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A Look at Ethanol Plant Profitability and Farmers’
Investment Portfolios
Bob Jolly
North Central Farm Management Extension CommitteeAmes, IA
May 9-11, 2006
Some Definitions and Rules of Thumb
• Nameplate capacity– Contractor’s certification
• Actual production level – 20% over nameplate capacity
• Capital Costs– $1.50/gallon rated capacity
• Ethanol yields– Anhydrous 2.75 gallons/bushel – Denatured 2.83 gallons/bushel
• DDGS yields– 18 pounds/bushel
• Natural gas consumption– 35,000 BTU’s/ denatured gallon– 1031 BTU’s/cubic foot
• Electricity– 1.1 kWh/denatured gallon
• Water– 5 gallons/denatured gallon??
Ethanol PlantRevenue Composition
EthanolDDGSCO2
Source: Tiffany and Eidman
Ethanol Cost Components(per denatured gallon)
CornNatural GasElectricityChemicalsOther
Source: Tiffany and Eidman
Some Stylized Facts
1. Capital Costs– Cube-Square Rule– Imagine an ethanol plant as a large cylinder– Capital costs are proportional to the area– Output is proportional to the volume– Decreasing returns to scale
Derived from Gallagher et al, 2005
Unit Capital Cost
$0.000
$0.050
$0.100
$0.150
$0.200
0 25 50 75 100 125 150
Ethanol Output (million gallons)
Dollars/gallon
Some More Stylized Facts
3. Corn Assembly Costs– Priced delivered to plant– Total assembly cost is linear function of distance– Unit assembly cost increases at a decreasing rate
Unit Corn Acquisition Cost
$0.720$0.730$0.740$0.750$0.760$0.770
0 25 50 75 100 125 150
Ethanol Output (million gallons)
Dollars/gallon
And a Few More Stylized Facts for Good Measure
2. Operations Costs– Fixed Proportions– Chemicals and Water – Energy
Operating and Other Processing Costs
$0.000
$0.100
$0.200
$0.300
$0.400
$0.500
$0.600
$0.700
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150
Ethanol Output (million gallons)
$/ga
llon
Putting the Costs together
Full Production Costs
$1.460
$1.470$1.480
$1.490$1.500
$1.510
$1.520$1.530
$1.540
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150
Ethanol Output (million gallons)
Mill
ions
d
Contested Market Areas
Discussion of Farm ResultsCorn Price Where 50:50 = 2/3:1/3 ($5.75 Beans)
35 40 45 50 55150 2.92 3.13 3.34 3.56 3.77160 2.78 2.98 3.18 3.39 3.59170 2.66 2.85 3.04 3.23 3.42180 2.56 2.74 2.92 3.10 3.28190 2.47 2.64 2.81 2.97 3.14200 2.38 2.54 2.70 2.87 3.03
Soybean Yield
Cor
n Yi
eld
Discussion of Farm ResultsCorn Price Where 50:50 = 2/3:1/3 ($5.75 Beans)
Soybean Yield Asian Rust35 40 45 50 55
150 2.51 2.70 2.89 3.09 3.28160 2.41 2.58 2.76 2.94 3.12170 2.31 2.48 2.65 2.81 2.98180 2.23 2.38 2.54 2.70 2.86190 2.15 2.30 2.45 2.60 2.75200 2.08 2.22 2.37 2.51 2.65C
orn
Yiel
d
Full Production Costs
$1.490$1.495$1.500$1.505$1.510$1.515$1.520$1.525$1.530$1.535$1.540
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150
Ethanol Output (million gallons)
Mill
ions
Monthly Ethanol Input and Output Prices
0.00
1.00
2.003.00
4.00
5.00
6.00
Jan-9
6Ja
n-97
Jan-9
8Ja
n-99
Jan-0
0Ja
n-01
Jan-0
2Ja
n-03
Jan-0
4Ja
n-05
Jan-0
6
Year
$/ga
llon
of e
than
ol
EthanolCornNatural GasDDGS
Estimated Ethanol Plant Monthly Profitability, 1996-2006
-$0.50$0.00$0.50$1.00$1.50$2.00$2.50
Jan-9
6Ja
n-97
Jan-9
8Ja
n-99
Jan-0
0Ja
n-01
Jan-0
2Ja
n-03
Jan-0
4Ja
n-05
Jan-0
6
Date
Dol
lars
Per
Gal
lon
Net Margins Gross MarginsTechnical and Cost AssumptionsBased on Tiffany and Eidman
Sensitivity TablePrice of Ethanol ($/Gal)Net Margin Breakeven
Price of Natural Gas ($/Dtherm)
Price of Corn($/bu.)
