DTN's latest ethanol margins update on Tuesday showed net and operating margins both in the red for the first time this year, as rising corn prices pushed those numbers way down in our hypothetical plant model, https://www.dtnpf.com/….
University of Illinois agriculture economist Scott Irwin said a model he uses to track margins shows similar results.
"The profit situation for ethanol was essentially breakeven according to my representative plant model until the last month," he told DTN. "Sharp decline into the red in the last month."
Here is what has happened based on Irwin's records dating back to the beginning of 2007:
Ethanol prices dropped to the lowest level ever between 2007 and 2018 at $1.15 at Iowa plants at the end of September.
"Ethanol production profits have been hammered right in parallel, down to minus 17 cents per gallon after all variable and fixed costs," Irwin said. "Some strength in DDGS (dried distillers grains with solubles) prices have helped offset some of the drop in ethanol prices. Ethanol price is now perilously close to the shutdown price according to my model. Usually means that higher-cost plants will be forced to throttle back or be idled."
Keep in mind, though, ethanol margin models have their limitations and no two plants are the same. Depending on the individual operation, some producers may in fact be seeing positive margins.
Although the ethanol industry is concerned small refinery waivers and issues with the Renewable Fuel Standard have led to woes, Irwin said he sees a number of market challenges hurting margins.
"Domestic use of gasoline has at best plateaued during 2018," Irwin said. "This means E10 use is flat. Ethanol exports are off the scorching-hot pace of last fall and early 2018. Brazil is not needing as much ethanol and hoped for gains with China have obviously not materialized."
Irwin said he believes the ethanol industry "simply over-expanded since 2015," something he wrote about in March 2018: https://farmdocdaily.illinois.edu/….
"Production capacity, which was nearly all from expansion at existing plants, quietly accumulated to over 1 billion gallons," he said.
"Last, many in the ethanol industry want to blame SREs and low RIN prices for driving down ethanol prices. I just don't see it in the data. Classic case of over-capacity and over-production for an industry that got too far out over its skis. Look at the huge production runs lately."
Todd Neeley can be reached at firstname.lastname@example.org
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