The ethanol industry has rebalanced in 2015 following 18 months of record earnings. As energy prices collapsed late in 2014, so did ethanol prices and plant margins. The report from CoBank, “Ethanol Industry Reblanaces,” has found that ethanol’s supply and demand has remained well balanced, and producers have maintained positive earnings. Looking into 2016, the report finds plant operators will face dueling positive and negative shifts in the market that are likely to result in lean, yet positive margins.
“With corn prices expected to remain relatively static, it will be the prices of distillers grains and ethanol that determine the direction of earnings,” explained Dan Kowalski, the report’s author, and director of CoBank’s Knowledge Exchange Division. “Ethanol profitability will largely hinge on two key factors: the volatility of energy prices and the industry’s ability to maintain strong export sales. The report also points to the importance of sustained discipline in growing production capacity and output.”
Kowalski continued, “The industry will see little growth in domestic sales as a result of improving fuel efficiency in the nation’s vehicles and changes to the EPA’s renewable fuels blending mandate. The EPA’s proposed alteration to the Renewable Fuels Standard (RFS) is expected to be approved later this year, and will set a floor beneath the current 10 percent blending level. However, the new policy will not incentivize retailers to sell higher ethanol-blended fuels.”
The report finds that the potential for increased export sales will help to counterbalance the domestic picture. Brazil has increased its domestic blending rate to 27 percent. This has reduced its export ability and opened the door to U.S. producers.
The report cautions foreign markets also pose a risk to ethanol producers. China, which currently imports 60 percent of U.S. distillers grains, is expected to change its grain policies to discourage the import of corn-alternative feed grains. These changes could significantly impact producers’ bottom lines.