More facts woger will deny AGMRC is an Ag business promotion
agency sponsored by a consortium of universities. 'course being
goobermnt agencies, they have to at least act like they believe in
the "global warming" scam; so that accounts for the last part of
this newsletter name.
Greetings
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Agricultural Marketing Resource Center
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Brazil Ethanol Developments & Implications for the U.S. Ethanol Industry
AgMRC Renewable Energy & Climate Change Newsletter
October 2012
Dr. Robert Wisner
University Professor Emeritus
Iowa State University and
Biofuels Economist
<mailto:rwwis...@iastate.edu>rwwis...@iastate.edu
For many years, Brazil was the world's largest producer of fuel
ethanol. The U.S. is now the No.1 ethanol producer but Brazil's
ethanol policies, production, and exports are an important influence
on the U.S. biofuels industry. Through government incentives,
Brazil's ethanol industry became a major source of bio-based motor
fuel in the 1990s and in recent years has been a major ethanol
exporter. Brazilian ethanol is produced from sugar cane, a
low-cost feedstock that also allows processors to use the cane
stalks as fuel for processing plants after the juice has been
removed for ethanol or cane sugar production. Sugar cane is a
perennial crop that needs to be replanted only every 6 to 8 years.
The sugar marketing year in Brazil's major center-south sugar
producing region runs from May through April, although crushing of
sugar cane has sometimes started as early as late March. In the
northeastern Brazil sugar area, the marketing year runs from
September through August. Brazil sources indicate 90% of the crop
is produced in the center-south region.
With large ethanol production, Brazil's government has been able to
mandate ethanol-gasoline average blends of 18% to 25%. The
percentage blend can vary from time to time, depending on the
available supply of ethanol. In October 2011, it was lowered from
25% to 20%, due to tight sugar and ethanol supplies. In August 2012,
it was expected to remain at that level until at least the start of
the 2013-14 sugar marketing year. (1) In recent years before June
2012, Brazil had a federal tax on gasoline but not on ethanol, thus
helping to provide an economic advantage for ethanol. In June 2012,
the gasoline tax was removed, thus tending to reduce the advantage
of ethanol relative to gasoline. Individual states continue to tax
gasoline at varying levels. (2)
The number of flex-fuel vehicles in Brazil's automobile fleet has
increased rapidly in the last few years and now accounts for most
new car sales. As a result, Brazil has a large fleet of vehicles
that can be powered by hydrous ethanol, a mixture that includes a
small amount of water in ethanol and no gasoline. Alternatively,
anhydrous ethanol can be blended with gasoline to create the 20 or
25 percent ethanol-gasoline blends. Motorists in Brazil have
indicated to us that E-100 needs about a 30% price discount per
liter to offset its lower fuel mileage than gasoline.
This year, the U.S. faces a drought-reduced corn crop and tight U.S.
domestic ethanol feedstock supplies. U.S. ethanol production is
projected to decline from last season. The impact of reduced
domestic production on supplies and cost of ethanol for U.S.
motorists, profitability of domestic ethanol processors, corn use
for ethanol, and corn and distillers grain and solubles (DGS) prices
will be influenced partly by potential imports from Brazil and the
amount of competition U.S. ethanol exports face from Brazilian
ethanol.
Factors Affecting the Economics of Brazilian Ethanol Production
The economics of ethanol production, exports, and use for motor fuel
in Brazil depend on a number of factors including (1) the world
sugar price, (2) the exchange rate of the Brazilian currency (the
real) vs. the dollar and other major currencies, (3) the size of
Brazil's sugar crop, (4) its government-controlled domestic gasoline
price, and (5) tax policies. Brazil is the world's largest sugar
producer. The size of its crop and that of India (the No. 2 sugar
producer) have a major impact on world refined sugar cane prices.
Those prices influence Brazil's sugar processors in determining how
much of its production should be refined as sugar vs. processed into
ethanol. In the last two years, sugar cane crops in Brazil and
India have been disappointing because of less than ideal weather.
