Marginal Improvement

FROM THE JANUARY ISSUE: Margins at some plants have begun to rise, but they’re still tight, and factors like crop condition and harvest progress will have an impact.
By Matt Thompson | December 18, 2019

When Donna Funk, principal at KCoe Isom, compares the ethanol industry’s current low-margin environment to similar difficulties in the past, she says the differences are in which factors are contributing to the slim margins, and how long those factors have been present. Previous periods of challenging margins have been a result of one factor, but the industry’s current difficulties have been exacerbated by multiple challenges: trade disputes, oversupply of the market, weather and growing conditions, and small refinery exemptions. “This year, it’s just been one [thing] after another, and none of which an individual plant can control,” Funk says.

Another difference, she says, is the role ethanol inventories have played. “I do think the difference is really more on managing production levels this time around than maybe it has been in the past,” she says.

The Renewable Fuels Association reported in November that ethanol stocks in the U.S. had declined to 20.5 million barrels, the lowest they’ve been in nearly three years. Experts say that has led to a slight improvement in margins.

“I think we are starting to see a little bit of an improvement, which is probably a combination of some of the production that’s been offline as well as just some improvement in the spread between grain cost and fuel cost,” Funk says. She adds that it will be interesting to watch how the plants that have closed or idled in recent months react to the improving margins, as managing those inventories will be paramount to maintaining more favorable margins. “Until some of the export markets get opened back up, I think that inventory supply is a critical piece of managing these margins,” she says.

Jamey Cline, business development director with Christianson PLLP, agrees. He says in order for the industry to manage its inventories, demand will need to increase, which will likely come from exports, as well as E15. “All of those things have to move forward in order to make room for the increased production,” he says.

Cline says margins experienced an uptick toward the end of 2019, but they remain tight. And with some plants idled or shut down, the long-term impacts for rural areas could be dire. “Overall, rural economic health is extremely important,” he says. “We definitely hope this is a short-term thing, because in the long-term, that would affect taxes and different things in the area, let alone corn pricing.”

Inputs and Efficiency
Funk says the adages of increased efficiencies and decreased input costs are important. But, she says, it’s also important to take a holistic approach to a plant’s cost structure. “It’s really just continuing to monitor and manage that overall input balance, and not just for your immediate ethanol output, but it’s also on your distillers output,” she says. “If you’re in an incredibly strong distillers market, for some plants it makes sense to produce a little more ethanol, because they need that distillers output because they’re in a strong distillers market. So it’s the total balance.”

Pam Miller, board chair of Siouxland Ethanol, a 90 MMgy plant in Jackson, Nebraska, says the plant’s efforts to lower costs and maximize efficiency have been key components of operations. “I think maintaining a low cost structure makes a difference when margins are tight, so we’re doing a lot of drilling down on ingredient costs and different pieces of the puzzle of the operation. We’re looking always to how we can lower our carbon score so we can participate in the markets that reward the low carbon score.

“It’s really made the difference for us, being able to go to California and be rewarded with a low carbon score,” Miller says. “The value that we’ve seen because of those credits has made the difference in our bottom line.”

That will become increasingly important for ethanol plants, Funk says, as more regions adopt a carbon system like California’s. “There’s going to be more and more California-like places that you’re going to have to ship to, it’s just finding those incremental improvements that you can pay for either through the improved price, betting on what the carbon index pricing’s going to be and/or you get a lower carbon score, but you improve your operational efficiency, which doesn’t necessarily mean you produce more gallons. Maybe you produce the same number of gallons with less input costs, those types of things.”

Commodity Concerns
Cline says corn prices have been steady, but a factor in that price will be the crop condition as harvest wraps up. In November, Cline said much of the corn that had been harvested to that point was wet. “Now we have a lack of LP in order to dry it, and you’re seeing a lot of corn go into bunkers and things like that. So, corn quality is going to become an issue, potentially, and we’ve got some corn that has not hit physiological maturity, or what they call black layer, and that’s going to affect corn quality as well, as we start the season,” he says. And data from the U.S. Department of Agriculture shows the condition of 2019’s corn crop is far below that of previous years.

Funk says corn conditions across the Midwest aren’t uniform. “I think there’ll be some areas that maybe are going to be in a better position from a corn perspective, compared to the nation than they’ve been in the past. Just based on when they were able to plant and how much and what the yields turn out to be.”

Cline adds that one of the biggest factors will be the movement of corn from the western Corn Belt to the eastern Corn Belt, where growing conditions were worse for corn farmers. He says Christianson saw evidence of that movement even before last year’s harvest began. “I don’t know how harvest has affected that, but to see that movement as we began to run short on last year’s stocks was very interesting to us,” Cline says.

One area that is so far faring better than others is Nebraska, Miller says. She says the ground pile in November was the biggest in the plant’s history, at 2.2 million bushels. “We’re actually having a good year. The crop is coming in on time and it also has a high yield per acre.”

Uncommon Competition
As Brazil ramps up its ethanol production, it continues exports to California, Cline says. “Right now, there’s definitely arbitrage due to some of the RIN pricing to bring in ethanol to California,” he says. “That mostly has been from a sugarcane perspective, because they’re treated as an advanced biofuel.”

Funk says it’s important to look at Brazilian imports to California in comparison to exports. “I think where the challenge comes up is how much are we importing versus how much are we exporting to Brazil,” she says. “There have certainly been times where we’ve imported a lot of Brazilian ethanol into California, but then a bunch of U.S. ethanol gets sent to Brazil for use down there. So it’s really, I think, that balance of imports versus exports.”

Energy Economics
Both Cline and Funk say that, while they don’t follow natural gas markets closely, they haven’t heard of any issues, beyond the seasonal weather, that might impact prices. “I’ve not heard anybody talk about any concerns, at least in the short run—you never know what’s going to happen if you get too far out—but there do not seem to be concerns about the current price of natural gas from an input cost,” Funk says.

And forecasts from the U.S. Energy Information Administration don’t show any alarming trends. The EIA forecasts the average industrial natural gas price will top out at $3.70 per thousand cubic feet in 2020. The agency says, despite forecasted colder weather in the early part of November, futures prices at the end of October rose only minimally, thanks to higher-than-average storage injections.

According to EIA’s Short-Term Energy Outlook, released in November, “Lower forecast prices in 2020 reflect a decline in U.S. natural gas demand and slowing U.S. natural gas export growth, allowing inventories to remain higher than the five-year average during the year even as natural gas production growth is forecast to slow.”

Miller says Siouxland has hedged its natural gas costs by signing a year-long contract. “Our prices are locked in for the season,” she says. It’s a strategy that she says worked well last year, as well. She adds that Siouxland expects natural gas prices to remain steady, noting that weather, like the polar vortex of two years ago, could change that outlook.

The EIA also expects gasoline prices to remain steady in 2020, averaging $2.62 per gallon during the year. In October 2019, the average price for a gallon of gasoline in the U.S. was $2.63.

While margins may be improving slightly, Miller says more certainty, from trade or from the government, is critical. “Until we have either a trade deal with China or some positive sign from the U.S. EPA through the White House that small refinery exemptions will be curtailed, or at least addressed reasonably to restore gallons into the Renewable Fuel Standard, I think we’re in a holding pattern right now,” she says.

Funk agrees. “Every plant can do the best that they can to try to manage things, but if policies get undercut, it’s pretty hard to be successful if you have your knees cut out from underneath you at the 11th hour,” she says.


Author: Matt Thompson
Associate Editor, Ethanol Producer Magazine
701.738.4922
mthompson@bbiinternational.com