OVERVIEW - US ethanol set for tight margins as capacity outpaces demand

Source: CoBank, Ethanol’s Growth Path: Output and Export Uncertainties Both Rising

Aug 22 (Renewables Now) - The US ethanol industry is now in expansion mode but production growth is expected to exceed demand in the near term, leading to a period of slim to negative margins, according to a report by CoBank.

The sector is expected to experience a market correction in the next one to two years that could trigger consolidation. That correction, however, will not be as severe as that of 2012/13, when ethanol producers were hit by high corn prices, the cooperative bank says. Corn prices for now are expected to remain low, softening other adverse factors, according to the report, released last week.    

"More idling of production is expected in the next 18 – 24 months and aging facilities could be retired," said Tanner Ehmke, CoBank senior economist. "Financially weak and less efficient producers who have limited access to dependable corn supplies and transportation risk being consolidated," Ehmke added.


Ethanol producers enjoyed good profits last year on the back of plenty of cheap corn, increasing domestic demand and accelerating exports, CoBank explains. They are reinvesting profits, increasing capacities through expansions and improved efficiencies. In an illustration of the expansion trend, US ethanol producer Poet LLC last week broke ground on a USD-120-million (EUR 102m) project to lift the annual capacity of its ethanol plant in Marion, Ohio by 80 million gallons (303 million litres).

Ethanol production capacity is expected to grow by 850 million gallons to 900 million gallons by 2020 compared to 2017 levels, the report says. According to recent data from the US Energy Information Administration (EIA), US fuel ethanol production capacity reached 15.5 billion gallons per year at the beginning of 2017, a rise of over 600 million gallons from January 2016.

Given the expected increase in capacity Ehmke said that "without a substantial increase in domestic demand or exports to clear excess supplies, ethanol producers are facing a downturn over the medium term."   


CoBank says that US demand for gasoline and ethanol has grown noticeably since 2014, driven by affordable fuel prices. Consumers have also been increasingly buying higher blends like E15. The longer-term outlook, however, is less optimistic due to factors such as the rise of electric vehicles, ride-sharing services and greater fuel efficiencies.

On the exports side there are also difficulties. Exports, especially to Brazil and China, have been strong over the last year, the bank noted. A recent analysis from the US Grains Council (USGC) showed that US ethanol exports have already reached a new record of 1.15 billion gallons in the current 2016/17 marketing year, with exports to Brazil more than quadrupling to 438 million gallons.

China, however, imposed a 30% tariff on US ethanol in early 2017 and Brazil is also taking steps to limit imports. At the same time, increasing exports to new markets such as Mexico, India and Indonesia will probably take time, CoBank says.


Ethanol crush margins have already eroded, according to the report, mainly as a result of falling prices of dried distillers grains with solubles (DDGS). The latter are expected to remain under pressure after China imposed an anti-dumping tariff on US DDGS in January and due to an abundance of competing feed supplies.

According to estimates of the University of Illinois at Urbana-Champaign, cited in the report, the average profit for ethanol producers was USD 0.12 (EUR 0.10) per gallon in 2016, up USD 0.05 per gallon from the previous year. The average net profit has dropped to about USD 0.01 a gallon in the first half of 2017.    

Many ethanol producers have favourable cash position thanks to recent profits. Those with strong balance sheets, efficient plants and discipline with risk management are best fit to wheather the challenges, according to the report. Access to a reliable corn supply and to multiple transportation venues will also be important.


US ethanol companies such as Pacific Ethanol Inc (NASDAQ:PEIX) and Green Plains Inc (NASDAQ:GPRE) saw their second-quarter results impacted by weak margins.

At the start of August, Pacific Ethanol posted a net loss of USD 9.2 million for the three months to the end of June, versus a net profit of USD 4.7 million a year earlier. "These results were impacted by weak ethanol production margins in the face of record ethanol production volumes and high ethanol inventory levels during the quarter," its chief executive Neil Koehler said.

Green Plains suffered a net loss of USD 16.4 million, against a USD-8.2-million profit in the prior-year period. "We proactively took action against the weakened ethanol margin environment by idling approximately 50 million gallons, or 40%, of production capacity in June," president and chief executive Todd Becker said and added that the company has returned to full production but will remain disciplined in its response to supply-demand imbalances. Green Plains was supported by its food and ingredients and ag and energy businesses and Becker said diversification remains a key focus.     

Pacific Ethanol, meanwhile, noted that its recent acquisition of industrial alcohol maker Illinois Corn Processing helps to minimise the effects of fuel ethanol margin volatility.

Both companies are not pessimistic on demand. Koehler said Pacific Ethanol remains "encouraged by the long-term demand for ethanol as supported by continued strong domestic and export markets, and the growing demand for higher ethanol blends and higher octane fuels."

Green Plains also said that both US and global ethanol demand remain strong and the company forecast better performance in the third and fourth quarters.

Valero Energy Corp (NYSE:VLO), the petroleum refiner, which is also an ethanol producer, at the end of July also reported a fall in operating profit from its ethanol segment for the second quarter, down to USD 31 million from USD 69 million, or USD 49 million adjusted, a year earlier. It said this is in part due to strong industry ethanol production that pressured margins. Ethanol segment gross margin declined USD 10 million, or by USD 0.02 per gallon, which was attributed to a slight decline in ethanol prices year-over-year as a result of higher industry production, which led to excess domestic inventories, and to lower co-product prices as a result of lower export demand for distillers grains. These were partially offset by lower corn prices. The company expects ethanol margins to remain weak.   

Below are some key figures of the three companies' performance.  

In USD million Q2 2017 Q2 2016 H1 2017 H1 2016
Pacific Ethanol        
- Net sales 405.2 422.9 791.5 765.2
- Gross profit (loss) 1.7 17.7 (4.1) 18.8
- Operating profit (loss) (7.1) 11.6 (18.3) 4.3
Green Plains - ethanol        
- Revenues 618.85 595.2 1,240 1,123.5
- Gross profit 6.2 29.7 28.4 23.6
- Operating profit (loss) (22.5) 7.6 (29.1) (22)
Valero - ethanol         
- Operating revenues 867 965 1,812 1,793
- Gross profit 157 167 315 287
- Operating income (loss) 31 69 53 108

(USD 1 = EUR 0.848)

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Browse all articles from Plamena Tisheva

Plamena has been a UK-focused reporter for many years. As part of the Renewables Now team she is taking a keen interest in policy moves.

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