Corn Revenue, Costs and Returns Trends and Implications for Ethanol Profitability
AgMRC Renewable Energy & Climate Change Newsletter
Iowa State University
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. In this article we will discuss this 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.
The analysis below shows the revenue, costs and net returns for a hypothetical Iowa corn farmer. It has been tracked monthly since the year 2000. The corn selling price used in the analysis is the monthly average price received by Iowa farmers over this time period. The annual corn yield reflects the Iowa average yield as reported by NASS. The annual cost figures are assumed to be typical of an Iowa farmer 1/.
Monthly corn income is shown in Figure 1 on both a per acre and per bushel basis. Income consists primarily of corn selling price with a small addition in the form of U.S. government payments.
Figure 1. Corn Farmer Income per Acre and per Bushel (2000 to present)
Income was relatively low from the 2000 to the 2006 corn marketing year but shot up to over $5.00 per bushel in 2007 before retreating below $4.00 per bushel in 2008 corn marketing year. From there it advanced to almost $8.00 per bushel in August of 2012 before retreating once again to the current range of $4.00.
Both figures show the volatility that has occurred in recent years in corn price and income. It shows the ability of the corn commodity market price to turn on a dime due to changing market conditions and head in a different direction.
Corn production costs over this time period are shown in Figure 2. The figure on the left reflects a corn farmer who owns the cropland he/she farms. The figure on the right reflects a farmer who rents cropland under a cash rent lease. Because most farmers both own and rent cropland, their land cost falls somewhere between these two extremes.
Figure 2. Landowner and Cash Rent Corn Farmer Costs per Acre (2000 to present)
The cost side of the equation is less volatile. Production cost has gone up over this time period. More specifically, it has increased at an increasing rate over this time period and essentially doubled since 2000. The trend has been relatively stable except for 2009 where cost increased substantially but then fell back in 2010. Seed, fertilizer, diesel fuel, machinery repairs, etc. have all increased substantially over the 15 year period. Only herbicide cost has bucked the trend.
For the farmer who owns cropland (free of debt), the only direct land cost is real estate taxes. For the farmer who rents cropland, cash rent is the largest production cost and has also doubled during this time period. In 2014 the cash rent corn farmer is expected to have an $800 total cost per acre (up from less than $400 per acre in 2000). The landowner farmer is expected to have an $250 total cost per acre (up from $125 in 2000). The increase in cost over the 15 year period has either been financed by borrowing or by using previously earned net income.
Due to variations in yield from year to year, a farmer’s cost structure should also be viewed from the perspective of cost per bushel. Cost per bushel is shown in Figure 3 for both the landowner and cash rent corn farmer. The 2009 spike in production cost per acre is largely offset in the cost per bushel chart due to the high corn yield of 2009. Conversely, the rather modest increase in cost per acre in 2012 is more pronounced in the cost per bushel chart due to the drought reduced yield of 2012.
Figure 3. Landowner and Cash Rent Corn Farmer Costs per Bushel (2000 to present)
Net return (profitability) can be estimated by combining income and costs. Figure 4 shows the revenue, production cost and net return per acre for both the landowner farmer and the cash rent farmer. Net return to the landowner farmer was positive throughout the entire 15 year period. Although net return has dropped precipitously in recent months due to falling corn price, the net return to the landowner farmer is still strong. This is because the landowner farmer receives both the farm operator’s and landowner’s return. In the case of the cash rent farmer, the landowner’s return (cropland cash rent) becomes a cost and the farmer’s net return reflects just the farm operator’s return. This results in much lower net returns for the cash rent farmer. Although there were two high profit periods, net returns during most of this period were breakeven as shown in Figure 4.
Figure 4. Landowner and Cash Rent Corn Farmer Income, Costs and Returns per Acre (2000 to present)
The profitability of the ethanol supply chain since 2005 is shown in Figure 5. The white portion of the figure is profit per bushel for the ethanol supply chain. The white space is bounded by the ethanol producer’s breakeven corn purchase price and the cash renter farmer’s breakeven corn selling price. The corn price allocates supply chain profits between the ethanol producer and the corn farmer. The supply chain profit margin has declined recently due to lower ethanol producer revenue and higher corn production costs. The corn price is currently allocating the profit to the ethanol producer.
Figure 5. Ethanol Supply Chain Profitability (2005 to present)
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.
1/ Production input costs are based on Estimate Cost of Crop Production – File A1-20, Cash Rental Rates are based on Cash Rental Rates for Iowa – File C2-10