Recent Trends in Ethanol Profitability: The Contribution of Distillers Corn Oil

By Sampath Jayasinghe
Decision Innovation Solutions, 11107 Aurora Avenue, Urbandale, IA 50322
http://www.decision-innovation.com/

The American ethanol industry is poised to produce 14.96 billion gallons in 2016 and 15.07 billion gallons in 2017 (see the July AgMRC Renewable Energy Report).The structure of the ethanol industry has changed dramatically over the last 10 years with advancement of technologies, resulting in a significant increase in efficiency. The principal co-products of dry-mill ethanol plants are distillers dried grains with solubles (DDGS) and distillers corn oil (DCO). The market for these co-products plays a significant role in the economic viability of the ethanol industry.

Presented here are new estimates of ethanol profitability of a typical dry-mill Iowa ethanol plant from January 2012 to May 2016. This analysis is based on the Ethanol Profitability Spreadsheet developed by Hofstrand and Johanns (2016). The novelty in this analysis is to include additional returns that would be generated by DCO removal from DDGS that would be marketed to the biodiesel and animal feed industries.

There are numerous studies that track the profitability of ethanol production, but most of these studies include only ethanol and DDGS revenues, ignoring the contribution from DCO. One clear exception is by Irwin (2016) in bringing crude corn oil into his analysis rather than DCO. In a nutshell, crude corn oil is primarily produced at wet-mill ethanol plants whereas DCO is from dry-mill ethanol plants. Crude corn oil is marketed for food grade and DCO is targeted for biodiesel and animal feed purposes. In general, crude corn oil is priced at a premium to DCO. Based on our research, in 2011 only 15% of ethanol plants in the United States extracted corn oil; by May 2016, approximately 90% of ethanol plants extracted corn oil.

The U.S. ethanol industry is in the process of adopting advanced extraction technology to increase corn oil yields. Average corn oil yields have improved steadily over the past few years, from 0.5 pounds of oil per bushel to 0.65 pounds per bushel. Industry experts even mention possible yields of about 0.8 pounds per bushel.

Based on our private communication with some industrial experts from Feed Energy Company, crude corn oil does come from wet-mill plants that fractionate the corn kernel before steeping to solvent-extract the oil from the germ. This oil is not approved for generation of Renewable Identification Numbers (RINs) for compliance purposes in the biodiesel process, as it is a more energy-intense process.

DCO coming from dry-mill ethanol plants is viewed more as a co-product. The entire corn kernel is ground up for fermentation, and the oil is spun out later from the syrup. The energy component used to create this co-product is calculated to be much lower than that of a wet-mill plant, therefore allowing it to be a viable feedstock to generate RINs.

Note that the entire point of the RIN-generation process is to use feedstocks that create a net-negative energy balance to create the finished unit of energy.  

To track plant ethanol profitability, we extended the basic model from Hofstrand and Johanns (2016) by adding monthly average prices of DCO at the Missouri River as our target location. This location represents average Midwest prices for animal fats and vegetable oil markets. The daily DCO prices are collected from thejacobsen.com and data are available from January 2012. 

Figure 1 shows the major three constituents of ethanol plant revenue per gallon on a monthly basis from January 2012 to May 2016. The ethanol prices started at $1.23 per gallon in January 2016 and surged to $1.57 per gallon in May 2016. DDGS prices started at $122 per ton in January 2016 and rose to $132 per ton in May 2016. DCO prices started at $23 per hundred pounds in January 2016 and rose to $30 per hundred pounds in May 2016. Total revenue rose from $1.66 per gallon in January 2016 to $1.94 per gallon in May 2016. In the meantime, the total cost per gallon rose from $1.82 per gallon in January to $1.88 per gallon in May 2016.

Figure 2 shows estimates of ethanol plant production profitability with and without DCO. Negative profits started in November 2015 and continued until March 2016. This can be directly traced to the weakness in ethanol prices and DDGS prices. But these losses were somewhat mitigated by soaring DCO prices beginning last November. The average monthly profit in April 2016 was $0.01 per gallon and $0.06 per gallon in May 2016. This is mainly because of an increase in ethanol prices and the prices of both co-products—DDGS and DCO. As shown in Figure 2, the estimates of profits are still negative without taking into account the contribution of DCO during May 2016. In the first five months of 2016, DDGS and DCOs contributed 23% and 4% to the total revenue of the dry-mill ethanol plant, respectively.

There are numerous publications that analyze the importance of DDGS in ethanol plant profitability. Therefore, we concentrate on only DCO here.

Figure 3 shows total DCO production and utilization in biodiesel industry. Biodiesel is the major market for DCO. The U.S. Energy Information Administration (EIA) biodiesel production report published June 30, 2016, showed that approximately 43,640 tons (87.02 million pounds) of DCO were used to produce biodiesel in April 2016. May 2016 data for biodiesel feedstocks will be published on July 29 and were not available as of this writing. USDA reported that DCO production was 111,077 tons in April 2016, an increase of 9% from April 2015. The biodiesel industry utilized approximately 39% of total DCO production in April 2016. In addition to the biodiesel market, DCO has become a vegetable fat supplement for the livestock and poultry industry, but it’s hard to estimate how much is used in the animal feeding industry.

Figure 4 shows the monthly feedstock utilization percentage in biodiesel production from January 2014 to April 2016. We excluded soybean oil in the figure as it accounts for on average 50% of total feedstock in the biodiesel industry. Vegetable oil feedstocks are plotted as the vertical bars in the graph and animal fat feedstocks are plotted as horizontal lines. In addition to soybean oil, DCO competes with canola oil, yellow grease, choice white grease, and tallow. DCO accounts for approximately 11% of total biodiesel feedstocks, just below yellow grease, which accounts for about 13% of total biodiesel feedstocks.

No Profits Without Co-Products

Ethanol producers across the Midwest have been battered by plummeting crude oil and gasoline prices over the last 24 months. The industry has been helped by the co-product market during this lean period. In addition to DDGS, DCO, with its increasing oil yields, has also helped producers to survive. This analysis shows that the industry would not be profitable without the co-products in the face of the ethanol market collapse. The big picture indicates that unless U.S. energy market conditions strengthen substantially, ethanol returns for the rest of the year may be laser thin to near break-even for ethanol producers.

Sources

EIA (U.S. Energy Information Administration), various, Monthly Biodiesel Production Reports.

Hofstrand, D., and A. Johanns, 2015. Monthly Profitability of Biodiesel Production. Ames IA: Ag Marketing Resource Center:

Irwin, S., 2016. "The Profitability of Ethanol Production in 2015." farmdoc daily (6):3, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, January 6.

USDA-NASS (U.S. Department of Agriculture, National Agricultural Statistics Service), 2016. Grain Crushing and Co-Products Production 2015 Summary. March 2016.