High inventories and high corn prices squeeze ethanol producers’ margins
Energize Weekly, August 14, 2019
High corn prices and high inventories have squeezed operating margins for Midwest ethanol plants to multiyear lows in the first half of 2019, with an average margin of 3.5 cents a gallon, according to the federal Energy Information Administration (EIA).
The high prices and inventories led to near zero margins for June and July. Despite a limited domestic demand, production has remained high in 2019.
“Lower operating margins mean some ethanol plants may cut or even pause production until conditions improve,” the EIA said.
The agency estimates operating margins for a dry mill corn ethanol plant of average capacity in the Midwest by subtracting variable and fixed production costs from the sales revenue of the ethanol and coproducts.
The calculation assumes a fixed operating cost of about 3.5 cents a gallon, while the variable costs include the price of corn feedstock and the natural gas used to make the heat in distilling.
The blending of ethanol into gasoline, the prime market, has not be able to absorb the growing production, resulting in an oversupply and leading to depressed ethanol prices.
Through most of 2019, fuel-ethanol production and inventories have been either near or higher than their five-year averages. In June and July, they set seasonal records.
The key to profitability is determined by corn and corn ethanol prices. Ethanol production has become more efficient, increasing the amount made from each bushel of corn. About 2.8 gallon of ethanol is currently made from each bushel of corn.
Still, as corn prices rise, it pinches the equation. In June, corn prices averaged about $4.20 a bushel, 15 percent higher than previous months and the highest since June 2016. The hike in corn prices was the result of flooding in the Midwest that is expected to delay harvests and reduce yields.
Meanwhile, the more efficient ethanol production has led to a combination of high inventories in the face of a lack of demand, leaving ethanol prices relatively low for the year, with an average spot price in the first half of the year of $1.28 a gallon – 10 cents a gallon lower than the same period in 2018.
EIA forecasts that U.S. ethanol production will average 1.03 million barrels per day in 2019, about 2 percent less than the 2018 average, marking the first decrease in annual production since 2012.
By 2020, the EIA said it expects excess ethanol supplies will be consumed, and normal weather and harvest conditions will help production levels increase slightly to an average of about 1.05 million barrels a day, similar to 2018 levels.