What is in this article?:
- Why Are Ethanol Plants Losing Profit?
- Follow the money
Profit margins for the ethanol industry have been in negative territory for 2012, resulting in the closure of more than 20 refineries. The cause of the problem is the high cost of corn, due to the drought-shortened crop and the inability to find adequate supplies of corn to continue refining. The U.S. ethanol mandate is keeping production going, despite the economics, and without that, ethanol content in gasoline would be cut to 3-5%. Profits of the ethanol industry have been used to pay for corn that costs about $1 more/bu. than in 2011.
Follow the money
So if a plant has to shut down, and if profitability of other plants is challenged, where does all of the money go that was received for ethanol and DDG sales? Hofstrand says there is an interesting allocation of those funds across the spectrum from cash rent and crop inputs to corn prices and the plant’s return on its investment. And he adds, “The corn price allocated virtually all of the profits from the 2010 and 2011 corn crops to the corn farmer. During 2012 the corn price has allocated more than the supply chain profits to the corn farmer. This has resulted in the ethanol producer losses.”
Hofstrand says corn production levels for 2013 are yet to be determined as well as the level of corn prices. And while gas prices are high, the declining consumption of gasoline may lead to lower ethanol prices and use. He says the ethanol mandate is keeping use at a high level, and without it, the percentage of volume in gas would fall to the 3-5% range to supply enough oxygen content, without being a direct substitute for gasoline.
Where does the buck really stop?
To answer the question of where the money goes, Hofstrand says the profits from ethanol production have gone to corn farmers to purchase higher-priced quantities of corn. However, farmers will report their profit margins have been clipped by income transfers of their own to land owners wanting higher cash rents and input suppliers for seed, fertilizer and equipment.
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