OAKHURST, N.J. (DTN) -- Estimated production margins at U.S. ethanol plants using corn as a feedstock averaged 22 cents per gallon in 2017. It was the fifth consecutive year that margins averaged more than 20 cents per gallon, driving consistent ethanol production growth over that period, the Energy Information Administration reported in its latest Today in Energy brief.
U.S. ethanol production averaged an estimated 1.032 million barrels per day (bpd) in 2017, marking the fifth consecutive record level of annual production.
EIA said increases in ethanol supply have outpaced increases in domestic ethanol demand in 2017. That has contributed to falling spot prices and margins that are about 20 cents per gallon lower than the previous four-year average but still largely in line with levels in the previous two years.
Ethanol producer margins are estimated by EIA for a dry-mill corn-ethanol plant of average capacity located in the Midwest, a region that is home to more than 90% of domestic fuel-ethanol production capacity. EIA estimates these margins by taking the sum of revenue generated from the sale of ethanol and co-products, such as distillers' dried grains with solubles and corn oil, and subtracting variable and fixed costs. Variable costs include expenses such as the cost of corn and natural gas, along with a fixed operating cost of 35 cents per gallon.
The price of corn is the largest variable cost associated with a dry-mill corn-ethanol plant. Profits are generally highest when corn supply is plentiful and demand for ethanol gasoline blending is high. U.S. corn production has been at record-high levels in recent years, which has kept corn prices generally stable, ranging between $3.40 and $4 per bushel since 2015. A period of drought in 2012 and 2013 led to corn prices of greater than $8 per bushel, resulting in one of the least-profitable periods for ethanol operators.
In the United States, ethanol is used primarily as a blending component in motor gasoline production and mainly blended in volumes up to 10% ethanol, known as E10. Ethanol demand is highly dependent on motor gasoline consumption.
Ethanol production has been driven higher in recent years because of the Renewable Fuel Standard. The RFS, administered by the U.S. Environmental Protection Agency, mandates the blending of biofuels into the nation's fuel supply. Although demand for higher ethanol blends such as E15 and E85 remains limited, low ethanol price and increasing RFS targets have created favorable blending conditions for these higher ethanol blends.
For most of 2017 and the first two months of 2018, ethanol production, net inputs and inventory levels have been near or above the five-year average. During December 2017, fuel-ethanol production set a four-week record production rate, averaging 1.09 million bpd, while ethanol blending into gasoline, measured by net inputs, was nearly unchanged from the previous year.
Despite record-high domestic gasoline demand and record-high ethanol exports in 2017, ethanol production exceeded consumption, which led to end-of-2017 inventories that were 4 million barrels higher than at the end of 2016.
In its latest Short-term Energy Outlook, EIA forecasts that continued growth in ethanol production and limited export growth through 2019 would lead to increases in domestic consumption of ethanol by way of limited higher-level ethanol blend growth beyond E10. U.S. ethanol consumption, which increased 1% in 2017, is expected to increase by an average of 1% through 2019, resulting in an estimated ethanol blend percentage of gasoline that increases from slightly more than 10.1% in 2017 to about 10.3% by 2019.
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