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Abstract
This study evaluates the economic viability of using corn to supplement sugarcane for ethanol production in Brazil. Volatility of input and output prices and their correlation due to the transmission of shocks across markets is considered in calculations of Net Present Value. Investment in a flexible mill (i.e. a mill that can process corn during the sugarcane off-season) is dominated by investment in a standard mill based on a second order stochastic dominance criterion. The latter suggests that risk-neutral and risk-averse investors may refrain from investing in a flexible plant. Downside risk associated with a flexible plant may be worsen by the US ethanol blend wall as this weakens the correlation between the price of corn and the price of inputs and outputs of the sugar complex. Reductions in capital import tariffs can offset this effect.
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