Ability Of Ethanol Producers To Pay For Corn

CattleNetwork
10/23/2008 11:28:00 AM

The maximum price of corn for ethanol producers is the price above which they begin to lose money. For a time, ethanol plants will buy corn so long as they cover all their operating costs. In the longer run, though, they must also cover their capital costs. Ethanol plants sell ethanol and distillers grains and buy corn, natural gas, electricity, and labor. Given representative operating cost estimates and the relationship between the price of distillers grains and the price of corn, it is straightforward to calculate the price of corn that just covers operating costs. Table 1 shows the maximum price of corn that an efficient ethanol producer can pay at various ethanol prices. As shown, a 50¢ change in the price of ethanol changes the operator's ability to pay for corn by $1.73 per bushel.

In the corn marketing year that just ended on August 31, domestic livestock feeders, food users, and importers used about 10 billion bushels of corn. Corn production was about 13 billion bushels. Ethanol producers used the difference, about 3 billion bushels. If non-ethanol users last year had high maximum prices for corn, then the ethanol industry was the marginal user of corn. If ethanol was the marginal user, then the market price of corn should be determined by ethanol producers' ability to pay for corn.

Read the full story