The Changing Picture of Corn Ethanol Profitability
AgMRC Renewable Energy & Climate Change Newsletter
Retired Iowa State University Extension Agricultural Economist
Based on our economic model of a typical northern Iowa ethanol plant, the ethanol supply chain has continued to be profitable although the profits are now accruing to the ethanol producer rather than the corn farmer. This change has occurred in the last few months. Previously the profits accrued to the corn farmer.
Shown below is the monthly revenue from the ethanol from 2005 to the present time. The revenue stream is composed of both ethanol and DDGS sales. Although both ethanol and DDGS prices have declined recently, the combined revenue steam is still relatively strong compared to past levels. DDGS price has declined more rapidly than ethanol, dropping $56 or 22% since the first of the year. This is due primarily to the decline in corn price over the same period.
The monthly cost of producing ethanol during the same time period is shown below. Ethanol production cost reached a high of $3.47 per gallon in August of 2012. Since then, production cost has declined, dropping just this year from $3.15 per gallon in June to $2.15 in October. The reduction can be attributed to declining corn prices. During the ethanol production cost monthly peak in August of 2012, corn price reached $8.15 per bushel. During the recent cost slide from June to October, corn price has retreated from $7.17 to $4.43 per bushel, and has continued to decline into November.
With ethanol production cost dropping more rapidly than revenue, ethanol returns have increased as shown in below. This has resulted in a peak profit level of over 50 cents per gallon, similar to a peak in late 2011. However, several months of losses occurred between these two peaks. Although current profit levels are attractive, they are dwarfed by the enormous profit levels of 2006.
In the figure below we combine the costs and returns of the ethanol plant with those of the corn farmer (cash rent farmer). The red line at the top of the chart shows the revenue from the ethanol plant, similar to revenue figure shown previously, except the revenue is shown per bushel of corn rather than per gallon of ethanol. The tan area is the cost of producing ethanol, not including the cost of corn. It is similar to the non-corn cost elements in the cost figure shown previously. The orange line is the maximum (breakeven) price the ethanol producer can pay for corn and not lose money. Purchasing corn at a price lower (higher) than the breakeven level will generate profits (losses) for the ethanol producer.
At the bottom of the figure, the green and blue sections represent the cost of producing corn. The light blue area is the cost of land rental and the green area includes all other costs of producting corn (e.g. seed, fertilizer, fuel, machinery, etc.). The dark blue line is the cost per bushel of producing corn (combined light blue and green areas). It is the breakeven price for producing corn. Selling corn at a price higher (lower) than the breakeven price generates profits (losses) for the corn farmer.
The difference (white area) between the ethanol plant’s breakeven corn purchase price (orange line) and the farmer’s breakeven corn selling price (dark blue line) is supply chain profit (ethanol and corn production). Situations where the orange line dips below the dark blue line are supply chain losses. During most of 2006, 2007 and 2008, ethanol supply chain profits were large. Profits narrowed to approximately breakeven levels during 2009 and 2010, before rebounding to high profit levels again from 2011 to the present time.
The red line with gold dots is the corn price during this period. Corn price allocates supply chain profits between the ethanol producer and the corn farmer. During 2006, virtually all of the profits accrued to the ethanol producer. However, as the ethanol industry expanded (due to large profits), it bid up the price of corn during 2007 resulting in a division of profits 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. Only in recent months has corn price allocated most of the profits to the ethanol producer.
During the twelve and one half years displayed in the last figure above, several trends can be observed. Generally, the ethanol supply chain has displayed strong though volatile profitability over this period. However, the continued upward trend in corn production costs is eating into supply chain profits. This trend was punctuated in 2012 when corn production cost per bushel was abnormally high due to reduced corn yields.
Since 2008, corn price has tended to track the ethanol breakeven corn price, allocating supply chain profits to the corn farmer. If corn ethanol usage continues to expand, this trend may continue, because expanding ethanol production will continue to bid up corn price to ethanol production breakeven levels. However, if corn ethanol usage plateaus or declines, reduced demand for corn (at a time when corn production will probably continue to increase due to rising trend line corn yields) will result in lower corn prices resulting in an allocation of profits to the ethanol producer. It is even possible that corn price could decline even further (below cost of production). The cost of corn production does not adjust downward very quickly.
Of course all of this depends on the demand and resulting price of ethanol, which determines the overall profitability of the corn ethanol supply chain. Bob Wisner and I will be exploring supply and demand in the ethanol and gasoline markets in future issues of this newsletter.
You can follow the Monthly Ethanol Profitability and Monthly Corn Farmer Profitability at our website.