Ethanol plant margins get thinner

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Ethanol prices have weakened since mid-summer as additional plants have come on line adding to ethanol supplies and contributing to some infrastructure bottlenecks, noted USDA Chief Economist Keith Collins (below) in a recent speech. Prices at ethanol plants in Iowa and Nebraska have fallen nearly 50 cents per gallon since late July 2007.  During the same period, futures prices on the nearby contract have lost about 40 cents per gallon. 

Historically, ethanol prices have been at a premium to gasoline.  Until recently, ethanol premiums averaged 50 cents per gallon compared with unleaded gasoline.  This situation has suddenly reversed, with wholesale ethanol prices in Nebraska, for example, 39 cents per gallon below the wholesale price for gasoline during September.  The outlook for ethanol prices appears even less favorable in the futures market, with the nearby Chicago Board of Trade contract for ethanol trading 50 cents per gallon below the nearby New York Mercantile Exchange contract for reformulated gasoline blendstock.  This shift in the ethanol/gasoline price relationship has sharply reduced returns for ethanol producers. 

In his speech, Collins said with current retail gasoline prices at $2.80 per gallon, wholesale prices without federal and state excise taxes would be about $2.20 per gallon.  Nearby futures for ethanol are trading at $1.57 per gallon, 71 percent of the $2.20-per-gallon estimated wholesale gasoline price and about equal to ethanol's energy value relative to gasoline.

"This year's record corn production is bringing some relief to declining ethanol producer margins," he said. "However, despite the record corn harvest, corn prices remain strong supported by strong demand, record-high wheat prices, and strong soybean prices." 

USDA estimates that a 40-million gallon Midwest ethanol plant, receiving the late September price of $1.52 per gallon for ethanol and paying $3.00 per bushel of corn, was earning 17 cents per gallon above variable costs of production and 3 cents below total variable plus capital costs of production.  In the current price environment, the 51 cents-per-gallon ethanol tax credit is important in sustaining ethanol demand and prices at levels that are forestalling some plant shut-downs.  

 U.S. ethanol production capacity is now estimated at 6.9 billion gallons, up 2 billion gallons from a year ago.  Production capacity is expected to increase sharply over the coming 18-24 months, if the 76 plants currently under construction are completed.  The new construction would add 6.7 billion gallons of additional ethanol production capacity, bringing total capacity to 13.6 billion gallons potentially as early as late 2009.

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Parting thought. Let's spend less time counting the days, and more time making the days count.

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