Economists evaluate ethanol profitability cycles, outlook

By Susanne Retka Schill | January 28, 2015

Ethanol profitability has swung widely in the past three years, from bust to boom to breakeven, writes retired Iowa State University ag economist Don Hofstrand. Since launching the renewable fuels report in the Agriculture Marketing Resource Center in 2008, he has followed the swings in ethanol profitability through a model Iowa-based ethanol plant built in an Excel spreadsheet. The AgMRC’s monthly renewable energy newsletter was recently transferred to the Iowa Grain Quality Initiative, resulting in the first newsletter to be published since mid-2014.

In his article, Hofstrand reviews the recent swings in ethanol profitability. In 2012, the loss at the model Iowa plant averaged 9 cents per gallon, primarily due to high corn costs. The corn market turned around in 2013, quickly leading to returned profitability for the model ethanol plant. The year ended with the highest month of profitability at 78 cents per gallon. “Profitability continued in 2014,” Hofstrand writes, “peaking at $1.08 per gallon in April before starting a decline to 45 cents per gallon in December.”  

Biofuels economist and university professor emeritus Robert Wisner also stepped back to analyze the explosive growth of the ethanol and biodiesel beginning in 2002 that is now shifting into a third phase, characterized by cellulosic ethanol production. He outlines the new environment that is quite different from the one envisioned when the 2007 Energy Independence and Security was passed, forming the basis for current U.S. ethanol policies.

That new environment includes higher ethanol blends beyond E10, the global crude oil price war, the rapid growth of U.S. crude oil production and new corporate average fleet efficiency (CAFE) fuel mileage standards that are set to increase. “With the right combination of government policies and other economic conditions, further growth in U.S. production and use of both ethanol and biodiesel can occur in the next several years,” he writes. “However, the growth appears likely to be much slower than in the first decade of the 21st century.”

Wisner goes on to review the U.S position in the world ethanol market, increasing its share of global production over the past eight years, factors affecting the domestic liquid fuels market such as the increasing CAFE standards and alternative fuel developments such as electric and compressed natural gas.  He also cites work on engine technology. “Another technology in the experimental state is very high compression gasoline-ethanol dual super-charged engines with precise computerized combustion chamber fuel injection and varying ethanol-gasoline blends on demand from the engine’s computer. Research on a small General Motors V6 engine shows the possibility of fuel efficiency, torque, and horsepower similar to that of much larger diesel engines. Commercialization of this technology, if it becomes feasible, might help to meet sharp increases in government-mandated fuel mileage and could possibly expand the demand for ethanol.” 

The full texts of Hofstrand and Wisner’s reports are available here

The AgMRC renewable energy newsletter has been adopted by the grain quality initiative, led by ISU extension ag engineer, Charles Hurburgh. “I was hearing from people in the industry that the AgMRC profitability spreadsheets were very useful,” Hurburgh told Ethanol Producer Magazine. “We did not want to lose that, so we’ve worked to transfer the program over.” The Iowa Grain Quality Initiative is partnering with the Value Added Agriculture Program at ISU Extension and Outreach to continue and host the AgMRC renewable energy newsletter.

The new partnership means the spreadsheet-based profitability models will be continued. Several spreadsheets, available here, are update monthly with current, Iowa-based prices for corn, soybeans and other inputs used for ethanol and biodiesel production. With prices dating back to January 2005, the data used in the model 100 MMgy ethanol plant gives a picture of the cycles of ethanol costs and returns. The spreadsheets can be customized to reflect a specific plant’s construction and financing costs, efficiency factors, labor and management, chemical and other specific costs.

“Connection of the [grain quality initiative] and the monthly report will provide a long-term connection with the research and technical expertise of [ISU Extension and Outreach], as well as provide expanded student opportunities for interaction with industry,” the statement accompanying the January newsletter explained. The spreadsheets will also be available at the ISU Extension and Outreach ag decision maker website.