Ethanol Margins Pressured

Production Likely Slowing in Some Areas

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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Slightly higher corn prices and considerably lower crude prices are weighing on ethanol plant margins. (DTN file photo by Chris Clayton)

OMAHA (DTN) -- Though corn ethanol profit margins are reportedly tight if not negative in some areas of the country, so far there is no indication of widespread plant shutdowns.

Recent declines in crude oil prices have led to falling gasoline and ethanol prices, which makes it difficult for many ethanol producers to stay profitable. Typically, overall demand for gasoline drops in the winter and ethanol producers are looking toward the summer driving season for a boost in demand.

Todd Sneller, administrator for the Nebraska Ethanol Board, said Nebraska ethanol is feeling the pinch. A couple of Nebraska plants are down for mechanical, legal or other reasons, he said. However, tight margins are more likely leading to reductions in production rates.

"They are at about break-even, so we are detecting a bit of a slowdown but no plant closings that are directly attributable to narrow margins specifically," Sneller said.

"This reduction will take a bit of ethanol off the inventory but not much. Others are really focusing efforts on exports, but exports are slightly softer in January than in December. I would say that plants are slightly reducing capacity at this point, but I don't see imminent shutdowns primarily because, unfortunately, the growing corn surplus is bringing feedstock prices down."

Donna Funk, a certified public accountant for KCoe Isom who works with a group of ethanol plants in Kansas, said producers are facing pressure.

"I have not heard of plants closing," she said. "Yes margins are very tight right now, and there is fear distillers (dried distillers grains) margins will shrink with the China threats/lawsuits."

Last Friday, Informa Economics reported ethanol margins in central Illinois were slightly in the negative as of Jan. 13. In addition, the group said ethanol blending margins in the region stood at minus 26 cents per gallon compared to gasoline.

HYPOTHETICAL PLANT

Ethanol margins can vary widely depending on an individual plant's feedstock costs, price received for ethanol and other factors.

DTN Analyst Rick Kment said DTN/Progressive Farmer's hypothetical corn ethanol plant, Neeley Biofuels, has seen eroding margins throughout the month of January.

Neeley Biofuels posted a net loss of 25.8 cents per gallon of ethanol produced at its hypothetical ethanol plant as of the end of last week.

Although ethanol prices have bounced back from contract lows of $1.30 per gallon -- the lowest price ethanol futures have traded since 2005 when futures trades launched -- Kment said recent firmness in corn prices through the second half of January contributed to lower plant margins by adding to production costs. Corn prices had moved from near $3.50 per bushel to around $3.68 per bushel in front-month March futures as of the end of last week.

"This adds significant costs to plant structure as well as concerns about growing long-term costs through the spring and summer," he said. "Wintertime traditionally is always difficult for gasoline and ethanol demand, and this is the case in 2016 also."

RBOB gasoline prices at their lowest levels since 2008 recession lows and "teetering on the edge" of falling below $1 per gallon, Kment said, hurt the overall cost-advantage appeal of alternative fuels compared to gasoline.

"This continues to remain a major concern for the overall ethanol industry, although there will continue to be additional focus on long-term demand for gasoline and ethanol blending with current environmental standards in place," Kment said.

PRODUCTION INCREASES

DTN/Progressive Farmer Analyst Todd Hultman said the pace of ethanol production began picking up in early November and has posted three weeks of record production in excess of one million barrels since.

"This appears to be a push by the industry to take advantage of corn's low, post-harvest prices and push more ethanol out the door as profit margins were dwindling," he said.

However, the market's appetite for ethanol has not kept up and inventories have climbed higher, Hultman said, from 18.3 million barrels in late October to 21.9 million bushels as of Jan. 15, the most since March 2012.

"Even though the ethanol market is somewhat protected by mandated volumes, spot crude oil prices at their lowest level since 2003 are pressuring all energy prices lower -- ethanol included," he said.

Officially, USDA's weekly tally of ethanol product values showed the combined prices for ethanol and dried distillers grains, or DDGS, from processing one bushel of corn at $4.79, just $1.13 above the cost of No. 2 Yellow Corn in Illinois. That is down from $1.57 premium a year ago and shows profit margins are shrinking, Hultman said.

"Unofficially, there has been talk that some ethanol facilities are not currently profitable and some plants may soon be idled," he said. "Slower corn demand for ethanol production is not good news for corn prices at a time when the market is already feeling bearish pressure from exports that are down 23% from a year ago."

Seasonally, corn prices typically rise early in the year until March. However, Hultman said "that may be difficult in 2016 with the expensive U.S. dollar taxing exports and ethanol margins feeling the pinch of crude oil's decline."

Tim Cheung, vice president and research analyst at ClearView Energy Partners based in Washington, D.C., said there are silver linings in the current margin environment.

"Producers might be encouraged by the fact that ethanol prices haven't fallen as much as RBOB or crude prices," he said. "Higher final blending targets under the RFS (Renewable Fuel Standard) relative to the proposal and elevated RIN (renewable identification numbers) prices might also help."

Cheung said it is important to remember the U.S. Energy Information Administration increased ethanol production estimates for 2016 since the release of the final RFS in November 2015.

"Still, based on our assessment of the 'typical' ethanol plant, current prices are challenging margins right now," he said.

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @ToddNeeleyDTN

(CZ/BAS)

Todd Neeley