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A turnaround for ethanol?

With the ethanol industry running at about 85% of capacity and corn prices suddenly cheaper after last week's bearish USDA reports, the industry may be poised for a brief rebound, according to estimates from economists and plant managers. Yet, there's enough excess capacity to make the return to positive margins fade by summer.

The U.S. Energy Department's March 29 weekly report of production and ethanol stocks, which came out on Wednesday, showed a slight blip upward from an ethanol supply what was approaching 20 days. Anything below that amount is considered a tight supply.

"You're seeing plants start back up that had been down," said Chuck Woodside, CEO of KAAPA Ethanol in Minden, Nebraska. "The question is, is it sustainable? You did see margins improve after the start of the year."

Woodside knows of two nearby plants in Nebraska that have restarted or are about to go back into production.

One widely-watched estimate of ethanol plant margins, from John Stewart and Associates, showed margins moving up from a year of depressed levels last January, but not until sometime in February or March, did they rise above the 38 cent-a-gallon level considered enough to break even above expenses but not depreciation.

Better margins came before corn prices crashed and were partly driven by distillers grains, which for a time were selling on par with the value of corn for feed, said Woodside. They're currently running at about 93% of the value of corn.

It may take time for any increase in production to show a dramatic shift in stocks, Woodside said, especially in the western Corn Belt. Some plants had released rail cars normally used to ship ethanol to the West Coast.  Some of those rail cars are now in North Dakota oil fields.

"If, for some reason, your rail cars aren't available, now you're stuck in the truck market," Woodside said.

Another factor in improving margins is a drop in ethanol exports from Brazil at the start of this year, said Walt Wendland, who is CEO of Golden Grain Energy in Mason City, Iowa and of Homeland Energy Solutions in Lawler, Iowa.

Last year, the U.S. began importing more Brazilian ethanol in July, just as the severity of the U.S. drought was hitting domestic production here.

"The inventory never dropped because the imports came in at a rate that made up for any decline in production," Wendland told Agriculture.com

He expects net U.S. ethanol exports to be strong into May of this year, which could help ethanol plant margins in the U.S.

"The third quarter is going to be a big question for the ethanol industry," Wendland said.

Corn stocks will be tight as the short 2012 crop marketing year ends. Whether plants continue to operate this summers will depend on local supply as well as the margins for the plants.

"A lot of these plants are down because they don't have corn in their area," he said.

In some states with wheat available for ethanol, such as Indiana, plants are considering adding wheat to the corn that's being fermented, said Wendland, who is treasurer of the ethanol trade group, the Renewable Fuels Association. The gluten in wheat created technical problems that limit blending with corn to about 20% of the grain that's fermented, he said.

When the Department of Energy's Energy Information Administration (EIA) released its next report on April 10, Iowa State University economist Chad Hart will be watching for signs of expanded production. That a will be for the week that ends today, the first full week after the March 28 USDA reports on planting intentions and grain stocks led to a sell-off in corn futures.

So far, lower corn prices haven't led to much change in weekly production, according to a report released Wednesday by the Renewable Fuels Association.

"According to EIA data, ethanol production averaged 807,000 barrels per day (b/d) — or 33.89 million gallons daily. That is up 2,000 b/d from the week before. The four-week average for ethanol production stood at 804,000 b/d for an annualized rate of 12.33 billion gallons," the RFA report said.

Hart points out that U.S. production has been running at about 85% of capacity for some time, but plants that are running below capacity can increase output in a matter of days. The industry could increase productions soon, perhaps hitting 92% of capacity of more than 15 billion gallons.

"Do we see it in the production numbers? Not yet, but it's likely coming," Hart says.

Hart also expects to see the petroleum industry shift from hoarding credits for blending ethanol, called RINs (short for Renewable Identification Numbers) to buying more ethanol.

With ethanol prices running about 50 cents a gallon less than the lower octane gas used for blending, companies that blend the two can make money doing that. But they've also bid the prices of RINs up to current levels of about 70 cents a gallon, partly because the oil companies are hoarding RINs due to uncertainty about ethanol supplies later this year, Hart said.

Current ethanol production is at an annualized rate of 12.33 billion gallons, well below the 2013 renewable fuel standard mandate to blend 13.8 billion gallons.

Blenders have been getting a good return on their purchases of ethanol, Hart says. But, between the high prices of RINs and short supplies of ethanol, he expects blenders to bid mow strongly for ethanol.

"It's going to force the blenders to share the returns by giving it to the ethanol market," Hart said.

Neither Woodside nor Wendland see improving margins as necessarily long-lived. Without more demand, either from exports or an expanded market for E15, the remaining share of capacity that exceeds 15 billion gallons could swamp the market.

"The last two to three weeks have been the best margins since January of a year ago," Wendland said, "not that they're that great."

Golden Grain showed a gross profit for its fiscal year that ended October 31 of slightly more than $5 million. That was down from nearly $24 million in 2011.

Wendland hopes that the Brazilian government's decision to increase its own domestic mandate for ethanol blending from 20% to 25% may lower competition in the export market.

And, like everyone in the ethanol industry, he wants to see the oil industry blending more ethanol into gasoline, at the 15% rate allowed for E15.

"The answer to better margins shouldn't be reducing production; it should be in making demand," he said.

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