Recent Trends in U.S. Ethanol Production, Profitability and Inventories
AgMRC Renewable Energy & Climate Change Newsletter
Dr. Robert Wisner
University Professor Emeritus
Department of Economics
Iowa State University
U.S. ethanol production declined sharply starting in late June last year when severe drought caused a sharp increase in corn prices. From that time until a few weeks ago, U.S. ethanol production was well below a year earlier and below mandated levels. Production at less than the mandated level was possible because of excess RINs that had accumulated in previous years when production exceeded government mandates. (1) An increase in imported sugar cane ethanol also helped to allow production to fall below the mandates. Reduced use of corn for ethanol impacted not just ethanol producers. It caused a reduction in output of distillers grains and solubles (DGS), which has become an important source of protein and energy for U.S. and foreign livestock and poultry industries. The decline in corm processing for ethanol and DGS also has impacted corn producers and industries that supply them with inputs and market their grain. Reduced processing at ethanol plants has been an important factor in the downward trend of corn prices since their peak in late summer 2012, along with an extremely sharp decline in U.S. corn exports.
In the last several weeks, corn processing for ethanol has increased moderately. The increase has been in response to lower corn prices that occurred after the March 28 USDA grain stocks report, as well as rising gasoline and ethanol prices. This combination has substantially increased ethanol profitability and a number of idled ethanol plants have been brought back into operation. Even with increased ethanol production, ethanol inventories in the motor fuel industry remain at relatively low levels. In this article, we review trends in these aspects of the biofuels industry and their contributions to increased ethanol profitability. A key question for ethanol producers and the industries supplying corn to them as well as for other users of corn is whether the increased profitability will continue through late summer and early fall.
Ethanol Production Increasing
Weekly ethanol production since September 1, 2010 is shown in Figure 1 below, using weekly data from the Environmental Protection Agency (EPA) (2). The dark blue line is weekly ethanol production from September 1, 2010 through August 31, 2012. The other line is weekly ethanol production from September 1, 2011 through May 10, 2013 and two alternative projections for production through the remainder of the current corn marketing year to August 31, 2013. The upper (red) horizontal projection is the 5-week average ethanol production from April 12 to May 10, 2013. If ethanol production continues at that level through August 31, 2013, production will be about 0.8% larger than indicated in USDA’s May 10 corn supply-demand projections. That level of production, if attained, would require about 36 million bushels more corn than the USDA May 10 projection. The lower projection is based on the 20-week average ethanol production from December 28, 2012 through May 10, 2013. At that level of production, corn use for ethanol and distillers grain and solubles (DGS) production would be about 24 million bushels less than USDA’s May 10 projection. The increase in ethanol production in April and May reflects substantially improved profitability of production that resulted in part from lower corn prices. Reduced ethanol imports and rising ethanol prices also contributed to improved profitability of the industry. At this writing, there are reports that plants being brought back into production include one plant that was intended to be permanently closed and is now reportedly is being prepared for re-starting production. Whether the recent increases in production will be sustained through summer will depend heavily on the trend in corn and ethanol prices. If the recent increases in ethanol production are sustained, Figure 1 indicates that ethanol production from late June through August will be moderately above a year earlier. That would bring the first year-over-year increase in U.S. ethanol production since early June 2012.
Indicators of Corn Starch Ethanol Profitability
USDA’s Agricultural Marketing Service (AMS) provides a indicators of weekly gross margin data for ethanol plants in Iowa, Minnesota, Nebraska, and Illinois (3). May 17, 2013 data for Iowa are shown in the table below, along with comparisons for the previous week and the same week a year earlier. The same types of comparisons for early March 2013 are shown in Table 2. Trends in margins of other states are similar to those in Iowa.
The tables show calculations using the AMS assumed 17.75 pounds of DGS per bushel of corn and a lower 15 pounds of DGS per bushel. We have heard from some industry sources that the 17.75 pounds per bushel DGS yield may be too high. For that reason we show the two different comparisons. The corn, ethanol, and DGS prices and the ethanol yield per bushel of corn are from AMS data. Variable costs are from the Agricultural Marketing Resource Center (AgMRC) ethanol plant model and are available from the Ethanol Profitability Spreadsheet web site: http://www.agmrc.org/renewable_energy/ethanol/ethanol-profitability/
The margins shown in Tables 1 and 2 do not include additional returns that would be generated by oil removal from DGS that would be marketed to either the feed industry or the biodiesel industry. Many ethanol plants are now removing corn oil and thus have modest additional returns beyond those shown in these calculations.
The tables are intended to provide a general look at the components of ethanol profitability, how profitability has changed in the latest week available versus the previous week, and how it compares with a year ago. They are not precise indicators of profitability for any individual dry-mill ethanol plant or individual company.
Note that the indicated return over variable costs was strongly positive on May 10 and 17, 2013 but was negative in May of last year. Corn prices in May of this year were higher than a year earlier, but the higher corn cost was offset by 25% higher ethanol prices. DGS prices on May 17 of this year were 1.6% below a year earlier and 3.7% below a week earlier.
Shut-down prices for ethanol plants are the corn price at which the return over variable costs becomes zero. Variable costs are the expenses of producing ethanol that would not be incurred if the plant is idled. Fixed costs are not affected by the volume of ethanol produced. They may include financing costs, depreciation, property taxes and other expenses that would be incurred whether or not the plant is operating, and thus are eliminated if the plant is closed.
