Market Analysis of Ethanol Capacity

Xiaowei Cai and Kyle Stiegert ()

International Food and Agribusiness Management Review, 2014, vol. 17, issue 01, 12

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.

Keywords: Agribusiness; Agricultural and Food Policy; Crop Production/Industries; Demand and Price Analysis; Environmental Economics and Policy; Land Economics/Use (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:ifaamr:163355

DOI: 10.22004/ag.econ.163355

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