Ethanol Supply Chain Profitability
AgMRC Renewable Energy & Climate Change Newsletter
Based on our economic model of a typical Iowa ethanol plant, the combination of high ethanol prices and high corn prices have resulted in a breakeven situation for ethanol producers over the last year. Essentially, the returns from the high ethanol prices have been transferred on to the corn farmer through high corn prices.
Monthly revenue from the ethanol plant from 2005 to the present time is shown in Figure 1. The revenue stream is made up of both distillers dried grains with soluble (DDGS) and ethanol sales. Both ethanol and DDGS prices have increased over the last year. The high DDGS prices area result of high feed grains prices. The combined revenue levels have been over $3.00 per gallon in recent months. Similar price levels were reached in the early summers of 2006 and 2008.
The monthly cost of production for the ethanol plant during the same time period is shown in Figure 2. The cost per gallon of ethanol is also over $3.00 per gallon in recent months, due to the high price of corn. The other costs of ethanol production are minor compared to corn and have held relatively steady. A similar cost level occurred in early summer of 2008.
The increase in ethanol price has been matched by the increase in corn price as shown in Figure 3. This has resulted in approximately a breakeven level since the beginning of 2009, with blips of profitability in late 2009 and 2010. Ethanol profitability during the current surge in ethanol and corn prices is following the same pattern as the previous surge in 2008. How the surge will end and whether it will follow the same or a different pattern from that of 2008 is yet to be determined.
In Figure 4 we combine the costs and returns of the ethanol plant are combined with those of a corn farmer (cash rent farmer) to create an ethanol supply chain analysis.
- The red line at the top of the chart shows the revenue from the ethanol plant, similar to Figure 1.
- The tan area is the cost of producing ethanol not including corn. It is similar to the non-corn elements of Figure 2.
- The orange line is the maximum (breakeven) price the ethanol producer can pay for corn and not lose money. Purchasing corn at a price below(above) the breakeven level will generate profits (losses) for the ethanol producer.
- The green area at the bottom of the chart reflects the production inputs associated with producing corn (e.g.seed, fertilizer, machinery, fuel, herbicides, insurance, etc.)
- The blue area represented the cost of renting farmland on which to grow corn.
- The dark blue line is the minimum (breakeven) price the corn farmer can receive for corn and not lose money. Selling corn at a price higher(lower) than the breakeven level will generate profits (losses) for the corn farmer.
The difference between the ethanol plant’s breakeven corn purchase price and the farmer’s breakeven corn selling price is supply chain profit (both ethanol and corn). The profits of the ethanol supply chain were high during most of 2006, 2007 and 2008, narrowed to minimum levels during 2009 and 2010, but expanded again in 2011.
The red line with gold dots is the corn price during this period. It essentially allocates the supply chain profits (losses) between the ethanol producer and the corn farmer. During 2006, virtually all of the profits went to the ethanol producer. However, as the ethanol industry expanded, it began to bid up the price of corn and during 2007 the profits were divided between the ethanol producer and the corn farmer. The continued expansion of the ethanol industry in 2008 bid corn prices up to the level where virtually all of the profits accrued to the corn farmer.
In later 2008 there was a convergence of declining ethanol revenue and rising corn production costs which lasted through2009 and the first half of 2010. This squeezed the profits out of the supply chain and resulted in periods of losses. During the early part of this period, corn price provided modest returns to the corn farmer at the expense of the ethanol producer. However, in summer of 2009, the relationship changed. Corn price allocated periods of loss from mid-2009 to mid-2010 to the corn farmer. Starting in September of 2010,rising ethanol prices and lower production costs for the 2010 corn crop versus the 2009 crop generated significant supply chain profits. Corn price has allocated almost all of those profits to the corn farmer at the expense of the ethanol producer.
What can we expect for the coming year? The evolution of ethanol price over the coming months will determine the level of supply chain profits or losses. The corn price will allocate these profits (losses) between the ethanol producer and the corn farmer. Although the level of these prices over coming months is uncertain, we can be assured that these market prices will be unusually volatile.
We are in the process of creating ethanol supply chain profitability “projections” based on futures prices. This will be a part of the on-going supply chain analysis and will be reported in a future article in this newsletter. In addition, Bob Wisner will periodically provide ethanol and corn price analysis and projections in this newsletter, along with his corn and ethanol supply/usage balance sheets.