Risk Analysis Essential for Ethanol and Biodiesel Plants

Risk Analysis Essential for Ethanol and Biodiesel Plants

 Tool Provides Confidence in Financial Projections


DES MOINES, IA (June 14, 2007) – The Midwest leads the nation with its bumper crop of renewable fuel production plants, both ethanol and biodiesel.  Investors including local farmers and companies are devoting billions of dollars in this rapidly growing industry.  In the current economic climate, the opportunity for profit is great.  Risk of loss may also be great.  Now plants can assess the probability of revenues and costs more effectively.


The Iowa Agriculture Innovation Center enables ethanol and biodiesel plants throughout the Midwest to identify the risks and maximize profit potential through its powerful Stochastic Risk Analysis Tool, which was developed through the Iowa Farm Bureau.   


The stochastic risk model provides essential risk analysis for investors and producers to demonstrate various financial probabilities for proposed plants as the step between feasibility studies and business plans.  The tool is also used to help operating plants with their annual strategic planning process. 


“Ethanol and biodiesel plants, and investors will use these studies to more fully understand the dynamics of key production and market variables,” stated Pat Paustian, executive director of the Center.   


This management tool can be used by existing plants (with current financials) or proforma plants with projected data to analyze the plant’s variable costs.  It includes industry predictions on feedstocks to develop 10-year financial predictions. This 10-year planning horizon is then simulated 500 times to develop possible future outcomes for evaluation.  The results are summarized in an easy to understand graph showing the probability of profit or loss.  Scenarios can be created with variations of any input and charted on graphs.  When compared, these graphs provide decision makers information to assist in expanding profitability and mitigating risks.  


In contrast, conventional or deterministic analyses focus only on a single point in time with no consideration of historical and future volatility of the variables or their correlation to one another.


According to the Missouri Corn Growers Association, there are 4 ethanol plants in Missouri today that produce 213 million gallons of ethanol.  Five additional plants have broken ground or are in the planning phases. Annual production of these additional plants will contribute an additional 340 million gallons per year. 


The biodiesel industry in Missouri is also growing. Statistics published by the National Biodiesel Board show Missouri has 3 biodiesel plants that currently produce 47 million gallons of biodiesel. 


In addition to risk analysis, the Iowa Ag Innovation Center, a non-profit corporation, provides business services to value-added ag producers and processors in Iowa and the surrounding states.  The Center’s Board of Directors includes seven major farm organizations: Iowa Cattlemen’s Association, Iowa Corn Growers Association, Iowa Department of Agriculture, Iowa Farm Bureau, Iowa Farmers Union, Iowa Pork Producers Association and Iowa Soybean Association.


For more information on stochastic risk modeling, call the Center at 515-281-7825 or visit the website at www.ia-aic.com.













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