Friday, September 7, 2007

Understanding Ethanol Plant Economics: Will Boom Turn Bust?

A new study by David J. Peters of the University of Nebraska (Lincoln) puts the ethanol boom in perspective.
From DTN Ethanol Center:
Profitability for many ethanol plants will be determined by the federal renewable fuel standard, according to a new study from the University of Nebraska Agriculture Economics Department.

The study, "Understanding Ethanol Plant Economics: Will Boom Turn Bust?" by professor David J. Peters, looks at how ethanol profitability changes depending on the level of RFS. The study can be found online at

Looking at two different plants, one 40-million-gallon plant built in 2002 and another 100-million-gallon plant built in 2005, the study found that with the current 7.5-billion-gallon RFS in place through 2015, the 40-million-gallon plant would remain profitable only between 2003 and 2010.

"The plant fails to be profitable by 2011 and generates losses by 2013," the study said. "Losses are primarily due to falling ethanol prices as the 7.5-BGY standard is met, relatively high corn prices, and the expiration of tax credits."

However, the study found that if the RFS is increased to 15 billion gallons, the same 40-million-gallon plant would ensure profitability and "generate small net profits" between 2013 and 2015, even if the balance sheet dips into the red in 2011 and 2012.

In the same set of circumstances, according to the study, a 100-million-gallon plant built in 2005 would remain profitable between 2006 and 2013 with the 7.5-billion-gallon RFS in effect. The plant then generates losses in 2014 and 2015, "but these losses are easily covered by existing cash reserves."...

36 page PDF.