As ethanol yields have increased and more corn oil gets spun out, the inevitable result is that DDGS production goes down. Ag economist Scott Irwin, chair of agricultural marketing at the University of Illinois Urbana-Champaign, pins down the impact as a net gain worth about 28 cents per bushel of corn produced.Getting to that conclusion requires data analysis that reveals multiple industry trends. Irwin has been following the ethanol industry closely since the mid-2000s, “when it was clear we were having a major build-out in ethanol capacity in the U.S., and it was having a major impact on corn prices,” he says. In recent years, Irwin has looked at the profitability of the industry annually, utilizing a representative ethanol plant model developed by a fellow ag economist at Iowa’s AgMarketing Research Center. The spreadsheet uses Iowa-based corn, ethanol and coproduct prices and allows users to either run the model’s assumptions for other fixed and variable costs or replace them with their own numbers.A critical variable to getting a good analysis is inputting the best numbers for ethanol and coproduct yields. “I can’t do a reasonable job of assessing the profitability of ethanol production in the U.S. without having a good handle on critical measures of productivity,” Irwin says. The challenge, of course, is that this data is not publicly reported like commodity prices. Four years ago, Irwin began analyzing the industry’s conversion rates using data from the USDA and the DOE’s Energy Information Administration. His most recent report, “Trends in the Operational Efficiency of the U.S. Ethanol Industry: 2023 Update,” was published online in February at farmdocdaily.illlinois.edu. Note: All figures and data illustrations in this article, with the exception of one, come from this report.The analysis gives a snapshot of how the industry is doing, using the best available data, Irwin says. “I will take the EIA/USDA data any day over private data that is a subset of the industry,” he says. “I know and trust their survey methods—I’m the opposite of most farmers. I know the statisticians, and I understand their survey methods and their rigor and consistency.”Ethanol production data comes from the EIA, published in its Monthly Energy Review. Feedstock and coproduct volumes come from the USDA’s monthly Grain Crushings and Co-Products report.The USDA’s report distinguishes wet mills from dry, giving a window into how wet milling—dominated by ADM and Cargill—compares to dry-grind milling in ethanol production. While the corn crushed by dry mills ranged between 85% and 93% between Oct. 2014 (when the crush report began) and Oct. 2023, the average was 91%, leaving wet mills with an average 9% share of the crush.Ethanol Yield&nbsp; Getting data from two different agencies, using two different surveys and reporting methods, complicates the analysis of corn ethanol yield. EIA reports total ethanol production, regardless of feedstock. USDA tracks corn and sorghum crush separately. Irwin’s report explains that because sorghum is such a small fraction—typically less than 5 million bushels per month compared to 400 to 450 million bushels of corn—it has little effect on the corn ethanol yield calculation. Furthermore, no sorghum use has been reported since July 2020.EIA’s ethanol production numbers, however, include both wet and dry mill ethanol production. Wet and dry technologies likely have different conversion rates, but Irwin concludes the use of combined production is not a significant limitation to computing yield because wet mill plants represent less than 10% of total production.The ethanol yield in late 2014, when the crush report first came out, amounted to 2.88 gallons per bushel, improving over the decade by about 1.8% per year on average to a 2023 average yield of 2.95. Figure 1 shows the monthly conversion rates and trend line.Irwin adds that after looking at last year’s data, he’s wondering if efficiency gains are losing momentum. “It’s really flattened out,” he says. “We last peaked at 2.98 in August 2022, and we haven’t been at that level since. If we don’t go above that in 2024, it will raise the question: Has the ability of the ethanol industry to increase ethanol yield finally begun to taper off?”When asked whether the fluctuations in ethanol yield correlate at all with changing margins, Irwin ran the analysis for Ethanol Producer Magazine, shown in Figure 2. He charted the monthly average margin for a representative Iowa ethanol plant versus deviations from the trend in ethanol conversion rates. “It shows a slight downward trend largely driven by a few outliers,” he says. “Basically, it’s a scatter plot showing no statistical correlation.” He suspects the variations in yield are random and not correlated to margins, which would be an indicator of profitability. “In talking to people in the industry, some of the variation has to be explained by the ethanol milling quality of a corn crop—that would be the first place I’d look for a correlation.”Coproduct Yield&nbsp; Calculating the yield of distillers corn oil (DCO) is straightforward using the data from the USDA Crushings