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The Feasibility of Ethanol Production in Texas

The Feasibility of Ethanol Production in Texas. Brian Herbst. Chapter 9 Knutson, Penn and Flinchbaugh. Introduction. Increase Interest in Ethanol Conflict in Middle East Houston – Non-attainment area Methyl Tertiary Butyl Ether (MTBE) Commodity Prices. Background.

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The Feasibility of Ethanol Production in Texas

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  1. The Feasibility of Ethanol Production in Texas Brian Herbst Chapter 9 Knutson, Penn and Flinchbaugh

  2. Introduction • Increase Interest in Ethanol • Conflict in Middle East • Houston – Non-attainment area • Methyl Tertiary Butyl Ether (MTBE) • Commodity Prices

  3. Background • Historic ethanol production • Texas interest • Added value • Community Development • Ask by Texas State Legislature to complete the feasibility study • Benefits communities, farmers, and producer groups

  4. Objective • The primary objective of this research is to evaluate the feasibility of ethanol production in Texas

  5. Alternative Scenarios • 2 Feedstocks • Corn • Sorghum • 3 Locations • Panhandle • Central • Southeast • 4 Sizes • 20, 40, 60 and 80 MMGY

  6. Methods and Data • Stochastic simulation • Capital budgeting • Monte Carlo simulation using SIMETAR • Multivariate Empirical Distribution

  7. Stochastic Variables • Output prices • Ethanol • Dried Distillers Grain with Solubles • Input Prices • Corn • grain sorghum • Electricity • natural gas

  8. Assumptions • Discount Rate – 8% • Dividends paid at 30% positive after tax net farm income • Unlimited financing • Long-term Debt • 8% interest • 10 years • 50% equity required

  9. Capital Requirements

  10. Net IncomeCorn in the Panhandle

  11. Net Income RiskCorn in the Panhandle

  12. Ending CashCorn in the Panhandle

  13. Dividends PaidCorn in the Panhandle

  14. Real Net WorthCorn in the Panhandle

  15. Net Present ValueCorn in the Panhandle

  16. Variable Base 20 MMGY 80 MMGY Corn Price ($/bu.) 2.61 -0.29 -0.21 Natural Gas ($/Mcf) 2.39 -1.49 -1.00 Ethanol Price ($/gal) 1.086 0.099 0.066 DDGS ($/ton) 106.40 32.45 21.63 Discount Rate (percentage point change) 8.00 -11.40 -6.74 Sensitivity TableCorn in the Panhandle

  17. Net IncomeSorghum in the Panhandle

  18. Net Income RiskSorghum in the Panhandle

  19. Ending CashSorghum in the Panhandle

  20. Dividends PaidSorghum in the Panhandle

  21. Real Net WorthSorghum in the Panhandle

  22. Net Present ValueSorghum in the Panhandle

  23. Variable Base 20 MMGY 80 MMGY Sorghum Price ($/bu.) 2.38 -0.06 0.03 Natural Gas ($/Mcf) 2.39 -0.27 0.22 Ethanol Price ($/gal) 1.086 0.018 -0.014 DDGS ($/ton) 106.40 5.90 -4.59 Discount Rate (percentage point change) 8.00 -0.97 0.83 Sensitivity TableSorghum in the Panhandle

  24. Net Present Value Table

  25. Summary • Corn showed little economic incentive to entice equity investment • Grain sorghum based ethanol showed some economic incentive in the Texas Panhandle • Grain sorghum based ethanol in the Central region of Texas shows potential • Southeast Texas did not show positive results using grain sorghum to produce ethanol

  26. Summary – Continued • Sensitivity Analysis • A small change in ethanol price can have a big impact on the economic viability of the plants because of the large volume produced

  27. Future Research • Different feedstocks • Different technologies • Feedstock Prices

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