Abstract
A real options analysis of entry–exit decisions for dry-grind corn ethanol plants is conducted to incorporate the impact of rising volatility in market prices. For a large plant, the estimated gross margins (ethanol price less corn price), in current dollars, that induce entry and exit were 0.35 US$ dm−3 and 0.03 US$ dm−3, respectively; nearly 207% (63%) above (below) their respective net present value estimates. Under baseline conditions, a large operating plant would become mothballed at 0.05 US$ dm−3 and reactivate if margins rebounded to 0.17 US$ dm−3. Growth in the variability of ethanol margins will lead to delays in new plant investments, as well as exits of currently operating facilities. To the extent that alternative renewable fuel technologies become viable, the model can be easily adapted to estimate and compare the results across alternative bioenergy investments.
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