Ethanol Production: Positive Margins, Record Exports, Record High Domestic Demand, and Exploded RINs
By: Sampath Jayasinghe, Decision Innovation Solutions, 11107 Aurora Avenue, Urbandale, IA 50322. http://www.decision-innovation.com/
Guest Contributor: Shashi Menon, EcoEngineers, 300 E Locust Street, Des Moines, IA 50309. http://ecoengineers.us/
U.S. ethanol production reached 981,000 barrels per day for the week ending September 16 according to the most recent Weekly Ethanol Plant Production report from the Energy Information Administration (EIA). Figure 1 illustrates weekly U.S. oxygenate plant production of fuel ethanol (thousand barrels per day) and weekly U.S. ending stocks of fuel ethanol (thousand barrels) from June 4, 2010, to September 16, 2016. Correspondingly, weekly ending stocks of fuel ethanol are at 20,016,000 barrels.
The most recent production low was recorded approximately three months ago during the week ending June 17 at 962,000 barrels per day. Then the production soared up to the historical record of 1,029,000 barrels per day during the week ending July 15 and again recorded a similar number during the week ending August 12. Average production in July was 1,003,000 barrels per day and average production in August was 1,024,000 barrels per day.
Figure 2 depicts the ethanol production by number of week in each year from 2013 to September 16, 2016. Notice two seasonal periods each year at the end of winter and the beginning of fall when there is a slowdown in blending because of repair and maintenance. As such, the production will be slowing down in the coming weeks because of the seasonal fall maintenance in 2016.
The average weekly ethanol production from January to August 2016 was at 983,000 barrels per day compared with 956,000 barrels per day during the same period in 2015. Historically high production last July and August (above one million barrels per day) can be attributed to a few factors.
Reasonably Good Margins
Ethanol producers are now enjoying positive margins. Production margins are mainly being supported by the comparatively lower price of corn, the main feedstock in U.S. ethanol production. On average, the net return over all costs per gallon was $0.23 in July based on the Ethanol Profitability Spreadsheet developed by Hofstrand and Johanns (2016). Negative profits started in November 2015 and continued until April 2016. Since May 2016, the net returns have turned positive as the cost of corn per gallon of producing ethanol has come down significantly. Historically high ending stocks have eroded to approximately 20,016,000 by the week ending September 16 from 23,307,000 barrels for the week ending March 4 as shown in Figure 1. Disappearance of stocks has helped the ethanol price to rise above $1.50 per gallon. All these factors have helped producers to make positive margins and boost production to a historically record level on a weekly basis.
Significantly High Exports
U.S. exports remain very large for the first seven months of 2016, as shown in Figure 3. Total ethanol exports from January to July 2016 were a record 12,303,000 barrels; this compares with 12,273,000 barrels during the same period in 2015. This is in spite of zero exports to China in June and July of this year. However, as we have indicated in our July AgMRC report, China recently eliminated government support of floor pricing for corn. As a result, domestic corn prices have fallen and become price competitive to boost domestic ethanol production. Additionally, the Chinese government is subsidizing industrial corn use to erode excess domestic corn stocks, which would increase corn for ethanol use during the 2016/17 marketing year. These policy changes are the likely reasons for reduced Chinese ethanol imports from the United States in June and July.
Strong Demand for Ethanol
The Short Term Energy Outlook published on September 7 by the EIA forecasts that U.S. motor gasoline consumption will increase by 170,000 barrels per day (1.9%), to 9.33 million barrels per day in 2016. This would make 2016 the highest average gasoline consumption on record as we have shown in our August 2016 AgMRC article. However, gasoline consumption declined by approximately 1% from July to August.
Current Developments 2016-2017: Prices of Ethanol RINs Exploded
The prices of Renewable Identification Numbers (RINs) can be defined as the marginal compliance cost of Renewable Fuels Standard (RFS) mandates. As shown in Figure 4, the ethanol D6 RIN prices that had been $0.36 per RIN at the end of September 2015 rocketed to $0.97 per RIN by mid-July 2016. Now it has slowly settled into the $0.86–$0.88 range by mid-September 2016. Because RINs are thinly traded and highly dependent on regulations and perceptions of supply, they typically show some volatility that is often difficult to fully explain—for example, a sudden move by a trading house can cause prices to jump.
After the Environmental Protection Agency (EPA) released its long-awaited final ruling for 2014-2016 RFS standards on November 30, 2015, the price of D6 ethanol RINs increased dramatically. An increase of additional total renewable fuels obligations (RVOs) for each year from 2014 to 2016 in the final rulemaking in comparison to the preliminary proposal released on May 29, 2015, was one factor in the spike of the prices of RINs. On May 31, 2016, the EPA released its proposal for the 2017 RFS mandate and D6 RIN prices have generally risen.
The steady rise in RIN prices from above $0.60 in January to above $0.90 in July of this year can be mostly attributed to the RVOs for 2016 and 2017 and perceptions of future supply. There has been a slow but steady awareness that the supply of RINS might be tight for the next two years. In late June there was a Reuters news report that referred to Goldman Sachs Group talking about a supply crunch and how RINs will be $1 or above in 2017. That may have contributed to the rise in prices in late July. As seen in Figure 4, there was a fall to around $0.80 in mid-August, which may have been just a correction or some other market event. During August, we witnessed some market incidents such as a letter from a well-known investor, Carl Icahn, addressed to the EPA on how the system is rigged. That may have tempered trading for a few days. An excellent applied economics analysis of the pricing behavior of RINs for 2013-2015 can be found in Irwin and Good (2015) and the literature cited therein.
Sources
U.S. Energy Information Administration (EIA), various. Monthly Energy Review.
———, various. Short Term Energy Outlook.
———, various. Weekly Ethanol Plant Production.
Hofstrand, D., and A. Johanns, 2016. Monthly Profitability of Biodiesel Production. Ames IA: Ag Marketing Resource Center, Iowa State University.
Irwin, S., and D. Good, 2015. "RINs Gone Wild? (Round 2)." farmdoc daily (5):224, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, December 4.
