OMAHA (DTN) -- Ethanol profit margins continue to improve at DTN's hypothetical 50-million-gallon Neeley Biofuels plant in South Dakota, as producers in the United States continue to dig out from a COVID-19 economic shutdown hole.
Since our last update on July 13, Neeley Biofuels saw its net-profit margin improve from 4 cents per gallon to 9.4 cents for this update. This is a dramatic improvement from a 16.1-cent loss on May 22.
Most ethanol plants are not paying debt. If the hypothetical plant was not paying debt, it would be seeing a 41-cent per-gallon profit. That's an improvement from 35 cents in our July 13 update.
The improved margins come as a result of a drop in corn prices paid by Neeley Biofuels. The plant paid $3.25 a bushel based on the Chicago Board of Trade September futures price for Aug. 13. That price has fallen from $3.80 since May.
For this update, the hypothetical ethanol plant received $1.63 per gallon for its ethanol, based on the rack price -- the same price received in our July 13 update.
The price received for dried distillers grains came in at $112 per ton, down from $113.
DTN Cash Grain Analyst Mary Kennedy said the industry has benefitted from falling ethanol inventories.
"Given the ethanol market has been blossoming on its own lately, the rise in futures and cash prices can likely be attributed to the lower inventories we have seen recently as demand remains solid," she said.
Recent U.S. Energy Information Administration data show ethanol inventories have fallen in the past week, to their lowest level in more than three years as demand rose to a 4-month high.
"Plant margins have been better lately and DDG prices are contributing in that prices have slightly improved in some locations from last month," Kennedy said, "as supplies are becoming tight, according to some sellers DTN contacted, a result of plant production still slowing."
Ethanol industry leaders suggested earlier this year the economic shutdown would lead to billions of dollars in losses.
An analysis by University of Illinois Agriculture Economist Scott Irwin on Thursday, however, shows the industry is bouncing back.
"We investigated this issue and show that the ethanol industry experienced a relatively large total loss of nearly $400 million in the early months of 2020 before the COVID lockdowns hit," Irwin wrote.
"Surprisingly, plants that remained in operation after the COVID lockdowns generated a total profit that exceeded $200 million through July. This was due to favorable movements in ethanol, DDGS, and corn oil prices compared to corn prices. The profits of operating plants post-COVID were combined with the costs of shuttered ethanol plants in order to estimate the overall impact of the COVID pandemic on the industry."
Irwin said estimated losses ranged from $37 million to $116 million.
"The estimates indicate that the COVID pandemic has imposed real losses on the U.S. ethanol industry, but these losses are at most in the hundreds of millions of dollars not billions of dollars," he said.
PACIFIC ETHANOL CHANGES
Pacific Ethanol announced during an earnings call this week it will leave idled ethanol plants idled. Back in March the company announced it was idling 60% of its 435-million-gallon capacity. Pacific Ethanol said it is expanding production of ethanol for the hand-sanitizer market.
Mike Kandris, co-chief executive officer at Pacific Ethanol said during an earnings call this week, the company is expanding hand-sanitizer production by 25 million gallons per year at its Pekin, Illinois, plant.
The company expects to have a 140-million-gallon total capacity to produce hand sanitizer in Pekin by the start of 2021.
"Further, high-quality alcohol is traditionally sold at fixed prices and volumes with longer commitments than ethanol," Kandris said during the call.
"This allows us to lock in our input costs over the contract term and better secure margins and favorable spreads."
DTN established Neeley Biofuels in DTN's ProphetX Ethanol Edition to track ethanol industry profitability. Using the real-time commodity price data that flows into the "corn crush" in ProphetX, and some industry-average figures for interest costs, labor and overhead, DTN is able to track current profits. It also tracks how much Neeley Biofuels would make or lose under an infinite number of "what-if" scenarios.
DTN uses industry-average figures from Iowa State University. Included in the figures are annual labor and management costs, transportation costs, debt-servicing costs, depreciation and maintenance costs. Although Neeley Biofuels is paying debt-service and depreciation costs on its plant, many real plants are not in debt.
Also, it should be noted the calculations include all other costs, such as chemicals and yeasts, electricity, denaturant and water. While DTN uses natural gas spot prices for these updates, many ethanol plants lock in prices on the futures market, so they are not as vulnerable to natural gas market volatility.
Todd Neeley can be reached at firstname.lastname@example.org
Follow him on Twitter @toddneeleyDTN
(c) Copyright 2020 DTN, LLC. All rights reserved.