Final RFS Volumes for 2019 and Biomass-Based Diesel Volumes for 2020
By Sampath Jayasinghe
Decision Innovation Solutions
On November 30, 2018, the Environmental Protection Agency (EPA) published its final rule for the 2019 renewable volume obligations (RVOs) for cellulosic biofuel, advanced biofuel, and total renewable fuel under the Renewable Fuel Standard (RFS). This also contained the EPA’s final rule for biomass-based diesel (BBD) volume standards for calendar year 2020. The EPA was required by law to issue a final rule setting the 2019 RVOs by November 30.
Table 1: The finalized renewable fuel volume requirements under the Renewable Fuel Standard program for 2019, and biomass-based diesel for 2020 (Source: EPA)
Table 1 from the EPA News Releases published November 30, 2018, summarizes the finalized volumetric requirement for cellulosic biofuel, advanced biofuel, and total renewable fuel for 2019, plus the final volume for BBD for 2020. The 2019 BBD volume requirement of 2.1 billion gallons was established in the 2018 final rule, released December 12, 2017.
The 2019 conventional ethanol fuel volume is set at 15 billion gallons, which is equal to the statutory volume proposal in the original 2007 RFS. Total advanced biofuel volume is at 4.92 billion gallons, an increase of 0.63 billion gallons from the 2018 final rule volume of 4.29 billion gallons. Total cellulosic biofuel volume for 2019 is set at 0.418 billion gallons, an increase of 0.13 billion gallons from the 2018 standard. The 2020 BBD volume will increase by 0.33 billion gallons over the 2019 standard. The total renewable fuel volume for 2019 will increase by 0.63 billion gallons from the 2018 standard.
Iowa Ethanol Gross Production Margins
Ethanol crush spread is a dollar value calculated as the difference between the combined sales values of ethanol, distillers dried grains with solubles (DDGS) and corn distillers oil (CDO) and the cost of corn in producing ethanol. This also is commonly known as the gross production margin (GPM). Previous updates covering GPM in 2018 can be found in the March 2018 report. This GPM analysis represents a real plant situation and demonstrates the importance of the ethanol co-product market on the ethanol plant profitability.
Ethanol producers often use this spread to hedge the purchase price of corn and sales prices of ethanol and DDGS. The spread relationship between corn, ethanol, and DDGS varies over time and offers many opportunities for speculative actions. This GPM calculation is not intended to show precise ethanol plant margins.
Table 2: Weekly Average Iowa Ethanol and Co-Products Processing Values and Indicators of Average Gross Production Margin; January 2016 – November 2018.
Table 2 presents a simple comparison of Iowa average gross production margins in November from 2016 to 2018. Iowa’s corn prices are compared with the value of processing products for Iowa ethanol plants published by the USDA’s Agricultural Marketing Service (USDA-AMS). USDA-AMS publishes weekly cash bid prices of corn, ethanol, DDGS and CDO in Iowa locations. The dry-mill ethanol plants’ gross margins are calculated assuming ethanol yield of 2.80 gallons per bushel, 17.75 pounds of DDGS per bushel, and 0.6 pounds of CDO per bushel.
The Iowa average gross production margin was at $1.40 per bushel of corn in November 2018, compared to $1.86 in November 2017. Ethanol value per bushel has decreased to $3.48 in November 2018 from $3.80 in November 2017. But DDGS value per bushel has increased to $1.17 in November 2018 from $1.02 in November 2017. CDO value per bushel has decreased to $0.14 in November 2018 from $0.16 in November 2017. Combined total ethanol, DDGS, and CDO values have decreased to $4.79 in November 2018, compared to $4.98 in November 2017.
Figure 1 shows estimated weekly Iowa ethanol gross production margins from January 2016 to November 2018. Ethanol gross production margins generally are lowest in the January-March period, rising throughout the year. Iowa ethanol gross margins in the January-March period in 2018 have been significantly higher compared to the same time in the previous three years and recorded at $1.82, the highest so far during the same period for the last three years. As seen in Figure 1, ethanol gross production margin rose to an average $2.06 per week during June 2018, then declined significantly to an average $1.40 per week during November 2018.
The average ethanol price in Iowa dropped to $1.24 per gallon in November 2018, compared to $1.36 per gallon in November 2017. However, the average DDGS price in Iowa rose significantly to $131.50 per ton in November 2018, compared to $115 per ton in November 2017. The average CDO price in Iowa declined to $0.23 per pound in November 2018 from $$0.25 per pound in November 2017. The average cash corn price in Iowa also rose to $3.39 per bushel in November 2018, from $3.12 per bushel in November 2017. Overall, average gross production margin in Iowa decreased by nearly 25 percent in November 2018 from November 2017.
Estimated Iowa gross ethanol production margin averaged $1.40 per bushel of corn in November 2018, the lowest during the last four years, compared to $1.86 in November 2017. Ethanol value per bushel has decreased to $3.48 in November 2018 from $3.80 in November 2017 mainly due to significant decline in ethanol prices. But DDGS value per bushel has increased to $1.17 in November 2018 from $1.02 in November 2017. Continuous decline in ethanol price coupled with some strength in the cash corn price in Iowa will create some hardships in ethanol plant margins in the near future.