report. DCO conversion industry-wide has risen an impressive 90% from a low of just 0.48 lb/bu of corn in December 2014 to a peak in May 2023 of 0.91 lb/bu. The 2014 low quickly improved, with the 2015 DCO yield averaging 0.60 lb/bu. The average in 2023 came to 0.88 lb/bu.Calculating the DDGS conversion rate requires more work. The crush report breaks out five categories of distillers grains coproducts, which have to be adjusted by assumed moisture content to calculate an aggregate DDGS conversion rate. The 9% increase in ethanol yield and 91% increase in corn oil extraction have resulted in a 12% decline in DDGS conversion rate, Irwin reports. The peak was seen in October 2014 at 17.34 lb/bu, and the low was recorded in July 2023 at 15.25 lb/bu. The average for 2015 was 16.95 lb/bu, which declined by 1.43 lb/bu to an average DDGS yield of 15.52 lb/bu last year.Efficiency Trade-off&nbsp; Irwin’s analysis this year tackled the question of the economic impact of these efficiency trade-offs—how well does getting more ethanol and DCO offset the loss in DDGS?To answer that, Irwin turned to the representative Iowa ethanol plant model. He first calculated the annual revenue from ethanol, DDGS and corn oil for 2015 ($5.53 per bushel) and 2023 ($8.51) using the USDA’s reported Iowa market prices and his calculated average conversion rates for each of those years. Then, to see how it would have looked if conversion rates hadn’t changed, he ran the model again with 2023 prices, keeping the 2015 conversion rates as a constant.The operational efficiency gains over the past decade led to an additional 26 cents of ethanol revenue and 18 cents of corn oil revenue per bushel of corn processed—a total gain of 44 cents. This was offset by a drop of 16 cents per bushel in DDGS revenue for a net gain of 28 cents. “This represents about a 4% improvement in total revenue, which is economically meaningful,” Irwin says.The cost of boosting ethanol and DCO yield isn’t factored in, he adds, as that data isn’t available. “I presume since they’re profit maximizing firms, the net is positive after you consider the cost of the operational trade-offs.”Implications&nbsp; As an economist analyzing the ethanol industry closely, Irwin is sometimes called on to testify before congressional committees to share his findings. But his computed ethanol yield isn’t the one that counts for regulators. In using the EIA and USDA data, Irwin’s average ethanol yield for 2023 of 2.95 is higher than the GREET21 average Midwest ethanol yield of 2.864.Not knowledgeable about GREET’s methodology for determining ethanol yield, Irwin can’t explain the difference. He is, however, confident that using EIA and USDA data gives the best indication of averages and trends, though it may not be an accurate measure of yield at a specific point in time.The one-tenth difference in ethanol yield amounts to about 1.5 points in carbon intensity. “It’s not a huge mover of CI score like carbon sequestration, but at the margin these things matter. Particularly when you’re right around the critical 50% mark,” he points out, referring to the threshold to qualify for incentives in the Inflation Reduction Act.The productivity story of the U.S. ethanol industry is important in its own right, Irwin says. “It’s also interesting because of the importance of these basic analyses in the policy debates about carbon accounting, what I now call #GREETwars.”The biggest strength of the ethanol industry is its resiliency and its “quiet innovation” in operational efficiency, Irwin says. In considering its biggest weakness, he doesn’t point to economics at all. “The industry tends to have, and not without good reason, an ‘us against them’ mentality. I understand why that’s developed considering the ferocious battles with the U.S. crude oil refining industry. But that doesn’t always serve them well, in my opinion,” he says, adding that he’s experienced that reaction to some of his analyses that are perceived as a threat.“But that’s small potatoes relative to this enormous transition that’s just gotten started from internal combustion engines to EVs,” he continues. While he expects the timeline is much further out than some fear (or hope, among EV proponents), Irwin maintains that the future of mass transportation will be electric vehicles and internal combustion engines will be reserved for niche uses. “That’s an unusual existential threat,” he says. “It’s not normal for a well-established, profitable industry to say we can see a future that doesn’t include us.” &nbsp;Thus, the interest in sustainable aviation fuel as a new market for liquid fuels is strong. “And that is why #GREETwars is so ferocious now. The ethanol industry, for good reason, feels like it’s fighting for its long-term life.” Author: Susanne Retka Schill&nbsp; Contact: writer@bbiinternational.com

2024-05-13 - Efficiency Trade-offs (Ethanol Producer Magazine)

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More ethanol and oil wrung from each bushel of corn means less DDGS. How well does it pay?

Efficiency Trade-offs

Efficiency Trade-offs

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