Ethanol Margins Improve Slightly

OMAHA (DTN) -- Falling corn prices and rising ethanol prices have given a shot in the arm to DTN's hypothetical 50-million-gallon plant based in South Dakota.

However, the plant continues to see double-digit losses.

In the past year, ethanol companies have sold plants and others have been cutting costs, including laying off employees, in an attempt to survive what has been a long downturn in the industry.

The latest look at the hypothetical plant based in South Dakota shows the negative margins have moved little since our last update in February. Losses have modified, however, since hitting some of their lowest levels of the past year in December 2018. The plant currently is showing a 28.3-cent loss, a slight improvement from February's 31.9 cents. This number includes continued debt service.

Most ethanol plants are not paying debt, however. If the hypothetical plant was not paying debt, it would have recorded a 3-cent-per-gallon gain -- up from a 1-cent-per-gallon loss in February.

In our latest update, the price for dried distillers grains fell to $130 per ton, down from $141 in February.

The ethanol rack price for this update came in at $1.41 per gallon, up from $1.385 in February. The price of corn paid by the hypothetical plant fell from $3.78 on the Chicago Board of Trade in February to $3.53 for this update.

Since July 2018, ethanol margins have taken a severe turn south. Neeley Biofuels reported a 22-cent per-gallon net profit as of July 6, 2018. By Sept. 20, net profits sank to 8 cents per gallon. By Oct. 16, 2018, the plant reported a net loss of 34.5 cents. Margins hit a low in December, as the hypothetical plant reported a net loss of 37.9 cents.

Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, who works with ethanol plants, said many companies are weighing their options for the future.

"I think folks continue to believe there is light at the end of the tunnel, the uncertainty is how long the tunnel is," she said.

"There is increased (mergers and acquisitions) activity currently with more anticipated which is a sign some folks have been through the cycle enough times to not want to do it again."

During the week of Oct. 8, 2018, Omaha-based Green Plains Inc., announced the sale of three ethanol plants to Valero Renewable Fuels, as part of a company-wide plan to control costs.

In a $328 million deal, Valero acquired about 280 million gallons of production capacity in purchasing GP plants in Lakota, Iowa; Riga, Michigan; and Bluffton, Indiana.

Funk said the industry continues to be dogged by tariffs, weakened exports and an inability to get E15 and higher blends into the market.

"Simply put -- supply and demand -- and right now we are definitely in an oversupply situation with more gallons coming online and gallons leaving the market not keeping pace," she said.

Funk said mergers and acquisitions activity ongoing is a "strong indicator that folks still believe the industry is sustainable" or there would not be buyers for the plants.

"So, long-term, the belief is still there and those that are in a good financial position will come out of this downturn OK," she said. "Those that were not as strong at the start of the downturn might come out of it with different ownership."

Ethanol industry officials have pointed to the EPA's granting of small refinery waivers to the Renewable Fuel Standard as harmful to ethanol demand.

During the past two years EPA granted a historically high number of waivers. Waivers have led to an estimated 2.6 billion gallons of biofuels not blended. For the first time in 20 years, the amount of biofuels blended in gasoline fell.

EPA granted 48 such waivers total in 2016 and 2017, totaling an estimated 2.25 billion gallons of biofuels not blended. Five additional waivers granted for 2017 raised the total to 53. The agency has 40 small refinery waivers pending for 2018.

During an earnings call held by refiner PBF Energy on Wednesday, company officials said they expect no changes in the waiver program this year, meaning there will continue to be a surplus of Renewable Identification Numbers, or RINs, on the market. That is expected to keep RINs prices low.

THE DTN MODEL

DTN established Neeley Biofuels in DTN's ProphetX Ethanol Edition as a way 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 economist David Swenson. 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 todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

(BAS/CZ)

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