Technology, Markets, and Ethanol Plants Shutdown Price
Price volatility and policy changes may compromise the ability of corn ethanol plants to operate above average variable cost and avoid shutdown. This study derives a variable cost function capable of accommodating two features of ethanol plants; 1) some inputs are used in fixed proportions and some are not, and 2) supply of different types of byproducts may be subject to unobservable market frictions. The function is estimated based on data from a survey of ethanol plants. Increased size does not seem to lower plants’ shutdown price. Frictions in byproduct markets seem to result in sub-optimal byproduct mix choices that increase ethanol shutdown price by up to 10 cents per gallon. Futures and other price discovery instruments in byproduct markets may enhance plants’ ability to prevent shutdown.
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