World sugar prices have been high, signaling to Brazilian processors
to increase the percentage of the crop devoted to sugar production
rather than ethanol. This tendency has been reinforced by at least
two other developments. Brazil's governmental petroleum company,
Petrobras, has kept gasoline prices artificially low during the last
few years to help restrain inflation. Low domestic prices for
gasoline have kept domestic ethanol prices low, thus discouraging
increased use of sugar cane for ethanol. That tendency has been
reinforced by removal of the federal gasoline tax. Also, attractive
returns for corn and soybeans have encouraged farmers to place
greater emphasis on those crops. As a result, part of Brazil's
sugar cane crop is becoming aged and in need of replanting. After
reaching peak production, productivity of sugar cane plants tends to
decline in the last few years before replanting. Early indications
are that Brazil's early 2012 sugar crop was near or slightly below
last season. However, availability of sugar for ethanol production
in the 2012-13 U.S. corn marketing year is still uncertain and will
depend strongly on the size of Brazil's spring 2013 sugar crop.
Trends in Brazil Biofuels Use
Figure 1 shows the trend in Brazil's use of gasoline and ethanol
since 2006 and August 2012 projections for 2013 use. (3) Its
gasoline use has trended sharply upward while ethanol use declined
moderately starting in 2010 but increased slightly in the last two
years. Brazil's consumption of ethanol as a motor fuel reached
almost 90% of the volume of gasoline in 2009 but since has declined
to about 55% because of strong international demand for sugar and
limited domestic production. Brazil's limited sugar cane production
was partly due to adverse weather and also as a result of an aging
sugar cane crop.
Brazil Adjustments to Tightening Ethanol Supplies: U.S. Implications
This combination of developments has led to a decline in Brazilian
ethanol exports (Figure 1) in the last few years. In adjusting to
declining export availability and tightening domestic ethanol
supplies, Brazil's government took two actions to deal with the
situation. As we noted above, it reduced the mandated level of
ethanol blending with gasoline from 25% to 20%. Secondly, it
eliminated its tariff on ethanol imports. In December 2011, Brazil
extended its zero tariff on imports of ethanol with less than one
percent water to December 31, 2015. (4)
With these policy changes, the U.S. ethanol industry last year and
earlier this year faced not only reduced export competition from
Brazil, but also was able to export a modest quantity of ethanol to
Brazil. Figure 2 shows Brazilian ethanol exports and imports for the
last few years and August projections for 2013. The chart shows a
downward trend in Brazil's ethanol exports and an upward trend in
its imports. Early and very tentative projections for 2013 show a
marginal increase in Brazil's ethanol exports and a significant
increase in its imports. We caution that these projections should be
viewed as very tentative since Brazil's major sugar cane harvest
season is still at least six months away.
Key Questions for the U.S. Ethanol, Feed, and Livestock Industries
One key question for the U.S. ethanol, grain, feed, and livestock
industries is "What will Brazil's ethanol supply-demand balance be
in the year ahead?" The answer to this question will influence (1)
the amount of sugar cane ethanol imported into the U.S., and (2) the
size of U.S. ethanol exports. Consequently, it will have a bearing
on the amount of U.S. corn processed for ethanol and the amount
remaining for other uses.
U.S. Monthly Ethanol Imports and Exports
In the 2010-11 corn marketing year, the U.S. imported approximately
171 million gallons (646.6 mil. liters) of ethanol and exported
approximately 838 million gallons (3.173 billion liters) of ethanol
as shown in Figure 3 below. (5) Its exports went to a wide range of
destinations, as shown in Figure 4. (6) The leading destinations in
2010-11 were Canada, EU, Brazil, United Arab Emirates, and Mexico in
that order. Before Brazil removed its ethanol import tax in the
2010-11 marketing year, U.S. ethanol exports to Brazil were almost
insignificant.
Figure 5 shows monthly U.S. ethanol exports through June 2012.
There is a considerable lag time in EPA's release of monthly U.S.
ethanol export and import data. Reports from January through June
2012 indicate U.S. ethanol exports were running at an annual rate of
approximately 960 million gallons while imports were running at a
182 million gallon annual rate. The six-month annual average ethanol
exports rate in corn equivalent would be about 345 million bushels.
