Economics of Ethanol
Visit <http://www.ces.purdue.edu/bioenergy> forfree, downloadable copies of all of the publicationsin the Purdue Extension BioEnergy series.
plant could pay $2.19 per bushel or corn. Te middle linerepresents the corn breakeven price when the value o the$0.51 per gallon ederal subsidy is added, and at $60 oil thisis $3.96 per bushel. Finally, when an oxygenate premium o $0.25 per gallon is added, this raises the estimated break-even price an ethanol plant could pay to $4.82 per bushel.During some periods, the oxygenate premium has beenconsiderably higher than the 25 cents per gallon assumed here.Given these assumptions, this means that i a plant can buy corn at less than $4.82 per bushel, the owners will get ahigher return than 12% and/or a quicker payback than 15years. We should note also that the capital cost componento ethanol production cost is about 30 cents per gallon, or80 cents per bushel. Tis means that existing plants withcapital costs already recovered could potentially pay 80cents more per bushel or about $5.60.Tis summarizes some o the great opportunities in etha-nol, but also highlights some o the extreme vulnerabili-ties. One vulnerability is the oxygenate premium. As thesupply o ethanol increases to meet the amount needed toreplace MBE, the oxygenate premium could drop sharply.We have not experienced the situation in which ethanolproduction exceeds oxygenate demand, so there is consid-erable uncertainty regarding ethanol market value oncewe reach that threshold. Without the oxygenate premium,the ethanol industry will be operating on the middle linein Figure 1. You can see that lower crude oil prices couldmake ethanol prots vulnerable as well. Te corn breakevenon the middle line with $50 oil as an example is a bit over$3.00 per bushel.Te high demand to build ethanol plants is bidding upconstruction and processing costs, which also makeethanol prots vulnerable. Another major vulnerability isthat as more ethanol capacity comes on line, the increasingdemand or corn results in higher corn prices, thus narrowingethanol producers’ margins. Finally, the ederal subsidy is very large and could be subject to change, as higher cornprices have adverse impacts on livestock producers andultimately on livestock product consumers (yner andQuear, 2006).
Te uture direction o ethanol will be highly dependent onstate and ederal governmental policy and on energy andcorn markets. I all actors were to stay as they are today, theexponential expansion o ethanol plants would continueuntil corn prices were bid up to near their breakeven level.It is much more likely, however, that policy and energy priceswill also be dynamic, that corn prices will rise, and thatother constraints will dramatically slow the growth o theindustry aer 2007.It is clear that the ethanol industry cannot continue togrow at the current rate based on the use o the corn seedas a eedstock source without hitting major constraintsincluding extreme competition or corn to be used oreed, exports, and ood. Aer 2007 the industry will haveto grow at a much slower rate, probably keeping pace withcorn production increases. Te hope is that cellulose-basedethanol can then emerge by 2010 to 2012. However, as longas corn based ethanol is protable, investors will probably preer the more certain technology to the still uncertaincellulose technology.
Doering, O. “Ethanol and Energy Policy.” (ID-340).Purdue University Cooperative Extension Service (2006)<http://www.ces.purdue.edu/bioenergy >.Mosier, N. “Cellulosic Ethanol—Biouel Beyond Corn.”(ID-335). Purdue University Cooperative ExtensionService (2006) <http://www.ces.purdue.edu/bioenergy >.ifany, D.; Eidman, V. “Factors Associated with Success o Fuel Ethanol Producers.” Staf paper series, P03-7,Department o Applied Economics, University o Minnesota (2003).yner, W. E.; Quear, J. “Comparison o A Fixed and VariableCorn Ethanol Subsidy.”
, Volume 21, No. 3,pp 199-202 o pd. (2006) <http://www.choicesmagazine.org/2006-3/grabbag/index.htm>.