Last year was challenging one for the ethanol industry with at least a dozen ethanol plants filing for bankruptcy. However, profit margins for many plants have improved recently. This begs the question: Are ethanol plants making money now?

Iowa State University's Agricultural Marketing Research Center data show that ethanol production was unprofitable during the first half of 2009. But since last summer, ethanol margins have improved due to rising prices in energy markets and only moderate corn cost increases.

This analysis is a bit simplistic because few ethanol plants purchase all of their corn or sell ethanol entirely on a cash basis. Most plants forward contract, hedge or use the future's markets to price both corn and ethanol, notes Cole Gustafson, biofuels economist, North Dakota State University.

Depending on when prices of either corn or ethanol are locked in, plants may or may not be making money.

To illustrate this, Gustafson points to several plants that continued to make money during early 2009 because they had locked in higher ethanol prices in 2008, and purchased lower cost corn in 2009. Alternatively, plants, such as the former Verasun organization, locked in higher-priced corn and then sold the ethanol in a declining market, which led to bankruptcy, he notes.

To gauge the overall health of an industry, economists often evaluate the number of firms entering and exiting at any given point of time. "The theory being that if profits exist, firms will have incentive to enter and establish new plants," Gustafson says. "In the long term, great production will temper prices and overall profitability, which eventually reduces this incentive."

Likewise, if firms are exiting an industry, this is a signal that sufficient profitability does not exist to sustain plants long term, he adds. As firms cease operation, total industry production declines. As production declines, prices rise because shortages start to occur, so the remaining firms gravitate toward breakeven once again.

As Gustafson notes, in the past month, ethanol plants have both exited and entered the industry. "Hawkeye Energy put two ethanol plants into bankruptcy during December," he points out. "Alternatively, Velaro announced that it has purchased two new plants and is initiating production. Overall, it appears the industry itself is close to operating breakeven."

Source: North Dakota State University