IDEAS home Printed from https://ideas.repec.org/a/eme/afrpps/v70y2010i2p169-183.html
   My bibliography  Save this article

Do lender‐imposed sweeps affect ethanol technology investment?

Author

Listed:
  • Jason Fewell
  • Cole Gustafson

Abstract

Purpose - New federal legislation proposes to reduce greenhouse gas (GHG) emissions associated with biofuel production. To comply, existing corn ethanol plants will have to invest in new more carbon efficient production technology such as dry fractionation. However, this will be challenging for the industry given the present financial environment of surplus production, recent profit declines, numerous bankruptcies, and lender‐imposed covenants. The purpose of this paper is to examine a dry mill ethanol firm's ability to invest in dry fractionation technology in the face of declining profitability and stringent lender cash flow repayment constraints. Firm level risk aversion also is considered when determining a firm's willingness to invest in dry fractionation technology. Design /methodology/approach - A Monte Carlo simulation model is constructed to estimate firm profits, cash flows, and changes in equity following new investment in fractionation to determine an optimal investment strategy. Findings - The addition of a lender‐imposed sweep, whereby a percentage of free cash flow is used to pay off extra debt in high profit years, reduces the firm's ability to build equity and increases bankruptcy risk under investment. However, the sweep increases long‐run equity because total financing costs are reduced with accelerated debt repayment. Practical implications - Results show that while ethanol firm profits are uncertain, imposition of a lender sweep combined with increased profit from dry fractionation technology helps the firm increase long‐run financial resiliency. Originality/value - Examination of ethanol plant financial structures and investment capabilities has received scant research attention to date.

