The recent political moves in Congress to remove the federal supports for ethanol, including the blenders’ credit and the import tariff, have justifiably created some question about the profitability of ethanol given high prices for corn. The price of crude oil and its derivative gasoline have influence over the pricing of ethanol. Is the high price of ethanol enough revenue to maintain profitability for ethanol refiners?
Ethanol producers have been breaking even over the past year says agricultural economist Don Hofstrand at Iowa State University, as the higher prices of ethanol have been used to buy corn. His analysis of the ethanol supply chain and its profitability indicates the flow through of cash from the refiner to the farmer. He says the revenue stream comes from both ethanol and DDG sales, with prices for both increasing over the past year. The price of DDG has to keep up with the price of corn, and sales of both have allowed ethanol revenue to exceed $3/gal. in the recent past, which paralleled period in 2006 and 2008, as well.
Hofstrand says pricing of ethanol has been at a breakeven price for refiners since early in 2009 with some small periods of profitability in late 2009 and 2010. He says, “Ethanol profitability during the current surge in ethanol and corn prices is following the same pattern as the previous surge in 2008. How the surge will end and whether it will follow the same or a different pattern from that of 2008 is yet to be determined.”
He says the profit in the ethanol supply chain is the difference between the top corn price that the ethanol plant can pay and remain profitable and the least the farmer can accept for his corn and still remain profitable. That profit margin for the “supply chain” was high for 2006 through 2008, but narrowed to minimum levels in 2009 and 2010, and has expanded this year with the higher price of corn and ethanol. Hofstrand says in 2006 virtually all of the profits in the supply chain went to the ethanol producer, but as the ethanol industry began to expand with the federal ethanol and renewable fuel mandate, and then refiners began to bid up the price of corn. He says at that point both the farmer and the refiner shared the supply chain profits. Since then more of the profits have shifted toward the farmer and away from the refiner.
Hofstrand says in 2008 declining ethanol revenues and rising corn prices converged which squeezed out supply chain profits and there were losses. But at the outset of that period farmers were collecting profits at the expense of the refiner. That shifted in mid-2009 when fewer funds were allocated to farmers and more to refiners. But lower costs of corn production allowed farmers to capture more of the profits beginning in September of 2010. And he says since that time corn prices have allocated almost all of the profits to the farmer and away from the ethanol refiner.
So what happens next? It is too early to tell says Hofstrand, and nothing is certain except for the fact that market prices for both oil and corn will be unusually volatile. He says his colleagues at Iowa State are in the process of making projections about ethanol supply chain profitability, based on futures prices.
The margin between the highest corn price that an ethanol producer can pay and break even, and the lowest corn price that a farmer can accept and break even is consider the profitability in the ethanol supply chain. The profitability is shared by the refiner and the farmer, but at times is greater one way than another. Recently, high ethanol revenues due to high oil prices have been used to buy corn from farmers, and farmers have garnered nearly all of the supply chain profits. The only certainty about the future is the volatility of both ethanol pricing (due to oil) and corn prices.