Price risk management challenges of United States ethanol firms

This quantitative study involved a path model approach to study why some of the key ethanol producers filed for bankruptcy after the commodities market price volatility of 2008. The path included analysis of the magnitude of cointegration of the futures prices of the key input and output of ethanol producers. The second path included comparison of how the futures corn crush compared with soybean crush in the years leading to the bankruptcies of some key ethanol producers. The third path involved an analysis of the hedging strategies of the ethanol producers. The last path analyzed the financial structures of these firms to understand to assess if their financial structures predisposed them to bankruptcy risks. The dissertation yielded evidence that ethanol producers faced significant price risk in the 2007 through 2009 periods resulting from poor cointegration between the input and output prices. The study found evidence that the ethanol producers that filed for bankruptcy hedged their feedstock without proportionately hedging the corresponding output, resulting in significant losses after the price trends reversed. Another contribution of this study is evidence that a link exists between price risk management and the financial structure of a firm. Firms need to consider their financial structure and cash flow in designing their price risk management strategies. Some of the firms that filed for bankruptcy were forced to liquidate their hedges because they were running out of cash and their financial structures predisposed them to bankruptcy risks. In the literature a debate persists about whether financially constrained firms should practice risk management. The contribution of this study is that poorly designed and implemented price risk management strategies can increase the financial risks of a firm. In that case a financially constrained firm significantly increases its financial risks through improper price risk management strategies.