Metro-East News

How viable is ethanol? Profit margins decrease as corn prices drop from 2014

A truck takes on a load of ethanol at Center Ethanol in Sauget.
A truck takes on a load of ethanol at Center Ethanol in Sauget. 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. He said a recent spike in gas prices late last month was temporary because it resulted from a BP refinery in Whiting, Ind., that was forced offline for a while and limited supply in the Midwest.

“High gas prices reduce ethanol demand because it reduces gasoline demand,” Frazier said. “What you were looking at recently in the Midwest was a spike in gas related to refinery outages. The outage created short-term shortage. I think with that being alleviated, I think you’ll see gasoline prices at the pump will continue to come down in the next several weeks.”

The Sauget plant was the first ethanol manufacturer in the metro-east when it began operations in April 2008. Frazier also said that although the market faces tightened margins, the metro-east plant continues to produce 150,000 gallons of ethanol a day.

“That’s been pretty consistent since we opened with minor fluctuations here and there,” he said. “I don’t predict that to change materially any time soon.”

In Madison, Abengoa Bioenergy has been producing 90 million gallons per day and has been at full capacity soon after opening at River’s Edge business park in 2010.

Chris Standlee, the executive vice president of the Chesterfield, Mo.-based company, said profit margins are slimmer, but increasing the current 10 percent U.S. standard for ethanol blend would decrease reliance on oil. He said any vehicle manufactured after model year 2000 is certified for e15, or 15 percent ethanol blended fuel.

“The thing ethanol can do to help is increase blended ethanol to reduce the price or at least percentage of gasoline supply,” Standlee said. “If we moved from e10 to e15, then you can obviously have significant impact on prices by displacing 5 percent of gasoline with ethanol, not just on price but on supply.”

Bob Dinneen, president and chief executive officer of the Renewable Fuels Association, has also witnessed ethanol’s thinning margins but said the ethanol manufactured in the United States has been, and continues to be, the most economically competitive motor fuel in the world.

“It has played an important role in reducing consumer fuel costs,” Dinneen said. “And the value proposition for ethanol as well as the demand for ethanol continues to remain strong.”

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.

“You would not anticipate there are people who are trying to build new ethanol plants,” he said. “Some of them are running pretty tight and some have consolidated.”

Reduction in ethanol blend levels

Analysts also believe the federal policy that initially encouraged ethanol development and expansion has been thwarted amid the Environmental Protection Agency’s recent proposal calling to reduce ethanol blend levels that were set in 2007.

Some policymakers believe the move is necessary as consumers’ driving habits and fuel consumption have changed.

Dinneen said the EPA’s proposal represents a step backward for the Renewable Fuels Standard. The federal program was created under the Energy Policy Act of 2005 that requires fuel gasoline sold to contain a minimum volume of renewable blends that are to increase with each year and to reach 36 billion gallons by 2022. The standard was expanded and extended by the Energy Independence and Security Act of 2007.

“The EPA proposal has sent a decidedly negative and confusing signal to the marketplace,” he said. “The proposal has eviscerated the ability of the program to incentivize investments in infrastructure that would break through the blend wall and encourage commercialization of new technologies.”

In the decade since the Renewable Fuels Standard was implemented, corn growers have raised record crops driven by the demand of biofuels, said John Caupert, the executive director at the National Corn to Ethanol Research Center at Southern Illinois University Edwardsville. He said the industry has also witnessed 10 years of job expansion as well as 10 years of declining foreign oil imports.

But Caupert said that progress has been disrupted when the EPA initially proposed renewable volume obligations for the Renewable Fuel Standard in November 2013. Efforts to put this requirement into effect has been delayed amid challenges related to declining demand for gasoline and oil and higher fuel transportation costs.

Although the proposal intended to promote energy independence and security by increasing the amount of domestic renewable fuel, Caupert said the industry’s reaction halted the progress that had been accomplished. Caupert, who testified on behalf of the biofuels industry at EPA hearings in Kansas City, Mo. in July and in Washington, D.C. in December 2013, said gasoline prices in the St. Louis area jumped by 30 cents within 48 hours of the announcement.

“When you take into account that the United States will consume about 130 to 135 billion gallons of liquid transportation fuels, not counting diesel, that 30-cent spike, that’s a direct impact to the consumer in billions of dollars,” Caupert said. “It’s this fluctuation that we continue to see in gasoline prices as the EPA has struggled to get their house in order on these volumes required in the Renewable Fuel Standard.”

On May 29, the EPA announced a 10 percent in cut to the renewable fuel obligations. Again, Caupert said, the market responded.

“And what did we see? Declines in agriculture commodity prices directly impacting profitability, but this continued fluctuation in retail gasoline prices,” he said. “Right here in Southwestern Illinois, we’ve seen in the last two weeks alone 50-cent spikes and 20-cent drops. Being very frank about this subject matter, biofuels, home-grown, produced in America is the answer. It’s the only answer to this price fluctuation.”

Price of corn declining

Caupert said this also impacts U.S. farmers’ profitability. He said farmers are concerned about where the market is headed considering another record yield is anticipated by harvest time.

“What are we going to do with half a billion to one-and-a-half billion bushels of corn that, as things stand today based upon EPA proposed rulings, may not have a home in the biofuels market?” he asked.

Farmers are disappointed with the current price for corn. Two years ago, farmers were earning more than $7 a bushel. That has gradually fallen to below $4. St. Clair County and Madison County Farm Bureau Manager Tom Jett said local farmers are wanting more for their record yield.

“Farmers are not really pleased where prices are,” Jett said. “They would love to see a little higher than they are, but it’s all supply and demand and market expectations of the crop.”

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.”

In Sauget, Frazier said demand has increased for biofuels produced by Center Ethanol Co. and he is anticipating that to continue through the year.

“The U.S. ethanol demand has been promising and the export demand for ethanol has been picking up as well because with the corn prices where they are,” he said. “We think not only domestic demand, lots of promising export demand for ethanol looks good for the future.”

Caupert said the biofuels industry provides an opportunity to steer away from fluctuating prices at the pump and more stability in the market.

“Who wants to see a 50-cent spike and then a 20-cent drop and then a 10-cent spike? It’s like what is the price of fuel going to be today whenever I walk out the door?,” he said. “That’s where I believe there is an opportunity for biofuels. Working on education and information of the benefits of this fuel and how it can bring market stability, how it has led to unprecedented market growth, how it has reduced our imports of foreign oil by more than 20 percent — these are all success stories about this industry that can do nothing but help to stabilize fluctuating fuel prices.”

Contact reporter Will Buss at wbuss@bnd.com or 618-239-2526.

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