Ethanol Margins Continue to Erode

DTN's Hypothetical Ethanol Plant Hurt by Higher Corn Prices, Lower Ethanol Prices

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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A rise in corn price and a drop in the price of ethanol have eroded plant margins. (DTN file photo)

OMAHA (DTN) -- Ethanol margins continued to weaken during the past month as ethanol prices continued to fall, despite what has been overall strong seasonal demand heading into the spring and summer months. As a result, net margins at DTN's hypothetical Neeley Biofuels ethanol plant continued to drop since our last update on March 22.

Ethanol futures prices, in particular, have fallen nearly 8 cents per gallon in the past month to around $1.54 per gallon. DTN Analyst Rick Kment said global market and export concerns have "limited buyer support" during the past several weeks.

In addition, margins have taken a hit as corn prices moved about 15 cents higher per bushel at the hypothetical 50-million-gallon plant in South Dakota.

Since March, Neeley Biofuels' net profitability has fallen to a 17.3-cent loss per gallon of ethanol produced. That number is based on an assumption the plant continues to pay off debt.

However, assuming most corn ethanol plants today are free and clear of debt and depreciation, the net-margins picture is much different. Assuming the plant is completely depreciated, Neeley Biofuels posted a net profit of 14 cents per gallon in this latest update.

In our March update, Neeley Biofuels recorded a net loss of 12 cents per gallon of ethanol produced for a plant with continued debt service. Without debt, that net margin was about 19 cents.

Neeley Biofuels' net margin has continued to erode since February. In our Feb. 22 update, the plant posted a narrow loss of about 9.8 cents per gallon of ethanol produced.

Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, who works with several ethanol plants, said producers are struggling with trying to get a handle on the political environment in Washington, D.C., as it relates to the Renewable Fuel Standard.

In recent months, it has been reported the EPA granted numerous RFS waivers to small refineries. A recent estimate shows about 1 billion gallons of ethanol and other biofuels were not blended in 2017 because of the waivers. There is concern those waivers continue to deteriorate ethanol demand.

"The general message I'm hearing is margins remain fairly tight and the political environment is as confusing and leading to as much lack of market stability as we've seen in several years," Funk said. "Companies continue to look for ways to diversify their operations to create additional revenue streams and to become less dependent on the political movements."

She said ethanol producers also continue to closely monitor the price of renewable identification numbers, or RINs, ethanol export levels and whether they will continue.

As a result of the political turmoil, Funk said, ethanol plants are finding it tricky to navigate the market.

"Maybe not impossible but definitely more of a challenge to plan very far into the future," she said. "The plants have traditionally been price-takers on both the ethanol and grains but felt like they could plan for rational market reactions, and that isn't necessarily the case right now."

DTN established Neeley Biofuels 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 and overhead, 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.

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

Follow him on Twitter @toddneeleyDTN

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Todd Neeley