A wide variety of factors affect the economics of ethanol production. These factors include feedstock and energy costs, capital and debt financing costs, the value of products produced and plant design and efficiency. A host of other factors will also affect production costs and profitability. Many of these factors have been discussed and additional factors should be quantified during the site specific feasibility study.
These value factors will be essential to the financial pro forma and sensitivity analyses conducted during a detailed project evaluation.
Value assumptions typically include input from the project development team as well as consultants and other advisers on the project. A sensitivity analysis will provide an indication of value ranges for input factors used in the financial pro forma. Many of the input factors represent potential risk. For example, a rapid increase in feedstock or energy costs that may occur concurrently with a strong downward trend in ethanol prices will considerably change the financial outlook for the project. Risk management practices can often mitigate risk and help to insulate the project’s exposure to rapid swings in cost and price scenarios. Risk mitigation strategies are essential to the long term viability of most ethanol projects. Project developers should evaluate risk management strategies and consider the impact of these strategies during the financial analysis of the project.
Any person contemplating an investment in an ethanol plant should evaluate a variety of criteria to determine suitability of the investment under consideration. Agribusiness lenders with Farm Credit Services of America offer the following tips for evaluating investment in an ethanol plant:
- Equity-to-asset ratio of at least 40 percent. That means investors should own 40 percent of the total value of the plant and inventory, with no more than 60 percent financed by loans.
- Working capital for buying and hedging inputs of at least 10˘ for every gallon of plant capacity.
- Adequate corn supply. Ideally, a plant should use no more than 50 percent of the net exportable bushels of corn in a 35- to 50-mile radius.
- Find management with industry experience, something that’s difficult to do during rapid expansion. Some plant builders/designers will train staff and manage start-ups. Have a risk management strategy. The goal is to lock in a margin by hedging inputs of corn and natural gas used in distilling. Plants hedge or contract outputs of ethanol and distillers’ grains when possible.
- Use technology. With high natural gas prices, some new plants are looking to coal or methane from manure. Capital cost for these energy sources can be higher. Have a competitive break-even cost. Energy inputs are pushing that up. Typical break evens currently run from $1.10 to $1.30 a gallon.
- Use marketers. Many plants sell ethanol through marketing companies.