Historical Ethanol Operating Margins
The return over operating costs is one signal of the level of profitability to producing ethanol. This return is calculated as the difference between the revenues from ethanol plant outputs (ethanol and dried distillers grains with solubles [DDGS]) and the costs of variable production inputs (corn, natural gas, and other costs such as enzymes, labor, electricity and water).
CARD tracks ethanol returns over operating costs based on an updated dry-mill production technique for a representative Iowa corn ethanol plant. 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 2.80 gallons of denatured ethanol, 17 pounds of DDGS and 0.7 pounds of corn oil. Other operating costs of $0.30 per gallon of ethanol and $0.05 per pound of corn oil extracting cost are also included.
We base our corn price on the daily nearby futures price in Chicago plus Iowa corn basis. Weekly corn basis is calculated as the difference between the price that Iowa ethanol plants pay, as reported by USDA’s Livestock and Grain Market News, minus the CBOT nearby futures price. We base our daily ethanol price on the nearby futures contract for ethanol in Chicago plus Iowa ethanol basis which is calculated based on the USDA’s weekly Ag Energy Roundup, which also include the weekly crude oil price we used. The natural gas price is taken from the nearby futures contract on New York Mercantile Exchange plus basis calculated from the average price paid for natural gas by industrial users in Iowa as reported by the US Energy Information Agency. We base our DDGS price off of the corn price adjusted for the previous month’s average ratio of the price of DDGS to corn.
By definition, per-gallon returns over variable costs plus variable costs equals the price of ethanol. The chart below shows how the price of ethanol is split between the various cost components—the net cost of corn in ethanol (corn costs less distillers grains value) and other operating costs (includes the cost of natural gas)—and returns over variable costs. A positive operating return does not necessarily imply profits because 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) attempts to capture the costs of capital and other fixed costs. Profits are implied under the current set of assumptions when operating returns exceed the horizontal line.
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