Ethanol Producers Continue to Cut Costs

DTN's Hypothetical Ethanol Plant Margins Improve on Lower Corn Price

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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A certified public accountant who works with ethanol companies said the industry is running out of ways to cut costs in a tough margin environment. (DTN/Progressive Farmer photo by Matthew Wilde)

OMAHA (DTN) -- Many ethanol companies in the United States have done about all they can do to weather the downturn in the industry, while others have been less fortunate and have idled production.

As President Donald Trump's administration continues to consider some kind of biofuels deal, the economics of ethanol production still remain difficult.

Donna Funk, a certified public accountant with K-Coe Isom, based in Lenexa, Kansas, who works with ethanol plants, said producers continue to look for ways to survive an ongoing downturn in profit margins.

"What I'm hearing is plants are continuing to evaluate costs and make adjustments when possible, but the options are getting fewer and fewer as they don't want to sacrifice on repairs and maintenance too much because they know that is not a good solution long-term," she said. "The cost structure for the plants doesn't really allow for a lot of cost-cutting in the operations side, so they are looking at the discretionary spending and making adjustments when they can."

That includes cutting costs on attending conferences, sponsorships, travel, and other items.

Many publicly traded companies have reported losses in the past few months, and many have idled production. At last count, 18 ethanol plants are known to have idled production.

In addition to poor economics that include lower ethanol prices and higher corn prices, the biofuels industry as a whole has seen the EPA grant 85 small-refinery exemptions totaling about 4 billion ethanol-equivalent gallons not blended in petroleum since 2016. As a result, the prices of renewable identification numbers (RINs) have plummeted in the past year.

"Some plants have or are considering not giving pay raises or bonus this year if they stayed the course last year and made upward adjustments," Funk said. "Plants are continually looking at their run rate and evaluating how much below 100% they can produce before the losses per gallon are higher than if they run at higher rates. The federal policy is certainly taking a toll on the mental state of management and board members, because they are being forced to run their businesses not knowing how federal policy is going to get implemented or waiver after the fact, and they are left with no recourse."

Funk said management at ethanol plants continues to struggle to get a read on where federal biofuels policy may go. The industry has gone from having hope in recent weeks that the Trump administration had decided on a deal that would reallocate biofuels gallons lost to exemptions one week, to no deal following a White House meeting involving lawmakers from oil-producing states who oppose reallocation.

"The stings hurts a bit more, given it feels like the ethanol industry is being used as a pawn in a chess game as it relates to political agendas for some," Funk said.

"There are a lot of jobs that were created and investments made that are now being undercut. I totally get that things change and we all have to adjust and adapt our business models to stay relevant, which I think every ethanol plant would agree with, but having to change to anticipate mood swings that go in reverse is a totally different game than anticipating the future and adapting."

ETHANOL MARGINS IMPROVE

DTN's hypothetical Neeley Biofuels 50-million-gallon plant in South Dakota continues to show some easing of market pressures that have been hammering producers in 2019. Plant margins, however, continue to be deep in the red.

The plant this week reported a 34-cent loss, which is a significant improvement from our Aug. 1, 2019, update that showed Neeley Biofuels losing 43.9 cents per gallon. 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 3 cents per gallon, compared to a 13-cent loss in our previous update.

The margin improvement was fueled by a drop in the corn price paid by the plant, from $4 per bushel based on the Chicago Board of Trade futures price in August to $3.74 for this latest update.

The plant saw a drop in the ethanol rack price from $1.63 per gallon in August to $1.53 for this update. In addition, the price received for dried distillers grains fell from $131 a ton to $130 for this update.

It has been a long year 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 on 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 plant has since had losses topping 60 cents at times during the past few months.

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

(BAS/CZ)

Todd Neeley