Energy Markets Erode Ethanol Margins

Industry Officials Call on Trump Administration to Bolster Ethanol

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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The ethanol industry is looking for help from the Trump administration as profit margins continue to erode. (DTN file photo)

OMAHA (DTN) -- Ethanol plants have been responding to an eroding gasoline market amid an economic slowdown from coronavirus concerns and an oil war between Saudi Arabia and Russia. Ethanol companies have slashed production and are asking the federal government for help as they fight to keep their operations viable.

"It is impacting the entire industry," Randy Doyal, CEO of Al-Corn Clean Fuel in Claremont, Minnesota, said during a news conference on Thursday.

"We haven't seen anything like this since the financial collapse. We may be faced with shutdowns because customer tanks are full. It looks almost inevitable from where I stand. I think this is going to impact the entire industry. We're doing all we can to weather this storm and it's going to be ugly."

ONGOING PRICE WAR

An ongoing oil price war has driven prices down to their lowest levels in years. The ongoing economic shutdown to stop the spread of the coronavirus across the United States is driving down ethanol prices and demand for gasoline.

The Wall Street Journal reported on Thursday the Trump administration may intervene in the oil war.

As gasoline demand is waning, ethanol blenders aren't blending as much. This creates a backlog for ethanol plants, forcing many to stop producing.

Geoff Cooper, president and CEO of the Renewable Fuels Association, said the industry's struggles with demand loss from small-refinery exemptions already made life tough on producers. In the past week, an increasing number of ethanol plants cut production and are moving toward shutdown.

DON'T APPEAL COURT DECISION

Cooper called on the administration not to appeal a recent court decision that delivered a victory for biofuels on small-refinery exemptions. Also, he called on the EPA to return 500 million gallons of ethanol production to the Renewable Fuel Standard, as ordered by a federal court in another case.

"We're calling on Congress and the president to take action immediately to avoid a collapse of the ethanol industry," Cooper said.

In a letter to President Donald Trump this week, the RFA joined other industry groups asking for action to help companies to continue to have access to credit.

Jeanne McCaherty, CEO of Guardian Energy Management, manager of three Midwest ethanol plants, said it's possible the industry as a whole could see production cut by 50% to 60% at some point.

"That would be devastating to us as an industry," she said. "We're preparing for the worst here, but we're certainly hoping for the best."

Cooper said the industry has had conversations with the administration about providing financial help for the industry.

On average, he said, ethanol plants spend about 6 to 8 cents per gallon of ethanol produced on labor -- or about $6 million to $8 million annually for a 100-million-gallon plant.

ENERGY MARKETS ERODING

Margins at DTN's hypothetical Neeley Biofuels 50-million-gallon ethanol plant have improved in the past month.

However, DTN Cash Grains Analyst Mary Kennedy said concern comes from falling gasoline demand and consequently ethanol prices -- with no end in sight.

On Thursday, the hypothetical plant reported a net loss of 25.3 cents per gallon, including debt service. That has improved from a loss of 31.8 cents on Feb. 2.

Most ethanol plants are not paying debt. If the hypothetical plant was not paying debt, it would have a 6-cent-per-gallon profit -- an improvement from breakeven in February.

The ethanol rack price received by the plant, however, dropped from $1.40 in February to $1.22 in this update in response to falling gasoline demand.

The corn price paid dropped substantially to $3.45 per bushel based on the Chicago Board of Trade futures price for May, down from $3.80 in our February update. In addition, the price received for distillers dried grains jumped from $140 to $150 per ton.

"As the coronavirus is causing energy markets to erode, the trickledown effect is hitting cash ethanol prices and in turn, cash corn prices," Kennedy said.

"Corn basis at many ethanol plants continues to weaken as plants struggle with lower margins, with some plants even pulling bids according to various farmers," Kennedy said.

"With the price of gasoline cheaper than ethanol, cash ethanol prices have been fading, and on Monday, the Argo terminal in Chicago saw its lowest trade since November 2018. All of this means corn demand will suffer, especially if the downturn causes plant slowdowns or closures beyond spring maintenance," said Kennedy.

The DTN national average basis has been above the five-year strongest basis on the DTN weekly chart since the beginning of the current crop year, she said.

That changed on March 17 as the DTN average corn basis weakened and started to move below the five-year strongest basis.

"This is only the beginning of what will likely be a downward slide," Kennedy said.

DOES NOT BODE WELL

"With ethanol blended at 10% into one gallon of gasoline, the current price structure does not bode well for plant margins. As of the March 17 closing futures prices, ethanol was a 31-cent premium to gasoline when normally it is the other way around," said Kennedy. "With the U.S. pretty much shutting down everything except essential businesses and with everyone asked to stay home and not go out in public unless absolutely necessary, the demand for gasoline and in turn ethanol will shrink. Bottom line is that ethanol plants will suffer those consequences."

Some ethanol companies have stopped buying corn, while others have at scaled back or shutdown production.

Union City, Indiana-based Cardinal Ethanol announced in a report to the U.S. Securities Exchange Commission it was cutting production from 140 million gallons to 120 million gallons.

"The company believes that this reduction is warranted due to current unfavorable operating conditions in the ethanol industry and a slowdown in global and regional economic activity resulting from the COVID-19 pandemic that have contributed to negative operating margins," the company said.

PLANTS TRY TO NAVIGATE

Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, who works with ethanol plants, said companies are continuing to explore their options to react to market conditions.

"I think plants are trying to figure out how much to slow down versus not, and some of that is dependent on what market they ship to," she 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. 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

(ES/AG)

Todd Neeley