Ethanol Industry Continues Recovery

Rising Ethanol, DDGs Prices Fuel Industry's Recovery from COVID Shutdown

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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Ethanol margins continue to improve following the COVID-19 economic shutdown. (DTN file photo by Elaine Shein)

OMAHA (DTN) -- Falling demand for gasoline earlier this year from the COVID-19 economic shutdown sent ethanol producers into a tailspin. Plants closed down and cut production, as margins dipped to their lowest levels ever.

Now the craziness has subsided, and the industry continues to bounce back.

Ethanol margins have improved since last month, when the hypothetical Neeley Biofuels 50-million-gallon ethanol plant recorded a net per-gallon loss of 22.2 cents in October. That improved to a net loss of 11.9 cents.

Not counting debt service, however, the plant's profit margin improved from 9 cents per gallon in profits to 19 cents for this update.

DTN Cash Grains Analyst Mary Kennedy said although the cash-corn price continues to strengthen, higher ethanol cash prices and stronger dried distillers grains prices have boosted profit margins.

The corn price paid by Neeley Biofuels for the Nov. 9 update came in at $4.07 based on the November futures price on the Chicago Board of Trade. That is a 21-cent increase from our Oct. 6 update. The corn price paid by the plant has increased by 82 cents since the middle of August.

A boost in the ethanol price received by the hypothetical plant from $1.48 per gallon to $1.59 based on the rack price, has helped the plant improve margins. The most recent rack price is nearly back to mid-August levels when Neeley Biofuels received $1.63 per gallon.

In addition, the plant continues to benefit from rising DDGs prices. Since the middle of August, the DDGs price jumped from $112 per ton to $170 for this update.

Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, who works with ethanol plants, said the industry is beginning to get a break from what has been a difficult year.

"Most of the plants we work with are at 80%-plus production capacity. Those that aren't at 100% are slowed a bit for a whole host of reasons," she said.

"Margins have been getting a little better and folks are starting to feel better, not great about financial results, but the deep bleeding seems to have stopped for now. Keeping production in line with demand is going to be key to keeping results going in the right direction."

At the moment, Funk said ethanol companies are focused on finding ways to diversify revenue streams, including carbon capture or other products.

"They all know they have to look different to continue to produce returns for the shareholders," she said.

In addition, the ethanol industry continues to wait for EPA to release proposed renewable volume obligations in the Renewable Fuel Standard. The agency has until Nov. 30 to finalize a rule but has yet to release a proposal.

"I'm sure they would like to know the RVO number, but it isn't something that I've been discussing with them," Funk said.

"The industry doesn't really do a good job, in my opinion, of matching production with the RVO -- hence the oversupply and imports/exports influence the match between production and RVOs. So maybe the RVO really doesn't matter but I'm sure no one would publicly say that."

DTN established Neeley Biofuels in DTN's ProphetX Ethanol Edition 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

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Todd Neeley