Ethanol Margin Improves on USDA Report

OMAHA (DTN) -- USDA's bump in estimated 2018 corn yields and production on Friday provided a shot in the profitability arm for DTN's hypothetical 50-million-gallon ethanol plant in South Dakota.

Ethanol futures have moved to the lowest point since early January as concerns of growing supplies and seasonal demand weakness may keep markets under pressure.

For this update, Neeley Biofuels posted a net loss of 11.7 cents per gallon, including debt service and depreciation. Profitability without debt service and depreciation came in at positive 20 cents per gallon. Most ethanol plants are not paying debt service.

On Friday, USDA released its World Agricultural Supply and Demand Estimates and Crop Production reports. USDA estimated the national average corn yield at 178.4 bushels per acre, higher than last month's 174 bpa estimate and the average pre-report estimate. That bumped up estimated production to 14.59 billion bushels, 356 million bushels higher than last month's 14.23 bb estimate.

As a result, the price of corn paid by the hypothetical plant dropped from $3.69 per bushel on Aug. 9 to $3.57 on Friday. Even with a market-moving WASDE report, the price of corn paid by the plant increased by 6 cents on July 6 when it was $3.51 per bushel in the spot-month futures contracts.

On Aug. 9, the plant reported a net loss of 17 cents per gallon, including debt service and depreciation, and a net profit of 14 cents per gallon without debt service and depreciation.

For our last update on 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, the net profitability stood at a 22-cent-per-gallon gain.

The price of ethanol has remained steady since the July 6 update, at $1.53 per gallon.

"Ethanol profitability has eroded following moderate buyer support in the corn market through the last month," said DTN Ethanol Analyst Rick Kment. "This has increased overall cost of production for the ethanol plant as traders continue to focus on the potential of firm buying support in the near future. Ethanol futures prices have turned sharply lower with prices breaking below long-term support levels in front-month September contracts."

As of the latest update, Neeley Biofuels was receiving $130 per ton for its dried distillers grains, which is unchanged since July. 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's hypothetical ethanol plant turned in a solid performance in June with some of its highest margins of 2018, with losses in the corn market.

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

(AG/SK)

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