Monthly exports have fluctuated in a relatively narrow range since
January. Trade sources indicate a large part of the decline in
ethanol exports after the first of the year reflected EU's new
restrictive policy on imports of U.S. ethanol.
First-half 2012 monthly ethanol imports (Figure 6), at an annual
rate, in corn equivalent would be approximately 65 million bushels.
However, June ethanol imports increased sharply. June imports
converted to an annual rate would be about 402 million gallons, or
the equivalent of ethanol from about 145 million bushels of corn.
June exports were at an annual equivalent rate of approximately 910
million gallons, with a corn-equivalent of about 325 million bushels.
Recent trade reports suggest U.S. ethanol exports may decline
modestly in coming months because of the increase in ethanol prices.
There also is an expectation that imports may increase.
With the time lag in releasing EPA's monthly trade data, another
month or two and perhaps longer will be needed before impacts of
higher ethanol prices than a year ago will begin to show up in
monthly import and export reports.
California Air Quality Regulations
California's Air Quality Board (CARB) has established very strict
Greenhouse Gas (GHG) emissions standards and these may be an
influence on U.S. ethanol imports. The standards restrict imports of
Midwest corn-starch ethanol into the state and favor imports of
Brazilian sugar cane ethanol. (7) A lower court has affirmed the
acceptability of these regulations. However, they may be tested
again in a higher court. The regulations encourage imports of
Brazilian and Caribbean-Basin sugar cane ethanol into California to
reduce GHGs. Sugar cane ethanol imports are considered an advanced
biofuel and help to meet the U.S. advanced biofuels mandate.
Biodiesel is the only U.S.-produced advanced biofuels available in
significant commercial quantities. Imports of Brazilian and
Caribbean-Basin ethanol thus do not do not compete with corn-starch
ethanol in meeting the conventional ethanol mandates. However, they
do reduce the amount of the blend-wall restricted ethanol market
that is available for corn starch ethanol.
Brazil's exports of ethanol to California may tighten Brazilian
ethanol supplies and may create an opportunity to export U.S. corn
starch ethanol to Brazil. Thus, California's policies have the
potential to create uneconomical trade patterns and may not reduce
global GHG emissions as much planned.
Summary
Net U.S. ethanol trade in 2010-11 and the first half of 2011-12 have
been strongly positive. A late August USDA report on Brazil's
ethanol industry indicates production is likely to be restrained at
least until March or early April 2013, when the next sugar cane crop
becomes available to processors. (8) Recent Brazilian ethanol
production has been below a year earlier, along with its exports.
Because of limited ethanol production, Brazil indicates it will keep
mandated ethanol-gasoline blends at 20%, rather than the previous
25% for at least the next several months. This information appears
to signal that Brazil will have limited ethanol exports, at least
until better estimates of its next sugar cane crop become available.
This information reinforces a view that Brazil will not offer a
strong increase in export competition for U.S ethanol in the next 5
or 6 months, but its competition may increase from March or April
onward if weather in its south central sugar belt is favorable.
For the current U.S. corn marketing year, higher ethanol prices and
possible increased Brazilian ethanol competition in the last half of
the season may modestly reduce net U.S. ethanol exports and increase
its imports.
Brazil's availability of sugar for ethanol production will also be
affected by the size of the sugar crop in other important sugar
producing or exporting countries. Especially important areas are
India (the world's second-largest sugar producer), Australia and
Thailand (important exporters), and EU. USDA's Foreign Agriculture
Service will have an updated world sugar markets and trade report in
November that will have new estimates of current production and
exports in these and other countries.
References
1 Sergio Barros, Brazil Biofuels Annual Report, , Foreign
Agriculture Service, Global Agricultural Information Network
(GAIN),U.S. Department of Agriculture, Brazil Biofuels Annual
Report, 2012-13, August 21, 2012, GAIN Report Number 2012013
2 Ibid. This report provides additional detail on Brazil's tax
policies and other subsidies for ethanol.
3 Source of data for Figure 1 is Ibid.
4 Ibid.
5 ERS, USDA,
<http://www.agmrc.org/email/click.cfm?LinkUUID=237EC8EF-D566-F48B-5F89ADF61476B109&RecipientUUID=2383D3F8-D566-F48B-5371EF0ED5518296>Feed
Yearbook Data Base, Tables 32 and 33.
