The Changing Economics of Corn Ethanol
AgMRC Renewable Energy & Climate Change Newsletter
Iowa State University
Changes in the corn-ethanol cost structure, along with the rapid increase in the revenue generated from the sale of distillers dried grains with solubles, have changed the relationship between ethanol sale price and the breakeven corn purchase price for profitable corn-ethanol production. In this article I will discuss these changes and their impact. The corn-ethanol economic model at http://www.extension.iastate.edu/agdm/info/outlook.html is the basis for the analysis.
Stable non-corn ethanol production costs
There are a variety of costs other than corn associated with corn-ethanol production. Natural gas is one of the most important. It typically takes about 30 cubic feet of natural gas to produce a gallon of corn-ethanol. Declining natural gas price since 2007 has resulted in a reduction in the cost of natural gas for corn-ethanol production.
Other variable costs include enzymes, yeasts, denaturant, other chemicals, repairs and maintenance, water, electricity and other costs. Except for denaturant, these costs are assumed in the analysis to stay constant since 2007, although in reality some variation would be expected. For example, chemicals and repairs would be expected to increase somewhat over this period.
Fixed costs include facility depreciation, interest on outstanding debt, labor, management and property tax. These costs are also assumed to stay constant in the analysis although in reality they may have increased or decreased. For example, if debt is reduced over time, interest cost will decrease.
Total non-corn ethanol production costs are shown in Figure 1. Since 2007 non-corn cost has declined from 70 cents to 60 cents per gallon of ethanol, although costs spiked to over 80 cents during a portion of 2008/09. This cost reduction is due to the decline in the price of natural gas.
While non-corn costs have remained relatively stable or declined since the beginning of the rapid growth of the corn-ethanol industry in 2007, the prices of ethanol and corn have risen dramatically. This has resulted in changes in the relative importance of corn cost versus non-corn costs in corn-ethanol production.
In 2007 non-corn costs made up about 35 to 40 percent of the cost of producing corn-ethanol as shown in Figure 2. This was down from over 50 percent during 2005 and 2006. Currently non-corn costs comprise less than 20 percent of the cost of producing corn-ethanol.
Higher value dried distillers grains with solubles (DDGS)
Distillers grains with solubles is the major co-product of ethanol production. In this analysis, all of the distillers grains is dried before sale. DDGS revenue is closely tied to the cost of corn. This relationship is shown in Figure 3. Since 2007 the relationship between DDGS revenue and corn cost has remained relatively constant in a range of 25% to 30% (DDGS revenue being 25-30% of cost of corn).
The yield of DDGS has remained constant in the analysis over this time period at 17 pounds of DDGS per bushel of corn. Because of the constant yield and the high correlation between of DDGS revenue and corn cost, it means that the prices of DDGS and corn are also highly correlated. So, as the price of corn has increased substantially since 2007 (due primarily to the increase in demand for ethanol production), the price of DDGS has also increased, thereby substantially increasing DDGS revenue.
Although DDGS generates only a relatively small portion of the revenue from corn-ethanol production, its importance has increased since 2007. As shown in Figure 4, DDGS share of total revenue has increased from 15 percent in 2007 to 25 percent currently.
In absolute terms the increase has been even greater than shown in Figure 4. Since 2007 the revenue from DDGS has risen substantially. As shown in Figure 5, DDGS revenue doubled from 40 cents to 80 cents per gallon of ethanol. The range was even larger from a low of less than 30 cents to a peak of 90 cents per gallon of ethanol.
The changing economics of ethanol production
Also shown in Figure 5, DDGS has gone from offsetting roughly half of non-corn costs in 2007 to offsetting all non-corn cost during a portion of the 2011/12 period to generating a net return of 20 cents per gallon over non-corn costs currently. This has changed the economics of ethanol production.
Figure 6 shows the relationship between ethanol selling price and the breakeven purchase price of corn (corn price expressed in dollars per gallon of ethanol). In 2007 the breakeven price of corn per gallon of ethanol was below ethanol price by the amount needed to cover the non-corn cost of ethanol production not offset by DDGS revenue. By 2011, the breakeven purchase price of corn was equal to the selling price of ethanol because DDGS revenue was sufficient to offset all of the non-corn costs. Currently, the breakeven price of corn is higher than the price of ethanol because DDGS revenue exceeds non-corn costs.
So, the significant rise in DDGS revenue, when combined with declining non-corn costs (lower natural gas price), has increased the breakeven purchase price of corn relative to ethanol selling price. Even if potential increases in some non-corn costs are taken into account, it is unlikely that these increases would offset a major portion of this change. The higher breakeven corn purchase price relative to ethanol sale price has generated additional profit in the ethanol supply chain. This additional profit can accrue to the ethanol producer, the corn farmer or both.