Ethanol Blog

Ethanol Margins Show Signs of Life

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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Ethanol margins at DTN's hypothetical ethanol plant experienced an improvement in January. (DTN file photo by Chris Clayton)

While the ethanol margins picture remains bleak, net losses at DTN's hypothetical ethanol plant in southeast South Dakota have moderated since our December update.

In recent months, ethanol companies across the country have either idled plants or cut production in response to low ethanol prices and low seasonal driving demand for gasoline.

The net loss at the hypothetical 50-million-gallon plant was 29.7 cents per gallon for this update, an improvement from the December loss of 37.9 cents. This number includes continued debt service.

Most ethanol plants are not paying debt, however. If the hypothetical plant was not paying debt, it would have recorded a 2-cent-per-gallon profit for this update. This is the first profit reported by the hypothetical plant since Sept. 20 when our update showed an 8-cent-per-gallon profit.

Ethanol margins have been given a reprieve by an increase in the price received for dried distillers grains at the hypothetical plant. In September, the plant received $125 a ton for DDG. The price increased to $160 for this latest update.

The ethanol rack price for this update came in at $1.36 per gallon, while the price of corn paid by the hypothetical plant increased by 4 cents to $3.78 -- the Chicago Board of Trade price.

"Ethanol market profitability has improved over the last two weeks, following ethanol prices posting limited support and moving off of long-term lows as buyers are starting to focus on underlying demand support that will continue to be built through the upcoming weeks and months," said DTN Ethanol Analyst Rick Kment.

"The focus on spring and summer driving demand is giving limited support to ethanol prices, as well as recent production reductions due to weak profit margins. Corn prices continue to hold within a 10-cent-per-bushel trading range, which is helping to slightly improve margins at ethanol production facilities through early January."

PLANT RESPONSES VARY

Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, who works with ethanol plants, said the way ethanol companies are responding to the current market varies widely.

"What I'm seeing and hearing is plants are individually deciding what production level generates the least amount of cash burn for them and the production level impact on working capital and how deep they want to go into their lines of credit," she said.

"Each situation is really different; you hear one plant announce they are idling or slowing production and the next one is producing at full capacity. I believe everyone has faith the margins will return, but no real consensus on when that will happen. Q1 is traditionally a poor-margin period, so (I'm) not hearing much from folks that they think it will turn around in the next 30 to 60 days."

According to a recent news account, during recent trade negotiations, United States trade officials have been pressing China to buy U.S. ethanol. In addition, concern continues to build that the EPA may not complete a rulemaking for year-round E15 sales in time for the beginning of the summer driving season on June 1 because of the ongoing partial government shutdown.

Funk said even if both situations end favorably for U.S. producers, the market effects won't be felt overnight.

"Even if China starts taking gallons again, it will take a little time to really see the impact on margins, and depending on the size of the impact, those that are slowed down or idled will come right back online and the overproduction will resume," she said.

"The status of E15 year round is another challenge that seems to be moving slower than promised or hoped for. I don't think we can look to just one trigger as the solution; it is going to take a combination of events to really restore margins for an extended period of time. We need China to resume imports, year-round E15 and rational production levels."

CHINA MARKET LOSS

Pavel Molchanov, senior vice president and equity research analyst at Raymond James and Associates, said losing the China ethanol market has been harmful.

"Chinese purchases of U.S. ethanol fell to zero as of April 2018 when China implemented an increased tariff, following the original tariff from 2017," he said.

"Although some other countries, e.g., Brazil and India, have been importing higher volumes, the loss of the Chinese business was undeniably damaging to the U.S. ethanol industry. So yes, any durable trade agreement between Washington and Beijing would naturally help alleviate the current ethanol glut. Of course, we will need to see the actual details of any such deal."

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. 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 me on Twitter @toddneeleyDTN

(AG/BAS)

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