Seasonality of Corn Ethanol Profitability
Based on monthly profitability estimates of a hypothetical Iowa corn ethanol plant, there appears to be a seasonal variation in the profitability of corn ethanol production (1). Analyzing monthly data from 2004 through 2011, profits during the last half of the year appear to be higher than those during the first half of the year as shown in Figure 1. Average profits were lowest during February through April and then began to increase, reaching a high in July. Profits remained above average during most of the remainder of the year before dropping below average in December.
The corn ethanol industry is a new and emerging industry that expanded rapidly during the analysis period. So, relationships during the early years of the industry may not be as representative of the future of the industry as those during recent years. To account for this a system of weighting recent years more heavily than early years was created. The 2004 year was given a weight of one. Each subsequent year was given an addition weight of one-half so that by the end of the period the 2011 year received a weight of 3.5. The seasonal ethanol profitability pattern using the weighting system is shown in Figure 2. The pattern corresponds roughly with the pattern using the simple average shown in Table 1. However, of note is the high profitability shown in November. During the three year period of 2009, 2010 to 2011, the February price was well above the price during the other months of the year. A pattern that was not present in earlier years.
A similar pattern emerges when monthly profitability is examined based on the number of years during the seven year period that monthly profits were above the annual average profit. As shown in Figure 3, only one or two years out of seven were profits above the annual average during the February through April period. This compares to July, August and October when profits were above the annual average during five of the seven years.
To identify the underlying drivers of this seasonal pattern we must examine the variables that impact profitability. In the ethanol computer model (1), four prices impact the monthly change in profitability. Of these prices, ethanol price and corn price provide the greatest impact.
Ethanol Price Impact
Ethanol price is the major factor impacting revenue as shown in Figure 4. Although DDGS price contributes to ethanol revenue, the volatility in revenue is due primarily due to ethanol price.
Figure 4. Monthly Ethanol Revenue
The monthly average ethanol prices over the seven year period are shown in Figure 5. The ethanol price pattern correlates quite closely with the ethanol profitability pattern. Monthly ethanol prices are below average during the first part of the year and above average during most of the remainder of the year. Although further investigation is warranted, the ethanol price trend may be correlated to the heavily gasoline demand, and subsequent high gasoline prices that often occurs during the summer vacation months.
When the weighing process (as described above) is applied to ethanol prices, the November price emerges as the high price of the year. This is due to the high November ethanol prices during the last three years of the period and is the reason for the high ethanol profits during the same time period. With the exception of the November spike, the weighted average pattern is quite similar to the simple average pattern.
Corn Price Impact
On the cost side of the ethanol profitability equation, corn is the primary driver of ethanol cost of production as shown in Figure 7. Natural gas, other variable costs and the fixed cost of production comprise only a small and stable portion of the total cost of producing ethanol. So let’s examine corn price variability to assess its impact on seasonal changes in ethanol profitability.
Figure 7. Cost of Ethanol Production
The monthly average corn price is shown in Figure 8. As may be expected, the low prices are in late summer and the fall harvest period. This adds to the profitability of ethanol production during this time period. Prices rise after harvest and continue rising until late spring and early summer of the following year and contribute to low profits during the early part of the year.
However, the corn seasonal pattern is skewed somewhat by the fact that there was a huge rise in corn price over the seven year time period. At the beginning of the analysis period in January of 2005, corn price was $1.75 per bushel. By the end of the analysis period in December of 2011 corn price had risen to $5.89.
It appears that a seasonal pattern of corn ethanol profitability has emerged. The profitability seasonal pattern is greatly influenced by the corn price seasonal pattern (the major input) and the ethanol price seasonal pattern (the major output) as discussed above. However, several factors should be kept in mind. First, only seven years of data were available. Second, the corn ethanol industry was an emerging industry during those seven years so there are limits to the conclusions that can be drawn from the analysis. Third, the profitability pattern for an individual ethanol facility can be greatly impacted by forward pricing strategies of ethanol and/or corn. Fourth, other potential factors such as seasonal variations in input costs, efficiency factors and others factors were not examined. Finally, as with any historic seasonal pattern, it does not mean that the pattern for an individual year will follow the historic seasonal pattern.
1) In 2007, Agricultural Marketing Resource Center www.agmrc.org created a hypothetical Iowa based 100 million gallon per year name plate capacity corn ethanol plant
. Efficiency factors, input costs and other factors are typical of a modern corn ethanol plant. Four variables are updated monthly to calculate the monthly profitability of the model plant. These are the monthly average ethanol, corn, distillers dried grains with solubles (DDGS) and natural gas prices. The ethanol, corn and DDGS prices originate from the Iowa Ethanol Plant report of USDA Ag Market News. The Iowa natural gas price originates from the Energy Information Administration.