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Happy days are here again for the ethanol industry

Domestic ethanol demand is expected to remain high.

Happy days are here again at ethanol plants, with profits nearing the all-time high-water mark set in 2014.

The black ink has all but erased the bad old days of 2020 brought on by the pandemic-induced cutback in liquid fuel use that befell the industry.

Scott Irwin, Laurence J. Norton Chair of Agricultural Marketing at the University of Illinois at Urbana-Champaign, said the rapid rise in ethanol plant profits has brought smiles to ethanol plant operators and owners across the United States. “Happy days are here again is an accurate statement right now,” Irwin told Successful Farming in a telephone interview.

Profits jump

Irwin said he doubts that 2021’s profit margins will top the record returns from seven years ago but, because of the incredible ethanol price spike that occurred in the last four months of the year, they will be close. On March 28, 2014, a representative Iowa ethanol plant modeled by Irwin chalked up a record profit margin of $1.53 profit-per-gallon. In mid-November 2021, profits at the representative Iowa plant totaled $1.34 a gallon.

“We are in rarified territory for ethanol prices and profits, and it’s happened over a pretty short period of time,” Irwin noted. “What’s really interesting is that on August 1, plants were basically operating at break-even margins. Since then, ethanol prices and profits have gone literally straight up.” At the beginning of 2021, Iowa plants were selling each gallon of ethanol for $1.39. In November, ethanol prices more than doubled to $3.17 a gallon. 

Connie Lindstrom, senior biofuels analyst at Christianson Benchmarking, LLC, in Willmar, Minnesota, said ethanol prices have been pushed higher because ethanol demand has outpaced supplies and corn prices have stabilized since harvest began. Ethanol plants also have seen strong demand for the co-products they produce, she stated, particularly for corn oil that is processed into renewable diesel.

Lindstrom said that Christianson Benchmarking, which analyzes the finances of 60 ethanol plants that account for 35% of U.S. ethanol production, also has noted that prices paid for corn have stabilized because of favorable yields from the 2021 harvest. “We had a good corn harvest this year,” she said, “which kept corn prices stable.” The twin trends of higher ethanol demand and abundant feedstock supply should continue, she said, “which means we should get some pretty good profitability going forward.”

Scott Richman, chief economist at the Renewable Fuels Association in St. Louis, Missouri, said that the financial fortunes of ethanol plants started to turn around in August. That’s when stocks of old-crop corn were running low, corn prices were relatively high, and margins for ethanol producers were quite thin, he said. Those negative factors led to a drop in ethanol production through mid-September.

When the 2021 corn crop started coming in in September, Richman stated, there was a strong surge in gasoline demand and ethanol plants’ profit margins rose considerably. “Since then,” he said, “ethanol production has really geared up, and we’ve been producing more than a million barrels of ethanol a day for six straight weeks, approaching all-time production records a couple of times. And, because ethanol demand has remained so strong, we’ve been unable to rebuild stocks.”

At Ringneck Energy in Onida, South Dakota, president and chairman of the board Walt Wendland said dry weather cut corn yields in the area, but the plant has been profitable because higher ethanol prices have outstripped the higher corn prices that the plant is paying.

Ringneck Energy started production in April 2019 and produces 80 million gallons of ethanol a year. After a challenging year starting up the plant, Wendland said, Ringneck Energy was turning the corner financially in March 2020, when COVID-19 hit and demand for gasoline and ethanol both plummeted. “Our start-up year in 2019 was extremely challenging but, when we went into 2020, things were starting to look better until COVID hit,” Wendland recalled. “Eventually, we’ve come out of it OK, and things are looking pretty promising.”

During the depths of the economic implosion caused by the pandemic, Ringneck Energy cut production by 50% or more during a two- or three-month period when there was little demand. “During the third and fourth quarters of 2020,” Wendland said, “we returned to full production.”

Because dry weather cut average corn yields in central South Dakota where Ringneck Energy is located, the plant has been bringing in 20 to 25 railcars of corn every week to supplement the local corn it purchases for processing. The plant processes 80,000 bushels of corn a day. Local corn yields averaged about 100 to 120 bushels per acre in 2021, Wendland noted. Normal yields are closer to 150 bushels per acre and, in a good year, 190 to 220 bushels an acre.