6 Ibid.
7 R. Wisner,
"<http://www.agmrc.org/email/click.cfm?LinkUUID=237EC8FE-D566-F48B-563D6549C9767787&RecipientUUID=2383D3F8-D566-F48B-5371EF0ED5518296>Biofuels
and Greenhouse Gasses on a Collision Course", Renewable Energy and
Climate Change Newsletter, Ag Marketing Resource Center, June 2009.
8 Foreign Agriculture Service, op.cit.
Constructing a Capital Budget
AgMRC Renewable Energy & Climate Change Newsletter
October 2012
Don Hofstrand
retired Iowa State University
extension agricultural economist
<mailto:d...@iastate.edu>d...@iastate.edu
A capital budget can be used to analyze the economic viability of a
business project lasting multiple years and involving capital
assets. It is divided into three parts. The first part is the
initial phase where capital assets such as machinery and equipment
are purchased and a production facility is constructed. The second
phase involves estimating a series of operating cash flows that
generate annual returns from the project. These operating cash
flows extend over the life of the business project. The third phase
occurs at the end of the project and involves liquidating the
remaining assets and closing the business project.
Estimating Operating Cash Flows
The process for computing operating cash flows is shown below.
Operating cash flows are usually estimated for monthly, quarterly or
annual time periods. First, cash revenues are estimated. This
usually involves estimating the number of units sold during each
time period and multiplying the number by the selling price of the
units.
The next step is to estimate the cash expenses associated with
making the product. Cash expenses are categorized as variable and
fixed cash expenses. Variable cash expenses are tied directly to
the amount of output produced. For example, if it takes ten pounds
of raw materials to make one unit of output, then the cost of raw
materials varies in direct proportion to the amount of output
produced. Fixed cash expenses are those that don't vary according
to the amount of output produced. For example, administrative
expense is often a fixed expense because it is constant regardless
of the amount of output produced.
Computing Cash Flow After Taxes Relevant Cash Flows Cash Revenue +
$10,000 Cash Revenue + $10,000 Cash Expenses - $5,000 Cash
Expenses - $5,000 Depreciation - $2,000 Net Cash Flow Before Taxes
= $5,000 Net Income After Taxes = $3,000 Taxes - $1,000 Taxes -
$1,000 Net Cash Flow After Taxes = $4,000 Net Income After Taxes =
$2,000 Depreciation + $2,000 Cash Flow After Taxes =
$4,000
Depreciation of the capital assets is computed next. Depreciation
and cash expenses are then subtracted from cash revenues to compute
net income before taxes. The income tax rates are applied against
the net income before taxes to compute the amount of taxes. The
taxes are subtracted from net income before taxes to compute net
income after taxes. Because depreciation is a non-cash expense, it
is added back to net income after tax to compute cash flow after tax.
The relevant cash flows generated from this process for use in
capital budgeting are cash revenues, cash expenses, taxes and net
cash flow after tax.
Capital Budgeting Example
A simplified example of capital budgeting for a business project is
shown in Table 1. The initial investment includes outlays for
buildings, equipment and working capital. $110,000 of cash revenue
is projected for each of the ten years of the project. After
variable and fixed cash expenses are subtracted, $50,000 of net cash
flow (before taxes) is generated.
Depreciation on the buildings and equipment used in the project is
computed and used to compute the tax liability. For the first seven
years taxes are $7,500 resulting in net cash flow after taxes of
$42,500 per year. The equipment is completely depreciated after
seven years resulting in higher taxes and net cash flow after taxes
of $40,000 for years eight and nine.
At the end of ten years the project ends. The market value of the
buildings and equipment is $110,000. Adding the return of the
$30,000 of working capital, the cash inflow is $140,000. Because
the equipment has a market value of $10,000 but is completely
depreciated, $10,000 of depreciation is required to be repaid
(recaptured). The recaptured depreciation increases the taxable
income which increases the amount of tax and reduces the net cash
flow after tax to $37,500. When the net cash flow for all three
phases are totaled and discounted, the net present value of the
project is $64,315. So, the business project is expected to provide
a net cash return of $64,315.
