Rising Corn Prices Hurt Ethanol Margins

Heavy Midwest Rains Drive Up Corn Prices, Hit Ethanol Producers Hard

Losses are deepening at DTN's hypothetical ethanol plant, fueled by rising corn prices. (Photo courtesy of Blue Flint Ethanol)

OMAHA (DTN) -- The usual driving-season bump that helps to improve ethanol profit margins faces a new headwind this year: rising corn prices from wet weather across the Corn Belt.

The latest planting progress report tells the story for worsening ethanol margins.

An estimated 58% of U.S. corn was planted as of last Sunday, the slowest progress since at least 1980. Corn planting was up 9 percentage points from 49% the previous week, but was still well behind 90% at the same time last year and 32 percentage points behind the five-year average of 90%.

DTN's hypothetical 50-million-gallon plant in South Dakota is experiencing the negative effects.

The Neeley Biofuels plant this week reported a 53.5-cent loss, a dramatic drop from a 28.3-cent loss on May 1. This number includes debt service.

Most ethanol plants are not paying debt, however. If the hypothetical plant was not paying debt, the loss would be 22 cents per gallon, compared to a 3-cent profit on May 1.

The dip was fueled by a rise in the corn price paid by the plant, this time at $4.20 per bushel based on the Chicago Board of Trade futures price. That compares to $3.53 paid on May 1.

The ethanol rack price for this update came in at $1.44 per gallon, an increase from $1.41 in our last update. In addition, the plant experienced a drop in the price received for dried distillers grains, from $130 to $120 for this update.

In the past year, ethanol companies have sold plants and others have been cutting costs, including laying off employees in an attempt to survive what has been a long downturn in the industry.

Pavel Molchanov, senior vice president and equity research analyst at Raymond James and Associates, said the industry continues to experience the same headwinds it has for the past 12 to 18 months.

That includes an increased number of small-refinery waivers to the Renewable Fuel Standard, translating to reduced domestic demand and lost ethanol sales to China as a result of the ongoing trade battle.

"In addition to those two headwinds, in recent weeks a third one has also emerged: rising corn prices," Molchanov said. "Heavy Midwestern rainfall and flooding has resulted in delayed corn plantings, pushing corn prices to multi-year highs, which is placing added pressure on ethanol production margins."

Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, who works with ethanol plants, said she's concerned the planting difficulties will hurt ethanol producers for much of the year.

"My fear is the shortage of corn acres planted and what that is going to do to corn prices for this next year, which has the ability to keep margins low or even more negative depending on the price of fuel," she said. "The summer driving season should help, but not enough to make it a good year unless something else changes as well."

It has been a long 10 months for the ethanol industry.

Since July 2018, ethanol margins have taken a severe turn south. Neeley Biofuels reported a 22-cent per-gallon net profit as of July 6, 2018. By Sept. 20, net profits sank to 8 cents per gallon. By Oct. 16, 2018, the plant reported a net loss of 34.5 cents. Margins hit what was then a low in December, as the hypothetical plant reported a net loss of 37.9 cents.

THE DTN MODEL

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. Although 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/BE)