An Analysis of Ethanol Production by State and Iowa Ethanol Crush Margins

By Sampath Jayasinghe
Decision Innovation Solutions, 11107 Aurora Avenue, Urbandale, IA 50322
http://www.decision-innovation.com/

U.S. Annual Ethanol Production

U.S. annual fuel ethanol production in 2016 was 15.329 billion gallons, according to the Energy Information Administration’s (EIA) Fuel Ethanol Supply and Disposition monthly data released Feb. 28, 2017. Compared to 2015 production, this is a 3.5 percent increase. In November 2015, the U.S. Environmental Protection Agency (EPA) finalized the volume requirements across all types of biofuels for calendar year 2016 under the Renewable Fuel Standard (RFS) program. The final 2016 standard for corn ethanol was set at 14.5 billion gallons. 

The total annual fuel ethanol production from 2009 to 2016 is shown in Figure 1. Following drought conditions in 2012, U.S. ethanol production has been increasing significantly since 2013. Notice the annual production linear trend line in Figure 1, indicating U.S. ethanol production has increased an average of 0.47 billion gallons in each year.

The total production in 2014 was 14.313 billion gallons, an increase of 7.7 percent from 2013. The production in 2015 was 14.807 billion gallons, an increase of 3.5 percent from 2014. The production in 2016 is the highest recorded in U.S. history.

Ethanol Production by State

The Renewable Fuel Association (RFA) regularly publishes ethanol plant capacities and ethanol operating production by state. Figure 2 shows the ethanol operating production by state based on RFA’s latest updated data from December 2016. Iowa has the largest operating production of 4.017 billion gallons, which is 26.1 percent of the nation's total. Nebraska has the second largest ethanol operating production of 2.122 billion gallons, which is 13.8 percent of the nation’s total. Illinois has the third-mostethanol operating production of 1.597 billion gallons, 10.4 percent of the national’s total. Kentucky has the smallest operating production of 36 million gallons. As seen in Figure 2, twenty-five states have operating ethanol facilities.

Iowa Ethanol Gross Production Margins: Ethanol Crush Spread 

The ethanol crush spread is a dollar value calculated as the difference between the combined sales values of ethanol and distillers’ dried grains with solubles (DDGS), and the cost of corn in producing ethanol. This is commonly known as the Gross Production Margin. Ethanol producers often use this spread to hedge the purchase price of corn and sales prices of ethanol and DDGS. The spread relationship between the corn, ethanol, and DDGS varies over time and offers many opportunities for speculative actions. 

Table 1 presents a simple comparison of Iowa gross margins in mid-February from 2015 to 2017. Iowa’s corn prices are compared with the value of processing products for Iowa ethanol plants published by the USDA’s Agricultural Marketing Service (USDA-AMS). The contribution from corn distillers’ oil is not included in this analysis. The dry-mill ethanol plants’ gross margins are calculated assuming ethanol yield of 2.80 gallons per bushel and 17.75 pounds of DDGS per bushel. 

Iowa gross production margin is at $1.35 per bushel in February 17, 2017 compared to $1.28 in February 19, 2016. Ethanol value per bushel has increased to $3.95 in February 17, 2017 from $3.67 in February 19, 2016. But DDGS value per bushel has decreased to $0.87 in February 17, 2017 from $1.09 in February 19, 2016 as shown in Table 1. 

Table 1: Weekly Iowa Ethanol and Co-Products Processing Values and Indicators of Gross Production Margin in Mid-February 2015-2017.

Source: USDA-AMS

Figure 3 shows weekly Iowa ethanol gross production margins from January 3, 2015 to February 17, 2017. Note these are not intended to show precise margins of Iowa plants. Iowa State University’s Agricultural Marketing Resource Center maintains an excellent spreadsheet model of ethanol profitability.

In general, ethanol gross production margins are lower in the February-March period, as shown in Figure 3. Iowa ethanol gross margins rose significantly from March 2016 to December 2016. The average gross margin in March 2016 was $1.22 per bushel, and rose to $2.23 in December 2016, an increase of approximately 83 percent. During the week of December 16, the Iowa ethanol gross margin reached a nearly two-year high of $2.59 per bushel. Since then, the gross margin has fallen back to $1.35 per bushel as of February 17, 2017, mainly due to falling ethanol price and steady-to-higher corn price. The gross margin during mid-February in 2017 fell into the middle range compared to the past two years, as shown in Table 1.

References

U.S. Energy Information Administration (EIA), 2017. Fuel Ethanol Supply and Disposition. Downloaded February 28, 2016.

USDA-AMS (U.S. Department of Agriculture, Agricultural Marketing Service), 2017. Iowa Ethanol Corn & Co-Products Processing Values, various reports.

Errata: On February 28, 2017, the January 2017 AgMRC renewable energy report was reposted to correct an error under the subtopic “National Average Ethanol Yield.” In the second paragraph, the estimate of sorghum in fuel ethanol production for the first 10 months in 2016 was listed as 1.171 million bushels. The correct value is 117.1 million bushels, and this correction has been made.