Instead of ending the business, the equipment can be replaced at the
end of the ten years and the business continued. But for capital
budgeting planning purposes at the beginning of the project, the ten
year period provides a good assessment of economic viability.
Cash Flow, Not Profitability
Capitol budgeting is based on the projected cash flows of a project,
not its projected profitability. Although closely related, cash
flow and profitability are different. Cash flow represents the cash
inflows and outflows from the business. Profitability represents
the income and expenses of the business.
You may think of cash flow as transactions that affect your business
"checkbook" and profitability as items that impact your "income tax
return". For example, the purchase of capital assets results in
different transactions. Cash flows include the initial outlay for
capital assets and their sale at the end of the project whereas
profitability expresses the cost of capital assets in a series of
annual depreciation expenses over the life of the assets.
Discount Rate
The discount rate used in the analysis should reflect the cost of
capital. If the project is financed entirely with debt capital, the
discount rate will be the interest rate charged by the lender. If
the project is financed entirely with equity capital, the discount
rate may be the opportunity cost of the funds. For example, the
opportunity cost may be the rate of return the funds would have
earned invested elsewhere. If both equity and debt are used, the
interest charged on the borrowed money and the opportunity cost rate
of return may be blended in computing the discount rate.
If the discount rate is designed to represent the cost of capital
for the business project, interest expense should not be included as
an operating cash flow. If it is, interest (the cost of capital)
will be counted twice.
Working Capital
Working capital represents the money required to fund the annual
operating cash flow. When creating a capital budget it is important
to allow for funds to provide adequate liquidity for operations. At
the beginning of the business project, working capital is a cash
outflow just like the purchase of capital assets. At the end of the
project, working capital is a cash inflow just like the sale of the
capital assets. The amount of working capital remaining at the end
of the project may not be the same as the working capital invested
at the beginning of the project.
A related issue is the capital needed to get the business project up
and running. In many situations, the time period from the initial
purchase of equipment until the facility is completed and running at
capacity can be long. Funds are needed to bridge this time period.
Another issue is working capital in the form of contingency funds
needed to cover any unexpected occurrences. These can include cost
overruns, under performance of the facility, a market downturn and
many other unexpected occurrences.
Lag Time in Converting Inputs to Outputs
In many traditional manufacturing and processing business projects
there is a relatively short time between the time when inputs and
purchased and outputs are produced. For example, corn can be
converted into ethanol rather quickly. So once production begins,
outputs are produced in the same time period as inputs are utilized.
However, for many agricultural production business projects, there
is a considerable lag time from the time the input is utilized until
output is produced. For example, it may take several months for a
feeder calf to be converted into a finished animal. So, from the
time inputs (feeder calf) are purchased, outputs (finished animal)
may not emerge until the following year. In this situation, the
first time period will generate cash outflows (feeder calf purchase)
but no cash inflows (finished animal sale). So, additional working
capital is needed to finance this lag time. Also, during the last
year of the projects, the situation is reversed because no inputs
(feeder calf) are purchased but outputs (finished animal) are
produced.
Expansion Versus Stand-alone Business Project
Business projects are primarily of two types - the expansion of an
existing business and the start-up of a new stand-alone business.
Expansion examples include an expansion of your main product line,
adding a new product line, making a component versus buying the
component, and a host of other ways of expanding a business. The
other is a stand-alone business project. This is often a new
start-up business that has no direct connection to an existing
business.
The purpose of the capital budgeting exercise for a business
expansion is to determine if the expansion will generate positive
cash returns for the existing business. When computing cash flows
for a business expansion, only those cash inflows and outflows
associated with the expansion are included. The cash flows of the
existing business need not be included. These additional cash flows
are sometimes called incremental cash flows because they often
represent an increase is an existing cash flow (e.g. more product
sales, larger purchase of raw materials, more marketing expense,
etc.). An expansion can lead to new and additional cash flows that
are difficult to detect. So, a careful assessment is required to
identify all cash flows.
