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Article
Scale, Organization, and Profitability of Ethanol Processing
Canadian Journal of Agricultural Economics
  • Paul Gallagher, Iowa State University
  • Hosein Shapouri, United States Department of Agriculture
  • Heather Brubaker, Iowa State University
Document Type
Article
Publication Version
Published Version
Publication Date
3-1-2007
DOI
10.1111/j.1744-7976.2007.00080.x
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.
Comments

This article is from Canadian Journal of Agricultural Economics 55 (2007): 63, doi: 10.1111/j.1744-7976.2007.00080.x.

Rights
Works produced by employees of the U.S. Government as part of their official duties are not copyrighted within the U.S. The content of this document is not copyrighted.
Language
en
File Format
application/pdf
Citation Information
Paul Gallagher, Hosein Shapouri and Heather Brubaker. "Scale, Organization, and Profitability of Ethanol Processing" Canadian Journal of Agricultural Economics Vol. 55 Iss. 1 (2007) p. 63 - 81
Available at: http://works.bepress.com/paul-gallagher/15/