Corn, ethanol prices squeeze profit

Last summer, US prices for ethanol and corn reached such an imbalance that production costs exceeded revenue at relatively simple ethanol plants, the US Energy Information Administration reported. Simple plants are unable to recover corn oil and represent “a diminishing portion of the ethanol industry” since several have shut down temporarily with “at least 20” idled by January, EIA reported.

“Relatively simple ethanol plants produce ethanol and distillers grains from corn," EIA said. “More advanced plants are able to recover other products, like corn oil, from a portion of the distillers grains. Ethanol plants with corn oil recovery units are able to earn more revenue, so they usually have higher profit margins than plants without corn oil recovery, even if their production costs are slightly higher.”

In recent years, profit margins at plants capable of corn oil recovery have been 15-20¢/gal higher than at plants without that capability. So the more sophisticated plants were making money while simple ethanol plants were operating at a loss. “Each time margins at the simple plants turned negative, several of these less sophisticated plants announced shutdowns, including plants in Nebraska, Illinois, and Minnesota,” EIA reported.

Profit margins also affect ethanol production, prices, and consumption. “Following the first set of plant shutdowns, a rise in margins resulted in more domestic ethanol production, which helped reduce prices and resulted in higher ethanol consumption through July,” said EIA. “Then at the beginning of August, a drop in margins led to lower production, reducing ethanol stocks to their lowest level since December 2011. This pattern illustrates how sudden changes in supply (e.g., shutdowns) can lead to short-term market volatility.”

During plant shutdowns, EIA officials said, some companies have embarked on new capital projects to recover corn oil, while others are performing routine maintenance and looking for opportunities to buy corn economically.

The POET LCC biorefining facility in Macon, Mo., and Abengoa Bioenergy SA’s plant in Madison, Ill., may add corn oil recovery units this year. But others, such as the Archer Daniels Midland Co. plant in Walhala, ND, could shut down permanently, EIA said.

“Corn oil recovery is one of several strategies that the ethanol industry is developing to improve margins. Others involve switching to processes that are more advantageous under the renewable fuels standard (RFS),” officials said at EIA. Aemetis Inc.’s 55 million gal/year renewable ethanol production facility in Keyes, Calif., is changing its feedstock from corn to sorghum and replacing its natural gas consumption with biomass.

“Other companies plan to produce butanol rather than ethanol or to integrate cellulosic feedstock, such as wood waste or corn stover (e.g., leaves, stalks, and leftover cobs after the corn harvest),” EIA reported. “These approaches allow their products to qualify as advanced biofuels under the RFS, a category that specifically excludes ethanol produced from cornstarch, which has been the dominant feedstock for the US ethanol industry.”

RFS problem

In 2007 Congress set an RFS production goal of 36 billion gal by 2022. Since then the US Environmental Protection Agency annually dictated a minimum to keep the RFS production on tract for the 2022 target. “This year's 16.5 billion gal is arguably already more than the current gasoline pool can absorb in light of environmental constraints (called the blend wall) and the overall shrinkage of the gasoline pool because of energy efficiency gains and the recession,” said Frank Maisano, a Washington-based energy and political analyst.

As a result, he said, “The market price for RINs—renewable identification numbers needed as evidence of compliance if you can't produce ethanol—was 5¢/gal as recently as late 2012. However, recent prices for RINs have spiked to as high as $1.02/gal. Reports have cited several reasons for the sudden price increase, such as: declining gasoline demand; the ethanol ‘blend wall’; unrealistic RFS mandates; and recent instances of fraud in the RIN market, which have increased uncertainty among obligated parties.”

Maisano forecasts, “The current projected RINs impact will result in large price increases at the pump. Recent reports make clear that, as RIN prices continue to move higher, refiners will be forced to: pass along the increased costs to consumers; export more product overseas; or lower refinery utilization rates.” Of course, EPA officials didn’t anticipate this. They mistakenly figured excess RINs would be available. They now need to resolve that mistake.

(Online Mar. 25, 2013; author's e-mail: samf@ogjonline.com)

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