Report: Plant size not a factor in profitability

By Holly Jessen | March 16, 2010
Posted April 9, 2010

Over the last two years, ethanol plants smaller than 60 MMgy were slightly more profitable than large plants, according to "Biofuels Benchmarking," an annual report released by Christianson & Associates. That might be surprising news for an industry that has been, in recent years, constructing larger plants, reaching for lower capital cost per gallon and operating efficiencies. "We haven't found through the data so far that the economies of scale are there that are assumed for larger plants," Paula Emberland, business analyst for the company told EPM.

Christianson & Associates, a certified public accountants and consultant company, first released the annual report in 2003, with only eight ethanol plants participating. For this report, which looks at plant data from 2009, more than 50 ethanol plants of all sizes, locations and ages submitted information.

Another highlight of the 25-page report, according to Emberland, is the importance of the grind margin, which is calculated by subtracting feedstock and energy costs from the revenues from ethanol and coproducts. Those four things together are the biggest factor in plant profitability, totaling 85 percent of the bottom line. "The management of the grind margin cannot be overemphasized," the report said. "Very few plants that were the top achievers in any one commodity … were in the leader group for the overall grind margin on a consistent basis. The plants that managed the relationship best among all four of the grind margin components on a consistent basis achieved the highest profitability."

Not surprisingly, the report showed a decrease in the average grind margin over the past few years. The number was more than $1 per gallon in 2006 and had dropped to just over 40 cents in 2009.

Of the more than 50 plants participating, the average capacity was 63 MMgy, according to the report's overall industry analysis. Of those plants, 20 percent are producing primarily wet distillers grains, 50 percent primarily dry distillers grains and 30 percent modified wet distillers grains. Corn oil was a popular technology upgrade, going from 30 percent in 2008 to 70 percent in 2009. In total, the plants' annual production of corn oil was about 6.6 million pounds. About 17 percent of the plants capture CO2 and sell an annual average of 70,000 tons annually.

Overall, the data showed a 2 percent increase in ethanol yield. Natural gas is still the top choice for energy among ethanol plants. For 2009, 92 percent of the total BTUs came from natural gas. Plants producing wet distillers grains had an average energy use of 20,700 BTUs per gallon of ethanol produced, while plants producing dry distillers grains averaged 30,000 BTUs per gallon.

With lowered grind margins, many plants cut back on labor and also paid out reduced incentives and bonuses based on net income. On average, production labor cost per gallon dropped 20 percent, from about .045 cents per gallon in 2006 to .035 cents per gallon in 2009. In addition, the number of gallons of ethanol produced per labor hour has increased. In 2009, 900 gallons of ethanol were produced per labor hour, an increase of 50 percent from four years ago. "This increase is due to the larger plants with newer technology coming online in the past two years and older plants tightening their belts as margins decreased," the report said.

The report concluded that no one single thing ensured profitability for an ethanol plant. In fact, what made a plant profitable in one quarter may cause it to lose money the next. "A risk management strategy that reduces the commodity market volatility, focuses on margin management and operates to maximize profitability has shown to consistently lead the industry over time," the report said. "Plants positioning themselves with strategy to adapt quickly during volatile times tend to be included in the leaders group a higher percentage of the time."