DTN’s Hypothetical Plant Shows First Profit Without Debt Since September

Source: By Todd Neeley, DTN/Progressive Farmer • Posted: Wednesday, January 16, 2019

Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, who works with ethanol plants, said the way ethanol companies are responding to the current market varies widely.

“What I’m seeing and hearing is plants are individually deciding what production level generates the least amount of cash burn for them and the production level impact on working capital and how deep they want to go into their lines of credit,” she said.

“Each situation is really different; you hear one plant announce they are idling or slowing production and the next one is producing at full capacity. I believe everyone has faith the margins will return, but no real consensus on when that will happen. Q1 is traditionally a poor-margin period, so (I’m) not hearing much from folks that they think it will turn around in the next 30 to 60 days.”

According to a recent news account, during recent trade negotiations, United States trade officials have been pressing China to buy U.S. ethanol. In addition, concern continues to build that the EPA may not complete a rulemaking for year-round E15 sales in time for the beginning of the summer driving season on June 1 because of the ongoing partial government shutdown.

Funk said even if both situations end favorably for U.S. producers, the market effects won’t be felt overnight.

“Even if China starts taking gallons again, it will take a little time to really see the impact on margins, and depending on the size of the impact, those that are slowed down or idled will come right back online and the overproduction will resume,” she said.

“The status of E15 year round is another challenge that seems to be moving slower than promised or hoped for. I don’t think we can look to just one trigger as the solution; it is going to take a combination of events to really restore margins for an extended period of time. We need China to resume imports, year-round E15 and rational production levels.”

CHINA MARKET LOSS

Pavel Molchanov, senior vice president and equity research analyst at Raymond James and Associates, said losing the China ethanol market has been harmful.

“Chinese purchases of U.S. ethanol fell to zero as of April 2018 when China implemented an increased tariff, following the original tariff from 2017,” he said.

“Although some other countries, e.g., Brazil and India, have been importing higher volumes, the loss of the Chinese business was undeniably damaging to the U.S. ethanol industry. So yes, any durable trade agreement between Washington and Beijing would naturally help alleviate the current ethanol glut. Of course, we will need to see the actual details of any such deal.”

DTN established Neeley Biofuels in DTN’s ProphetX Ethanol Edition as a way to track ethanol industry profitability. Using the real-time, commodity price data that flows into the “corn crush” in ProphetX and some industry-average figures for interest costs, labor and overhead, DTN is able to track current profits. It also tracks how much Neeley Biofuels would make or lose under an infinite number of “what-if” scenarios.

DTN uses industry-average figures from Iowa State University economist David Swenson. Included in the figures are annual labor and management costs, transportation costs, debt-servicing costs, depreciation and maintenance costs. Even though Neeley Biofuels is paying debt-service and depreciation costs on its plant, many real plants are not in debt.

Also, it should be noted the calculations include all other costs such as chemicals and yeasts, electricity, denaturant and water. While DTN uses natural gas spot prices for these updates, many ethanol plants lock in prices on the futures market, so they are not as vulnerable to natural gas market volatility.

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