How Viable Is Ethanol? Profit Margins Decrease as Corn Prices Drop from 2014
by Will Buss (Belleville News-Democrat) Ethanol producers’ profit margins have been squeezed while gasoline prices have fluctuated and oil prices have dropped. However, the biofuels industry is holding to its firm belief in the clean and renewable resource.
Crude oil prices have recently fallen to and have hovered around $40 a barrel, a six-year low, as regular unleaded gas prices have recently plummeted below $2.50 a gallon. This has impacted the bottom line for ethanol manufacturing, which has become big business in Illinois. The Land of Lincoln is the nation’s top corn grower and the No. 3 ethanol producer behind Nebraska and Iowa, respectively.
But this has not deterred local ethanol manufacturers. The metro-east’s two ethanol plants report operations at full capacity with optimism for the industry.
In Sauget, Barry Frazier, president of Center Ethanol Co., said cheaper gasoline benefits ethanol producers because it leads to higher demand, and that demand for gasoline requires a similar increase in ethanol.
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Independent marketing adviser Dave Marshall, of PCFG LLC commodities brokerage in Nashville, Ill., believes ethanol remains a viable fuel source. However, he said the industry is definitely facing diminishing returns.
“The profitability of a lot of plants has been hurt dramatically by lower prices, starting in June 2014,” Marshall said. “This year, the price of ethanol has dropped pretty dramatically.”
He also said profits for processed market grains are still tight and have also squeezed the ethanol industry as profit ratios for process grains have declined dramatically compared to a year ago.
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Although the ethanol market has yielded diminished returns, the premium remains for ethanol relative to gasoline, said economist John Urbanchuk. As the managing partner of ABF Economics in Doylestown, Pa. and chairman of agribusiness department at Delaware Valley University, also in Doylestown, Urbanchuk said there is an incentive to blend ethanol from an economic perspective, although Illinois corn prices have dropped from above $4 a bushel last year to $3.50 during the past eight months.
“Ethanol is still a discount,” Urbanchuk said. “The discount is still there, but diminished a little bit. I still think it remains an attractive blending component given the decline in oil and gas prices. I think the industry is pretty much holding its own profitability.” READ MORE