Ethanol Production Hurts Margins

Source: By Todd Neeley, DTN/Progressive Farmer • Posted: Monday, September 24, 2018

Ethanol prices dropped to long-term lows this week, causing profit margins to fall at DTN's hypothetical ethanol plant. (DTN file photo)
Ethanol prices dropped to long-term lows this week, causing profit margins to fall at DTN’s hypothetical ethanol plant. (DTN file photo)

OMAHA (DTN) — Profit margins at DTN’s Neeley Biofuels hypothetical ethanol plant have deteriorated significantly in the past month, as ethanol production in the United States has ramped up and ethanol prices hit long-term lows.

Since our last update of the hypothetical 50-million-gallon plant in South Dakota, the net margin without debt service has fallen dramatically from 20 cents per gallon on Aug. 13, to just 8 cents on Wednesday. Margins including debt service came in at a net loss of 23.4 cents, compared to a net loss of 11.7 cents on Aug. 13. Most ethanol plants are not paying debt service.

DTN Analyst Rick Kment said margins have weakened because of strong ethanol production and price pressure in corn markets.

“The focus on continued strong ethanol production as well as price pressure that has developed in corn markets is likely to limit any significant additional support through the ethanol market in the near future,” he said. “The lack of support in ethanol markets is likely to continue to keep margins weak over the near future.”

With a large corn crop expected through the fall, he said, additional short-term pressure is likely to develop in corn and ethanol prices.

Ethanol futures are already at long-term lows with ethanol trading at $1.25 per gallon on Wednesday. That was a dramatic drop from our August update when the ethanol price received by the hypothetical plant was $1.53.