Ethanol Margins Remain Tight

Expert: RFS Debate Not Affecting Ethanol Plant Profitability So Far

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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A recent drop in ethanol prices has put a crimp in net margins. (DTN file photo)

OMAHA (DTN) -- While corn ethanol production costs have continued to remain low, a drop in the price of ethanol is keeping net margins tight at DTN's hypothetical Neeley Biofuels ethanol plant.

This week, the 50-million-gallon plant in southeast South Dakota is posting a net loss of 12 cents per gallon of ethanol produced. The cost of production includes all variable and fixed costs, including debt service and depreciation. One month ago, the plant was posting a 9.8-cent loss.

However, assuming most corn ethanol plants today are free and clear of debt and depreciation, the net-margins picture is much different. With that assumption, Neeley Biofuels is showing a positive 19-cent net margin per gallon produced in our latest analysis.

"Ethanol prices have followed the move lower as front-month ethanol futures have backed away from recent highs, falling as much as 7 cents per gallon in the same time period," DTN Ethanol Analyst Rick Kment said. "The loss of revenue at the plant is outpacing the lower production costs, despite growing demand for ethanol in the upcoming months."

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, etc., 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. Even 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.

SHOWING IMPROVEMENT

Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, who works with several ethanol plants, said February and March are showing better financial margins than January.

However, she said China's role in the sorghum market is pressuring some producers in the United States who use sorghum.

"China's demand for sorghum is impacting some plants, and rising rail transportation costs are causing some plants to re-evaluate rail versus truck markets, which has a trickledown effect on plants in those truck markets as they are seeing increased deliveries in their markets that didn't historically see large volumes of ethanol from other regions," she said.

Washington talk about possible changes to the Renewable Fuel Standard so far isn't affecting bottom lines, Funk said.

"Folks are watching the RFS/RINs (renewable identification numbers) heavyweight fight with lots of interest, but I'm not seeing or hearing folks talk about it impacting margins yet," she said.

FARMDOC ANALYSIS

A recent analysis by Farmdoc at the University of Illinois shows 2017 was one of the tightest-margin environments for corn ethanol producers in years.

Farmdoc looked at what it calls a "representative Iowa ethanol plant." An analysis showed an average net profit of just 3 cents per gallon of ethanol produced in 2017. That was down markedly from about 12 cents in 2016. The total net profit of its model ethanol plant was the fourth lowest between 2007 and 2017, according to Farmdoc.

"The story behind the declining fortunes of the ethanol industry is straightforward," the analysis said. "Domestic and export use for U.S. ethanol has increased nicely since 2014, but production capacity and actual production increased even faster.

"The surge in production basically overwhelmed the rise in use, which caused ethanol stocks to increase and ethanol prices and profits to fall. The fortunes of the U.S. ethanol industry are unlikely to improve until production and use are better balanced. Based on recent production and stocks data it looks like this could take some time."

Farmdoc said the trend of rising ethanol stocks has continued on into 2018.

Read the Farmdoc analysis here: http://bit.ly/…

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

Follow him on Twitter @toddneeleyDTN

(BAS/AG)

Todd Neeley