Economic appraisal of production flexibility in different regions of the Brazilian sugar and ethanol industry
Vol. 18 No. 60 (2016), Articles
Vol. 18 No. 60 (2016)

Economic appraisal of production flexibility in different regions of the Brazilian sugar and ethanol industry

Articles
https://doi.org/10.7819/rbgn.v18i60.2867
Published 2016-07-12
David Eduardo Lopez Pantoja
Pontifical Catholic University of Rio de Janeiro, Technical and Scientific Center, Industrial Engineering Department, Rio de Janeiro, Brazil.
Carlos Patricio Samanez (in memory)
Pontifical Catholic University of Rio de Janeiro, Technical and Scientific Center, Industrial Engineering Department, Rio de Janeiro, Brazil.
Javier Gutiérrez Castro
Federal University of Technology – Paraná, Campus Ponta Grossa, Production Engineering Department, Ponta Grossa, Brazil.
Fernando Lucena Aiube
State University of Rio de Janeiro, Faculty of Economics, Quantitative Analysis Department, Rio de Janeiro, Brazil.
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Keywords

Agricultural commodities
flexible production
real options
recombinant binomial tree
bivariate binomial tree.

How to Cite

Pantoja, D. E. L., Samanez (in memory), C. P., Castro, J. G., & Aiube, F. L. (2016). Economic appraisal of production flexibility in different regions of the Brazilian sugar and ethanol industry. Review of Business Management, 18(60), 226–244. https://doi.org/10.7819/rbgn.v18i60.2867
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Abstract

Purpose – The main goal of this study is to demonstrate the value of flexibility within sugar and ethanol production. We use real data for the Southeast and Northeast regions of Brazil, which are subject to different taxes rates.

Design/methodology/approach – The framework of this study is based on Real Options valuation. We valued the option to switch between sugar and ethanol production. The dynamics of prices was based on the recombinant trees of Nelson and Ramaswamy (1990) and on the bivariate trees of Hahn e Dyer (2011). Empirical data is from the Center of Advanced and Applied Economic Studies (CEPEA), ESALQ-USP, from May/2003 through July/2014. Prices were deflated using the Brazilian Price Index (IGP-DI), available at the Ipeadata site based on July/2014.

Findings – The results show that, in both regions, flexible systems have greater value than those that produce only one product. Southeast plants exhibit greater value added if compared with Northeast plants, not only because of lower taxes, but also due to higher productivity.

Originality/value – This paper quantifies value added by the flexible system in the production of sugar and ethanol in two Brazilian regions subject to different taxes. Moreover, it demonstrates that regulators can use policies and incentives to establish flexible plants. In this way, both producers and fiscal authorities will achieve greater gains.

https://doi.org/10.7819/rbgn.v18i60.2867
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PDF (Português (Brasil))

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