Hypothetical Ethanol Plant Loss Deepens

Renewed Price Support in Corn Increasing Overall Ethanol Production Costs

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
Connect with Todd:
Ethanol plants continue to look for ways to maintain business during a current downslide in margins. (DTN file photo)

OMAHA (DTN) -- As net losses continue to deepen at Neeley Biofuels' hypothetical 50-million-gallon ethanol plant in South Dakota, one industry expert said real-world plants across the country continue to face challenges to survive the downfall.

DTN's hypothetical ethanol plant recorded a net loss of 37.9 cents per gallon in the latest update, down from 34.4 cents net loss in November. This number includes continued debt service.

Most ethanol plants are not paying debt, however. If the hypothetical plant was not paying debt, its operating loss in this update is just 7 cents per gallon, down from a 3 cent loss in November.

Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, who works with ethanol plants, said companies aren't optimistic that margins will improve.

"The plants I've talked to don't see a turnaround in margins coming within the next quarter," she said.

"The degree of profit decline is somewhat location/region specific as grain basis has varied a bit more in some areas this year than in year's past. Production is slowing down, but maybe not as much as needed or for as long as really needed to bring margins back to sustainable margins for the foreseeable future."

Funk said some ethanol production is down or out of the market for an anticipated longer period of time, because either plants shuttered operations or idled production because of a lack of local feedstock supply.

"However, there is real fear that the rest of the slowed production will come right back once margins show signs of improvement," she said.

"It is always the other guy that should slow/shut down and not me. This is definitely a supply-and-demand market and getting the supply is not the issue. In fact, with new plants coming online and production efficiencies/increases being brought on line, oversupply is as big an issue as is lack of demand. I've not looked at the numbers real recently, but would speculate the continuing increased production is more of the issue than decreasing or lack of demand."

Funk said each company takes a different approach in weathering the economic storm.

"Cash management is certainly a key, continuing to explore how to differentiate themselves and/or identify opportunities for efficiency, etc.," she said.

"The analysis of run at normal rates, slow down and to what degree or shut down looks a bit different for each plant -- how much is the incremental loss per gallon at each rate, feedstock supply, etc."

ETHANOL PRICE DOWN

In our latest update, the hypothetical plant saw a slight decrease in the ethanol rack price received and paid a slightly higher price for corn. The ethanol price fell from $1.37 per gallon last month to $1.36 in December, while the plant paid a penny more for corn at $3.74 per bushel in this update.

DTN Analyst Rick Kment said ethanol futures prices have bounced higher in the past week.

That has moved prices off the long-term lows that had not been seen since ethanol contracts were established in 2005. Nearby ethanol contracts are holding near $1.23 per gallon, while recent lows have pushed prices as low as $1.20 per gallon.

"The renewed support in the corn market based on potential export activity in the coming months is not only increasing overall production costs, but has hampered ethanol profitability levels at the plant," Kment said.

DTN established Neeley Biofuels in DTN's ProphetX Ethanol Edition as a way to track 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

(ES/SK)

Todd Neeley