Studying Farmers and the Ethanol Business

Missouri corn farmers saw the lure of big returns when they joined together in 2005 to form Mid-Missouri Energy (MME) and invest in corn-based ethanol. And big returns they got -- $23 million in fiscal year 2007.

But it didn't last long. Rising corn prices and declining ethanol prices soon were casting doubt on the farmers' strategy, and leaving them with hard decisions to make. Should the ethanol plant be sold? Another alternative: expand the plant and double capacity.

Do they think oil prices will continue to rise, making ethanol a more attractive energy alternative? (We know today how quickly the oil markets can change.) Will corn-price volatility continue, making a bet in ethanol a hedge against uncertainty? Will government ethanol subsidies for corn growers and blenders continue?

The economic decisions behind the formation of MME and its next steps are at the heart of a Harvard Business School case discussed by students and explored in this HBS Working Knowledge article. It's an interesting look into the economics behind alternative fuels and the opportunities they present entrepreneurs.

Professor Forest Reinhardt, quoted in the article, notes:

"For the first time in history, the food and energy markets are converging. It's hard to imagine two areas of greater importance, or with greater government intervention."

It's also hard to imagine the pressure on MME members as they struggle to make the right decision. What would you do?