Economist: Ethanol profits face decline

Source: By Susanne Retka Schill, Ethanol Producer Magazine • Posted: Monday, October 27, 2014

 Ethanol production profits hit a wall in the past month, according to an analysis by University of Illinois economist Scott Irwin in a recent FarmDocDaily post. Following an unprecedented streak of positive profits, the price of ethanol dropped more than 50 cents per gallon in September.

“While the recent drop in prices and profits is certainly painful for ethanol producers,” Irwin said in the analysis, “it is important to keep in mind the magnitude of the profits earned during the recent and unprecedented streak of positive profits. Specifically, a representative ethanol plant earned a cumulative $66.3 million profit during the current 84-week streak (March 15, 2013 through Oct. 17, 2014), which is more than twice the cumulative $25.0 million in profits earned during the previous 320 weeks (Jan. 25, 2007 – March 8, 2013).”

Irwin, who has been following ethanol industry economics, was using a model for representative Iowa-based ethanol plant for his analysis. Irwin pointed out that the the long streak of positive production profits was likely unsustainable and, “ethanol prices would likely to bear the brunt of the adjustment back to equilibrium.” An earlier study found that the relationship between ethanol and corn prices tends to revert to levels “implied by an equilibrium long-run level of ethanol production profitability.” The estimated long-run equilibrium for ethanol profits was found to be 20 cents per gallon.  Earlier this year, he found that surging U.S. ethanol exports explained why the typical adjustment process had been delayed.

For the complete analysis, along with links to earlier articles, click here.