Table 2 shows the same type of cost and return comparisons for early March 2013 and 2012. We selected that date because a number of ethanol plants were idled earlier this year due to negative profitability. The economics of ethanol production changed substantially after the release of USDA’s March 28 grain stocks report that showed considerably larger U.S. corn inventories than had been expected. Note that on March 1 and 8, 2013, the Iowa corn prices at ethanol plants were $7.24 and $7.34, respectively. Those prices were $0.32 per bushel higher than the prices in Table 1. Thus, the lower corn prices were one source of increased ethanol profitability. The other major source of increased profitability was higher ethanol prices. Ethanol prices at Iowa ethanol plants on May 17 were $2.57 per gallon, $0.20 per gallon higher than on March 8. Prices on May 10 were $0.26 per gallon higher than on March 1, 2013 and were $0.54 per gallon higher than a year earlier.
One negative influence on ethanol producer profitability is that the demand for DGS has weakened some in the last few weeks. Part of the decline is seasonal, with reduced need for DGS for beef cow-calf producers as the weather becomes warmer and pastures are available for their herds. However, data in Tables 1 and 2 suggest the recent decline may have been more than a normal seasonal pattern. Iowa DGS prices in early March were approximately 101% of corn prices, but by May 17 had declined to 86% of the lower corn prices. Last year, DGS prices increased from about 90% of corn prices in early March to 95% by mid-May as drought conditions worsened in the southern Great Plains.
Figure 2 puts these improved returns in an historical perspective. Based on the AgMRC ethanol model (which does not include returns for removal of corn oil), the return over total cost was negative for a typical Iowa ethanol plant from January 2012 until March 2013. January 2012 was the time at which the $0.45 per bushel ethanol blenders credit was eliminated. (4) Returns in April 2013 were the largest since November 2011, when an upward surge in returns occurred as the motor fuel industry aggressively blended ethanol with gasoline to capture as much return as possible from the blenders tax credit before it expired.
Influences on Corn Price Trends
Old-crop corn prices from late May through late summer 2013 will be influenced by USDA’s June 28 grain stocks report, progress in completing the remaining 29% of the U.S. corn crop that was not yet planted on May 19 (5), and the amount of early-harvested new-crop corn that will be available in August and early September. At this writing, it appears almost certain that much less early-harvested corn than last year will be available in late summer to help ease the tightness in old-crop supplies. The size of the winter wheat crop also may have some influence on corn prices through the availability of 2013-crop wheat feeding in the summer months, For several months, the condition of the U.S. hard red winter wheat crop has been at or near the poorest on record because of drought and repeated freeze damage. The soft red winter wheat crop is in much better condition and supplies of that class of wheat are expected to be large enough to permit substantial wheat feeding. For that reason, soft red wheat feeding may temper the upward potential in corn prices from June through August.
The USDA June 28 Grain Stocks report and Planted Acreage report will be other important influences on summer and fall corn prices. The grain stocks report will provide an updated indication of the quantity of corn fed during the March-May quarter. Domestic corn feeding is still the largest source of demand for corn. Over the last two years, the indicated quarterly feed and residual use has been quite variable. That creates a sizable range of uncertainty in this year’s potential March-May corn feed and residual use and the amount of old-crop corn likely to be available for ethanol and DGS production in the June-August quarter. Planted corn acres are expected to be near the level indicated in the March Prospective Plantings report and near last year’s level. If the 2013 U.S. corn yield is no more than 5% below the long-run trend, corn supplies are expected to be ample for the year ahead, at substantially lower prices in the 2013-14 marketing year than in the last 11 months. With those prospects, corn ethanol profitability is expected to improve after the 2013 corn crop is harvested.
Ethanol and Gasoline Inventories
The trend in U.S. gasoline and ethanol inventories is shown in Figure 3. Ethanol inventories have been trending gradually downward in the last several months, in response to moderately lower production than a year earlier. The downward trend continued in April and May despite increased ethanol production. The latest week on the chart, May 10, 2013, shows an uptrend in the nation’s gasoline inventories while ethanol inventories declined. Declining ethanol inventories along with government blending mandates have helped support ethanol prices.
Figure 4 shows ethanol inventories as a percentage of gasoline inventories through May 10, 2013. Inventories as a percentage of gasoline have been in an irregular but sharp downward trend since late May of last year. The May 10, 2013 percentage was at an historically low level not seen since late 2010. In the weeks ahead, the motor fuel industry may see a need to begin increasing inventories to meet summer seasonal demand. If so, that would be a supporting influence on ethanol prices and would help to maintain the recent improvement in ethanol profitability.
After many months of marginal to negative profitability for producing ethanol and distillers grain producers, profitability of the ethanol industry has improved. The improvement has resulted from lower (but still historically high) corn prices and increased ethanol prices. The ethanol industry is responding by bringing a number of previously idled plants back into production and the industry’s demand for corn has increased modestly in the last few weeks. A look back at the industry’s historical profitability shows highly volatile returns with numerous periods when full costs of production were not covered. The volatility is due largely to the fact that the primary input for ethanol production is a commodity whose prices are strongly influenced by weather, and the industry’s primary product is a commodity whose prices are strongly influenced by international geopolitics as well as domestic energy policies. There is reason for cautious optimism about ethanol profitability in the months ahead. However, improved profitability will depend heavily on favorable summer and early fall weather in the U.S. Corn Belt as well as in other major Northern Hemisphere grain producing countries.
1 For a discussion of RINs and their role in enforcing the mandates, see R. Wisner, “Renewable Identification Numbers (RINs) and Government Biofuels Blending Mandates,” AgMRC Renewable Energy Newsletter, April 2009.
2 EPA, “Weekly Ethanol Production”
3 Agricultural Marketing Service, USDA, “Iowa Ethanol Corn and Co-Products Processing Values”, May 17, 2013
4 R. Wisner, “Biofuels Prospects for 2012: Emerging Developments,” AgMRC Renewable Energy & Climate Change Newsletter January 2012.
5 NASS, USDA, Crop Progress, May 20, 2013.