Corn Oil Adds Significant Profitability to Ethanol
Tight margins for ethanol producers throughout last year led most in the industry to carefully examine all possible opportunities for generating coproduct revenue to supplement income derived strictly from ethanol sales. Specifically, decisions surrounding the extraction of corn oil have been high on everyone’s agenda this year, according to analysts with the Biofuels Benchmarking Program at Minnesota accounting and consulting firm Christianson & Associates PLLP.
More than 60 ethanol plants in the United States and Canada participated in the benchmarking program last year, and among these plants, more than 23 percent of total revenues are derived from coproducts like distillers grains and corn oil. Over half of the participating plants include corn oil extraction as an important component of their coproduct revenue stream.
Innovations in extraction technology have led to large increases in average corn oil yield over the past year. Corn oil yields have risen steadily as plants improve their technologies and processes for extraction. Average yields have increased more than 50 percent since the beginning of 2011 and now average well over half a pound per bushel. The leading top 25 percent of plants can expect even higher yields, averaging upwards of 0.8 pounds per bushel in the most recent quarter for which data is available, Q4 of 2012.
Netback on corn oil has fluctuated, rising early in 2011, then falling slightly for several quarters before stabilizing. The most recent calendar year has seen corn oil netback averages remaining in the range of $700 to $750 per ton. Leaders in this category averaged nearly $800 per ton for the most recent calendar quarter.
The profitability of corn oil extraction does appear to be tied to the unique economic environment in which each plant exists. For instance, plants with a robust market for livestock feed may find it most profitable to focus on producing feed with the specific oil content most desirable (and therefore most highly compensated) in their particular market. Other plants may have strong relationships with biodiesel producers or other markets for their corn oil, and in these cases, obviously, plant management teams will want to focus their efforts on maximizing corn oil production.
How, then, does any individual plant decide how much to focus on corn oil production, given these differences in marketability? In addition to performing economic analysis using information specific to each plant’s own market, some general observations may be made by looking at coproduct profitability data from several different angles. One of the most common ways to do this is by grouping plants into geographic regions (east of the Mississippi River for the Eastern region, west of Highway 83 from North Dakota to Texas for the Western region, and the Central region represented by everything in between).
Looking at coproduct revenue contributions with an eye to a plant’s geographic region shows a difference, on average, to the significance of corn oil, and this difference has remained present over time, including the most recent calendar year. Last year, corn oil sales net dollars averaged nearly twice as high in the East (per gallon of ethanol sold) as they did in the West. Western-region plants’ corn oil net sales dollars averaged just over 4 cents per gallon of ethanol sold, while Eastern plants averaged over 8 cents. When reviewing the relative contribution of corn oil to profitability, as a percentage of all coproduct sales, the difference by region remains pronounced, with the Eastern region averaging over 12 percent of coproduct sales from corn oil alone versus Western plants averaging just over 6 percent.
The cause of this disparity obviously varies from plant to plant, but in general, many plants in the Western region are located closer to markets for their livestock feed coproducts, whereas Eastern plants may have closer relationships to biodiesel refiners or other purchasers for their corn oil.
Although a regional gap remains, it is closing with Western plants gaining traction in the corn oil market. Thus, assuming that the most profitable plants in all regions are looking to diversify their coproduct revenue streams as much as possible and maximize the value of both distillers grains and corn oil, the question arises: will a plant generate more total revenue by extracting corn oil? Or will the value of livestock feed go down too far to make corn oil extraction worthwhile? The latter question arises frequently and benchmarking data indicates the answer is no.
To explore this concern, it is useful to examine total coproduct sales in two groups: plants that produce corn oil and plants that do not. We see from this comparison that plants that produce and sell corn oil historically earn more from coproduct sales than those that do not, although the additional revenue has flattened slightly over the past several quarters. The average difference in coproduct revenue over the past four quarters, between plants that produce corn oil versus plants that do not, is about 3 cents per gallon of ethanol sold. For a plant producing 60 MMgy, this translates to about $1.8 million in additional revenue—a significant amount given today’s extremely tight margins.
Cost vs Return
How about overall profitability? Increased corn oil yields (and hence higher profits from this source) do correlate to slightly increased costs, but the data indicates that the financial benefits of the higher yields outweigh the slight cost differences.
In order to examine this assertion more closely, the benchmarking analytical team reviewed data only from corn oil-producing plants, and then split those plants into several groups based on their corn oil yields each quarter. The intended purpose of such a grouping was to see whether the additional costs necessary to optimize corn oil yield were worthwhile investments. In other words, if a plant can expect corn oil extraction to generate 3 or 4 cents of additional revenue for every gallon of ethanol sold, do their production costs increase so much as to wash away the profit in this revenue?
As mentioned, the top 25 percent of corn oil producers by yield average more than 0.8 pounds of corn oil extracted per bushel of feedstock ground. By contrast, laggards, the bottom 25 percent, in corn oil yield produce an average of only about 0.3 pounds per bushel. For such a large difference of more than half a pound of corn oil extracted per bushel, it’s reasonable to assume there may be a correlated increase in certain expenses, notably chemical and ingredient costs to effectively break down the corn components and extract the oil. Thus, when we review the data in this manner, it’s not surprising to see that, indeed, corn oil-yield leaders pay more on average for chemicals and ingredients.
The difference between leader averages and laggard averages in chemical and ingredient cost, however, is well under a penny per ethanol production gallon—a difference that is more than made up for by that large increase in corn oil yield. Breaking down the data even further, a look at the cost category that specifically contains corn oil additive shows that even in this tiny cost category, the difference between a typical leader in corn oil yield and a laggard is negligible. The average plant spends about 0.75 cent per production gallon in this “other chemical” category, which includes only highly specialized-use chemicals like corn oil additive. By contrast, a corn oil yield leader spends just a few tenths of a cent more.
As the field of ethanol production keeps pace with the ever-changing marketplace, considerations such as finding the appropriate coproduct mix to optimize and diversify revenue for each plant will become increasingly important. Each plant obviously has its own unique considerations, but with several years of industry data available for analysis at this point, it seems clear that corn oil-extraction technologies have earned a closer look for any producer.
Author: Paula Emberland
Benchmarking Business Analyst
Christianson & Associates PLLP
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