New report tracks profitability of the ethanol industry

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The boom in ethanol production is a well-known and much-discussed phenomenon. Less understood is the profitability of all the ethanol plants built during the last decade. It is important to track the profitability of ethanol plants not only to assess investment performance in the industry but to also analyze short-term implications for the production of ethanol and use of corn as a feedstock.

In order to assess ethanol plant profitability over time, a model of a representative Iowa plant was developed. A model developed at Iowa State University by Don Hofstrand is used as a starting point. The final model incorporates these key assumptions:

• 100 million gallon annual ethanol production capacity
• Plant construction costs of $2.11 per gallon of ethanol production capacity
• 40% debt and 60% equity financing
• 8.25% interest on 10-year loan for debt financing
• A total of $0.60 fixed costs per bushel of corn processed
• Non-corn and non-natural gas variable costs of $0.59 per bushel of corn processed in 2011 (higher in previous years)
• 2.80 gallons of ethanol produced per bushel of corn processed
• 17 pounds of dried distillers grain (DDGS) produced per bushel of corn processed

This model is meant to be representative of an "average" ethanol plant constructed in the last five years. There is certainly substantial variation in capacity and production efficiency across the industry and this should be kept in mind when viewing profit estimates from the model. In addition, the model does not take into account the recent trend towards extraction of corn oil from DDGS as a way of increasing plant profitability.

click image to zoom To track plant profitability over time, weekly ethanol and DDGS prices at Iowa ethanol plants were collected starting in late January 2007. Natural gas costs are estimated based on monthly data as available and updated using natural gas futures prices. Figure 1 presents the (pre-tax) estimates of ethanol processing margins based on the prices and model assumptions. It is, of course, no surprise that margins have been enormously variable. Margins (net of variable and fixed costs) in early 2007 were very high but declined steadily into early 2009, reaching a low of -$0.63 per bushel of corn processed on March 13, 2009. Margins then began trending upward thereafter, reaching a peak of $2.45 per bushel of corn processed on November 23, 2011. Profitability then plummeted and has been negative much of the time since the recent peak. Over the entire time period, margins net of variable costs averaged $1.02 per bushel of corn processed and margins net of variable and fixed costs averaged $0.42 per bushel. Ethanol plants have operated in the black (vs. variable and fixed costs) about three-quarters of the time.

It is helpful to aggregate the profit margins over an annual horizon in order to see broader trends in estimated ethanol plant profitability and also compare to other investments. Figure 2 shows total annual profits net of variable and fixed costs for each year between 2007 and 2011. Profits are presented in terms of both total dollar returns to equity holders and percent return to equity. Profits were clearly highest in 2007 at $33 million. 2011 was next highest at $21 million. Lowest profits occurred in 2009 at just under $6 million. Averages for the five years were $16 million and 13 percent, respectively. The fact that no year showed a loss is rather remarkable in light of the deep economic recession of 2008-2009. By comparison, the average return in the stock market, as represented by the S&P 500, was only 2.4% for the same period.

click image to zoom Conclusion

There is little doubt that investment in ethanol plants over the last five years has paid off handsomely in a very turbulent period for other investments. However, the outlook going forward may be much less favorable. Issues abound that may have a negative impact on profits, including the loss of the blenders tax credit, the 10% blend wall, implementation of E15, declining gasoline use in the U.S., declining ethanol exports, and possible changes to the Renewable Fuels Standard (RFS) mandates. The recent and extended stretch of losses or small profits may be more representative of future prospects.

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russell walker    
Aberdeen, NC  |  April, 15, 2012 at 07:11 PM

I find your conclusion to be contrary to facts. There have been numerous ethanol plants that have closed in the last two years. The high price of corn has killed them along with unbridled competition from Brasil. Good as ethanol is a poison and a waste of energy. russell walker P.E.

Don Burns    
Iowa  |  April, 16, 2012 at 01:26 PM

The poison you are refering to is the lead and MTBE that used to be added to gasoline before switching to ethanol as a octane booster. Both are cancer causing. Ethanol is made in the same way any alcholic beverge is made and has no cancer causing affects.

Edgemont SD  |  April, 16, 2012 at 07:59 AM

Check the mileage. There is better mileage with reg. Gas. I also think it gums up fuel system in autos.

April, 16, 2012 at 11:56 AM

I search for non-ethanol gas stations after finding I get better gas mileage WITHOUT ethanol. So, this concept is a joke and hurting the price of food due to corn prices.

Tom Zachary    
Cheyenne, WY  |  April, 16, 2012 at 08:35 AM

I don't think so. Nowhere is it factored in the equation that I can see is the federal and state governments heavy subsidies to the industry to the tune of several BILLIONS of taxpayers dollars. Without the subsidies the ethanol industry would have rolled over and died w/n 3 years of it's conception. Another government promoted welfare program for a select few lucky enough to have some political connections. Blowing smoke about it's profitability over the past 5 years ain't gonna cut it. That dawg don't hunt!

Ohio  |  April, 16, 2012 at 10:32 AM

Also absent from the analysis and report is the fact that blending of ethanol into automotive fuels (gasolines) is mandated by federal law. So, even in the absence of direct subsidies to the ethanol production industry, they have a guaranteed market. And to help ensure that market, recent legislation approved increasing the maximum amount of ethanol blended into gasoline from 10 percent to 15 percent. The grain to ethanol for fuel industry is a child of crony capitalism.

April, 16, 2012 at 12:00 PM

The higher the content of alcohol the more it damages the engine due to the heat factor from alcohol. I rented a diesel station wagon in England that was peppy, had get up and go, and got 52 miles per gallon (they use liters). I was impressed.

NE  |  April, 16, 2012 at 10:52 AM

best fuel available $2.20 at plants in NE. oil companies playing you for suckers at $4.00for E-10

MO  |  April, 16, 2012 at 01:21 PM

Yes the price that you paid at that moment may have been $2.20. But when you add up the total cost it is well in excess of $5.00. Those subsidies and mandates are not free. Plus you have to consider the increase in cost of all of the other corn based products that you buy. For example; consider the cost of beef. Do some research and look into all of the products that you buy everyday that the cost of corn has a direct influence on. As the cost of corn rises so does all of the other items that are made from and/or are associated with it.

Mr. Francis M. C. Thompson    
81001-1418  |  April, 17, 2012 at 11:37 AM

Maybe the "welcome mat" can finally be pulled in on this (and other) projects, and such matters be left to the free market to either support or NOT support.....

Mike Stone Sr    
Pampa Republic of Texas  |  April, 19, 2012 at 09:28 PM

There is no way to justify the corn-ethynol program because just the outrageous effect it has on everyday peoples food bills cannot be over estimated or over emphasized! This program is just one of many, many, many government programs where the bottom line is to reward one segment(corn growers) of society while heaping huge cost increasers on another!

Russell Walker    
aberdeen, nc  |  January, 12, 2013 at 08:36 PM

Don Burns does not know what he is talking about. Ethanol is not and never has been used as an octane enhancer. It is used as an energy substitue, albeit an extremely poor one. Ethanol came on the scene long after lead compounds were outlawed in motor fuels. MTBE was used as an environmental enhancer for burning unburned hydrocarbons. MTBE was poisonous as could be, helped to poison many water supplies, and now is no longer used.

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