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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
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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.

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

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.
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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
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