Corn-Ethanol Supply Chain Profitability
AgMRC Renewable Energy & Climate Change Newsletter
Retired Iowa State University Extension Agricultural Economist
The future of the corn-ethanol industry is predicated on the supply chain costs of corn-ethanol production. This involves the cost of producing the corn feedstock and the cost of converting the corn feedstock into ethanol and distillers dried grains with soluble (DDGS). The supply chain costs of corn production, starting in the marketing year for the 2006 corn crop to a projection for the 2013 corn marketing year, is shown in Figure 1.
The cost of both corn production and ethanol is shown and the total cost ranges from $1.68 per gallon at the beginning of the period to peaking at $2.56 per gallon for the current crop marketing year before dropping back to $2.25 for the 2013 crop marketing year. All of this increase in cost has occurred in corn production while ethanol production cost has decline slightly.
A more detailed breakdown of supply chain costs is presented in Figure 2. While cropland rents have increased over this period, the primary driver of cost increase has been production inputs such as seed, fertilizer, fuel and other inputs.
Ethanol production fixed costs (depreciation and interest on long-term debt) are assumed to remain constant over the period, although a reduction in debt levels would have decreased interest cost. Energy costs declined over this period due to lower natural gas prices.
However, the primary driver of cost is corn yield. If corn yield drops as in the case of the drought year of 2012, the cost per bushel of corn produced increases. Because a bushel of corn converts to 2.8 gallons of ethanol, an increase in corn costs per bushel translates into an increase in corn cost per gallon of ethanol. The opposite occurs with an increase in corn yield as happened in 2009.
The variation in Iowa annual corn yield is shown in Figure 3. As indicated above the drought reduced yield of 137 bushels per acre in 2012 and the 182 yield of 2009 greatly impacted ethanol supply chain cost.
Figure 4 shows the trend in production cost if yield is held constant at 172 bushel per acre as shown in Figure 3. Because the variation in cost due to corn yield has been eliminated, the resulting variation in ethanol cost is primarily due to input prices. A spike in corn input prices of seed and fertilizer resulted in a significant cost increase for the 2009 crop. The actual corn cost spike was largely offset due to the high 2009 corn yield. Although input prices declined for the 2010 crop, these prices, along with cropland cash rental rates, have once again increased and current supply chain costs are at or above the 2009 level.
Supply chain revenue, including ethanol and DDGS, is shown in Figure 5. After generating a combined revenue of about $2.50 per gallon early in the period, revenue dropped below $2.00 per gallon at the end of the decade. Currently, strong ethanol prices along with rising DDGS prices have pushed revenue to $3.14 per gallon.
Although supply chain cost per gallon of ethanol production has risen over the period, rising ethanol revenue during the same time period has resulted in strong supply chain profit levels as shown in Figure 6.
Future supply chain profitability will be driven primarily by ethanol price and corn price. Ethanol price will determine the overall profitability of the supply chain while corn price will allocate the profits between the corn farmer and the ethanol producer. Ethanol price will be driven by gasoline price while corn price will be driver by corn yield.