Hypothetical Ethanol Plant Feels Pressure From Rising Futures Prices

Source: By Todd Neeley, Progressive Farmer • Posted: Tuesday, May 22, 2018

OMAHA (DTN) — Though ethanol margins continue to erode in the third week of May, one certified public accountant who works with a group of ethanol plants in Kansas said there are signs the tide may be turning soon.

Donna Funk, a certified public accountant with K-Coe Isom based in Lenexa, Kansas, said the upcoming start of the summer driving season is bringing optimism to ethanol plants.

“I’m starting the next round of client meetings this week, but generally I think folks are seeing a little improvement in margins,” she said. “If the price at the pump in Kansas City is any reflection of things to come and the refiners capitalize on their profits, the ethanol plants should start to see some pretty good margins. Gas in KC is hovering around $2.80 and that is ahead of the holiday weekend or the real start of driving season.”

Producers continue to pay close attention to the Renewable Fuel Standard happenings in Washington, where President Donald Trump’s administration is expected to announce a series of changes to the law, Funk said. That may include attaching renewable identification numbers, or RINs, to ethanol exports, tightening rules on issuing small refinery waivers, among other proposals.

“I think the thing that everyone is watching and waiting to see the impact are the DC meetings and what that really means to as it relates to RINs and the impact on refiners’ use of the domestic product in domestic gasoline versus exports, as well as all the trade talks that are currently in the works,” Funk said.

Recent news from China that includes holding off on a variety of agriculture tariffs including sorghum, an ethanol feedstock, should be positive for the industry. “There is so much uncertainty right now it is hard to know how margins will react,” Funk said.

According to the latest numbers on DTN’s hypothetical 50-million-gallon ethanol plant in South Dakota, profitability remains weak ahead of the Memorial Day weekend.

DTN Ethanol Analyst Rick Kment said recent pressure in ethanol futures prices has added even more margin pressure to the market.

Ethanol prices have hovered within a 10-cent trading range from $1.40 to $1.50 per gallon, with current futures levels holding near $1.45 per gallon, as of this update.

Neeley Biofuels is currently reporting a net loss of 18.3 cents per gallon of ethanol produced. When not accounting for debt service or depreciation at the plant, the net profitability is currently at a 13-cent per-gallon gain.

Since March, the net loss with debt service included has widened by 6 cents per gallon of ethanol produced, the same for the margin without debt.

Kment said corn markets have eroded slightly during the past week, but support seen during late April and early May has caused some higher overall production costs.

Corn prices have recently moved below $4 per bushel, but are still in the upper range of the current short-term trading range between $3.85 and $4.05 per bushel in the spot month futures contracts.

DTN established Neeley Biofuels in DTN’s ProphetX Ethanol Edition as a way of tracking 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.

Todd Neeley can be reached at todd.neeley@dtn.com