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HW#5 (Mid-Missouri Energy)_Problem_Set_Solution

HW#5 (Mid-Missouri Energy)_Problem_Set_Solution -...

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Agribusiness Strategy AEM 247 Professor Gloy 10/03/2008 Mid-Missouri Energy (Response) 1. What are the fundamental economic drivers in the ethanol business? What are the key inputs/outputs? What determines these prices and how are prices related? The primary economic drivers in the ethanol business relate directly to the prices of corn and gasoline, as well as the amount of energy produced by each compared to the amount of energy used in production of each source of fuel. Gasoline has proved more efficient than ethanol since the days of Henry Ford. Gas was comparably cheaper to produce and, when burned, gave off more energy than did ethanol. Ethanol was even said to have a negative “energy balance”. The inputs used to produce ethanol far exceeded the outputs gained from ethanol. Due to new technological developments; however, ethanol’s economic drivers are becoming more favorable; prices are falling and there no longer exists a negative “energy balance”. The negative balance no longer exists because outputs now outweigh inputs. There are a number of inputs commonly associated with the corn-based production of ethanol, but the outputs differ depending on whether or not a production facility employs dry milling or wet milling. Corn is actually less efficient in the production of ethanol than sugarcane because starch must be extracted from corn to be converted into sugar. The US uses corn because sugarcane isn’t a domestic crop. As for inputs, the major input in the production of ethanol is obviously corn, and then natural gas and electricity, and then chemicals, yeasts, enzymes and denaturants. Corn accounted for about 60% of production cost, followed by about 15% natural gas and electricity, and then another 10% from the chemicals, yeasts, etc. Dry-milling was the least expensive production method, able to produce roughly 15 to 80 million gallons of ethanol per year. Dry-milling also produces distillers dried grain with soluble, also known as DDGS, and carbon dioxide. DDGS is used in many animal feeds and carbon dioxide, as we all know, is used in may carbonated beverages. Wet-milling, on the other hand, is far more expensive in terms of production and operation because it breaks down corn into more of its component parts during the ethanol production process. Byproducts of wet milling included high-fructose corn syrup, corn oil, corn gluten, corn germ, and carbon dioxide. Wet-milling also allowed for an increase in one byproduct compared to another based on which had a higher demand in the market. The prices of the two milling processes are based mainly on production outputs. Wet milling produces more byproducts than dry milling which requires a larger plant facility and higher capacity. The trade off here however is that more can be sold and products can be customized depending on the outlook of market demand. Currently, more producers are employing the dry milling process despite this possible advantage to wet milling. The higher costs aren’t being justified with the appropriate amount of gains in revenues and overall income.
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2. What other factors led to the development of the ethanol industry?
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HW#5 (Mid-Missouri Energy)_Problem_Set_Solution -...

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