The purpose of the capital budgeting exercise for a stand-alone
business is to determine if the business investments will generate a
positive net cash return over the life of the project. So, when
preparing a capital budget, all of the cash inflows and outflows
over the life of the business project need to be included. This
includes the initial cash outlays at the beginning of the project,
the operating cash flows that occur annually over the life of the
project and the remaining cash value of assets at the end of the
project.
Assessing Risk
Because capital budgeting involves projecting cash flows several
years into the future, there is considerable risk as to the accuracy
of these projections, especially for those years farthest into the
future. This variability of outcome can have a major impact on the
outcome of the analysis and the resulting feasibility of the
business project. Several methods have been developed to assess
this variability and its impact on the analysis.
Discount Rate
One method for accounting for the risk is to increase the discount
rate. This is similar to the way banks account for high risk loans
by increasing the interest rate. Essentially it means that the bank
needs to receive a higher return to offset the higher risk of
default on the loan.
Table 2 shows the impact on net present value of the example in
Table 1 from raising the discount rate to 10 percent and 13 percent.
A higher discount rate will generate a smaller net present value.
Table 2. Impact of Risk Adjusted Discount Rate on Net Present Value
7 percent (base analysis) $64,315 10 percent $10,966 13 percent ($31,388)
Sensitivity Analysis
Sensitivity analysis is another method of assessing business risk.
It shows how a change in one of the major operations variables
impacts returns. Expressed differently, it shows how sensitive the
level of returns is to a change in each of the major variables.
Table 3 shows the impact of a positive and negative twenty percent
change in major variables on the net present value of the project
described in Table 1.
Table 3. Impact of Sensitivity Analysis on Net Present Value
Volume of Sales Variable Cash Expenses Fixed Cash Expenses
Discount Rate 20% Higher $180,204 $27,441 $37,976 $37,845 Base
Analysis $64,315 $64,315 $64,315 $64,315 20% Lower ($51,575)
$101,188 $90,653 $93,958
Scenario Analysis
Scenario analysis is similar to sensitivity analysis except that one
or more threats to and opportunities for the business project are
identified and how these threats and opportunities might impact
returns. Examples of outside threats include the entry of a
competitor into the market, a sudden rise in energy or raw materials
prices, a new technology breakthrough by a competitor, an economic
recession, etc. Examples of inside threats include cost overruns
during start-up, poor market development, poor quality control, etc.
Scenario analysis is often created in "best case" and "worst case"
scenarios based on opportunities for and threats to the business.
Table 4 shows the net present value of the example in Table 1 using
scenario analysis.
Table 4. Impact of Scenario Analysis on Net Present Value
Best Case $132,643 Base Analysis $64,315 Worst Case ($10,427)
Cash Flow and Profitability are Not the Same
AgMRC Renewable Energy & Climate Change Newsletter
October 2012
Don Hofstrand
retired Iowa State University
extension agricultural economist
<mailto:d...@iastate.edu>d...@iastate.edu
People often mistakenly believe that a cash flow statement will show
the profitability of a business or project. Although closely
related, cash flow and profitability are different. Cash flow
represents the cash inflows and outflows from the business. When
cash outflows are subtracted from cash inflows the result is net
cash flow. Profitability represents the income and expenses of the
business. When expenses are subtracted from income the result is
profit (loss). You may think of cash flow as transactions that
affect your business "checkbook" and profitability as items that
impact your "income tax return".
Cash inflows and outflows show liquidity while income and expenses
show profitability. Liquidity is a short-term phenomenon of "can I
pay my bills". Profitability is a medium-term phenomenon of "am I
making money". Cash flow (liquidity) is represented in a cash flow
statement while income and expenses (profitability) are represented
in an income statement.
Many income items are also cash inflows. The sales of products by
the business are usually both income and cash inflows (cash method
of accounting). The timing is also often the same as long as a check
is received and deposited in your account at the time of the sale.
Many expenses are also cash outflow items. The purchase of
ingredients and raw materials (cash method of accounting) are both
an expense and a cash outflow item. The timing is also the same if a
check is written at the time of purchase.
