Take David Peters, for example. He’s an assistant professor of sociology in the College of Agriculture and Life Sciences at Iowa State University in Ames, Iowa. During the summer of 2007, while working as a community economics specialist in the Department of Agricultural Economics at the University of Nebraska-Lincoln for the university’s extension service, Peters assisted communities and local governments with assessing the long-term viability of proposed ethanol plants. “We had a lot of local governments—cities and counties—that had ethanol companies coming to them asking for them to provide infrastructure revenue bonds or property tax abatements and to extend roads, rail lines, and water, sewer and electric lines,” which were expensive propositions for small towns with as little as 500 people, he says. “The question was: ‘If we bond out the infrastructure for 15 to 20 years, what is the long-term viability of the ethanol plant? Will we have a stable, long-term revenue stream?’ I did some research and put together this calculator where they can input the parameters and assumptions and look forward in time to determine profits. The goal was to give the communities a tool that can help them to make public policy decisions.”
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That was when corn prices were low and ethanol prices were high. Peters’ calculator hasn’t changed, but prices have. Peters can easily show you how high-priced inputs and low-priced outputs mean losses instead of profits, but even he is surprised at how far things have gone up and down. “The main thing that surprised me was how sensitive the bottom line is toward changes in corn and ethanol prices. Obviously, it’s intuitive that it would work that way, but what surprised me is how relatively minor changes either way can lead to profits or losses in sizeable amounts. At $3.50 per bushel for corn, the price of ethanol would only have to tick up another dime to change the entire economics of an ethanol plant.”
Deciphering the Data
Peters calculates that a typical 100 MMgy ethanol plant with a typical amount of debt breaks even when corn is at $3.75 per bushel and ethanol is at $1.85 per gallon. With $4 corn the break-even ethanol price is $1.90. For every $.25-cent increase in the price of a bushel of corn, the price of ethanol only needs to go up approximately 5 cents per gallon for the plant to break even. If the price of ethanol goes up an additional 10 cents, the ethanol plant realizes profits in the millions of dollars.
“It’s important for people to understand that the ethanol industry runs pretty lean,” Peters says. “There’s not much fat to trim out of the industry. Corn is the big cost component and most of your revenue comes from ethanol. If either of those changes, there isn’t much you can cut. Distillers grains help, but you’re not in the business of making distillers grains, you’re primarily producing ethanol.”
Peters’ calculator allows anyone to input their own data to estimate what the prices of corn and ethanol would have to be for an ethanol plant to be profitable. The calculator, a spreadsheet, models the data for a typical 100 MMgy ethanol plant built in Iowa or Nebraska in 2005. The plant is assumed to operate at 100 percent capacity with an ethanol yield of 2.9 gallons, a distillers dried grains with solubles yield of 19 pounds, and a carbon dioxide yield of 17.5 pounds per bushel of corn. Inputs include 7 gallons of water per bushel of corn and also 1.1 kilowatt-hours of electricity and 35,000 British thermal units of natural gas per gallon of ethanol. The capital costs for construction and equipment are assumed at $160 million with 60 percent financed at 8 percent and 40 percent equity returned to investors at 15 percent. The calculations include labor costs for 45 workers with an average salary of $47,750 per year with 13 percent tacked on for benefits and 10 percent added for other labor and management costs. The model assumes straight-line depreciation over 20 years with a salvage value equaling 25 percent of investment costs. Other inputs include the cost of enzymes, denaturants, yeasts, chemicals for processing and cooling, various antibiotics, waste management, maintenance, transportation costs, miscellaneous administrative costs, property taxes and sales taxes.
“In general, it’s the price of corn and the price of ethanol that really drive profits,” Peters says. “The only other inputs that might have a [variable] impact on production costs would be electricity, natural gas and water, but those are secondary inputs. Transportation costs are an issue, but they are a relatively small component, because most of the ethanol is shipped by rail, which is relatively inexpensive per ton-mile.”
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