By the Numbers

Trends and patterns in the ethanol industry
By Holly Jessen | March 05, 2012

The numbers are in for 2011, adding another year to the data compiled by the Agricultural Marketing Resource Center at Iowa State University on prices, profitability, and supply and demand in the ethanol sector. Economists Bob Wisner and Don Hofstrand maintain a set of spreadsheets and continually look for new ways of analyzing the facts and figures.   

So what did Wisner and Hofstrand discover about 2011 and the future of the ethanol industry by examining the data gathered in the past year? For one thing, they point to high corn and ethanol prices, the expiration of the Volumetric Ethanol Excise Tax Credit and exports as major stories. Hofstrand was especially struck by the high ethanol and corn prices that dominated 2011. “When you look at the patterns in the past, we last saw this for a brief time in 2008,” he says. “But the [recent] period of high prices has been longer, even though it is trailing off somewhat now.  That’s one of the things that marks 2011 in my mind and whether that’s a harbinger for the future, I don’t know.”

With higher corn prices, comes rationing. When everything shook out, it wasn’t the ethanol industry that cut back on corn use, however. “It rationed the demand for corn use for feed and the exports somewhat more than it did for ethanol,” Hofstrand says. “In fact the ethanol industry continued to expand while use of those other categories declined.”

Higher corn prices have meant increased profits for corn producers and, a less obvious benefit,  it also means more profit for the entire corn production system, including increased cash rents. “The ethanol profits are not only going to the ethanol producer and the corn farmer, they are also trailing back into the resources that the corn farmer uses,” Hofstrand says. Wisner points out that how profits are distributed between ethanol producers, landowners and farmers has varied over time and varied significantly in 2011.

Export demand was strong, resulting in an impressive 1 billion gallons of ethanol exported in 2011. With the U.S. at the blend wall, that demand proved very important for the ethanol industry, he says. For the coming year, demand for U.S. ethanol in Brazil is expected to continue, and increased demand due to mandates for ethanol in other countries is expected to continue, Hofstrand says. On the other side of the coin, Wisner adds, the fact that California’s Low Carbon Fuel Standard has been declared unconstitutional could slow imports from Brazil in the short term. However, the California Air Resources Board is appealing and the final outcome of that court battle is still unknown.

The year 2011 was a year of substantial fluctuations in profitability, ranging from times of negative returns to very strong profitability in the last quarter of the year. Based on spot prices, profitability in the final quarter of 2011 was exceptionally good, although it dropped sharply in December, Wisner says. The catalyst for that profitability was the eminent sunset of VEETC at the end of the year, as ethanol plants pumped out as much product as possible and the petroleum industry blended as much with gasoline as it could. 

Looking ahead, Wisner expects the loss of the blenders credit will result in slowed ethanol production in 2012. His projections for January to August are that the average weekly decline compared to last year will be 1.7 million bushels. Viewing the numbers a different way, comparing January to August to the weekly average from September 2011 through December 2011, he projects a 3.3 million bushel decline in corn processing by the ethanol industry. The expected decline is even more noticeable when stacked up against the last quarter of 2011. That comparison adds up to a decrease of 5.4 million bushels per week, or 5.4 percent. 

The arrival of the blend wall and expected increase in E85 prices due to the lapse of VEETC are two factors that have complicated the future outlook of ethanol use, Wisner says. Analyzing the removal of VEETC shows that the net price for E10 is likely to increase by 4.5 cents a gallon and won’t have much of an effect on E10 demand, particularly because many states don’t label E10 pumps. E85, on the other hand, is projected to go from a net price of $2.515 a gallon with VEETC to $2.897 a gallon without VEETC, a more than 38 cent a gallon increase. With E85 fuel mileage about 25 percent lower than gasoline, E85 prices need to be about 25 percent lower than gasoline. “Without competitive retail prices, the E85 market is unlikely to expand to the hoped-for size and to provide a way out of the blend wall,” he says. “If a break-through in cellulosic ethanol production technology occurs that encourages rapid increases in production, pricing of E85 will become increasingly important to the entire ethanol industry.”

