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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: ethanol ; optimal capacity ; real options ; processing margin

Editor(s): IFAMR, IFAMA

Subject(s): Agribusiness

Agricultural and Food Policy

Crop Production/Industries

Demand and Price Analysis

Environmental Economics and Policy

Land Economics/Use

Issue Date: Feb 01 2014

Publication Type: Journal Article

DOI and Other Identifiers: The IFAMR (ISSN #: 1559-2448) is published quarterly. http://www.ifama.org. (Other)

PURL Identifier: http://purl.umn.edu/163355 Published in: International Food and Agribusiness Management Review, Volume 17, Issue 1 Page range: 83-94

Total Pages: 12

JEL Codes: Q10; Q14; Q42

Note: The International Food and Agribusiness Management Review is the published by IFAMA. www.ifama.org

Series Statement: Volume 17

Issue 1

Record appears in: International Food and Agribusiness Management Association (IFAMA) > International Food and Agribusiness Management Review





Autor: Cai, Xiaowei ; Stiegert, Kyle W.

Fuente: http://ageconsearch.umn.edu/record/163355?ln=en







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