Looking at Current Iowa Ethanol Gross Production Margins
By Sampath Jayasinghe
Decision Innovation Solutions, 11107 Aurora Avenue, Urbandale, IA 50322
The 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 is commonly known as the gross production margin (GPM). In most previous analysis, including the AgMRC March 2017 report, CDO price was not included in the GPM calculation. In this month’s report, we include CDO prices in the GPM analysis to represent a real plant situation, and demonstrate 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. Note that the 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; August 2015 – August 2017.
Table 1 presents a simple comparison of Iowa average gross production margins in August 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 $2.08 per bushel of corn in August 2017, compared to $1.74 in August 2016. Ethanol value per bushel has increased to $4.18 in August 2017 from $3.73 in August 2016. But DDGS value per bushel has decreased to $0.95 in August 2017 from $1.07 in August 2016. CDO value per bushel has increased to $0.17 in August 2017 from $0.15 in August 2016. Combined ethanol, DDGS, and CDO values have increased to $5.31 in August 2017, compared to $4.95 in August 2016.
Figure 1 shows estimated weekly Iowa ethanol gross production margins from January 2, 2015 to September 2, 2017. Ethanol gross production margins generally are lowest in the February-March period, rising throughout the year. Iowa ethanol gross margins have continued to rise and recorded $2.08 in August, the highest so far in 2017. Average ethanol price in Iowa rose to $1.49 per gallon in August 2017, compared to $1.33 per gallon in August 2016. Average DDGS price in Iowa fell to $107 per ton in August 2017, compared to $119 per ton in August 2016. Average DCO price in Iowa rose to $0.28 per pound in August 2017 from $$0.24 per pound in August 2016. But average cash corn price in Iowa increased to $3.21 per bushel in August 2017 from $3.06 per bushel in August 2016. Overall, average GPM increased by nearly 20 percent in August 2017 from August 2016.
For now, Iowa cash corn prices are likely to remain low. But gross production margins will erode if DDGS prices fall significantly for the rest of 2017 as they have been since 2015. Since the beginning of this year, DDGS prices remain under pressure after China imposed anti-dumping and countervailing duties on DDGS from the United States. Current steady-to-high CDO prices will be very handy in mitigating tight margin situations, especially when DDGS price fall. Various strategies have been implemented at the plant level to increase CDO extraction, because oil is becoming more valuable comparatively than DDGS.