OMAHA (DTN) -- As debate continues about federal biofuels policy, ethanol producers across the United States continue to see tight, too-often negative, profit margins in corn ethanol.
Publicly traded ethanol companies including Archer Daniels Midland, Pacific Ethanol, The Andersons, Green Plains Renewable Energy and Valero Energy Corp., indicated in recent financial reports lower year-over-year margins, and lower incomes from 2016 to 2017.
Net margin pressure continues early in 2018, as indicated by DTN's hypothetical Neeley Biofuels 50-million-gallon ethanol plant.
DTN Ethanol Analyst Rick Kment, who tracks the plant's numbers, said Neeley Biofuels is posting a narrow loss of about 9.8 cents per gallon of ethanol produced.
At the current net margin level for Neeley Biofuels, losses are not as steep as they have been during the past several months. Seasonal pressure through the end of the year in ethanol markets and continued strong production levels, Kment said, have kept margins near a 20-cent loss in the past several months.
"This move continues to focus on the strength of ethanol prices over the last two weeks which have pushed prices near $1.50 per gallon," he said. "The move in higher ethanol prices is a combination of support from corn prices, which increase overall production costs, and seasonal buyer support moving into the RBOB gasoline market."
Front-month ethanol futures moved 12 cents per gallon higher in the past month. Kment said this allowed increased overall revenue for the hypothetical plant. Corn prices have gained nearly 20 cents per bushel in the same period.
"The growing volatility in both the grain and ethanol markets is focusing on a combination of fundamental moves in the grain and commodity markets, as well as wide-ranging shifts in financial markets and the stock market," he said.
DTN established the plant 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, overhead and the like, DTN is able to track current profits, but also 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. These included annual labor and management costs, transportation costs, debt-servicing costs, depreciation and maintenance costs. 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.
MARGINS TIGHT IN THE INDUSTRY
Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, works with several ethanol plants.
"Margins are tight in most regions but the degree varies on location and local grain basis as well as the mix between corn and sorghum, as well as the quantity of grain secured during harvest in connection with the risk management strategy," Funk said. "Not many are overly excited about their margins, but not everyone is hurting at the same level."
Producers continue to watch closely the ongoing debate in Washington about potential reform to the Renewable Fuel Standard, she said. They continue to hope the U.S. Environmental Protection Agency will allow year-round sales of E15 to expand ethanol markets.
"I think everyone is watching the conversations very closely to make sure they can react when necessary," Funk said.
"However I think most plants are making decisions they believe are the right decisions on a long-term basis. With such uncertainty it is nearly impossible to really make a decision in direct response to RFS."
Producers have a growing concern about trade-protectionist policies around the world, increasingly limiting export markets for ethanol and distillers grains, Funk said.
The industry as a whole has been hurt by a loss of the China distillers grains export market. Exports of distillers grains to China dropped by 84% in 2017 compared to 2016, according to the Renewable Fuels Association. China was the top export destination for five years running, until the nation levied duties against U.S. product.
"I think the actions of foreign countries on their tolerance of U.S. exports to their countries is a big a concern as the RFS," Funk said.
"Depending on who you listen to or what you read, the domestic use of liquid fuels is decreasing and the export market could be shrinking due to duties and tariffs, and therefore the mix of increased production and less demand do not make a good combination for wide, long-term success."
Todd Neeley can be reached at email@example.com
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