$5.00 $10.00
$2.00 1.02 1.19
$3.00 1.36 1.54
$4.00 1.71 1.88
DDGS at $80/tonDepreciation at $.08/gallon
Value Added What?...Horizontal Versus Vertical Investment in Iowa Production
Agriculture.
Josh RoeFormerly of
Department of Economics,Iowa State University
Now at Kansas State University
Or… Do ethanol investments make sense for farmers?
Sounds like a dumb question given current (rumored) rates of
return!
• Is Vertical or Horizontal Growth More Efficient for Iowa Agricultural Producers?
• What Attributes of a Farm Make it More Profitable for a Farm to Expand Vertically and/or Horizontally?
• Can a Farm’s Attributes Predict Their Optimal Investment Pattern?
Statement of The Problem
• Value Added Agricultural Investments-Investment in Ethanol Plant-Investment in Egg Production
• Stock Index-S&P 500
• Food and Agricultural Business Stocks-Fidelity Food Mutual Fund
Model Specification
Returns, Risk & CorrelationsValue-Added Investments
1993-2003
Correlation Matrix
Mean%
Std%
CV Ethanol Layers S&P 500
FidelityAgri-
business
Average Farm
Ethanol 10.13 16.51 1.62 1
Layers 7.23 6.28 0.86 -0.092 1
S&P 500 10.63 19.88 1.87 0.217 0.748 1
Fidelity Agribusiness 11.56 16.98 1.46 0.257 0.626 0.418 1
Average Farm 7.77 6.08 0.78 -0.249 0.663 -0.208 0.134 1
Source: Josh Roe, MS thesis
• Overall Implications-Farm Characteristics Not Accounted For-Each Producer Given a Unique Investment Alternative-Risk/Return Implications:
Model Specification
E-Va
σ
rf
µ
E-Vb
Results and Interpretations
Figure 4.5: Distribution of Average Portfolio Weight, by Cluster
0%20%40%60%80%
100%
1 2 3 4 5
Cluster Number
Perc
ent o
f Po
rtfo
lio
Farm Expansion Eggs Ethanol S&P Fidelity
Mean Values of Variables Used in Model, by Cluster
Cluster Number
Variable 1 2 3 4 5
Age of Operator*** 59 43 54 52 55
Grain Sales Ratio* 0.73 0.35 0.77 0.77 0.64
Net Farm Income Ratio*** 0.15 0.18 0.23 0.32 0.16
Return on Equity*** 0.12 0.18 0.09 0.12 0.09
Debt to Asset Ratio* 0.30 0.51 0.22 0.18 0.33
Interest Expense Ratio** 0.06 0.05 0.04 0.03 0.06
Government Payments Ratio 0.07 0.07 0.08 0.09 0.08
Non-farm Income 16,671 3,456 9,772 14,314 12,416
Conclusions
• Value Added Investments Fit Well into a Portfolio:-The Farm is Highly Dependant on Grain Sales-The Farm is Highly Leveraged and/or Relatively Inefficient-The Farm is Highly Dependent on Government Payments
• Stock Market Investments Don’t Appear to Be Profitable-Due to Greater Expected Risk-Would the Results Differ Across Another Time Period?-What About the Farms Who Heavily Invested in Them?