Ethanol profits remain strong in 2015, after slow start

By Susanne Retka Schill | June 26, 2015

Were the record profits in the ethanol industry during the past couple of years a temporary blip? Or are they reflecting a new normal, driven by a robust ethanol export market? “The answer appears to be some of both,” writes University of Illinois economist Scott Irwin in a recent FarmDocDaily post, “Mid-year update on ethanol production profits.”

While the extreme profits seen in the past couple of years have not been repeated so far this year, “profits have been surprisingly robust.”  Net profits for a model Iowa plant have averaged 11 cents per gallon so far in 2015, “almost three times the average profit of 4 cents per gallon earned over 2007-2012,” he writes, albeit  much lower than the average profit of 43 cents per gallon during the recent record profit streak.

The model ethanol plant used to track the profitability of ethanol production is meant to represent an average Iowa ethanol plant constructed in the past decade. “There is certainly substantial variation in capacity and production efficiency across the industry,” he cautions. The model includes variable and fixed costs, typical yields and Iowa-based values for sales estimates.

There are several factors responsible for the continued profitability, he suggests. CBOB gasoline prices have increased over $1 per gallon since the first of the year when ethanol margins dipped into the negative. Corn prices have experience only a minimal recovery since last fall’s lows and natural gas costs have been at historically low levels. In addition, distillers grains prices have remained elevated longer than expected. “Whether the profits can be maintained at [the current level] will depend to a considerable degree on DDGS prices,” Irwin writes, “which have been very strong relative to corn prices in recent months.”