Ethanol Plant Margins Improve

Ethanol, Corn Prices Lead to Higher Margins at DTN's Hypothetical Ethanol Plant

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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The month of June saw some of the highest ethanol margins of 2018. (DTN file photo)

OMAHA (DTN) -- A rise in ethanol prices and a drop in corn prices since the end of May helped boost the net margin for DTN's hypothetical 50-million-gallon ethanol plant in South Dakota.

As of July 6, Neeley Biofuels was reporting a net loss of 9.4 cents per gallon of ethanol produced. When not accounting for debt service or depreciation at the plant, the net profitability currently stands at a 22-cent-per-gallon gain. Since our May 22 update, margins improved by 8.9 cents per gallon.

A higher ethanol price and lower corn price since our last update drove margins higher. The futures price for ethanol gained 8 cents since May 22 to $1.53 per gallon. The price of corn paid by the plant was $3.51 per bushel on July 6, after paying between the $3.85 and $4.05 per bushel in the spot-month futures contracts on May 22.

Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, who works with ethanol plants, said producers are closely watching how the ongoing trade concerns with China and the recent resignation of EPA Administrator Scott Pruitt could affect profitability.

"From what I'm seeing and hearing, the profitability is somewhat dependent on location, but there aren't many plants that are excited about the profits right now," she said.

"The China tariffs will undoubtedly have an impact on the distillers market, which has always been a volatile market and will be even more so now. Generally, the information I'm seeing on Scott Pruitt's resignation is positive but maybe with guarded celebration as it is unclear how the new acting secretary or the new permanent secretary will view the RFS and biofuels market. I think Mr. Pruitt's resignation does give the ethanol producers a chance to reset and not be under constant attack by an agency that was getting to the point of being a market interference."

Pruitt came under fire from ethanol and agriculture interest groups for granting small-refinery waivers to the Renewable Fuel Standard, totaling 2.25 billion gallons for 2016 and 2017. The industries say the waivers led to "demand destruction" for ethanol.

As of the latest update, Neeley Biofuels was receiving $130 per ton for its dried distillers grains. The market for DDG exports to China remains largely closed off to producers in the United States after the Chinese slapped antidumping duties and tariffs on American ethanol producers.

DTN Ethanol Analyst Rick Kment said DTN's hypothetical ethanol plant turned in a solid performance in June with some of its highest margins of 2018.

"Plant profits peaked in late June following the most significant losses in corn markets while ethanol prices had yet to follow the cost of the corn market because of the Fourth of July holiday," Kment said.

"Now that holiday travel has wrapped up, there is expected to be some additional pressure in both ethanol and RBOB gasoline markets over the coming weeks. This could further erode plant margins, although the expected strong corn crop and adequate weather conditions in many areas is likely to keep overall production costs lower over the next several weeks and months."

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.

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Todd Neeley