Falling ethanol prices cutting plant profits
Nov 15, 2007 10:02 AM, By Elton Robinson
Farm Press Editorial Staff
Recent declines in ethanol prices have sharply reduced profitability
for ethanol producers, USDA's chief economist Keith Collins told the
House Agriculture Committee last month.
Speaking at a hearing on disaster conditions across the nation on
Oct. 18, Collins noted that ethanol prices have weakened since mid-
summer as additional plants have come on line, adding to ethanol
supplies and contributing to some infrastructure bottlenecks.
For example, prices at ethanol plants in Iowa and Nebraska have
fallen nearly 50 cents per gallon since late July 2007. During the
same period, futures prices on the nearby contract have lost about 40
cents per gallon.
Until recently, ethanol premiums have averaged 50 cents per gallon
compared with unleaded gasoline. The situation has suddenly reversed,
with wholesale ethanol prices as much as 39 cents per gallon below
the wholesale price for gasoline during September.
The outlook for ethanol prices appears even less favorable in the
futures market, with the nearby Chicago Board of Trade contract for
ethanol trading 50 cents per gallon below the nearby New York
Mercantile Exchange contract for reformulated gasoline blendstock.
This shift in the ethanol-gasoline price relationship has sharply
reduced returns for ethanol producers, according to Collins. "With
current retail gasoline prices at $2.80 per gallon, wholesale prices
without federal and state excise taxes would be about $2.20 per
gallon. Nearby futures for ethanol are trading at $1.57 per gallon,
71 percent of the $2.20-per-gallon estimated wholesale gasoline price
and about equal to ethanol's energy value relative to gasoline."
U.S. ethanol production capacity for today is estimated at 6.9
billion gallons, up 2 billion gallons from a year ago. Production
capacity is expected to increase sharply over the coming 18 to 24
months, if the 76 plants currently under construction are completed.
The new construction would add 6.7 billion gallons of ethanol
production capacity, bringing total capacity to 13.6 billion gallons
potentially as early as late 2009.
This year's record U.S. corn production is bringing some relief to
declining ethanol producer margins, according to Collins. "However,
despite the expected record corn harvest, corn prices remain strong
supported by strong demand, record-high wheat prices, and strong
USDA estimates that a 40 million-gallon Midwest ethanol plant,
receiving the late September price of $1.52 per gallon for ethanol
and paying $3 per bushel of corn, was earning 17 cents per gallon
above variable costs of production and 3 cents below total variable
plus capital costs of production.
"In the current price environment, the 51 cents-per-gallon ethanol
tax credit is important in sustaining ethanol demand and prices at
levels that are forestalling some plant shut-downs."
The news is not so good for soydiesel production either, noted
Collins, even though U.S. biodiesel production continues to rise,
setting new production records each month.
According to Collins, 20 percent of 2007-08 soybean oil production is
expected to be used to produce about 580 million gallons of
biodiesel. This compares with only 8 percent of soybean oil
production used to produce about 200 million gallons in 2005-06.
But as with ethanol, biodiesel profit margins are eroding due to
sharply rising soybean oil prices. The price of soybean oil, which is
the feedstock for 85 to 90 percent of domestically produced
biodiesel, has increased over 40 percent over the past year, causing
biodiesel returns to decline from around 80 cents per gallon to near
Prices for vegetable oil, another feedstock for biodiesel, are
expected to remain strong due to strong demand, particularly for
biodiesel in the EU, according to Collins.
"Due to the $1 per gallon tax credit for blending, U.S. produced
biodiesel is competitive in the EU biodiesel market. Since March
2007, net exports of biodiesel have accounted for more than 25
percent of U.S. biodiesel production. As long as U.S. biodiesel
remains competitive in world markets, U.S. production is likely to
grow despite weak margins."
USDA is also projecting smaller U.S. corn acres and higher U.S.
soybean acres for 2008-09. Corn planted area for 2008 is expected to
fall as prices and returns for competing crops, such as wheat and
soybeans, have improved relative to corn in recent months, Collins
"December 2008 futures prices for corn are currently more than 30
cents per bushel below the peak of December 2007 futures last
February. Current cash prices are more than $1 per bushel below their
levels in late February.
"Although world demand remains strong for feed grains, record U.S.
corn supplies are expected to put downward pressure on corn prices
over the coming months. Given the current outlook for the 2008 crop,
corn planted area next spring could decline 6 to 8 percent from 2007
to around 87 million acres.
"Even with the potential for a 6 to 8 percent reduction in planted
area next spring, 2008 corn area would still be 8 to 12 percent above
the 1997-2006 average. Lower production combined with continued
growth in the corn-based ethanol industry could reduce carryover
stocks adding support to prices in 2008-09.
"U.S. soybean area forecast to rebound to 70 million acres in 2008,
regaining more than half of the 11 million acres lost primarily to
corn in 2007. The soybean to corn price ratio, which declined to
below 2 in the spring of 2007, strongly favored corn planting.
Current March 2008 futures imply a soybean to corn price ratio of
2.7, favoring soybeans over corn. Rotation practices also favor a
switch back to soybeans."