Everyone knows oil prices are dropping. Unfortunately, oil is dragging other industries down into its murky blackness too.
Ethanol prices recently hit a four-year low, plunging 28% in September alone.
The price on October 1 was $1.53 per gallon, the lowest price seen since June 2010!
Back in March, I told readers why the $44-billion industry would face strong headwinds in 2014.
The price drop was caused, in part, simply by too much supply.
The Energy Information Administration said that ethanol inventories in September reached the highest level seen since March 2013.
This is despite ethanol production crashing in late September to its lowest level in nearly six months. That means demand is declining faster than production cutbacks – a major problem for future prices.
But there are three other big issues this commodity needs to get over before the market can recover.
Running the 400 Hurdles
The first issue is caused by the Environmental Protection Agency (EPA).
The agency was once the industry’s biggest benefactor, but the EPA will soon make a final decision on reducing the requirement for ethanol blending into gasoline.
Under the original 2007 law, 14.4 billion gallons of ethanol were to be blended into the nation’s fuel this year. But many believe the EPA will lower that requirement to only 13 billion gallons.
This will most certainly dampen the industry’s profit.
Competition from Brazil is also pressuring the ethanol industry.
The government there is considering offering their ethanol industry more tax benefits. More federal support means Brazilian suppliers can sell cheaper ethanol to the world market.
Brazil is a major contender, too. The United States and Brazil produce around 90% of the world’s ethanol.
Finally, the U.S. industry is facing infrastructure bottlenecks.
You see, most of the ethanol plants are located near the Corn Belt in the Midwest, but exports occur on the coasts. Therein lies the holdup.
A good bit of ethanol shipping from producers to export points is done by rail. However, last year’s intense winter caused by the polar vortex had rail shipments tied up in a knot.
Producers can also ship ethanol by truck, but that is a very expensive alternative.
With another harsh winter coming, transporting ethanol is sure to be challenging yet again.
Hitting the Stride
So what does the future hold for ethanol companies?
This was no doubt due to the profit margin in the industry falling from $2.04 per gallon in April to a mere $0.22 per gallon in September, according to the Iowa State Center for Agriculture and Rural Development.
While the steepness of the drop of both profit margins and stock prices should level off, the industry’s outlook is still gloomy.
And “the chase” continues,