Analyst: Worst is Behind Ethanol

By Todd Neeley
DTN Staff Reporter

ORLANDO (DTN) -- Ethanol margins continue to be depressed at the start of 2019, as evidenced by the losses DTN's hypothetical ethanol plant continues to experience.

The ethanol industry as a whole is looking and waiting for any kind of good market news.

Pavel Molchanov, senior vice president and equity research analyst for Raymond James and Associates, said during the National Ethanol Conference in Orlando on Tuesday that not only is the worst behind the industry, but there is reason for optimism.

"The good news is that, all over the world, there is more and more implementation of renewable fuel standards," he said. "Let's not lose sight of the fact that there are well over 30 jurisdictions that have a fuel standard. They're not going to be able to get there without ethanol from you. There's not enough ethanol that could possibly be produced in China."

In addition, Molchanov said there are new emerging export markets in Mexico and Ukraine, coming off a record 1.6-billion-gallon export year by the ethanol industry in the United States.

The latest look at DTN's hypothetical 50-million-gallon plant based in South Dakota shows the negative margins have moved little since our last update in January. The plant currently is showing a 31.9-cent loss, down from January's 29.7 cents. This number includes continued debt service.

Most ethanol plants are not paying debt, however. If the hypothetical plant were not paying debt, it would have recorded a 1-cent-per-gallon loss -- a drop from a 2-cent-per-gallon profit in January.

Last month, a $160-per-ton price for dried distillers grains bolstered margins. In our latest update, the price dropped to $141.

The ethanol rack price for this update came in at $1.385 per gallon, up from $1.36 last month. The price of corn paid by the hypothetical plant remained steady at $3.78 -- the Chicago Board of Trade price.

GROWTH SUFFERS FROM CHINA

In 2018, Molchanov said, ethanol production grew at a 1.3% clip -- the slowest growth since 2013. He said the growth suffered from the effective closing of the Chinese market.

Molchanov said he expects to see about 1.5% production growth in 2019 and around 2% in 2020.

Ethanol's 2018 closed with a thud, much like the rest of its year.

"Quarter four was one of the worst quarters in the modern era of this industry," Molchanov said. The industry was hurt by a 30% drop in oil prices.

"In any quarter we look at, ethanol production is higher than the year before," he said. "Quarter four was the exception."

Year over year, 2018 fourth-quarter production dropped by 1.5% compared to the final quarter of 2017.

As ethanol futures prices hit some of their lowest levels in a decade in 2018, Molchanov said, ethanol producers benefitted from fairly stable corn prices.

"With corn, the price was a straight line $3 to $4 a bushel," he said. "You would prefer stable feedstock prices. With ethanol at lows, you'd prefer corn to adjust accordingly, but it doesn't."

EXPORT STRENGTH

Even without the Chinese market, Molchanov said, 2018's record United States exports of 1.6 billion gallons show how widespread ethanol demand is around the world.

Even then, the closing of the trade window with China has been a significant factor in depressed U.S. margins.

"It would have been even higher had it not been for the trade war with China," he said. "Ethanol will have to live with whatever high-level political relationship [there is] between our two nations."

That trade window may reopen at some point, he said, placing the odds at better than 50-50 that a trade agreement will be reached with China.

Despite hope going forward, Molchanov said ethanol's market picture for the next six months is "touch and go" and that there is likely to be additional production cuts in the industry.

"The industry has put rock-bottom in the rear-view mirror," he said.

THE DTN MODEL

DTN established Neeley Biofuels in DTN's ProphetX Ethanol Edition as a way to track ethanol industry profitability. Using the real-time, commodity price data that flows into the "corn crush" in ProphetX and some industry-average figures for interest costs, labor and overhead, DTN is able to track current profits. It also tracks how much Neeley Biofuels would make or lose under an infinite number of "what-if" scenarios.

DTN uses industry-average figures from Iowa State University economist David Swenson. Included in the figures are annual labor and management costs, transportation costs, debt-servicing costs, depreciation and maintenance costs. Although Neeley Biofuels is paying debt-service and depreciation costs on its plant, many real plants are not in debt.

Also, it should be noted the calculations include all other costs such as chemicals and yeasts, electricity, denaturant and water. While DTN uses natural gas spot prices for these updates, many ethanol plants lock in prices on the futures market, so they are not as vulnerable to natural gas market volatility.

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

(AG/SK)

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