We have seen some pretty dramatic changes in ethanol prices over the past couple of months. In mid-February prices bottomed out near $1.90 per gallon but over the following six weeks prices roared higher reaching $3.15 per gallon by the end of March. Now prices are plunging again with a price of $2.50 per gallon last week and the chance of further erosion this week.
The transportation problems were at least one factor causing the big price run-up. Blenders on the coasts were having difficulty getting ethanol when they needed it. In fact, when ethanol prices were near their peak in late March, they were significantly higher than wholesale gasoline prices making the blending margins negative. With the recent decline in ethanol prices, and stronger gasoline prices, blending margins have turned positive again – but they are pretty slim.
There has been a pretty significant increase in corn prices over the last three months as well. Back in Mid-February when ethanol prices were at their low, the Central Illinois corn price was $4.29 per bushel. By last week the corn price was up to $4.76 per bushel. DDG price swings more closely correspond to ethanol prices, at least over the last few months.
The big swings in ethanol prices have resulted in big swings in net margins for ethanol producers. Net returns over processing costs were about 45 cents per gallon back in mid-February, based on the University of Minnesota ethanol budget. The net margins rose to $1.73 per gallon when ethanol prices reached $3.15 per gallon, but now they are back to the $1 per gallon level. The net margins for this week may be slightly lower, but ethanol production profits are still pretty good.
Ethanol production has been running close to a 14 billion gallon per year annualized rate over the last few weeks and the average of the weekly production reports puts the pace at 13.8 billion gallons so far this crop year. EPA has not yet set the ethanol blending mandate for 2014, but the proposal in November had corn-based ethanol at just slightly above 13.0 billion gallons. So if EPA sticks to their proposed mandate we need to see strong exports if we are to sustain the current production pace. It takes about 5.0 billion bushels of corn to produce 13.8 billion gallons of ethanol and we are nearly 8 months into the corn marketing year.