Ethanol Supply Chain Profitability

AgMRC Renewable Energy Newsletter
September 2009

  Don Hofstrand
  Co-director
  Agricultural Marketing Resource Center
  dhof@iastate.edu
 

Based on our economic model of a typical northern Iowa ethanol plant, ethanol has again become profitable after several months of losses.  Ethanol moved into the black in June and has stayed profitable, although not at the profit levels of the past. 

Although ethanol has gained modest profitability, it has been at the expense of the corn farmer and not from higher ethanol prices.  This portends a problem in the coming year from an inadequate revenue stream to cover the ethanol production supply chain costs (corn and ethanol).

Figure 1 shows the monthly revenue from the ethanol plant from 2005 to the present time.  The revenue stream is made up of both DDGS and ethanol sales.  Although both ethanol and DDGS prices declined from their July levels, the combined revenue steam maintained its levels of recent months of just under $2.00 per gallon of ethanol.

Figure 2 shows the monthly cost of production for the ethanol plant during the same time period.  The cost per gallon held in the neighborhood of $2.00 per gallon in recent months until July when corn prices declined. 

The decline in corn prices provides some breathing room for the ethanol industry as shown in Figure 3.  It provides modest profit levels similar to those achieved in 2008, but nothing like the enormous profit levels of 2006.

In Figure 4 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 Figure 1, 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 corn.  It is similar to the non-corn elements of Figure 2.  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 than the breakeven will generate profits for the ethanol producer.

At the bottom of the chart, the green and blue sections represent the cost of producing corn.  The dark blue line is the minimum (breakeven) price the corn farmer can receive for corn and not lose money.  Selling corn at a price higher than the breakeven will generate profits for the corn farmer.

The difference between the ethanol plant’s breakeven corn purchase price and the farmer’s breakeven corn selling price is supply chain profit (both ethanol and corn).  You can see that during most of 2006, 2007 and 2008, the profits of the ethanol supply chain were high, but narrowed to minimum levels during 2009.

The red line with gold dots is the corn price during this period.  It essentially allocates the supply chain profits between the ethanol producer and the corn farmer.  During 2006, virtually all of the profits went to the ethanol producer.  However, as the ethanol industry expanded, it began to bid up the price of corn and during 2007 the profits were divided 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.

In 2009 we have seen the convergence of declining ethanol revenue and rising corn production costs.  This has squeezed the profits out of the supply chain.  During most of this period, corn price provided modest returns to the corn farmer at the expense of the ethanol producer.  In July, the roles were reversed.

What can we expect for the coming year? The evolution of ethanol price over the coming months will determine the level of supply chain profits or losses.  The corn price will allocate these profits (losses) between the ethanol producer and the corn farmer.  However, one fact we know about the coming year – the cost of producing the 2009 corn crop was higher than that of the 2008 crop.  As we enter the 2009 crop marketing year, the corn farmer’s breakeven corn selling price will increase.  This is shown in Figure 5 which combines the cost of producing both corn and ethanol.  The supply chain cost of producing ethanol is pushed up to the $2.00 per gallon level.  These are supply chain loss levels at recent ethanol and DDGS prices.  In the year ahead, corn price may play the role of allocating losses rather than profits.

You can follow the Monthly Tracking of Ethanol Profits and Corn Farmer Profits at our Web site.