However, there are many cash items that are not income and expense
items, and vice versa. For example, the purchase of a capital asset
such as a machine is a cash outflow if you pay cash at the time of
purchase as shown in the example in Table 1. Because the machine is
a capital asset and has a life of more than one year, it is included
as an expense item in an income statement by the amount it declines
in value each year due to wear and obsolescence. This is called
"depreciation". In the tables below a $70,000 machine is depreciated
over seven years at the rate of $10,000 per year. Because the
machine is completely depreciated over the seven year period (is
shown to have no remaining value) but sold for $15,000 at the end of
the tenth year, $15,000 of depreciation needs to be repaid
(depreciation recapture). This is additional income in the tenth
year.
Depreciation calculated for income tax purposes can be used.
However, to more accurately calculate profitability, a more
realistic depreciation amount can be used to approximate the actual
decline in the value of the machine during the year.
In the example in Table 1, a $70,000 machine is purchased and used
for ten years, at which time it is sold for $15,000. The net cash
outflow and depreciation expense are both $55,000, although the cash
flow transactions are just at the beginning and ending of the period
while the depreciation expense is spread over most of the ten year
period. So the impact on annual operations from the purchase of the
machine is considerably different depending on whether you are
focusing on liquidity or profitability.
Table 1. Machine Purchase -- No Borrowing
Purchase Price $70,000 Depreciation 7 years Sale Price
$15,000 Year Cash Outflow Depreciation Expense 0 $70,000
$0 1 $0 $10,000 2 $0 $10,000 3 $0 $10,000 4 $0 $10,000
5 $0 $10,000 6 $0 $10,000 7 $0 $10,000 8 $0 $0 9 $0
$0 10 -$15,000 -$15,000 Total $55,000 $55,000
If money is borrowed for the purchase of the machine, the cash
outflows and expenses are different from those in Table 1. In this
situation, the down payment is a cash outflow at the time of
purchase and the annual debt payments (principal and interest) are
cash outflows over the term of the loan as shown in Table 2. The
total cash outflow is $65,500 in this example versus $55,000 in
Table 1 where no funds are borrowed. The additional $10,500 of cash
outflow is the interest payments.
Table 2. Machine Purchase -- Borrowing
Purchase Price $70,000 Down Payment $20,000 Borrowed $50,000
Interest Rate 7% Term 5 Years Depreciation 7 Years Sale Price
$15,000 Cash Outflows Debt Payments Year
Purchase & Sale Price Interest Principal Total Total Outflow 0
$20,000 $0 $0 $0 $20,000 1 $0 $3,500 $10,000 $13,500 $13,500 2 $0
$2,800 $10,000 $12,800 $12,800 3 $0 $2,100 $10,000 $12,100 $12,100 4
$0 $1,400 $10,000 $11,400 $11,400 5 $0 $700 $10,000 $10,700 $10,700
6 $0 $0 $0 $0 $0 7 $0 $0 $0 $0 $0 8 $0 $0 $0 $0 $0 9 $0 $0 $0 $0 $0
10 -$15,000 $0 $0 $0 -$15,000 Total $5,000 $10,500 $50,000 $60,500
$65,500 Expense Year Depreciation Interest Total
0 $0 $0 $0 1 $10,000 $3,500 $13,500 2 $10,000
$2,800 $12,800 3 $10,000 $2,100 $12,100 4 $10,000
$1,400 $11,400 5 $10,000 $700 $10,700 6 $10,000 $0
$10,000 7 $10,000 $0 $10,000 8 $0 $0 $0 9 $0
$0 $0 10 -$15,000 $0 -$15,000 Total $55,000 $10,500
$65,500
When money is borrowed to finance the purchase of the machine, the
amount of interest paid on the loan is included as an expense along
with depreciation. Interest payments are an expense because they
represent the cost of borrowing money. Conversely, principal
payments are not an expense because they are merely a cash transfer
between lender and borrower. The total cash outflow is $65,500 in
this example versus $55,000 in Table 1 where no funds are borrowed.
The additional $10,500 of cash flow is interest payments.
Once again the net cash outflow and expense of the machine in the
example in Table 2 are the same ($65,000). However, the timing of
the cash outflows and expenses are different over the ten year
period. So the impact on annual operations from the purchase of the
machine is considerably different depending on whether you are
focusing on liquidity or profitability.
