CoBank ethanol report: Industry rebalances in 2015

By Ann Bailey | October 07, 2015

After a year and a half of record earnings, the ethanol industry stabilized in 2015, according to a CoBank ethanol industry report.

Going forward, ethanol margins are expected to remain “modestly positive,” on average, for the next 12 to 18 months, with volatility resulting in temporary higher and lower prices swings, the report said.

Supply and demand for ethanol has been well-balanced in 2015 and producers have maintained positive earnings, according to the report.  As prices have dropped, resulting in narrow margins, plant operators have ramped up volume to capture earnings. Ethanol production has been at record levels nearly every week in 2015, the report said.

Ethanol production will rise 2.5 percent this year and another 1 percent in 2016, CoBank estimated.  Some ethanol operators will capitalize on strong cash positions and optimism about export markets by investing in capacity expansion, the company said.  

If those estimates are accurate, the industry will need to grow ethanol exports by 200 to 350 MMgy, or 20 to 22 percent during the next two years, to maintain capacity utilization of 90 percent, the CoBank report said. If capacity utilization declines, it will have a negative impact on margins.

During 2014, a steep decline in corn prices, combined with relatively strong ethanol and distillers grains (DDGs) benefitted ethanol producers, CoBank said. In 2015, however, ethanol prices have weakened, relative to corn, and lower crude oil prices have dragged down ethanol.

Corn futures prices are forecast to be $4 per bushel for at least the next year and a half and many analysts project crude oil prices will remain below $60 per barrel through 2016.

A stabilized corn market and an ample supply of the commodity should keep markets relatively steady during the next year, the CoBank report said. That means during the 2015-’16 ethanol marketing year, the revenue side of the business, that is, ethanol and DDG prices, will greatly influence ethanol plant profitability

The EPA’s proposed rule, for which the final rule is expected to come out in November, puts a “floor” beneath the 10 percent ethanol blend level, and does not require retailers to sell ethanol blends higher than E10. CoBank said that is likely to result in ethanol accounting for about 10 percent of U.S. motor for the next several years. At the same time, ethanol production will be slightly higher, as a result of plant expansions and plans for new plants. That means ethanol exports will be more important.

Distillers grain sales, meanwhile, are an increasingly important part of the equation for ethanol producers. China’s re-entry into the DDGs market this year has resulted in improvement in DDG prices.  During the first seven months of 2015, China DDG exports to the country accounted for 60 percent of all U.S. DDG exports. The increase in DDG exports to China has helped shore up ethanol producers’ margins during a period when weaker DDG prices could have put them in the red.

While China’s increase in DDG imports from the United States is positive, there is risk involved in concentration of exports to one buyer, CoBank said. In 2014 China exited the U.S. DDG market and there are concerns that the country is more closely watching its imports and is poised to change its minimum price on corn as much as 20 to 25 percent. The reduction could substantially reduce demand for alternatives such as DDGs and sorghum, CoBank said.