Corn Revenue, Costs and Returns, Trends and Implications for Ethanol Profitability

Posted on 04/10/2014 at 12:00 AM by Christa Hartsook

Blog article written by Don Hofstrand, retired ag economist and co-author of the AgMRC Renewable Energy & Climate Change newsletter.

Over the last several years the rapidly expanding market for ethanol has increased the demand for corn resulting in an increase in corn price.  During this same time period the cost of producing corn has risen substantially.  Currently, it appears as though a saturated ethanol market may result in excess supplies of corn.  We looked at the increase in corn production cost and how the saturation of the ethanol market may impact the profitability of the ethanol supply chain and how these profits may be distributed between corn farmer and ethanol producer. See our full analysis in this month’s Renewable Energy & Climate Change newsletter and a few highlights below.

Substantial uncertainty surrounds ethanol selling price and net returns to the ethanol supply chain over the next several years.  However, rising corn production cost is taking a larger slice of the revenue of ethanol production.  Where these costs will trend in the future is uncertain. Although energy prices may soften, interest rates are expected to strengthen.  With continued improvement in genetics, seed cost may continue to rise, but the rise may be offset by higher yields. 

What we know for certain is that corn selling price needs to stay relatively strong relative to historic levels to continue to generate farm operator net returns from the marketplace.  But if lagging ethanol demand cannot continue to mop up excess corn supplies, corn prices may drop below the cost of production.  If this happens, there will be considerable downward pressure on production costs.  A portion of the cost decline may occur in production inputs such as fertilizer, seeds, etc., but these costs are not very responsive to poor farmer profitability (losses).  The major portion of the adjustment will need to come in the form of lower cropland rental rates.  A major question is how quickly cropland rental rates will adjust downward.  

Lower corn prices will shift ethanol supply chain profits away from the corn farmer to the ethanol producer.  This is good news for the ethanol producer.  But this assumes that ethanol supply chain profitability will stay strong.  If corn price declines, distillers grains price will also decline, lowering the ethanol producer’s revenue stream.  More importantly, if retail gasoline prices decline or corn starch ethanol demand fails to increase, ethanol prices will also decline.  From two to four percent of the ethanol blended with gasoline is used as an octane enhancer.  The additional amount, up to the ten percent blend (15 percent is allowed but not widely used for newer vehicles), is a direct substitute for gasoline.

Even if retail gasoline prices don’t decline, ethanol prices may decline.   In early 2006, ethanol prices were about 80 percent of the price of gasoline.  By early 2014, with the domestic ethanol market nearly saturated, ethanol prices in Iowa plants were about 58 percent of retail gasoline prices.  Whether ethanol prices will weaken further relative to gasoline in the next few years will depend heavily on whether the domestic market can be expanded beyond the current blend-wall saturation level.   With the expected emergence of cellulosic ethanol production and increasing government mandates for its use, shrinkage of the corn starch ethanol market is an additional factor that may affect total returns and profits shown here.

A potential ethanol floor price could develop at the price point where E85 ethanol blend becomes competitive with gasoline.  Because ethanol only contains about two-thirds the energy value of gasoline, E85 price needs to be discounted about 30 percent below gasoline price.  If that point is reached, E85 will be competitive with gasoline based on energy content.  But few gasoline retailers currently offer E85 and few motor vehicles are equipped to utilize E85 (flex fuel vehicles).  It would probably require an extended period of time with E85 prices discounted below gasoline on an energy content basis (more than the 30 percent discount above) before gasoline retailers would begin offering E85 and consumers would consider modifying their motor vehicles for E85 consumption.

Categories: Renewable Energy