The Economics of Processing Ethanol at Louisiana Sugar Mills
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Louisiana State University LSU Digital Commons LSU Doctoral Dissertations Graduate School 2011 The economics of processing ethanol at Louisiana sugar mills: a three part economic analysis of feedstocks, risk, business strategies, and uncertainty Paul Michael Darby Louisiana State University and Agricultural and Mechanical College, [email protected] Follow this and additional works at: https://digitalcommons.lsu.edu/gradschool_dissertations Part of the Agricultural Economics Commons Recommended Citation Darby, Paul Michael, "The ce onomics of processing ethanol at Louisiana sugar mills: a three part economic analysis of feedstocks, risk, business strategies, and uncertainty" (2011). LSU Doctoral Dissertations. 2290. https://digitalcommons.lsu.edu/gradschool_dissertations/2290 This Dissertation is brought to you for free and open access by the Graduate School at LSU Digital Commons. It has been accepted for inclusion in LSU Doctoral Dissertations by an authorized graduate school editor of LSU Digital Commons. For more information, please [email protected]. THE ECONOMICS OF PROCESSING ETHANOL AT LOUISIANA SUGAR MILLS: A THREE PART ECONOMIC ANALYSIS OF FEEDSTOCKS, RISK, BUSINESS STRATEGIES, AND UNCERTAINTY A Dissertation Submitted to the Graduate Faculty of the Louisiana State University and Agricultural and Mechanical College in partial fulfillment of the requirements for the degree of Doctor of Philosophy in The Department of Agricultural Economics & Agribusiness by Paul M. Darby B.S., University of Louisiana at Lafayette, 2005 December 2011 ACKNOWLEDGEMENTS I would like to thank everyone who has stood beside me in my pursuit of a Ph.D. I would especially like to thank my fiancée, my daughter, my parents, and the rest of my immediate family for all their love and support. I would also like to thank my committee of Michael Salassi, John Westra, Walter Keithly, Margaret Reams, and David Constant. Finally, I would like to thank the following people for their help, humor, and support, without whom this would not have been possible: Tyler Mark – Office mate Jeremy D‟Antoni – Office mate Cristian Nedelea – Office mate Drew Varnado – Office mate Ashok Mishra – Mentor Joshua Detre – Mentor ii TABLE OF CONTENTS ACKNOWLEDGEMENTS ....................................................................ii LIST OF TABLES ................................................................................... v LIST OF FIGURES ............................................................................. viii ABSTRACT ............................................................................................ ix CHAPTER 1: INTRODUCTION .......................................................... 1 Ethanol ........................................................................................................................................ 1 Current Ethanol Policy ................................................................................................................ 5 Sugarcane .................................................................................................................................... 7 Why Louisiana?........................................................................................................................... 9 Purpose ...................................................................................................................................... 11 Objectives .................................................................................................................................. 11 Objective 1 – Stand Alone Cellulosic Ethanol Plant ............................................................ 12 Objective 2 – Cellulosic Ethanol Plant Collocated With Sugar Mill .................................... 14 Objective 3 – Expanding The Collocated Plant Under Uncertainty ..................................... 15 Interested Parties ................................................................................................................... 20 Study Area ................................................................................................................................. 21 CHAPTER 2: LITERATURE REVIEW ............................................ 23 Cellulosic Ethanol Production ................................................................................................... 23 Collocation of Ethanol Processing ............................................................................................ 24 Uncertainty ................................................................................................................................ 25 CHAPTER 3: DATA AND METHODS ............................................. 29 Net Present Value ...................................................................................................................... 29 Simulation ................................................................................................................................. 31 Uncertainty ................................................................................................................................ 32 Real Options Analysis ............................................................................................................... 33 Sensitivity Analysis ................................................................................................................... 34 Objective 1 Methods – The Stand Alone Plant ......................................................................... 35 Determination of Plant Size .................................................................................................. 36 Data ....................................................................................................................................... 37 Stand Alone Cellulosic Ethanol Plant Model ....................................................................... 39 Objective 2 Methods – The Collocated Plant............................................................................ 41 Collocated Ethanol and Sugar Mill Model ........................................................................... 42 Objective 3 Methods – Expanding the Plant Under Uncertainty .............................................. 51 Economic Shocks to the Collocated Ethanol Plant ................................................................... 56 CHAPTER 4: RESULTS AND DISCUSSION .................................. 59 iii Objective 1 – Standalone Ethanol Plant .................................................................................... 59 Sensitivity Analysis .............................................................................................................. 61 Objective 2 – Collocated Ethanol and Sugar Mill..................................................................... 65 Objective 3 – Expanded Ethanol and Sugar Mill Under Uncertainty ....................................... 71 CHAPTER 5: SUMMARY AND CONCLUSIONS .......................... 77 REFERENCES ...................................................................................... 82 APPENDIX A: FORECAST MEANS ................................................. 89 APPENDIX B: EXAMPLE SCENARIO BREAKDOWNS ............. 94 VITA ..................................................................................................... 102 iv LIST OF TABLES Table 1- Diagram of Scenarios and Quarters For Ethanol Plant Feedstocks ................................ 37 Table 2 - Expected Crop and Ethanol Yields............................................................................... 39 Table 3 - Simulation Factors ......................................................................................................... 47 Table 4 - Data Sources and Stats .................................................................................................. 48 Table 5 - OLS Regression Results for Ethanol Price .................................................................... 49 Table 6 - OLS Regression Results for Sugar Cane Yields ........................................................... 49 Table 7 - OLS Regression Results for Energy Cane Yields ......................................................... 49 Table 8 - OLS Regression Results for Sweet Sorghum Yields .................................................... 50 Table 9 – Standalone Ethanol Plant Feedstock Scenario Net Present Values (NPV) .................. 60 Table 10 –Effect of Ethanol Price Changes on the Bagasse Scenario NPV ................................. 62 Table 11 - Effect of Ethanol Price Changes on the Bag. + SSorg. Scenario NPV ....................... 62 Table 12 - Effect of Ethanol Price Changes on the Bag. + SSorg. + ECane Scenario NPV ........ 62 Table 13 – Effect of Transportation Costs on Bagasse Scenario NPV ......................................... 64 Table 14 - Effect of Transportation Costs on Bag + SSorg Scenario NPV .................................. 65 Table 15 - Effect of Transportation Costs on Bag + SSorg + ECane Scenario NPV ................... 65 Table 16 – Effect of Sugar Price Changes on Standalone Sugar Mill NPV ................................. 66 Table 17 – Effect of Molasses Price Changes on Standalone Sugar Mill NPV ........................... 66 Table 18 – Effect of Transportation Cost Changes on Standalone Sugar Mill NPV .................... 67 Table 19 – Summary of Sugar Ethanol Scenario NPVs ............................................................... 67 Table 20 – Summary for Cellulosic