As Corn Profits Rise, So Do Ethanol Profits, Or Do They?
The July 12th USDA Supply-Demand Report revised the 2008 estimate of corn used for ethanol production downward by 50 million bushels. And University of Illinois Marketing Specialist Darrel Good reported that the market was beginning to cast doubt on whether this year’s projection of 3.95 billion bushels of corn really would be refined into ethanol next year, since high corn prices have trimmed ethanol profit margins. Does that mean the bloom is off ethanol?
Critics of high food and fuel prices have found it convenient to blame ethanol for US economic woes despite the truth. Kansas State ag economists Daniel O’Brien and Mike Woolverton and Iowa State biofuels economist Bob Wisner acknowledge that ethanol has added substantially to the demand for corn, but it will be a number of years before ethanol consumes more corn than livestock. In their recent analysis of ethanol profitability the researchers say ethanol production capacity will consume an extra one billion bushels of corn in the next marketing year, increasing to 4 billion bushels in the 2008-2009 marketing year.
O’Brien, Woolverton, and Wisner report the changing relationship between cash corn prices and the value of ethanol and its co-products is the key to ethanol profitability. They report that in early 2007, Nebraska corn prices (in the midst of ethanol plants and cattle feedlots) ranged from $3.41 to $4.16 then declined to nearly $3 at harvest. In the same period, the value of ethanol and its wet and dry distillers grain co-products on a per bushel of corn basis were at highs above $7.50 in March and down to $5 at harvest. Then corn prices climbed 136%, while ethanol product values increased 85%. The economists say the diverging percentages signal the declining profitability of ethanol.
The volatility of both corn and ethanol makes ethanol profitability unpredictable. Looking back, ethanol producers enjoyed windfall profits when ethanol quickly replaced MTBE in gasoline in early 2006. Profits and plant construction boomed and early 2007 brought margins of 40¢ to 50¢ per gallon, but by September, when ethanol prices had declined by 75¢ per gallon, profitability turned negative with market prices for ethanol below the cost of production. From December 2007 to May 2008, both ethanol prices and production costs went up, and during that time, profits averaged 13¢ per gallon.
When profitability was erased late last year, almost no new plants were begun because of low market values and increasing costs of corn. However, the rising price of crude oil, which determines the price of gasoline and ethanol, kept pushing ethanol prices higher. At the same time corn prices rose by a greater percentage and some less efficient ethanol plants either halted production or construction. In addition to corn prices, two other factors apply pressure to ethanol plants, and those are the distance that corn has to be hauled and the ability to market distillers’ grains within a reasonable distance.
The economists say the bottom line of profitability depends on corn and crude oil prices. For the first five months of the year, ethanol production was 41% higher than in 2007, and that would not have been the case if there was no profitability. They add that if corn supplies tighten and prices rise in the near future, the Renewable Fuels Standard will provide the incentive to produce ethanol and pay the corn price necessary to reach prescribed levels. However, ethanol output could fall if the mandates are changed, or if the marketing and distribution structure for ethanol fails, or if there is a sharp drop in crude oil and gasoline prices which provide buoyancy to the price of ethanol. Overall, the economists say ethanol profitability will remain volatile.
Summary:
Ethanol remains a major consumer of corn, and while it is supporting corn at current prices, it is those prices that jeopardize the profitability of ethanol plants. Ethanol profitability is a function of corn prices, the value added by its livestock feed co-products, as well as the price of gasoline which gives buoyancy to ethanol prices. When production costs rise faster than the value of ethanol and the distillers’ grains, then profitability of plants diminish and production is curtailed. Volatility is the future of ethanol profitability.