Do lender-imposed sweeps affect ethanol technology investment?
Purpose – New federal legislation proposes to reduce greenhouse gas (GHG) emissions associated with biofuel production. To comply, existing corn ethanol plants will have to invest in new more carbon efficient production technology such as dry fractionation. However, this will be challenging for the industry given the present financial environment of surplus production, recent profit declines, numerous bankruptcies, and lender-imposed covenants. The purpose of this paper is to examine a dry mill ethanol firm's ability to invest in dry fractionation technology in the face of declining profitability and stringent lender cash flow repayment constraints. Firm level risk aversion also is considered when determining a firm's willingness to invest in dry fractionation technology. Design /methodology/approach – A Monte Carlo simulation model is constructed to estimate firm profits, cash flows, and changes in equity following new investment in fractionation to determine an optimal investment strategy. Findings – The addition of a lender-imposed sweep, whereby a percentage of free cash flow is used to pay off extra debt in high profit years, reduces the firm's ability to build equity and increases bankruptcy risk under investment. However, the sweep increases long-run equity because total financing costs are reduced with accelerated debt repayment. Practical implications – Results show that while ethanol firm profits are uncertain, imposition of a lender sweep combined with increased profit from dry fractionation technology helps the firm increase long-run financial resiliency. Originality/value – Examination of ethanol plant financial structures and investment capabilities has received scant research attention to date.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 70 (2010)
Issue (Month): 2 (August)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=afr Email:
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kenkel, Phil & Holcomb, Rodney B., 2006.
"Challenges to Producer Ownership of Ethanol and Biodiesel Production Facilities,"
Journal of Agricultural and Applied Economics,
Cambridge University Press, vol. 38(02), pages 369-375, August.
- Kenkel, Philip L. & Holcomb, Rodney B., 2006. "Challenges to Producer Ownership of Ethanol and Biodiesel Production Facilities," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 38(02), August.
- Searchinger, Timothy & Heimlich, Ralph & Houghton, R. A. & Dong, Fengxia & Elobeid, Amani & Fabiosa, Jacinto F. & Tokgoz, Simla & Hayes, Dermot J. & Yu, Hun-Hsiang, 2008. "Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change," Staff General Research Papers Archive 12881, Iowa State University, Department of Economics.
- Gustafson, Cole R., 2008.
"Financing Growth of Cellulosic Ethanol,"
44870, North Dakota State University, Department of Agribusiness and Applied Economics.
- Gustafson, Cole R., 2008. "Financing Growth of Cellulosic Ethanol," Statistical Series Reports 44870, North Dakota State University, Department of Agribusiness and Applied Economics.
- Gustafson, Cole R., 2008. "Financing Growth of Cellulosic Ethanol," Environmental and Rural Development Impacts Conference, October 15-16, 2008, St. Louis, Missouri 53504, Farm Foundation, Transition to a Bio Economy Conferences.
- Arslan, Ozgur & Florackis, Chrisostomos & Ozkan, Aydin, 2006.
"The role of cash holdings in reducing investment-cash flow sensitivity: Evidence from a financial crisis period in an emerging market,"
Emerging Markets Review,
Elsevier, vol. 7(4), pages 320-338, December.
- Ozgur Arslan & Chrisostomos Florackis & Aydin Ozkan, 2006. "The Role of Cash Holdings in Reducing Investment-Cash Flow Sensitivity: Evidence from a Financial Crisis Period in an Emerging Market," Discussion Papers 06/08, Department of Economics, University of York.
- 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.
- Hochman Gal & Sexton Steven E & Zilberman David D, 2008. "The Economics of Biofuel Policy and Biotechnology," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 6(2), pages 1-24, December.
- Baker, Mindy L. & Babcock, Bruce A., 2008. "Value maximization from corn fractionation: feed, greenhouse gas reductions, and cointegration of ethanol and livestock," Transition to a Bio Economy Conferences, Integration of Agricultural and Energy Systems Conference, February 12-13, 2008, Atlanta, Georgia 48714, Farm Foundation.
When requesting a correction, please mention this item's handle: RePEc:eme:afrpps:v:70:y:2010:i:2:p:169-183. 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: (Louise Lister)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.