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BiorenewablesHistorical Ethanol Operating Margins
The growth in the ethanol industry is partially driven by the potential for profit that investors see in the industry. One measure of profit potential is the return over operating costs for ethanol production, the difference between the revenues from ethanol plant outputs (ethanol and dried distillers grains with solubles [DDGS]) and the costs from variable inputs (corn, natural gas, and other costs such as enzymes, labor, etc.).
CARD is tracking ethanol returns over operating costs based on an updated dry-mill production technique for ethanol. In the returns calculations, we assume that one bushel of corn and 72.8 thousand British thermal units of natural gas are required to create 2.8 gallons of ethanol and 17 pounds of DDGS. Other operating costs of $0.35 per gallon of ethanol are also included. Given futures prices for the nearby contracts for ethanol and corn from the Chicago Board of Trade and for natural gas from the New York Mercantile Exchange, we have computed the ethanol operating returns from March 21, 2005, to the present. To capture historical basis levels, it is assumed that the price of corn in Iowa is $0.30 a bushel lower than the Chicago Board of Trade futures price.
The graph below divides the price of ethanol into three components: the net cost of corn in ethanol (corn costs less distillers grains value), natural gas and other operating costs in ethanol, and the ethanol operating returns. A positive operating return does not necessarily imply profits as other costs, such as plant financing, and returns to capital, must be taken into account. But a positive operating return does signal the potential for profits in the industry. The horizontal line (at $0.25 per gallon) aims to represent the costs of capital. Profits are implied under the current set of assumptions when operating returns exceed the horizontal line.
| Last Update | Ethanol Price | Corn Price | Natural Gas Price |
| 2/3/2012 | $2.13/gallon | $6.15/bushel | $2.5/mmBtu |
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