An analysis of the economics of corn ethanol production by Todd Schmit, an expert in agribusiness management and marketing, has the margin of production extremely close to unprofitable, which could result in ethanol plants shutting down.
“Strong increases in corn prices relative to the price of ethanol are resulting in tighter operating margins for corn-based ethanol facilities. Based on current market prices, operating margins are at their lowest levels in decades—only a 78-cent return on every dollar of operating costs.
“In addition, commodity and energy prices are exhibiting increased volatility. Both have implications for corn-ethanol plant investment and disinvestment decisions. With around 40 percent of the U.S. corn crop going to ethanol production, the implications are important to agricultural and energy markets,” said Schmit, who is associate professor of economics at Cornell University’s Dyson School of Applied Economics and Management
“Based on a real options-pricing model using historical data on corn, distillers grains, ethanol prices, and investment and operating costs of corn-based ethanol plants, we would anticipate plant closings to occur when the operating return-to-cost ratio drops below 0.70. In June, markets indicated a ratio of about 0.78, and then corn prices went up almost $3 per bushel. If ethanol prices in July hadn’t also strengthened some, margins would be below the exit threshold today. If corn prices continue at their historical highs, a 10 percent reduction in ethanol prices could signal that some ethanol plants will be shuttering their doors.”