Suggested Citation

  • Jason Fewell & Cole Gustafson, 2010. "Do lender‐imposed sweeps affect ethanol technology investment?," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(2), pages 169-183, August.
    • Handle: RePEc:eme:afrpps:v:70:y:2010:i:2:p:169-183
    DOI: 10.1108/00021461011064941
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1108/00021461011064941/full/html?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://www.emerald.com/insight/content/doi/10.1108/00021461011064941/full/pdf?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1108/00021461011064941?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kenkel, Philip L. & Holcomb, Rodney B., 2006. "Challenges to Producer Ownership of Ethanol and Biodiesel Production Facilities," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 38(2), pages 1-7, August.
    2. Gustafson, Cole R., 2008. "Financing Growth of Cellulosic Ethanol," Staff Papers 44870, North Dakota State University, Department of Agribusiness and Applied Economics.
    3. Searchinger, Timothy & Heimlich, Ralph & Houghton, R. A. & Dong, Fengxia & Elobeid, Amani & Fabiosa, Jacinto F. & Tokgoz, Simla & Hayes, Dermot J. & Yu, Hun-Hsiang, 2008. "Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change," Staff General Research Papers Archive 12881, Iowa State University, Department of Economics.
    4. Perrin, Richard K. & Fretes, Nickolas F. & Sesmero, Juan Pablo, 2009. "Efficiency in Midwest US corn ethanol plants: A plant survey," Energy Policy, Elsevier, vol. 37(4), pages 1309-1316, April.
    5. Peter Helmberger & Sidney Hoos, 1962. "Cooperative Enterprise and Organization Theory," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 44(2), pages 275-290.
    6. Baker, Mindy L. & Babcock, Bruce A., 2008. "Value maximization from corn fractionation: feed, greenhouse gas reductions, and cointegration of ethanol and livestock," Integration of Agricultural and Energy Systems Conference, February 12-13, 2008, Atlanta, Georgia 48714, Farm Foundation.
    7. Arslan, Ozgur & Florackis, Chrisostomos & Ozkan, Aydin, 2006. "The role of cash holdings in reducing investment-cash flow sensitivity: Evidence from a financial crisis period in an emerging market," Emerging Markets Review, Elsevier, vol. 7(4), pages 320-338, December.
    8. Hochman Gal & Sexton Steven E & Zilberman David D, 2008. "The Economics of Biofuel Policy and Biotechnology," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 6(2), pages 1-24, December.
    9. Gustafson, Cole R., 2008. "Financing Growth of Cellulosic Ethanol," Environmental and Rural Development Impacts Conference, October 15-16, 2008, St. Louis, Missouri 53504, Farm Foundation, Transition to a Bio Economy Conferences.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gal Hochman & Chrysostomos Tabakis, 2020. "Biofuels and Their Potential in South Korea," Sustainability, MDPI, vol. 12(17), pages 1-17, September.
    2. María Blanco & Marcel Adenäuer & Shailesh Shrestha & Arno Becker, 2012. "Methodology to assess EU Biofuel Policies: The CAPRI Approach," JRC Research Reports JRC80037, Joint Research Centre.
    3. Janda, Karel & Kristoufek, Ladislav & Zilberman, David, "undated". "Biofuels: review of policies and impacts," CUDARE Working Papers 120415, University of California, Berkeley, Department of Agricultural and Resource Economics.
    4. Hakan Eggert & Mads Greaker, 2014. "Promoting Second Generation Biofuels: Does the First Generation Pave the Road?," Energies, MDPI, vol. 7(7), pages 1-16, July.
    5. Karel Janda & Ladislav Kristoufek & David Zilberman, 2012. "Biofuels: policies and impacts," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 58(8), pages 372-386.
    6. Ghoddusi, Hamed, 2017. "Price risks for biofuel producers in a deregulated market," Renewable Energy, Elsevier, vol. 114(PB), pages 394-407.
    7. Karel Janda & Ladislav Kristoufek & David Zilberman, 2011. "Modeling the Environmental and Socio-Economic Impacts of Biofuels," Working Papers IES 2011/33, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2011.
    8. Canabarro, N.I. & Silva-Ortiz, P. & Nogueira, L.A.H. & Cantarella, H. & Maciel-Filho, R. & Souza, G.M., 2023. "Sustainability assessment of ethanol and biodiesel production in Argentina, Brazil, Colombia, and Guatemala," Renewable and Sustainable Energy Reviews, Elsevier, vol. 171(C).
    9. Baka, Jennifer & Roland-Holst, David, 2009. "Food or fuel? What European farmers can contribute to Europe's transport energy requirements and the Doha Round," Energy Policy, Elsevier, vol. 37(7), pages 2505-2513, July.
    10. Nguyen, Thu Lan T. & Hermansen, John E. & Mogensen, Lisbeth, 2010. "Fossil energy and GHG saving potentials of pig farming in the EU," Energy Policy, Elsevier, vol. 38(5), pages 2561-2571, May.
    11. Jiang, Jie & Hou, Jack & Wang, Cangyu & Liu, HaiYue, 2021. "COVID-19 impact on firm investment—Evidence from Chinese publicly listed firms," Journal of Asian Economics, Elsevier, vol. 75(C).
    12. Sarah Jansen & William Foster & Gustavo Anríquez & Jorge Ortega, 2021. "Understanding Farm-Level Incentives within the Bioeconomy Framework: Prices, Product Quality, Losses, and Bio-Based Alternatives," Sustainability, MDPI, vol. 13(2), pages 1-21, January.
    13. Argueyrolles, Robin & Delzeit, Ruth, 2022. "The interconnections between Fossil Fuel Subsidy Reforms and biofuels," Conference papers 333492, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    14. Aruga, Kentaka, 2011. "非遺伝子組換え大豆とエネルギーの価格関係について [Relationships among the Non-Genetically Modified Soybean and Energy Prices]," MPRA Paper 38186, University Library of Munich, Germany, revised 20 Aug 2011.
    15. Ribeiro, Lauro André & Silva, Patrícia Pereira da, 2013. "Surveying techno-economic indicators of microalgae biofuel technologies," Renewable and Sustainable Energy Reviews, Elsevier, vol. 25(C), pages 89-96.
    16. Mohlin, Kristina & Camuzeaux, Jonathan R. & Muller, Adrian & Schneider, Marius & Wagner, Gernot, 2018. "Factoring in the forgotten role of renewables in CO2 emission trends using decomposition analysis," Energy Policy, Elsevier, vol. 116(C), pages 290-296.
    17. A. M. Hind, 1994. "Cooperatives – Under Performers By Nature? An Exploratory Analysis Of Cooperative And Non‐Cooperative Companies In The Agri‐Business Sector," Journal of Agricultural Economics, Wiley Blackwell, vol. 45(2), pages 213-219, May.
    18. Khoo, Hsien H., 2015. "Review of bio-conversion pathways of lignocellulose-to-ethanol: Sustainability assessment based on land footprint projections," Renewable and Sustainable Energy Reviews, Elsevier, vol. 46(C), pages 100-119.
    19. Shirizadeh, Behrang & Quirion, Philippe, 2022. "The importance of renewable gas in achieving carbon-neutrality: Insights from an energy system optimization model," Energy, Elsevier, vol. 255(C).
    20. Fung, Timothy K.F. & Choi, Doo Hun & Scheufele, Dietram A. & Shaw, Bret R., 2014. "Public opinion about biofuels: The interplay between party identification and risk/benefit perception," Energy Policy, Elsevier, vol. 73(C), pages 344-355.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:afrpps:v:70:y:2010:i:2:p:169-183. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emerald Support (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.