Profitability Prospects for the Corn Ethanol Industry

AgMRC Renewable Energy Newsletter
January 2009

Don HofstrandDon Hofstrand
value-added agriculture specialist
co-director AgMRC
Iowa State University Extension

Corn-ethanol producers have come under pressure in recent months due to declining ethanol prices and rising corn prices.  Tight margins have led some production facilities to close down until the situation improves.  Most severely, some ethanol producers have gone into bankruptcy.

Although corn prices have fallen-back since their record highs of last summer, they are still above the levels of recent years.  In 2005 when the ethanol industry started expanding, corn prices were below $2.00 per bushel compared to over $3.00 today. 

At the same time, the cost of producing corn has increased substantially.  Although a portion of this is due to higher farmland rental rates, most of it is attributable to substantially higher fertilizer, seed and other production input prices. 

In the following discussion we will examine the cost of producing ethanol from the perspective of both the ethanol producer and the farmer who produces the corn feedstock for the ethanol producer.  If the ethanol price does not generate sufficient revenue to cover the costs of both the ethanol producer and the corn farmer, a loss will be incurred.  The market price for corn will determine whether the loss will be borne by the ethanol producer, the corn farmer or shared by both.

Ethanol prices are currently under $1.50 per gallon at the plant and have dropped by over $1.00 since last summer’s high.  There are many reasons for this decline including falling crude oil prices, rising ethanol inventories, the specter of reaching the ethanol “blending wall”, new ethanol plants coming on-line and other reasons.  Ethanol plant revenue over the last few years is shown in Figure1.  Revenue includes the price of ethanol and the value of the distillers dried grains with soluble (DDGS).  Revenue is at its lowest level in recent years. 
Ethanol Revenue Per Gallon

(Click to enlarge.)

At the same time, the cost of producing ethanol (including the cost of producing the corn feedstock) has increased substantially as shown in Figure 2.  The dark blue (land rental) and orange (production inputs) bars show the rising cost of producing corn.  The production inputs include all of the non-land costs including fertilizer, seed, herbicides,machinery, drying, etc.  This category is the single largest cost item for ethanol production.  The light blue bar represents the ethanol plant’s natural gas cost for processing the corn.  Other variable costs and the fixed cost of the ethanol plant make up the remainder of the cost.  Since September of 2005, the cost of producing ethanol has risen over 20 cents per gallon, due mainly to the increased cost of producing corn.

Cost to Produce Ethanol

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If we combine the revenue and cost charts (Figure 3), we see that during most of the period from 2005 to 2008 the total profits from ethanol production (ethanol and corn) were quite high. However, after periods of generous profits, ethanol production revenue is currently only sufficient to cover the cost of producing ethanol and its feedstock corn.  If ethanol prices continue to decline, significant losses will occur. 
Ethanol Revenue, Costs, and Profit

(Click to enlarge.)

Sharing of Profits (losses)

Profits (losses) from ethanol production are shared between the ethanol producer and the corn farmer. The mechanism that allocates these profits (losses) is the market price for corn.  Higher corn price means that more of the profits accrue to the corn farmer and less to the ethanol producer.  Conversely, lower corn prices means that less of the profits accrue to the corn farmer and more to the ethanol producer.

The division of profits between the ethanol producer and the corn farmer is shown in Figure 4.  Early in the ethanol expansion, most all of the profits accrued to the ethanol producer.  However, as the ethanol expansion continued, the price of corn was bid higher and most of the profits accrued to the corn farmer.  At the present time, no profits are accruing and the corn price is dividing the revenue so that both the ethanol producer and the corn farmer have just enough revenue to cover their costs. 

Ethanol Profits for Ethanol Producer and Corn Farmer

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Higher Corn Costs on the Horizon

Farmers are currently buying the production inputs they will use in growing and harvesting the 2009 corn crop.  As shown in Figure 5, current input prices indicate that the cost of producing corn will rise substantially for the 2009 corn crop.  This corn will be available to the ethanol producer starting next fall (Sept. 2009) and will be the source of the ethanol feedstock until harvest of the 2010 corn crop.  While some of this is due to higher farmland rental rates, most of it is due to higher fertilizer, seed and other input costs. 

Cost to Produce Ethanol and projected

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While we are not projecting the cost of operating the ethanol facility in 2009 and beyond, higher corn production costs during this period will almost certainly significantly increase the cost of producing ethanol.  Unless ethanol prices reverse course and start to increase,the corn ethanol industry (ethanol producers and corn farmers collectively) may incur substantial losses over this period.  How this loss will be allocated between the ethanol producer and the corn farmer will depend on the market price for corn. 

However, the cost of corn production may decline for the 2010 corn crop.  Producers of corn production inputs, especially fertilizer, have seen wholesale prices fall sharply in recent months, partly in response to reduced ethanol profitability and reduced corn prices.  The same is true for fuel producers.  Machinery prices may also be softening slightly.  However,input dealers selling retail to farmers, especially fertilizer suppliers, are caught with last year's high prices and have limited ability to lower the price of their high-cost inventories.  But, if current trends persist, production input costs for the 2010 crop will be sharply lower because current inventories will be cleared out and replaced with lower cost product.