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Updated Corn Ethanol Economics

Executive Summary: The current cost to produce a gallon of ethanol is approximately $3/gal. The current price of ethanol is $2.86/gal, which explains why ethanol producers are shutting down. If corn and natural gas prices remain high, I think ethanol has to rise to something like $3.40-$3.60/gal to make it worthwhile to ethanol producers. So, if I was a commmodities investor, I would probably go long ethanol right now. The only risk factors I can see – given that there is a mandated (and rising) demand for ethanol – is if corn or natural gas prices collapse.

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This is an update to a post I originally made back in February 2008: Corn Ethanol Economics. While this is approximate, I think I captured most of the major economic considerations. In fact, one of the comments I received following the first essay was: “I work in an ethanol plant. Those numbers are pretty accurate, but the price we get for ethanol has been going up lately. Our margins have been poor lately, but are improving. But you did capture the important economic factors that have hurt us lately.”

Since then, natural gas, corn, and ethanol prices have all risen. So what do the economics look like today? The following is my previous analysis, with updated numbers.

I found multiple references for all of the numbers I am going to use, but I will only reference a single source. According to Ethanol Reshapes the Corn Market, one 56-pound bushel of corn will yield up to 2.7 gallons of ethanol and 17.4 pounds of distiller’s dried grains with solubles (DDGS).

The price of corn for July delivery as of this writing is $7.24/bushel, so each gallon of ethanol contains $7.24/2.7, or $2.68 of corn per gallon of ethanol. However, the DDGS can be sold, so a credit is applied for that. The current price of DDGS as of this writing is $175/ton, which is $0.0875/lb. Given that a bushel of corn yields 17.4 pounds of DDGS, there is then a $1.52 credit, which spread over 2.7 gallons is equal to $0.56 gallon. This reduces our cost per gallon to $2.68 minus $0.56, or $2.12 for just the corn input. (Note that there is sometimes a credit for carbon dioxide sales, but it is very small relative to the other costs and credits).

I still have to consider utilities (natural gas is a major cost), labor, enzyme and yeast costs, and depreciation. I have a spreadsheet from an actual ethanol plant, but there isn’t much in the public domain that I could find on this. The closest thing to a source on these is the spreadsheet in the presentation Fossil Fuels and Ethanol Plant Economics (for a standard dry mill process). If you look at Page 16 of the presentation, you can see that all of the miscellaneous costs together total approximately as much as the corn inputs. If you take the spreadsheet on Page 24 and change the natural gas price to the current price of $13.20/MMBTU, you get an overall energy cost of $0.51/gal of ethanol. (You can play around with the original spreadsheet that is in the PDF here). The sum of enzymes, yeast, and other chemicals comes out to be $0.14/gal, and labor, maintenance, and various miscellaneous expenses add another $0.23/gal.

On depreciation, I have several sources for capital costs that are pretty consistent. In the EIA’s Energy Outlook 2006, capital costs per daily barrel of corn ethanol ranged from $20,000 to $30,000, depending on the size of the plant. This breaks down to between $1.30 and $1.95 per gallon of installed capacity. This is also consistent with A Guide for Evaluating the Requirements of Ethanol Plants, which states “Current capital cost per annual gallon of installed capacity for an ethanol plant ranges from $1.25 to $2.00.” So let’s be conservative and say that we want to build a big plant, so the capital costs are on the low end at $1.30/gallon. Depreciate that over 15 years and this portion amounts to about $0.08 per gallon (but is captured above already).

However, for biomass to liquids facilities – which would include the biomass gasification to ethanol that some are calling cellulosic ethanol – the capital costs in the EIA’s Energy Outlook 2006 are listed at around 5 times that of a conventional corn ethanol plant. Thus, the capital depreciation portion is going to be around $0.40 per gallon of ethanol. (On the other hand, the feed costs should be much lower).

Summary

Times are tough for ethanol producers. This is what the economics roughly look like at $7.24 per bushel of corn and $13.20/MMBTU of natural gas. To produce 1 gallon of ethanol requires:

  • $2.68 of corn
  • $0.51 of energy
  • $0.14 of enzymes, yeast, etc.
  • $0.23 of labor, maintenance, and various miscellaneous expenses

There is a DDGS credit per gallon of ethanol of $0.56. Thus, the total cost to produce a gallon of ethanol today is $2.68 + $0.51 + $0.14 + $0.23 – $0.56, or exactly $3/gallon of ethanol. For reference, the July contract for ethanol in the Midwest closed yesterday at $2.86. And $3/gallon is merely cost of production. It doesn’t take into account any return on investment.

Also note that due to the lower energy content, this production cost is equivalent to a $4.48 per gallon production cost for gasoline ($3/0.67) – and that this production cost is a moving target: As long as the ethanol mandates are driving up the price of corn and increasing the demand for and cost of natural gas, corn ethanol producers must chase their tails in a vicious circle.

