Ethanol production margins signal plant closures

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An analysis of the economics of corn ethanol production by Todd Schmit, an expert in agribusiness management and marketing, has the margin of production extremely close to unprofitable, which could result in ethanol plants shutting down.

“Strong increases in corn prices relative to the price of ethanol are resulting in tighter operating margins for corn-based ethanol facilities. Based on current market prices, operating margins are at their lowest levels in decades—only a 78-cent return on every dollar of operating costs.

“In addition, commodity and energy prices are exhibiting increased volatility. Both have implications for corn-ethanol plant investment and disinvestment decisions.  With around 40 percent of the U.S. corn crop going to ethanol production, the implications are important to agricultural and energy markets,” said Schmit, who is associate professor of economics at Cornell University’s Dyson School of Applied Economics and Management

“Based on a real options-pricing model using historical data on corn, distillers grains, ethanol prices, and investment and operating costs of corn-based ethanol plants, we would anticipate plant closings to occur when the operating return-to-cost ratio drops below 0.70. In June, markets indicated a ratio of about 0.78, and then corn prices went up almost $3 per bushel. If ethanol prices in July hadn’t also strengthened some, margins would be below the exit threshold today. If corn prices continue at their historical highs, a 10 percent reduction in ethanol prices could signal that some ethanol plants will be shuttering their doors.”

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Linda White    
Wisconsin  |  August, 02, 2012 at 06:47 AM

Bear in mind that the usage they report was 6.4 billion of last year's record 16.9 billion bushel crop. If you take that number against this year's projected 12 billion bushel crop you are looking at a whopping 54% of the US crop out of food production, and into fuel. This ethenol is also exported and that does nothing for reducing our dependence on foreign oil.

MA  |  August, 02, 2012 at 12:33 PM

At .78 on a dollar, they could still be doing better than the return on a 100 cow farm. Next up, an EPA bailout of the ethanol industry to save all those jobs that it created, and to preserve our "independence of foreign oil."

Tom Noyes    
Wooster Ohio  |  August, 02, 2012 at 03:05 PM

Ethanol has never been efficeint energy production.So why not shut their doors and make corn avaiable to dairy and livestock producers at reasonable prices.Corn and Soybean farmers will still be profitable withe the insurance for crop losses. The dairy industry will be in for a tough year with short forage supply and hgh grain prices.

James Benson    
Hurley SD  |  August, 02, 2012 at 08:27 PM

Planting more of America's vast lands makes more sense economically than reducing profit in one industry for another industry. CRP would be the starting point.

MA  |  August, 02, 2012 at 10:05 PM

To tough it out, it would be logical to reduce the size of the dairy herd....the net result being higher milk prices. We have been witness to record high beef prices, because beef cattle numbers are at an historic low. This should be a model for the dairy sector, yet so many don't get it!!

Ohio  |  September, 25, 2012 at 09:30 PM

The more I wrote the madder I got,,, so I just deleted it...most of it that is. Go ahead and bash ethanol and get ready for 6 dollar gas and 2 dollar corn. It's just around the corner when the majority wins.


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