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Market Analysis of Ethanol Capacity

Author

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  • Cai, Xiaowei
  • Stiegert, Kyle W.

Abstract

The ethanol industry experienced rapid growth and capacity expansion during the mid-2000s. The fast expansion could result from the high industry profitability in 2005 and 2006. The present study applies the real options approach to analyze the U.S. corn ethanol industry and derive the optimal industry manufacturing capacities during 1999 and 2010. The optimal capacity is dependent on various parameters such as market uncertainty, processing margin, marginal variable cost, and incremental investment cost. The major finding is that the industry-wide capacity expansions occurred in 2007 and 2008 might not have been recommended by the real options model. Driven by the potential high market profitability, the industry might have been expanded to a level higher than optimal.

Suggested Citation

  • Cai, Xiaowei & Stiegert, Kyle W., 2014. "Market Analysis of Ethanol Capacity," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 17(1), pages 1-12, February.
    • Handle: RePEc:ags:ifaamr:163355
    DOI: 10.22004/ag.econ.163355
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    References listed on IDEAS

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    Cited by:

    1. Gardner, Grant & Sampson, Gabriel S., 2022. "Land Value Impacts of Ethanol Market Expansion by Irrigation Status," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 47(3), September.
    2. Sampson, Gabriel & Gardner, Grant, 2021. "Land Value Impacts of Ethanol Market Expansion Differ by Irrigation Status," 2021 Annual Meeting, August 1-3, Austin, Texas 313854, Agricultural and Applied Economics Association.
    3. Fausti, Scott W. & Van der Sluis, Evert & Qasmi, Bashir A. & Lundgren, Jonathan, 2014. "The Effect of Biotechnology and Biofuels on U.S. Corn Belt Cropping Systems: Updated Version," Economics Staff Papers 168202, South Dakota State University, Department of Economics.
    4. Allan P. Bacho & Olga I. Murova, 2017. "Financial Performance Analysis of Corn-based Ethanol Enterprises in the U.S," Business and Economic Research, Macrothink Institute, vol. 7(1), pages 242-260, June.

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