journal of Commodity Markets, Elsevier, vol. 31(C).
    6. Felipe Isaza Cuervo & Sergio Botero Boterob, 2014. "Aplicación de las opciones reales en la toma de decisiones en los mercados de electricidad," Estudios Gerenciales, Universidad Icesi.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eaves, James & Eaves, Stephen, 2007. "Renewable corn-ethanol and energy security," Energy Policy, Elsevier, vol. 35(11), pages 5958-5963, November.
    2. Persson, Tomas & Garcia y Garcia, Axel & Paz, Joel & Jones, Jim & Hoogenboom, Gerrit, 2009. "Maize ethanol feedstock production and net energy value as affected by climate variability and crop management practices," Agricultural Systems, Elsevier, vol. 100(1-3), pages 11-21, April.
    3. Maxwell, Christian & Davison, Matt, 2014. "Using real option analysis to quantify ethanol policy impact on the firm's entry into and optimal operation of corn ethanol facilities," Energy Economics, Elsevier, vol. 42(C), pages 140-151.
    4. Šantek, Božidar & Gwehenberger, Gernot & Šantek, Mirela Ivančić & Narodoslawsky, Michael & Horvat, Predrag, 2010. "Evaluation of energy demand and the sustainability of different bioethanol production processes from sugar beet," Resources, Conservation & Recycling, Elsevier, vol. 54(11), pages 872-877.
    5. Georgios I. Papayiannis, 2025. "Static hedging of freight rate risk in the shipping market under model uncertainty," Operational Research, Springer, vol. 25(4), pages 1-33, December.
    6. Unterschultz, James R., 2000. "New Instruments For Co-Ordination And Risk Sharing Within The Canadian Beef Industry," Project Report Series 24046, University of Alberta, Department of Resource Economics and Environmental Sociology.
    7. Ammann, Manuel & Kind, Axel & Wilde, Christian, 2003. "Are convertible bonds underpriced? An analysis of the French market," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 635-653, April.
    8. Burnes, Ellen & Wichelns, Dennis & Hagen, John W., 2005. "Economic and policy implications of public support for ethanol production in California's San Joaquin Valley," Energy Policy, Elsevier, vol. 33(9), pages 1155-1167, June.
    9. Jérôme Detemple, 1999. "American Options: Symmetry Properties," CIRANO Working Papers 99s-45, CIRANO.
    10. Ryan, Lisa & Convery, Frank & Ferreira, Susana, 2006. "Stimulating the use of biofuels in the European Union: Implications for climate change policy," Energy Policy, Elsevier, vol. 34(17), pages 3184-3194, November.
    11. Bjork, Tomas, 2009. "Arbitrage Theory in Continuous Time," OUP Catalogue, Oxford University Press, edition 3, number 9780199574742.
    12. Giovanni Villani, 2008. "R&D Cooperation in Real Option Game Analysis," Quaderni DSEMS 19-2008, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
    13. Daniel Oda, 2013. "Introducing Liquidity Risk in the Contingent-Claim Analysis for the Banks," Working Papers Central Bank of Chile 681, Central Bank of Chile.
    14. Jamshidian, Farshid, 2008. "Numeraire Invariance and application to Option Pricing and Hedging," MPRA Paper 7167, University Library of Munich, Germany.
    15. Javier Pena & Juan Vera & Luis Zuluaga, 2010. "Static-arbitrage lower bounds on the prices of basket options via linear programming," Quantitative Finance, Taylor & Francis Journals, vol. 10(8), pages 819-827.
    16. Sven Rady, 1997. "Option pricing in the presence of natural boundaries and a quadratic diffusion term (*)," Finance and Stochastics, Springer, vol. 1(4), pages 331-344.
    17. Abbe Hamilton & Stephen B. Balogh & Adrienna Maxwell & Charles A. S. Hall, 2013. "Efficiency of Edible Agriculture in Canada and the U.S. Over the Past Three and Four Decades," Energies, MDPI, vol. 6(3), pages 1-30, March.
    18. João Adelino Ribeiro & Paulo Jorge Pereira & Elísio Brandão, 2013. "Volume Uncertainty in Construction Projects: a Real Options Approach," CEF.UP Working Papers 1309, Universidade do Porto, Faculdade de Economia do Porto.
    19. Tsai, Pei-Ling & Hsu, Yuan-Lin & Chih, Hsiang-Hsuan & Lin, Shih-Kuei, 2022. "Theoretical and empirical analysis of options in open market share repurchases of Taiwan companies," International Review of Economics & Finance, Elsevier, vol. 81(C), pages 205-226.
    20. Radnai, Márton, 2005. "Indexált alaptermék árú opciók [Indexed options based on the underlying price]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 130-143.

    More about this item

    Keywords

    ;

    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:eee:eneeco:v:32:y:2010:i:6:p:1221-1227. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.