Studying Farmers and the Ethanol Business

Last Updated Nov 5, 2008 9:21 AM EST

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?
  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.