Ethanol Profitability Potential: Positive Operating Margins during January - August 2018
By Sampath Jayasinghe
Decision Innovation Solutions
In this month’s article, we look at ethanol production margins in the first 8 months of 2018 and compare with the recent past. Before we get into margins, we briefly visit the current ethanol production rate in 2018.
US Ethanol Production: January-August 2018
U.S. ethanol production was at 1.07 million barrels per day for the week ending August 24, 2018, according to the most recent Weekly Ethanol Plant Production report from the Energy Information Administration (EIA). Figure 1 illustrates weekly production of fuel ethanol (thousand barrels per day on left Y-axis) and weekly ending stocks of fuel ethanol (thousand barrels on right Y-axis) from January 1, 2016 to August 24, 2018. The ending stocks of fuel ethanol were at 23.061 million barrels for the week ending August 24, 2018. Figure 2 depicts ethanol production by week number in the last five years and up to the week ending August 24, 2018. The average weekly production rate leading up to the week ending August 24, 2018 has been 1.047 million barrels, an increase of 2.3 percent, compared to 1.023 million barrels during the same period in 2017. The highest weekly production rate for the current year was recorded at 1.100 million barrels during the week ending August 03, 2018. This is the second recorded highest weekly production rate, next to the historical highest of 1.108 million barrels achieved during the week ending on December 01, 2017. The above indicates the ethanol production rate has been very strong so far in 2018 and the U.S. ethanol market is set to hit a record level of annual production.
Ethanol Operating Margin: January 2017- August 2018
In general, the return over operating costs is a well-accepted indictor for an ethanol production plant’s potential profitability. The total revenue from an ethanol plant’s production is calculated from three products: ethanol, dried distillers grains with solubles (DDGS), and corn distillers oil (CDO). The costs of corn, natural gas and other costs such as labor, water, electricity, and other ingredients for ethanol production are included in the calculation of total variable production costs. The difference between the total revenue and total variable production costs is considered the ethanol operating margin.
Iowa State University (ISU) maintains ethanol operating margins for a representative Iowa dry mill ethanol plant. A detailed description of the representative Iowa corn ethanol plant, assumptions and data used in the calculation can be found here.
Daily ethanol operating margins from November 01, 2016 to August 24, 2018 are shown in Figure 3. This period was selected as ISU started including CDO into the calculation in addition to ethanol and DDGS from the first week of November 2016. Estimated ethanol operating margins at an Iowa dry mill ethanol plant averaged 21 cents per gallon in August 2018, compared to 37 cents per gallon in August 2017. Average ethanol retail price declined to $1.37 per gallon in August 2018, compared to $1.49 per gallon in August 2017. Average corn price is at $3.39 per bushel in August 2018, compared to $3.26 per bushel in August 2017, indicating the average net cost of corn in ethanol production has increased to 76 cents per gallon in August 2018 from 72 cents per gallon in August 2017. These reasons have contributed to a 43 percent decline in ethanol operating margins from August 2017 to August 2018.
Ethanol operating margins have been positive since dropping into negative territory during January 2017 as shown in Figure 3. During January 2017, corn price soared to $3.70 per bushel and retail ethanol price dropped to mid $1.20-$1.30 per gallon resulting a significant increase in net cost of corn in the variable production cost to 90 cents per gallon. Then margins soared as high as 46 cents per gallon during mid-September 2017 and then declined to 5 cents per gallon during December 2017. Figure 4 shows monthly averages of ethanol rack prices and monthly average unleaded gasoline rack prices. Notice in Figure 4, the significant drop in ethanol rack prices between September 2017 to December 2017 were due to historical high ethanol ending stocks (see Figure 1) and a decrease in US ethanol exports during that period (See January 2018 AgMRC report for a detailed analysis). Estimated ethanol operating margins averaged 23 cents per gallon during 2017.
Ethanol operating margins have been positive for the first eight months of 2018 and averaged 25 cents per gallon. During January 2018, margins were on average 17 cents per gallon and increased to 30 cents per gallon in March 2018, and stayed in the range of 25 to 28 cents per gallon during April-July 2018. The margins averaged 21 cents per gallon during August 2018. Margins are generally lower at the beginning of the year and increase incrementally throughout Spring and Summer, then declines during Fall months.
Corn price is the largest cost component in the variable production cost of ethanol. The average corn price between the January-August 2018 period was $3.44 per bushel, compared to $3.35 per bushel during the same period in 2017, approximately a three percent increase. However, the net cost of corn averaged 73 cents per gallon during January-August 2018, compared to 82 cents per gallon during the same period in 2017. The comparative lower net cost of corn in January-August 2018 compared to the same period in 2017 is due to relatively lower ethanol prices in the 2018 period as shown in Figure 4. Average ethanol rack price during January-August 2018 is $1.28 per gallon, compared to $1.58 per gallon during the same period in 2017.
Ethanol operating margins have been positive in the first 8 months of 2018. The average monthly low was recorded at 17 cents per gallon during January 2018 and the average monthly high was spotted at 30 cents per gallon during March 2018. Currently, the average margins in August 2018 are 43 percent less than the margins in August 2017. Average ethanol price during August 2018 is nearly eight percent less than the average price in August 2017 as ethanol supply has outpaced domestic demand. However, the average price of corn in August 2018 is seven percent higher than the average price in August 2017, making the largest component of variable costs, net cost of corn, relatively higher in August 2018.
Jayasinghe, Sampath. 2018. “Ethanol Profitability Potential: Positive Operating Margins during January-August 2018.”, Renewable Energy Report, Agricultural Marketing Resource Center, Iowa State University. August 2018.