Ethanol Margins Show Major Improvement

Ethanol Profits Improving as Harvest Approaches

Margins at DTN's hypothetical ethanol plant have improved dramatically since Aug. 1. (DTN file photo)
By Todd Neeley
DTN Staff Reporter

OMAHA (DTN) -- Ethanol margins have seen significant improvement since Aug. 1, as plants have been cutting production costs, and ethanol prices have been on the rise.

A number of ethanol plants have scaled back production during the past year in response to tough market conditions.

DTN's hypothetical Neeley Biofuels 50-million-gallon plant in South Dakota continues to reflect an easing of market pressures that have been hammering producers in 2019. Margins for plants still paying debt, however, continue to be in the red.

The plant this week reported a 19-cent loss per gallon of ethanol produced, with debt service included. It is a major improvement from our update in September when the plant recorded a 34-cent loss. The plant was even deeper in the red as of Aug. 1, 2019, recording a loss of 43.9 cents per gallon.

Most ethanol plants are not paying debt, however. Without debt, Neeley Biofuels would be making a 13-cent per-gallon profit, compared to a 3-cent loss in our previous update.

The margin improvement was fueled by a spike in the ethanol rack price received by the plant from $1.53 in September to $1.65 for this update. The plant paid a higher price for corn in this update at $3.87 per bushel based on the Chicago Board of Trade futures price, the plant paid $3.74 in September.

In addition, the price received for dried distillers grains fell from $130 a ton to $125 for this update.

DTN Analyst Rick Kment said efforts by ethanol companies to cut production costs have helped to improve the ethanol market.

"Ethanol margins have improved moderately through the month of October following lower overall production costs as corn prices have eroded nearly 10 cents from October highs seen near the last couple of months," he said.

"Ethanol futures prices continue to shift higher and lower based on changing weekly inventory levels, but the pullback in production over the last couple of months has started to cause some underlying support through the market, limiting the tight connection of cash ethanol trade with futures trade at this point. It is expected that corn and ethanol prices will continue to move in a moderate pattern as harvest continues with increased focus on not only the quantity of corn in the 2019 harvest, but the quality of corn in many areas where weather concerns have been a major factor all year long."

It has been a long year for the ethanol industry.

Since July 2018, ethanol margins have been deeply in the red. 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.

In 2006, 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/ SK)