“We had an extended shut-down in August thinking that we’d have an early harvest in mid-September,” Wendland said, “but we had some rains that delayed the start of harvest until the first of October.” The late harvest meant that Ringneck Energy had to start using a 50-50 corn-to-milo mix for processing, although corn is the preferred feedstock for the plant’s ethanol. Milo accounts for less than 5% of the plant’s production, according to Wendland, who credits the plant’s marketing team for keeping it supplied with feedstocks, despite the dry weather.

Ethanol stocks haven’t increased because ethanol demand has risen even faster, Wendland said, and higher ethanol prices have outpaced corn prices.

Ringneck Energy ships 60% of its ethanol on the BNSF Railway to the West Coast and 40% of its ethanol goes to markets in the South and Western U.S., Wendland said. 

It sells wet distillers’ grains to local cattle-feeding and cow-calf operations in the area, which means it saves on natural gas expenses by not having to dry the distillers’ grains.

“Corn oil prices have been unbelievable,” Wendland noted, because of renewable diesel demand. “That’s been a real growth market for our corn oil and an industry-wide focus for increasing profits.” Ringneck Energy has capitalized on those high prices by increasing its corn oil yields by 50%, he stated.

Steve Roe, general manager and CEO at Little Sioux Corn Processors, LLC in Marcus, Iowa, said the plant had one of its best quarters ever in the third quarter of 2021 and the fourth quarter looks to be even better.

Roe has been general manager of Little Sioux Corn Processors since May 2002, when construction started on the plant. It began producing ethanol in April 2003. Since then, its production capacity has more than quadrupled from 40 million gallons of ethanol a year to 165 million gallons, making it one of the larger ethanol plants in Iowa. 

Margins at Little Sioux Corn Processors are currently running at more than a dollar per gallon, Roe said, and it appears that those margins will continue into December. “This run-up in margins has surprised everybody,” he stated. “I don’t think anyone expected this.” Profits are not as good as in 2014, he added, but they are going to be relatively close.

Corn harvest in northwest Iowa was exceptionally good in 2021, he said, despite some dry pockets. “We had average-to-above average yields, with some areas running to 250 to 260 bushels an acre, despite the dry conditions.”

2022 Outlook

As for 2022, “I don’t see how we’re going to have as good a year as we’ve had in 2021,” he stated. “I just don’t think these large returns are sustainable.”

Exports are the wild card for 2022. “Export prospects look promising because oil prices are high worldwide, so that will push ethanol exports up as people substitute ethanol for gasoline,” Roe said. Domestic demand for ethanol will be 14.5 billion gallons in 2021 based on the amount of gasoline consumed. With U.S. ethanol production expected to exceed 15 billion gallons this year, exports will have to make up the difference, Roe said. 

Domestic ethanol demand is expected to remain high. “Ethanol is the cheapest source of octane there is, and that means the demand will be there from the refiners,” Roe said.

Corn used for ethanol

The financial health of the ethanol industry is critical for corn farmers’ bottom lines because approximately 94% of the 15- to 16-billion gallons of ethanol produced in the United States is made from corn. More ethanol production means more demand for corn.

According to the most recent statistics released by the U.S. Department of Agriculture, 35%, or 5.25 billion bushels, of the projected 15.062 billion bushels of corn harvested in 2021 will be processed into ethanol. The USDA’s November 2021-22 corn outlook called for increased ethanol production and corn used for ethanol processing, the agency said in the report.

Corn used for ethanol production totaled 4.857 billion bushels in the 2019-20 marketing year.

In Iowa, the No. 1 ethanol- and corn-producing state, 57% of the state’s 1.3 billion bushels of corn were used to make 3.7 billion gallons of ethanol produced in Iowa in 2020 during a pandemic-induced slowdown in ethanol production, according to a report prepared for the Iowa Renewable Fuels Association by John Urbanchuk, managing partner of ABF Economics in Doylestown, Pennsylvania.

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