Head for Numbers
In the discussion about the AgMRC biofuels data, Hofstrand and Wisner just can’t help themselves. Even while discussing recent trends, they were busily thinking up new ways to analyze the numbers. “We’re always looking for things to add,” Hofstrand says, telling EPM that they’re also open to suggestions for additional data comparisons, depending on what would be most useful.

Targeted toward value-added agriculture, AgMRC is a virtual library that provides facts and figures on commodities, markets, business development and more. AgMRC, which is partially funded by USDA, is based out of Iowa State University. It started out as a collaboration of ISU, the University of California and Kansas State University but as it has evolved, other universities have provided data as well, Hofstrand says. The information compiled in abundant articles, spreadsheets, charts and graphs comes from various sources including the USDA, U.S. Energy Information Agency and the U.S. Census Bureau.

One part of that is data collected on the renewable energy industry, specifically ethanol and biodiesel. That includes the monthly Renewable Energy and Climate Change newsletter, which is posted online and emailed to more than 1,300 subscribers. Past newsletter articles on diverse subjects range from exports, risk management, profitability of the ethanol supply chain and more. The first monthly newsletter was published in June 2008. The information has value for people in a variety of areas, such as the management of biofuels plants, investors and those in the feed industry, Wisner says. In addition, domestic and foreign policy makers have been known to use the information in making policy decisions. Both Wisner and Hofstrand have received many calls and emails from people around the world, they tell EPM.

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Supply/Demand Balance

One set of analyses that Hofstrand says deserves more attention are the supply/demand balance sheets compiled by Wisner. “They are used quite a bit but I am not sure everybody knows about them,” Hofstrand says.

The data is somewhat unique among publically available sources of information and even data compiled in the private sector, Wisner says. The predictions examine questions such as, is the current situation a short-term development or will it continue on and for how long? “The reason we do that, is the markets are always forward looking, looking beyond just the current situation,” he says.

On the corn side, Wisner takes a long-term look at the trend for corn yields, going back to 1866 when the USDA first started recording the information. He examines, for example, how frequently corn yields are as much as 7 or 8 percent below or above trend. This helps determine the most likely long-term trend and possible implications. In the corn/ethanol and corn/distillers grains balance sheets, the data shows how many bushels of corn are being used for ethanol production, what amount of distillers grains is produced, how much of that is exported and even what percentage of distillers grains are utilized by various types of livestock. “There’s a lot of detail behind that,” Wisner says, “with the ultimate purpose being to determine how many bushels of corn are being replaced by the distillers grains.” The data shows it’s a substantial amount, he adds. 

In the future, he plans to add additional data on corn oil extraction. Recent reports have shown that more ethanol plants than initially anticipated have added that technology to their plants, Wisner says. While extracting corn oil can produce a premium product for some livestock, such as dairy cattle, the changing composition of distillers grains has caused some concerns in the pork and poultry industries.

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Ethanol Profitability

The data series that garners the most attention is the ethanol profitability spreadsheet, Hofstrand says. Starting with a hypothetical 100 MMgy ethanol plant in Iowa, the model tracks profitability by looking at four factors, the costs of natural gas and corn inputs and revenues from ethanol and distillers grains prices. The spreadsheet uses daily ethanol and distillers grains prices converted to monthly averages, as reported by USDA Ag Market News, and monthly natural gas prices as reported by EIA, to calculate profitability. “It serves in a general way as a barometer of what’s happening in the industry, even though it’s not an industry aggregate,” says Wisner. “We recognize that there are variations in costs and pricing strategies from one plant to another but it gives a general indication of what’s happening out there.”

Hofstrand points out one feature ethanol producers can take advantage of is plugging in their own numbers to adjust the profitability model. For example, a plant can enter in its own capacity, financing details, efficiency factors and more. The prices for ethanol, distillers grains and cost of natural gas and corn cannot be directly changed in the spreadsheet, but producers can enter in a price adjustment, plus or minus the average price recorded. For example, an ethanol plant that paid a few cents more or less than the average price for corn used by the model can enter that in under price adjustment. 

Author: Holly Jessen
Associate Editor, Ethanol Producer Magazine
(701) 738-4946
hjessen@bbiinternational.com