Off-the-chart profitability of ethanol production
Trends in the profitability of ethanol production were examined in a farmdoc daily post on March 14th. Using a model of a representative Iowa ethanol plant, it was estimated that a plant earned $23 million in profits during 2013. This was one of the best years ever for ethanol producers in terms of profitability. A new high in weekly profits of $2.55 per bushel of corn processed was reached in early December 2013. The high profits were driven by a drop in corn prices that substantially exceeded declines in ethanol and DDGS prices. It was also argued in the same post that there were logical reasons to suspect that the extended run of profits was unlikely to continue. Just the opposite occurred, as ethanol production profits subsequently exploded off-the-chart. Today's post will examine the spike in the profits of ethanol producers in recent months and the reasons behind it.
click image to zoom The analysis is based on the same model of a representative Iowa ethanol plant used in the March 14th post and other earlier posts on the profitability of ethanol production (see earlier posts here, here, and here). Rather than repeat the details of the plant model the reader is directed towards the March 14th post for further details on the model. Figure 1 presents the updated (pre-tax) estimates of ethanol production profits per bushel of corn processed. The historic spike in profits began during the first week in February 2014, peaked at the previously unheard level of $4.50 per bushel in the last week of March, and then dropped back to "only" $1.45 per bushel in the first week of May (note: just divide the bushel profits by 2.8 to convert to gallons). The new peak profits were almost $2 per bushel higher than the previous record. The net result was a profit for the representative plant of $23.4 million during the first four months of 2014, slightly more than the historically high profits earned over the entire calendar year of 2013.
click image to zoom The reason for the spike in profits is simple, as shown in Figure 2. Ethanol prices at plants spiked to new record levels exceeding $3 per gallon, while only modest increases in corn prices occurred. More specifically, ethanol prices increased 63 percent between the end of January and end of March, while corn prices increased just 8 percent over the same period. The underlying reasons for the spike in ethanol prices have been much discussed, and include: i) relatively high wholesale gasoline prices that support ethanol values, ii) strong export demand for ethanol, iii) low ethanol stocks going into the winter, iv) rail transportation congestion due to the severe winter weather, and v) continuing shortages of rail tanker cars due to ever rising crude oil production in the Bakken region of North Dakota. It does not appear that a single factor accounts for the majority of the price rise, but instead, the combination of factors was something of a perfect storm.