Big Changes in Ethanol Revenue, Costs and Profitability
AgMRC Renewable Fuels Monthly Report
retired Iowa State University Extension agricultural economist
During the last three years the corn ethanol industry has gone through a period of wide swings in costs, revenue and profitability according to the Iowa State University Extension ethanol production model that represents a typical 100 million gallon corn-ethanol facility in Iowa. Ethanol profitability went from bust to boom to breakeven. In this article we will examine the swings in ethanol revenue and cost of ethanol production. The combination of these two factors determines the shifts in profitability. Then we will examine the ethanol supply chain profitability and how these profits (losses) after divided between ethanol producer and corn farmer.
Late 2012 and early 2013 was an unprecedented rough economic time for corn ethanol production. The major culprit was high corn prices as shown in Figure 1. The widespread 2012 Midwest drought led to low corn yields and high prices. The 2012 corn marketing year cost of corn for ethanol production (September 2012 through August 2013) was $7.14 per bushel or $2.55 per gallon of ethanol (based on a conversion rate of 2.8 gallons of ethanol from one bushel of corn). This led to the extremely high total cost of ethanol production of $3.14 per gallon during the same period.
Figure 1—Cost of Ethanol Production
Favorable crop yields in 2013 and 2014, along with other factors, have resulted in rapidly declining corn prices reaching a low of $3.26 per bushel in October before rebounding to $3.77 in December. This is a decline from the peak of $8.15 per bushel in August of 2012.
Natural gas price, another cost of ethanol production, has risen over this period from about $4.50 during 2012 to $7.82 in 2014.
The revenue side of the equation is shown in Figure 2. Ethanol price was high during 2012 by historic standards with an annual average price of $2.24 per gallon. Due primarily to record high corn price, the annual average 2012 dry distillers grains price reached a record high of $238 per ton, over $40 higher than the previous year. Total revenue for 2012 averaged $2.96 per gallon.
Figure 2 – Total Revenue of Ethanol Production
Revenue stayed strong during 2013 averaging $3.04 per gallon for the year. However, revenue dropped in 2014, declining to an average of $2.60 per gallon, ending with a December price of $2.43 per gallon. Most of the reduction in revenue was due to lower ethanol price, which spiked at $2.79 per gallon in April before declining to $2.02 per gallon in December. DDGS price also declined from an average of $231 per ton in 2013 to an average of $161 per ton during 2014 and ending with a December price of $138 per ton.
Monthly ethanol profits were negative throughout 2012, as shown in Figure 3. Essentially, high ethanol prices were more than offset by higher corn prices. Although there were months of losses in previous years, 2012 was the first year the model showed a loss during every month. The 2012 annual average loss was nine cents per gallon.
Figure 3 -- Ethanol Production Revenue, Costs and Profits
Declining corn prices in 2013 quickly lead again to profitability with the year ending at the highest month of profitability for the year of 78 cents per gallon. Profitability continued into 2014, peaking at $1.08 per gallon in April before starting a decline to 45 cents per gallon in December.
Ethanol Supply Chain Profitability
Looking at ethanol production from the perspective of its supply chain (ethanol production plus corn production) provides a perspective on how the combination of the ethanol producer and the corn farmer generate revenue and profits (losses) from the sale of ethanol. It also shows how the profits (losses) are shared between corn farmer and ethanol producer.
Figure 4 provides a visual description of these factors over the last three years. The red line with white dots at the top of the figure is ethanol revenue (similar to Figure 2). The lines below the revenue line show the various corn and ethanol costs and profits associated with producing the ethanol revenue.
The gray area below the revenue line represents the cost of producing ethanol, not including corn. These non-corn costs are shown in Figure 2. The orange line at the bottom of the gray area is the ethanol producer’s breakeven price for purchasing corn. Purchasing corn at a price below the breakeven will generate a profit for the ethanol producer. Conversely, purchasing corn at a price above the breakeven will generate a loss for the ethanol producer.
The green area at the bottom of the figure represents the corn farmer’s cost of production inputs for producing corn (seed, fertilizer, machinery, labor, etc.). The blue area above the green area is the cropland cash rent paid by the corn farmer for securing the cropland on which to produce corn. The dark blue line is the breakeven corn selling price for the corn farmer. Selling corn to the ethanol producer at a price higher than the breakeven price will generate a profit for the corn farmer. Conversely, selling corn at a price below the breakeven will result in a loss.
Figure 4 – Allocation of Ethanol Supply Chain Profits between Ethanol Producer and Corn Farmer
As expected, the per bushel cost of producing the 2012 corn crop is high due to the drought reduced yield of 2012. This is reflected in the 2012 corn marketing year from September of 2012 through August of 2013. The drop in cost of production per bushel in subsequent years is due primarily to higher corn yields because the cost of production per acre is spread over more bushels resulting in a lower cost per bushel.
The white area between the blue and orange lines is the supply chain profit. This is the area above the breakeven corn selling price for the corn farmer and below the breakeven corn purchase price for the ethanol producer. Supply chain profits are high during the entire three year period except for the last few months of 2014. Rapidly declining ethanol revenue resulted in reduced profitability.
The red line with yellow dots represents the corn price received by the corn farmer and paid by the ethanol producer. Corn price essentially allocates the supply chain profit (or loss) between the corn farmer and the ethanol producer.
Corn price allocated virtually all of the profits from the 2012 and much of the 2013 ethanol supply chain to the corn farmer. In fact, corn price in 2012 allocated more than the supply chain profits to the corn farmer resulting in losses for the ethanol producer. So, the ethanol producer’s losses during this time period did not result from a lack of supply chain profits. Rather the losses were a result of high corn price due to strong non-ethanol corn demand and the 2012 drought reduced corn yield.
The situation changed late in the 2012 corn marketing year due to the anticipation of a return to normal corn yields and a subsequent drop in corn price. This resulted in an allocation of supply chain profits away from the corn farmer to the ethanol producer.
Further change occurred in 2014 with a precipitous drop in ethanol revenue. This resulted in supply chain profits giving way to supply chain breakeven. However, due to a high 2014 corn yield and weakening non-ethanol demand drivers, the declining corn price has created losses for the corn farmer that have in turn provided profitability for the ethanol producer during a period of supply chain breakeven.
So where do we go from here? As indicated above, the two major factors determining the profitability of ethanol production are ethanol price and corn price. When examining the ethanol supply chain, ethanol price is the only major factor determining profitability. Corn price serves to allocate profits (losses) between the corn farmer and the ethanol producer.
Ethanol and corn are commodities, so they tend to have large price swings due to changes in supply, demand and government policy. A major decline in corn price has occurred over the last year. Many forecasters expect low corn prices to persist at least through 2015 and possibly longer. This would indicate that ethanol supply chain profits will accrue to the ethanol producer over this time period. However, the recent large and rapid decline in gasoline price, along with other factors, creates uncertainty of the stability of ethanol price.
These issues and others will be addressed in future issues of the AgMRC Renewable Fuels Monthly Report. You can also follow monthly profitability of corn ethanol and biodiesel production, along with other relevant information, at http://www.extension.iastate.edu/agdm/info/outlook.html