AgMRC looks at ethanol production, gross margin, projections

By Susanne Retka Schill | March 20, 2017

Plotting the annual production linear trend line, U.S. ethanol production has increased an average of 470 million gallons a year in the past eight years, points out Sampath Jayasinghe. His paper, “An Analysis of Ethanol Production by State and Iowa Ethanol Crush Margins,” appeared in the Iowa State University’s Ag Marketing Resource Center monthly renewable energy report.  

In looking at the Iowa gross margins for the past two years, Jayasinghe found the February 2017 gross margin fell between the past two years’ margins. The gross margin per bushel of corn last month in mid-February, as reported by the USDA Agricultural Marketing Service, was $1.35, compared to $1.28 a year ago and $1.46 two years ago. While ethanol prices are higher in 2017 and corn prices lower, Jayasinghe points out, distillers grains revenues are down substantially.

In a cyclical pattern well-known in the industry, ethanol gross production margins generally are lowest in the February to March period, rising throughout the year. In 2016, the gross margin rose 83 percent from that low by mid-December.  

Writing in a separate AgMRC report, S. Patricia Batres-Marquez looked at the  “USDA Long Term Projections US Corn and Soybean Production and Expected Usage for Biofuels.”   The agency’s projections were developed late last year using the EPA’s proposed renewable volumes which were lower than the final rule published in December. In spite of the increased volumes of production and obligation since then, Batres-Marquez pointed out the already outdated projections provide a “neutral reference scenario that can be used as a point of departure for discussion of alternative farm-sector outcomes using different domestic or international circumstances.”

USDA projections through 2026 indicate U.S. corn production will grow steadily in the next 10 years from just above 14 billion bushels in 2017-’18 to nearly 14.8 billion bushels in 2026-’27. That increase, however, which would not surpass the record 20216-’17 corn yield of 15.2 billion bushels. “Corn production growth during the projected period results from increasing yields during the next 10 years. Corn prices are projected to increase over the next decade but are expected to stay below prices during the last decade, resulting in lower returns and decreased plantings.”

Corn use for ethanol is expected to fall from a peak of 5.4 billion bushels in 2018-’19 to 5.1 billion bushels by 2026-’27, based upon USDA assumptions that forecast declines in overall U.S. gasoline consumption, higher average mileage vehicles, and continued restraints on E15 and higher blends keeping gasoline blends at 10 percent. “Under this scenario, the share of U.S. corn used for U.S. ethanol production is expected to drop from 38 percent in 2018-’19 to 35 percent by 2026-’27. Despite these declines, corn to produce ethanol is projected to continue to be an important component in the demand for U.S. corn.” Under the scenario, DDGS production would drop from 36.9 million metric tons to 35.4 million metric tons at the end of the decade.

View the accompanying charts for further details, or click on the links to read the full reports: Sampath Jayasinghe, “An Analysis of Ethanol Production by State and Iowa Ethanol Crush Margins,” and S. Patricia Batres-Marquez, “USDA Long Term Projections US Corn and Soybean Production and Expected Usage for Biofuels.”