Prices, Profitability & Supply/Demand
AgMRC Renewable Energy & Climate Change Newsletter
October 2012
Don Hofstrand, <mailto:d...@iastate.edu>d...@iastate.edu
Ann Johanns, <mailto:ahol...@iastate.edu>ahol...@iastate.edu
The spreadsheets listed below provide data and trend lines for
various components of the renewable energy industry. These files are
updated with new information each month.
The U.S. public is concerned about rising food prices and escalating
fuel prices. Recent increases in both fuel and grain prices lead to
questions of how these prices have compared historically.
Comparisons are presented for crude oil, diesel fuel and gasoline
with corn and soybean prices. These monthly data series include
comparisons between energy prices (crude oil, gasoline and diesel
fuel) and crop prices (corn and soybeans).
The profitability of production for corn, ethanol, and biodiesel is
extremely variable. Due to the volatile price nature of these
products,and their feedstocks, profitability can change rapidly from
month to month. In addition, price variations of co-products
(distillers grains with solubles, DDGS) and the production
facility's energy source(natural gas) add to the variability of
profits. The models are updated with monthly input and output prices
to show the trend of production profitability.
Balance sheets for ethanol and biodiesel, as well as their
feedstocks of corn and soybean oil provide insight on available
supplies, various sources of demand, and carryover stocks that are
left at the end of the marketing year after all demands have been
met.
Prices
<http://www.agmrc.org/email/click.cfm?LinkUUID=237EC90E-D566-F48B-5A5C281C8398DD1A&RecipientUUID=2383D3F8-D566-F48B-5371EF0ED5518296>Midwest
Ethanol Prices
<http://www.agmrc.org/email/click.cfm?LinkUUID=237EC91D-D566-F48B-55A3C6C2429A43FD&RecipientUUID=2383D3F8-D566-F48B-5371EF0ED5518296>Ethanol
Basis
<http://www.agmrc.org/email/click.cfm?LinkUUID=237EC92D-D566-F48B-5D8848F7234DA1EA&RecipientUUID=2383D3F8-D566-F48B-5371EF0ED5518296>Fuel
vs. Grain (annual - xls)
<http://www.agmrc.org/email/click.cfm?LinkUUID=237EC93D-D566-F48B-5F062165A127503D&RecipientUUID=2383D3F8-D566-F48B-5371EF0ED5518296>Fuel
vs. Grain (monthly - xls)
Profitability
<http://www.agmrc.org/email/click.cfm?LinkUUID=237EC94C-D566-F48B-5F51C92455DC87CC&RecipientUUID=2383D3F8-D566-F48B-5371EF0ED5518296>Ethanol
Profitability
<http://www.agmrc.org/email/click.cfm?LinkUUID=237EC95C-D566-F48B-50FBF4E142E07C8D&RecipientUUID=2383D3F8-D566-F48B-5371EF0ED5518296>Corn
Profitability
<http://www.agmrc.org/email/click.cfm?LinkUUID=237EC96B-D566-F48B-539BEAE30C0A6E34&RecipientUUID=2383D3F8-D566-F48B-5371EF0ED5518296>Biodiesel
Profitability
Supply/Demand
<http://www.agmrc.org/email/click.cfm?LinkUUID=237EC97B-D566-F48B-53DA1D02560D4D8F&RecipientUUID=2383D3F8-D566-F48B-5371EF0ED5518296>Corn/Ethanol
Balance Sheet
<http://www.agmrc.org/email/click.cfm?LinkUUID=237EC98B-D566-F48B-5536FD09786ED660&RecipientUUID=2383D3F8-D566-F48B-5371EF0ED5518296>SoyOil
Biodiesel Balance Sheet
<http://www.agmrc.org/email/click.cfm?LinkUUID=237EC99A-D566-F48B-540D3A3D02875F0E&RecipientUUID=2383D3F8-D566-F48B-5371EF0ED5518296>Soybean
Balance Sheet
<http://www.agmrc.org/email/click.cfm?LinkUUID=237EC9AA-D566-F48B-5AE519C3CA29F33E&RecipientUUID=2383D3F8-D566-F48B-5371EF0ED5518296>Distillers
Grains Supply/Demand Balance Sheet
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