Ethanol Overproduction Hurting Margins

Ethanol Production Continues to Rise as Domestic Demand Falls

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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Ethanol margins are eroding as a result of production in the United States, which is continuing to increase amid rising supplies. (DTN file photo by Tom Dodge)

OMAHA (DTN) -- An ongoing ethanol industry recovery is fueling a decline in plant margins, as domestic ethanol supplies continue to expand and demand erodes.

As a result, DTN's hypothetical 50-million-gallon ethanol plant is reporting deeper losses as the price of corn continues to rise and ethanol prices fall.

Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, who works with ethanol plants, said the amount of travel during the holidays will be a key factor in whether more companies decide to cut production.

"I think it is a mixed bag right now as to how they are approaching it," she said.

"Location and corn basis is impacting plants differently as well, but yes, overproduction is a real issue, and if travel over the Christmas holiday isn't any better than it was for Thanksgiving, the excess is just going to build."

Funk said if overproduction continues at the current rate, plants will be forced to slow production some or "the margins will get to March/April ranges or worse again."

Total domestic ethanol inventories climbed to a 27-week high in early December as implied demand eroded further, according to Dec. 9 data from the U.S. Energy Information Administration. Ethanol blending tumbled 37,000 barrels per day to 755,000 (bpd) in the week ended Dec. 4, the lowest level since the last week of May.

Last spring, during the beginning of the COVID-19 economic shutdown, ethanol margins were at some of their lowest levels in history.

The hypothetical DTN Neeley Biofuels plant in South Dakota paid $4.22 per bushel for corn in this update -- a 43-cent spike since our Oct. 6 update. The price is based on the December futures price on the Chicago Board of Trade on Wednesday.

As a result, the plant's net-profit margin fell from a 22.2-cent-per-gallon loss to 35 cents in the current update.

Most ethanol plants are not paying debt. If the hypothetical plant was not paying debt, it would see a 4-cent-per-gallon loss. That's a drop of 13 cents since October and a decrease of 45 cents since the August update.

For this update, Neeley Biofuels received $1.37 per gallon for its ethanol based on the rack price, or an 11-cent drop since our last update.

The price received for distillers dried grains came in at $190 per ton, which was a big increase from $147 in October.

DTN Cash Grains Analyst Mary Kennedy said the rising DDG prices aren't enough to overcome a rise in corn prices and a fall in ethanol prices.

"Cash ethanol prices have been sliding lower and while DDG prices have been surging, that isn't enough to keep margins from sliding, given DDG sales account for about 25% of the margin," she said.

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