Ethanol industry pretax profit estimated at $7.8 B for 2014

By Susanne Retka Schill | March 05, 2015

The U.S. ethanol industry came off its best streak of profitability in January, one that ran 95 consecutive weeks without a loss for the model Iowa plant used to estimate and track industry profitability. The average profit during the 22-month streak was 43 cents per gallon, more than 10 times the average 4-cent-per-gallon profit earned over the previous seven years.

University of Illinois economist Scott Irwin presented his analysis of ethanol profitability in a recent FarmDocDaily post, “2014 really was an amazing year for ethanol.” Using the average net profit for the representative plant, Irwin included a rough estimate for the entire U.S. ethanol industry of pretax profits of $7.8 billion for 2014.

For his analysis, Irwin returned to an economic model meant to represent an average Iowa-based ethanol plant. The representative 100 MMgy plant showed an estimated pretax net profit of more than $50 million in 2014, Irwin reported, “driven by the happy combination of relatively high ethanol prices and relatively low corn prices.”

The model assumes an average yield of 2.8 gallons of ethanol (including denaturant), includes fixed costs of 21 cents per gallon and debt service. The model, first developed in 2007, was updated in 2012 and 2013, based on ethanol plant benchmarking studies by Christianson and Associates. Income in the model is based on weekly ethanol and DDGS prices reported at Iowa ethanol plants and reported crude corn oil prices. Input costs are also Iowa-based.

Corn figures at 70 percent of input costs on average, Irwin said. Thus, the main reason ethanol was profitable in 2014 was the decline in corn prices, even as the price of ethanol at Iowa ethanol plants dropped from a yearly peak of $3.15 on March 28 to a low of $1.48 on Oct. 3. The model plant’s weekly profit hit $1.61 per gallon on March 28, dwarfing previous record spikes.

“The record profits of 2014 are also part of the longest run of uninterrupted profits since we first began estimating margins in early 2007,” Irwin said. “The streak of positive profits began on March 15, 2013 and ended on January 2, 2015, or a total of 95 consecutive weeks without a loss.” 

The large profits of the past two years will provide a much needed financial cushion for the far less rosy 2015 outlook, due to the crash in crude oil prices and low corn prices impacting ethanol margins. “The key question moving forward is whether 2013-2014 profits were a temporary blip due to a unique set of circumstances or reflected a new normal driven by a robust ethanol export market.”