High profit margins for ethanol producers drive record production levels

Ethanol production margins at U.S. corn ethanol plants were an average of 22 cents per gallon in 2017, marking the fifth consecutive year margins were more than 20 cents per gallon, according to the U.S. Energy Information Administration. The margins have led to increased production over the period, and in 2017, it rose to 1.032 million barrels per day — the fifth consecutive record level of annual production.

In 2017, ethanol supply increased more than domestic demand, and as a result, spot prices have decreased and margins were about 20 cents per gallon lower than the previous four-year average but have been similar to levels over the past two years.

The EIA estimates margins based on the average dry mill corn ethanol plant in the Midwest, a region with more than 90% of domestic fuel ethanol production capacity. The EIA takes the sum of revenue generated by the sale of ethanol and co-products, such as distillers’ dried grains with solubles and corn oil, and subtracts variable and fixed costs. Variable costs include the cost of corn and natural gas combined with a fixed operating cost of 35 cents per gallon.

Corn has been the largest variable cost for dry mill corn ethanol plants, and profits are greater when corn supply increases and demand rises for ethanol gasoline blending. “U.S. corn production has been at record high levels in recent years, which has kept corn prices generally stable, ranging between $3.40 and $4.00 per bushel since 2015,” according to the EIA. “A period of drought in 2012 and 2013 led to corn prices greater than $8.00 per bushel, resulting in one of the least profitable periods for ethanol operators.”

In the majority of 2017 and for the first two months of 2018, ethanol production, net inputs and inventory levels have been near or above average levels compared to the previous five years. In December 2017, fuel ethanol production hit a four-week record of 1.09 million barrels per day, while ethanol blending into gasoline, which is measured by net inputs, was flat from the previous year. “Despite record-high domestic gasoline demand and record-high ethanol exports in 2017, ethanol production exceeded consumption, which led to end-of-2017 inventories that were 4 million barrels higher than at the end of 2016,” according to the EIA.

In 2017, U.S. ethanol consumption rose 1%, and it’s expected to rise by an average of 1% through 2019. As a result, the ethanol blend percentage of gasoline is expected to rise to 10.3% by 2019, from 10.1% in 2017.