While the future of ethanol is facing an uncertain future as the political battles about its usefulness continue, last year most U.S. ethanol producers were swimming in profits like they have never experienced.
According to a March 5 report by Scott Irwin of the University of Illinois’ Department of Agricultural and Consumer Economics, “The focus on the changing profit outlook for ethanol producers can obscure the fact that the industry is also coming off the best year it has ever had in terms of profitability.” The article, “2014 Really Was an Amazing Year for Ethanol Production Profits,” estimates ethanol production profitability in 2014 and compares the profits to those earned over the 2007-13 period.
The politics of ethanol is intensifying with the introduction of the Toomey-Feinstein “Corn Ethanol Mandate Elimination Act” in Congress on Feb. 26. According to reports, a variety of special interests have joined forces against the Renewable Fuel Standard, including poultry farmers, chain restaurant operators, cattle ranchers and oil companies who insist that the RFS isn’t working. At the same time, various industry groups are criticizing Toomey for saying ethanol drives up gas and food prices and Feinstein for her argument that corn ethanol is getting in the way of advanced biofuels.
But while Washington insiders drew battle lines, ethanol producers enjoyed the highest level of profits they’ve ever seen. According to Irwin, driven by the combination of relatively high ethanol prices and relatively low corn prices, profits averaged a record $0.54 per gallon in 2014.
“A new record weekly high profit of an astounding $1.61 per gallon was set on March 28, 2014. This dwarfs the previous record spikes in late 2011 and 2013. The record profits of 2014 are also part of the longest run of uninterrupted profits since we first began estimating margins in early 2007,” says Irwin.
“The streak of positive profits began on March 15, 2013 and ended on Jan. 2, 2015, for a total of 95 consecutive weeks without a loss. The average profit during the streak was $0.43 per gallon. This is more than 10 times the average profit of $0.04 per gallon that a representative plant earned during all the weeks preceding the recent record streak (Jan. 26, 2007 – March 8, 2013),” he says.
Soaring Profits
Irwin goes on to say that the 2014 net profit of $54.4 million is more than twice the profits of the next highest year (2007, $25 million). “Even more impressive, the 2014 net profit exceeds the sum of all profits — $49 million — earned cumulatively over 2007-13. Averages for the 8-year period of 2007-14 are $13 million and 10.3%, respectively. The total cumulative (pre-tax) return to equity holders for the period was $104 million.”
Using the model developed around an Iowa ethanol plant, Irwin says, “It was indeed a very good year for ethanol producers. Using the average net profit for the representative plant to make a rough estimate of profit for the entire U.S. ethanol industry in 2014, and assuming all plants in the industry earned a net profit of $0.54 per gallon, then, total ethanol production for the U.S. in 2014 of 14.3 billion gallons of ethanol implies aggregate industry (pre-tax) profits of $7.8 billion.”
Looking ahead, Irwin says, “The large profits of 2014 and 2013 will provide a much needed financial cushion as the industry faces a substantially changed profit outlook in 2015. The recent crash in crude oil prices ended the record streak of ethanol production profits that began in March 2013. The key question moving forward is whether 2013-14 profits were a temporary blip due to a unique set of circumstances or reflected a new normal driven by a robust ethanol export market.”
Moderate Growth
At least a partial answer to Irwin’s question may have come from the latest Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri. The “U.S. Baseline Briefing Book,” which focuses on projections for agricultural and biofuel markets, released earlier this month, says the record margins in 2014 lead to a recovery in ethanol production compared with 2012 and 2013.
“Production is projected to decline slightly in 2015 as margins become tighter. Beyond 2015, ethanol production grows slowly as RFS requirements increase and production margins recover,” says FAPRI. “Cellulosic and non-corn production levels contribute relatively minor quantities to the total.”
FAPRI expects sugarcane imports from Brazil to continue at a very low level in 2015 before resuming some growth in 2016 and remain relatively flat through the reminder of the decade.
The past year saw a rebound in the exports of ethanol. The report says U.S. exports of ethanol will “continue steady growth with domestic conventional ethanol prices competitive in the global market.”
Ag Equipment Intelligence — March 2015
