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Home » BioRefineries, Biorefinery Infrastructure, Business News/Analysis, Feedstocks, Field Crops, Infrastructure, Opinions

Managing Margin, Risk, Financial Transparency in the Ethanol Industry

Submitted by on April 5, 2017 – 10:15 amNo Comment

by Steve Rosvold (KRM Business Solutions/Ethanol Producer Magazine)  When it comes to margin and risk management, ethanol producers have difficult and unique choices. In most commodity processing industries, the output price is highly correlated to input price.

The ethanol industry is different. The main raw material, corn, originates from the ag complex while the main output, ethanol, is sold into the energy complex. This creates nightmares for risk managers in the ethanol industry. The accompanying graph shows the corn and ethanol price index (2007=100) for the past 10 years.

To further complicate matters, an ethanol plant’s customers are using ethanol as a substitute or additive to gasoline. They use gasoline, not corn, as a benchmark to determine how much to pay for ethanol. Their margin structure is independent of the ethanol producers. On the origination side, the ethanol producer is in double jeopardy.  First, the corn producer has an annual option to grow a better returning crop, potentially leaving ethanol producers short on corn. Second, corn producers have the option of selling their corn directly into the feed industry, creating a competitor for the ethanol producer whose economics are not tightly aligned with ethanol production.

With all of these extra factors, risk management in the ethanol industry requires the best-in-class people, systems and tools. The following roadmap will help management and boards of directors understand the risk, create an appropriate risk management system while developing the price risk tools and discipline to avoid the financial trauma that could occur from disjointed price moves in corn and ethanol.   READ MORE

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