Changes in biofuel policies potentially portray the industry in a negative view. Some observers perceive the EPA’s proposed renewable volume obligations (RVOs) for 2014 will cripple biofuel production profits. However, ethanol producers have enjoyed one of their best periods of profitability for the last year. A drop in corn prices substantially exceeded the declines in ethanol and DDGS prices has significantly increased profits. As a result, the ethanol production industry stands on a much sounder financial footing after severe drought-related losses in 2012.
Scott Irwin, Chair of Agricultural Marketing at the University of Illinois, analyzes recent trends in ethanol profits. He applies several years of data from an Iowa ethanol plant to track the profitability of ethanol production. The plant chosen represents an “average” ethanol plant constructed since 2006. Some of the model assumptions include:
- 100 million gallon annual ethanol production capacity
- Plant construction costs of $2.11 per gallon of ethanol production capacity
- 40% debt and 60% equity financing
- 8.25% interest on 10-year loan for debt financing
- A total of $0.60 fixed costs per bushel of corn processed.
- Non-corn and non-natural gas variable costs of $0.61 per bushel of corn processed in 2013 (higher in some earlier years)
- 2.80 gallons of ethanol (including denaturant) produced per bushel of corn processed
- 16 pounds of dried distillers grain (DDGS) produced per bushel of corn processed
- 0.55 pounds of corn oil per bushel of corn processed (starting in January 2012)
- Netback (marketing) costs of $0.05 per gallon of ethanol and $4 per ton of DDGS.
Since late January 2007, weekly ethanol and DDGS prices collected at Iowa ethanol plants help track profitability over time. According to Irwin, the profits break down into four sub-periods: 1) high profits from 2007 through mid-2008, 2) breakeven from mid-2008 through the end of 2011, 3) losses for 2012 through early 2013, and 4) high profits again from spring 2013 through the present. The most recent period became the longest run of uninterrupted profits since the series began in early 2007. During this one-year run, profits averaged $0.93 per bushel of corn processed and reached a new high of $2.55 per bushel in early December 2013. From these numbers, it seems recent policy proposals have close to no effect on ethanol profits.
Irwin suspects the recent run of profits will not likely continue for an extended period of time. “First, DDGS prices have reached unprecedented levels relative to corn and soybean meal prices,” Irwin writes. “Second, there is a documented “co-integrating” relationship between ethanol and corn prices, which simply means that the relationship between ethanol and corn prices tends to revert to levels implied by an equilibrium long-run level of ethanol production profitability. If the ethanol price is too high relative to corn prices, then either the ethanol price must fall or the corn price must rise. For any particular episode, it is difficult to know which price will bear the brunt of the adjustment, but history shows that such an adjustment is the norm. If corn prices are now driving ethanol prices due to the E10 blend wall, then one would expect ethanol prices to do the bulk of the adjusting.”
For more information, see Irwin’s full report: http://farmdocdaily.illinois.edu/2014/03/recent-trends-in-the-profitability-of-ethanol-production.html
by by Ashlea Marshall