A stochastic feasibility study of Texas ethanol production: analysis of Texas Legislature ethanol subsidy proposal

Abstract

The recent resurgence of interest in ethanol production has prompted the Texas State Legislature to investigate the feasibility of ethanol production in Texas. The reasons for the increased interest in ethanol production could possibly relate to depressed commodity prices, gasoline price volatility, environmental regulations and a renewed push towards increased fuel sufficiently given national and world events following September 11, 2001. Past feasibility studies have failed to incorporate the risk of input and output prices in their analyses. Furthermore, it is evident from the literature, that unrealistic values were used in many of the studies, to perhaps, entice prospective investors in providing capital for the construction and operation of the ethanol facilities. This study provides an unbiased, stochastic simulation feasibility study incorporating the risks of ethanol, corn, dry distillers grains (DDGS), soybean meal, electricity, and natural gas prices on three size facilities in Texas. In addition, four different scenarios were included incorporating four levels of the proposed Texas State Producer Grant into the feasibility study. Those levels were the $0.00, $0.10, $0.20, and $0.30/gal on the first 30 million gallons per year (MMGPY) of production for each registered plant. Rather than assuming point values for input variables and providing a deterministic analysis, the advantage of this study is that it provides a feasibility study that includes risks of input and output prices in its results. For each of the three size facilities analyzed (15, 30, and 80 MMGPY) the results of probability of negative cash flows and simple statistics, probability of dividend payments and simple statistics, present value of ending owners equity in 2022, net present value, certainty equivalents and absolute certainty equivalents risk premiums of net present value are described in the study. The study found that neither the 15, 30, or the 80 MMGPY facilities would be feasible in Texas. The facilities have little chance of economic success under the best scenario ($0.30/gal) and all have a zero percent chance of maintaining beginning equity.