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Industry At A Glance: Ethanol margins narrow dramatically

Gross margins for ethanol production have trended sharply lower in recent months, while ethanol plants have also had to deal with a stronger dollar and a stubborn corn market.

Nevil Speer

January 15, 2015

1 Min Read
Industry At A Glance: Ethanol margins narrow dramatically

Several weeks ago, Industry At A Glance focused on the potential influence of declining gas on consumer behavior and the beef industry. Meanwhile, plunging fuel prices have also caused the ethanol industry to receive a lot of attention in recent weeks.

Ethanol industry revenue is derived from the sales of fuel (~2.8 gals. of ethanol per bushel of corn) and distillers grain (~17.75 lbs. per bushel of corn). On the flip side, production costs are overwhelmingly dictated by the price of corn. Therefore, calculation of gross profit is relatively straightforward. Gross profit must then cover fixed costs, variable production costs (e.g., natural gas), return to management, return to investment and profit.

The chart highlights moving average trends for ethanol plant gross margin (basis Iowa) and fuel prices through 2014. Gross margins have trended sharply lower in recent months. Meanwhile, ethanol plants have also had to deal with a stronger dollar (slowing down exports) and a stubborn corn market.

How do you perceive the influence of lower fuel prices on the ethanol industry? How might this play out considering other dynamics around foreign exchange and the overall corn market? If tighter ethanol margins become a prolonged reality, how might that affect the livestock industry going forward? Leave your thoughts in the comments section below.

 

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About the Author(s)

Nevil Speer

Nevil Speer serves as an industry consultant and is based in Bowling Green, KY.

Nevil Speer has extensive experience and involvement with the livestock and food industry including various service and consultation projects spanning such issues as market competition, business and economic implications of agroterrorism, animal identification, assessment of price risk and market volatility on the producer segment, and usage of antibiotics in animal agriculture.
 
Dr. Speer writes about many aspects regarding agriculture and the food industry with regular contribution to BEEF and Feedstuffs.  He’s also written several influential industry white papers dealing with issues such as changing business dynamics in the beef complex, producer decision-making, and country-of-origin labeling.
 
He serves as a member of the Board of Directors for the National Institute for Animal Agriculture.
 
Dr. Speer holds both a PhD in Animal Science and a Master’s degree in Business Administration.

Contact him at [email protected].

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