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Wednesday, July 11, 2012

Ethanol:  Analysis At Middle Age


For many months, the nation could not get enough ethanol, and increasing amounts of corn were being refined into ethanol—for a while overtaking the amount of corn being used for livestock feeding.  But the bloom is off the rose, and ethanol, while still a major force in the corn economy, is now reacting to many different dynamics than being the dynamic itself.  Ethanol is growing older, just like the rest of us, and the more it ages, the more bumps and bruises it has, but the more experience it has and the more talents it can extol.  Ethanol, welcome to middle age.
Ethanol has quite a story to tell and its history is no secret.  But in the past year ethanol has gained quite a few wrinkles and beauty marks, and those have been identified by Iowa State University <a href="http://" title="ag economist Bob Wisner"><b>ag economist Bob Wisner</b></a>.  Just like any other agricultural commodity, profitability is the key to its success and Wisner says that has been up and down in the past couple years.  While much of it depends on the price of corn, other aspects will vary with processing cost, demand, and even many outside economic forces.
1) The more miles put on by the motoring public, the more gallons of ethanol that were needed and demand usually translates into profits.  However, with the US car parked in the garage there is less demand for gasoline, and fewer gallons will be blended.  
2) If less ethanol is needed, weekly production should decline.  However, about 5 billion bushels of corn will be refined into ethanol in the current marketing year.  But due to some slim profit margins, some refineries have closed temporarily.
3) The cost of corn makes up nearly 80% of the production cost of ethanol.  With corn prices at historic levels, due to global shortages, refineries have had to offer high incentives for deliveries of corn.  As it happens, many ethanol plants are located in Cornbelt areas were there is a deficit of corn and the drought has threatened future quantities.
4) As the price of corn has gone up, the cost of energy has gone down.  Most ethanol plants use natural gas for heating water.  The cost of natural gas has dropped to the point that a gallon of ethanol can be produced from 16-cents of natural gas, instead of the 36-cents in the mid-2000’s.
5) While the US motor fuel market cannot absorb much more ethanol, refiners have found a welcome market in Brazil where the auto industry is used to using ethanol.  While the European market for ethanol was abruptly ended with a tax issue, the global sugar market has opened the door for more ethanol demand in Brazil.  There it is more profitable to use sugar cane for sugar than for ethanol.
6) While the courts have flip-flopped on whether US ethanol can be used in California, California considers it to be a high carbon fuel and is importing ethanol from Brazilian sugarcane.  US ethanol refiners have accepted the policy and are just exporting more to Brazil, with no significant impact on the carbon issue.
7) Prior to the first of 2012, ethanol blenders received a 45-cent per gallon credit, which has since expired.  However, the US production mandate is still in effect and ethanol is still in demand, since it is selling 40-cents to $1 under the price of unleaded gas.
8) The approval of E-15 and all of the E-85 cars on the road would seemingly provide a greater market for ethanol fuels.  However the merchandising industry has been slow to install appropriate pumps.
9) Current federal policy for renewable fuels calls for cellulosic ethanol to begin supplying the nation’s needs, beyond the current levels of corn-based ethanol.  However, technology has not kept up with policy and targets have been lowered, and will still have to be lowered.
10)  Distillers grains, the ethanol co-product, has been a popular domestic livestock feed when priced at levels under the cost of corn.  However, more and more is being exported, with China taking a quarter of DDGS production in the last marketing year.  While there has been a brief hiatus in that demand while legal issues were being resolved, DDGs is expected to begin flowing to China at a bigger pace.
11)  Oil is a co-product of the DDGs, and depending on technology used, it can increase the profitability, since it would be used for biodiesel production.  Biodiesel is the only domestically produced advance biofuel and has a demand. Livestock feed researchers are beginning to identify specific rations that are better with or without oil.
There are many variables and dynamics that have pushed and pulled on ethanol profitability.  It has had some setbacks, but the industry is working around many of those and it will continue to contribute profitability to the corn economy.

Posted by Stu Ellis on 07/11 at 09:57 PM | Permalink

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