Rising Corn Prices Hurt Ethanol Profits

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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For the first time this year DTN's hypothetical ethanol plant reported losses in both net margins and operating margins. (DTN file photo)

OMAHA (DTN) -- Ethanol profit margins at DTN's hypothetical 50-million-gallon plant in South Dakota hit their lowest levels of 2018 this week after corn prices dramatically increased in the past month.

Including debt service and depreciation, Neeley Biofuels reported a net loss of 34.5 cents per gallon of ethanol produced. However, assuming most corn ethanol plants today are free and clear of debt and depreciation, the net-margins picture is much different.

Operating profits, the margins not including depreciation and debt service, reported a net loss of 3 cents per gallon.

The October update marked the first time net margins and operating margins were both reporting losses at Neeley Biofuels. Since last month, margins have fallen about 11 cents per gallon.

Since our July 6 update, however, net margins including debt service and depreciation have fallen by 25.5 cents. Operating margins on July 6 posted a 22-cent gain.

DTN Analyst Rick Kment said profits have continued to fall as corn-buying activity has been on the rise.

"Ethanol plant profitability levels continue to erode with active buyer support seen in the corn market increasing overall production costs of the plant," he said.

Since our September update, the corn price paid by Neeley Biofuels has increased by 21 cents per bushel. The corn price paid by the plant for this update came in at $3.78.

"Ethanol futures have wandered within a 4-cent trading range over the last month, leaving nearly all of traders' focus on the direction of corn prices and overall cost of production," Kment said.

The price of ethanol received by Neeley Biofuels increased from $1.25 per gallon in September to $1.37 this week. The ethanol price received by the plant still remains far below the $1.53 per gallon received in August.

Pavel Molchanov, senior vice president and equity research analyst at Raymond James and Associates, said ethanol prices have been hurt by recent trade conflicts.

In 2017, the United States exported 1.4 billion gallons, or 9% of total domestic production, with the top three destinations being Brazil, Canada and India.

"Exports to China, on the other hand, dropped by more than 90% -- the direct result of China's decision to impose a 30% tariff on U.S. ethanol," Molchanov said, "one of the first manifestations of the bilateral trade war that has been escalating ever since."

The Chinese tariff on U.S. ethanol was expanded to 45% in April 2018, essentially shutting down the ethanol trade between the two countries.

"Less impactful, but still noticeable is Brazil's 20% tariff on U.S. ethanol, also dating back to 2017," Molchanov said. "The key point here is that ethanol is not immune from the global proliferation of trade conflicts. The current ethanol pricing discount versus gasoline is at historically wide levels, the widest in more than five years. I think the main culprit here is the dislocation in exports arising from the trade wars."

DTN established Neeley Biofuels in DTN's ProphetX Ethanol Edition as a way of tracking 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 economist David Swenson. Included in the figures are annual labor and management costs, transportation costs, debt-servicing costs, depreciation and maintenance costs. Even though 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 todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

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Todd Neeley