Entry and Shutdown in the Ethanol Industry: Does Policy Matter? Juan Sesmero & Chris Hurt Ag Economists Learning Tuesday - March 20, 2012 Acknowledgments: funding provided by USDA regional project NC 506. Thanks to Richard Perrin and Lilyan Fulginiti for helpful discussion.

Profitability and Entry into the Ethanol Industry: recent history Profitability has been generally high since up to ▫Triggered entry and capacity expansion in the industry. Margins have shrunk since ▫Triggered reduction in entry and shutdown. Growth in production volumes slowed down: ▫Absolute quantities ▫As percentage of total liquid fuel consumption

Source: Tracking Ethanol Profitability, Agricultural Marketing Resource Center, Iowa State University,

Entry and Competition in the Ethanol Industry Source: 2011 Federal Trade Commission Report on Ethanol Market Concentration Reduction in margins Anticipation of wall?

Renewable Fuel Standard and Blending Wall E10 reaches saturation in 2011

Reductions in margins and survival Blending wall, reduction in foreign demand, and elimination of subsidy and tariff may reduce ethanol price and crush margin. How big a reduction in margins can ethanol plants handle? Answer to this question depend upon plants’ cost structure. ▫We estimate cost based on data from a survey of ethanol plants located in the US North Central Region.

Size, Corn prices, and Shutdown Price of corn (12/11): $6 Price of Eth > $2.23 during 2011 Price of Eth < $2.23 since 12/11 New wave of shutdowns?

Policy and Reductions in Margins Hard to disentangle influence of different factors in ethanol price. General equilibrium models attempt to do this. According to FAPRI model removal of subsidy and tariff was expected to reduce ethanol rack price from $2.25 to $2.10. ▫Policy may put ethanol price below shutdown.  “US Biofuels Baseline and impact of extending the $0.45 ethanol blenders credit.” FAPRI ‐ MU Report #07 ‐ 11. Short term evidence is consistent with this prediction. ▫Observed ethanol price dropped from $2.75 to $2.

Byproducts Markets – evolution Hoffman, L. and Baker, A. Market Issues and Prospects for US Distillers’ Grains. USDA FDS-10k-01, Dec

Byproduct Markets and Shutdown Reductions in ethanol price may be compensated by increases in byproduct prices. Byproduct prices are correlated with corn (and more so as the market becomes more efficient). Corn stable so byproduct prices stable. Some divergence occur between wet and dry prices in regional markets.

Price of DDGS, accessibility to Wet markets and Shutdown Total flexibility No flexibility Price of corn (12/2011): $195 Estimated flexibility: Price of Eth < $2.80 since 11/11 Source: Sesmero, Perrin, and Fulginiti (2012)

Conclusions Removal of subsidy and tariff may push some plants to shutdown. Flexibility in byproduct mix choice does seem to matter in plants’ survival. ▫Flexibility is given by accessibility to wet markets and contracting decisions. Size does not seem to make a difference in survival. ▫While bigger plants achieve greater ethanol yield per bushel of corn they use more natural gas per gallon and produce less byproduct per gallon.