Iowa Ethanol Gross Production Margins: Update February 2018
By Sampath Jayasinghe
Decision Innovation Solutions, 11107 Aurora Avenue, Urbandale, IA 50322
In this month’s report, we look at the ethanol crush spread. Ethanol crush spread is a dollar value calculated as the difference between the combined sales values of ethanol, distillers dried grains with solubles (DDGS) and corn distillers oil (CDO) and the cost of corn in producing ethanol. This also is commonly known as the gross production margin (GPM). Previous updates covering GPM can be found in the September 2017 Report and March 2017 Report. This GPM analysis represents a real plant situation, and demonstrates the importance of the ethanol co-product market on the ethanol plant profitability.
Ethanol producers often use this spread to hedge the purchase price of corn and sales prices of ethanol and DDGS. The spread relationship between corn, ethanol, and DDGS varies over time and offers many opportunities for speculative actions. This GPM calculation is not intended to show precise ethanol plant margins.
Table 1: Weekly Average Iowa Ethanol and Co-Products Processing Values and Indicators of Average Gross Production Margin; February 2015 – February 2018.
Table 1 presents a simple comparison of Iowa average gross production margins in 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). USDA-AMS publishes weekly cash bid prices of corn, ethanol, and DDGS in Iowa locations. Iowa CDO prices are based on The Jacobsen. The dry-mill ethanol plants’ gross margins are calculated assuming ethanol yield of 2.80 gallons per bushel, 17.75 pounds of DDGS per bushel, and 0.6 pounds of CDO per bushel.
The Iowa average gross production margin was at $1.81 per bushel of corn in February 2018, compared to $1.40 in February 2017. Ethanol value per bushel has decreased to $3.79 in February 2018 from $3.91 in February 2017. But DDGS value per bushel has increased to $1.29 in February 2018 from $0.86 in February 2017. CDO value per bushel has decreased to $0.147 in February 2018 from $0.16 in February 2017. Combined total ethanol, DDGS, and CDO values have increased to $5.17 in February 2018, compared to $4.92 in February 2017.
Figure 1 shows estimated weekly Iowa ethanol gross production margins from January 2, 2015, to March 3, 2018. Ethanol gross production margins generally are lowest in the February-March period, rising throughout the year. Iowa ethanol gross margins in February 2018 have been significantly higher compared to the same time in the previous three years and recorded $1.81, the highest so far in February for the last three years.
The average ethanol price in Iowa dropped to $1.33 per gallon in February 2018, compared to $1.40 per gallon in February 2017. However, the average DDGS price in Iowa rose significantly to $145.12 per ton in February 2018, compared to $96.38 per ton in February 2017. The average CDO price in Iowa declined to $0.22 per pound in February 2018 from $$0.26 per pound in February 2017. The average cash corn price in Iowa also dropped to $3.36 per bushel in February 2018, from $3.41 per bushel in February 2017. Overall, average GPM in Iowa increased by nearly 29 percent in February 2018 from February 2017.
The average Iowa GPM in 2016 was $1.76 per bushel of corn, and in 2017 it was $1.77 per bushel of corn. As seen in Figure 1, compared to 2016, one pattern stands out in the data on GPM in 2017. GPM declines substantially in the fourth quarter of 2017, whereas GPM increased in the fourth quarter of 2016. After reaching the peak of $2.41 per bushel of corn in mid-September 2017, GPM rapidly declined to $1.54 per bushel of corn by the end of December 2017. The question is, what caused the decline in the fourth quarter of 2017? This can be answered by looking at ethanol price very closely. The average ethanol price in Iowa recorded a historically low level in January 2017 at $1.37 per gallon, rose to $1.55 by the summer of 2017, and then fell dramatically by the end of 2017 to $1.25 per gallon. But in 2016, the average ethanol price in Iowa rose gradually from $1.25 per gallon in January 2016 to $1.64 per gallon in December 2016.
Estimated Iowa gross ethanol production margin averaged $1.81 per bushel of corn in February 2018, compared to $1.40 in February 2017. Ethanol value per bushel has decreased to $3.79 in February 2018 from $3.91 in February 2017. But DDGS value per bushel has increased to $1.29 in February 2018 from $0.86 in February 2017. This has helped drive the gross production margin higher in February 2018 in comparison to the previous years.