Ethanol Profit Margins Continue Upswing

Hypothetical Ethanol Plant Margins Improve Despite Higher Corn, Lower Fuel Price

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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Margins continued to improve at DTN's hypothetical ethanol plant. (DTN file photo)

OMAHA (DTN) -- Heading into the new year ethanol margins continue to improve at DTN's hypothetical ethanol plant, as a higher price received for dried distillers grains helped the 50-million-gallon plant in South Dakota improve its bottom line since September.

At the end of last week, the plant reported a 30.6-cent per-gallon loss that included debt service. That was an improvement of 3.4 cents from our last update in September. The situation has continued to improve since August when the plant reported a loss of 43.9 cents per gallon.

Most ethanol plants are not paying debt, however. If the hypothetical plant was not paying debt, it would be making a profit of 1 cent per gallon. That too was an improvement from our September update when the plant reported a 3-cent loss without paying debt.

Neeley Biofuels' margins improved despite paying a higher corn price and receiving a lower price for ethanol for this update.

The plant paid $3.87 per bushel based on the Chicago Board of Trade futures price in March, an increase from $3.74 during our September update.

In addition, the ethanol rack price received by the plant dropped from $1.53 per gallon in September to $1.46 in our latest update.

The improved margins could be explained by an increase in the price received for dried distillers grains, increasing from $130 in September to $140 in this latest update.

Although margins at the hypothetical plant have improved since September, DTN Analyst Rick Kment said margins have eroded since last month from a combination of higher production costs and lower ethanol revenues.

Kment said ethanol rack prices softened in the last two weeks of December, falling nearly 6 cents per gallon and by more than 10 cents per gallon since the end of November. Corn prices meanwhile rallied 20 cents per bushel through the last half of December as traders are focused on uncertainty of current production estimates from the previous year. This sent plant margins tumbling once again, as seasonal demand pressure is likely to continue over the next few weeks, Kment said.

The year 2019 will go down as a long one for ethanol plants.

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.

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Todd Neeley