Producers are going to be hard-pressed to ever match the 2006 windfall that was given to them when the MTBE phaseout drove ethanol prices sky-high. But my conclusion is – since ethanol is mandated – some marginal producers will shut down and prices will rise. If everything else remained constant, I think ethanol would have to rise to something like $3.40-$3.60/gal to make it worthwhile to ethanol producers. So, if I was a commmodities investor, I would probably go long ethanol right now.

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June 24, 2008 - Posted by | corn prices, economics, ethanol, ethanol prices, investing, natural gas

9 Comments

  1. Very interesting analysis. Thanks. A comment and a question:

    I think using the CBOT price for corn inflates the cost of production just a bit. Farmers can’t sell for that price. While the CBOT is quoting 7.24 for July delivery as I write this, the local Co-op will pay 6.62. I suspect local ethanol plants would offer a similar price to local farmers as the local Co-op.

    Did you happen to watch the Indy Car race from Iowa this weekend? I believe it was sponsored by the Iowa Corn Growers Association and was officially called the Iowa Corn Indy 250. The ads on tv were all about ethanol making dubious claim after dubious claim. The best was the completely unsubstantiated claim that ethanol lowers the price of gas by about 50 cents a gallon. There were many others. It was worth watching the ads for comic value alone.

    Comment by Tim | June 24, 2008

  2. Hey Robert, It does make you wonder why ethanol producers are not back integrated into the soil… That way you can chase the value up and down the chain, and not get too badly shafted when the margin isn’t in distillation and distribtution.

    Comment by Biofuelsimon | June 24, 2008

  3. Thanks for updating this, Robert. You can hedge a long ethanol position against corn/NG price drops easily enough. The real problems with a long ethanol position are:

    1. Imports are cheaper than today’s spot price even with the tariff.

    2. Producers who hedged corn are OK even at 2.86. If they hedged enough to meet the mandate ethanol prices could actually fall.

    3. The mandate could be relaxed temporarily due to flooding.

    Note that at current prices the mandate is superfluous. With gas at 3.40 every gallon of 2.86 ethanol made into E10 boosts a blender’s profits by more than $1. This is a business which lives on a couple pennies per gallon. Blenders who haven’t maxed out at E10 are desperate for more ethanol, but those far from the corn belt can’t get it because the transport infrastructure is behind the curve.

    Comment by doggydogworld | June 24, 2008

  4. I think it’s better to be short ethanol & it’s suppliers.

    1.) All it’s inputs are way up.

    2.) It’s end market, shared with a more attractive competitor (gasoline), is shrinking.

    3.) There is a small possibility we step back from ethanol due to the food cost backlash.

    Comment by mh497 | June 24, 2008

  5. I think using the CBOT price for corn inflates the cost of production just a bit. Farmers can’t sell for that price. While the CBOT is quoting 7.24 for July delivery as I write this, the local Co-op will pay 6.62.

    Maybe, but note that I didn’t inflate any of the maintenance, enzymes, etc. over the 2005 costs. Everything has risen with the price of oil. I suspect I have nailed the costs down to within 5%.

    Comment by Robert Rapier | June 24, 2008

  6. 2.) It’s end market, shared with a more attractive competitor (gasoline), is shrinking.

    That’s the part that I would dispute. The mandate increases year after year. Even if gasoline demand falls, the ethanol mandate increases. I think what’s going to happen is that marginal producers will shut down, supply will fall, and prices will rise. Of course if they were to roll back the mandate – and I don’t see that happening – then all bets are off.

    RR

    Comment by Robert Rapier | June 24, 2008

  7. Robert,

    All of this really points out that making corn ethanol HAS to consume more energy than it produces.

    If corn ethanol producers actually made more energy than they consume, they would of course completely break their ties with increasingly expensive fossil fuels, and use some of the ethanol they make as their feedstock for making more ethanol.

    If they could do that, and aren’t, they must be bad business people.

    That they can’t do it means they have a poor understanding of thermodynamics.

    Comment by Hawkshaw | June 25, 2008

  8. According to Iogen, it currently costs $4/gallon to make ethanol from cellulose. Their feedstock, wheat straw, is cheaper than corn, but their capital costs are much higher. If ethanol producers are losing money making $3 ethanol from corn, will they be motivated to try making $4 ethanol from cellulose? Things could always change, but right now ethanol looks like a dead end.

    Comment by Anonymous | June 25, 2008

  9. Well, it looks like the US will soon be making a lot more corn dogs and importing their ethanol from Brazil. Of course then that means that you will be still using all of that corn growing fuel just to make surplus food to get fatter on. But your imported ethanol will be cheaper and this will hold down the price of fuel. End result fatter people can go back to their good old gas guzzling ways.
    Road trip anyone?

    Comment by BilB | June 27, 2008


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