Ethanol Blog

DTN's Hypothetical Ethanol Plant Continues to See Major Losses

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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DTN's hypothetical ethanol plant continues to show severe margin pressure on the industry. (DTN/The Progressive Farmer file photo by Jim Patrico)

Ethanol profit margins continue to remain negative and show little sign of improving, as evidenced by DTN's hypothetical ethanol plant, which continues to suffer from low ethanol prices.

Neeley Biofuels Inc., a hypothetical 50-million-gallon plant in South Dakota, saw little movement in its margin in the past month. Including debt service and depreciation, the plant continues to show a 34.4-cent-per-gallons loss, compared to a 34.5-cent-per-gallon loss last month.

Most ethanol plants, however, are not paying debt service. Excluding debt and depreciation, Neeley Biofuels continues to show a 3-cent-per-gallon loss, which is unchanged from one month ago.

Since our last update on Oct. 16, the corn price paid by the hypothetical plant dropped by 5 cents to $3.73 per bushel. The South Dakota rack price of ethanol received by the plant, however, remained unchanged at $1.37 per gallon.

Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, who works with ethanol plants, said the industry is struggling.

"The feedback I'm getting is financial results are ugly and no change is expected anytime soon," she said. "Some plants are slowing production or shutting down, but there is still more inventory in the market than can be blended in a reasonable time to return margins unless more production goes offline, or consumption really increases."

DTN Analyst Rick Kment said the slumping ethanol price continues to weigh heavily on producers.

"Hampering the firm moves in corn prices over the last couple of months is the fact that ethanol prices remain extremely sluggish with both seasonal pressure as well as growing supply through the end of the year," he said.

Usually, the rack and futures ethanol prices are nearly identical, Kment said. But, right now, there is a gap between the two price points. Ethanol futures prices are trading at $1.30 per gallon during early November.

"Although prices have moved off of long-term support levels of $1.26 per gallon in late October, the concern is that price increases will be extremely limited over the next several months," he said.

The most recent losses in energy prices, which have pushed RBOB gasoline prices more than 45 cents lower in the past month, are adding additional pressure on the entire ethanol complex.

ETHANOL COMPANIES REPORT REAL-WORLD STRUGGLES

During a Nov. 1 earnings call, Pacific Ethanol CEO and Director Neil Koehler said his company has cut overall production in response to tight margins.

"Ethanol industry margins continue to be compressed in the third quarter with industry inventories near record highs, pointing to the need for some combination of lower production levels and new incremental demand from higher blends and exports," he said. "As a company, we have reduced our production levels and are running at around 90% of operating capacity."

Although ethanol exports to China has hit zero as a result of Chinese tariffs, Koehler said his company expects to see overall exports hit a record in 2018.

DTN established Neeley Biofuels in DTN's ProphetX Ethanol Edition as a way of tracking 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. Even though 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

(AG/BAS)

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