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Abstract
Price volatility and policy changes may compromise the ability of corn ethanol plants to
operate above average variable cost and avoid shutdown. This study derives a variable cost
function capable of accommodating two features of ethanol plants; 1) some inputs are used in
fixed proportions and some are not, and 2) supply of different types of byproducts may be
subject to unobservable market frictions. The function is estimated based on data from a survey
of ethanol plants. Increased size does not seem to lower plants’ shutdown price. Frictions in
byproduct markets seem to result in sub-optimal byproduct mix choices that increase ethanol
shutdown price by up to 10 cents per gallon. Futures and other price discovery instruments in
byproduct markets may enhance plants’ ability to prevent shutdown.