FOLLOWING an extremely challenging period sparked by the historic 2012 drought, ethanol and corn prices have finally reached levels that allow U.S. ethanol producers to return to profitability.
During the second quarter of 2013, as corn prices moderated, a number of idled ethanol plants returned to production, and overall ethanol output has increased to levels not seen in several months.
Investing in ethanol production has been something of a roller-coaster ride over the past six years, according to an analysis of profitability conducted by University of Illinois agricultural economist Scott Irwin.
Aggregating both total dollar returns to equity holders and percent return to equity from 2007 through 2012, the industry saw significant profits in 2007, far smaller profits in 2008 and 2011 and marginal or negative profits in 2009 and 2010, followed by a disastrous 2012 (Figure).
"After starting out the recent boom period with strong profits, ethanol plants have struggled to maintain profitability," Irwin said. "It is not clear whether the recent three-month period of positive margins will be maintained going forward. A case can be made for some optimism given the possibility of lower corn prices in the upcoming marketing year and pressures for increasing volumes of ethanol to meet the rising mandate for renewable fuels under the renewable fuel standard."
Given those factors, he predicted that another extended period of red ink like last year "does not appear to be in the cards." As with most analyses of ethanol profitability, Irwin's projections are based on a "typical" 100 million gal.-per-year, corn-fueled Iowa ethanol facility.
Iowa State University biofuels expert Robert Wisner largely echoed Irwin's findings. He noted that in late June last year, severe drought caused a sharp increase in corn prices, but since late March, production conditions have improved significantly.
"The improvement has resulted from lower (but still historically high) corn prices and increased ethanol prices," Wisner explained. "The ethanol industry is responding by bringing a number of previously idled plants back into production, and the industry's demand for corn has increased modestly in the last few weeks."
Volatility, as with the corn markets in general, has been the name of the game for ethanol producers. Wisner said because ethanol is derived from a commodity whose prices are strongly influenced by weather, and because ethanol prices are strongly influenced by global politics and domestic energy prices, profitability is likely to remain volatile moving forward.
Even so, he concluded that "there is reason for cautious optimism about ethanol profitability in the months ahead."
That profitability, however, will depend heavily on favorable summer and early-fall weather in the Corn Belt as well as in other major corn-producing countries.
To that end, corn producers themselves are cautiously optimistic. As of June 30, the U.S. Department of Agriculture reported just 3% of corn acres silking — behind the five-year average of 9% — with 67% of the crop in good to excellent condition, well ahead of the 48% rating during the same week of 2012.
Should weather conditions remain favorable through the critical pollination period, yields will quite likely move back toward USDA's current weather-adjusted projection of 156.5 bu. per acre.
With USDA's June acreage report showing a whopping 97.4 million acres planted (an estimate the trade views with no small amount of skepticism due to the late planting window this year), production could top 15.24 billion bu., and prices will most likely fall precipitously.
On the other hand, should Mother Nature throw midwestern producers another rain-related curveball over the next six weeks, all bets for corn production — and ethanol profitability — are off.