Gray Clouds Loom Over Ethanol Industry in 2014
Last year, the profit margins in the $44-billion ethanol business were at the highest level since the 2007 Renewable Fuel Standard was implemented. At times, profits were as high as $1 per gallon of fuel produced, with an average of $0.81 per gallon!
Ethanol producers owed the boom to increasing demand and a three-year low in the price of corn. Demand was high for not only ethanol, but also the dried distillers grains (DDG), a co-product of dry mill ethanol production, which is used as animal feed.
But there are a few – three, to be exact – gray clouds on the horizon that might adversely impact the industry.
Gray Cloud #1 – The EPA
Clouding the view to profits in ethanol is the fact that, for the first time ever, the Environmental Protection Agency (EPA), is studying whether to reduce the ethanol blending requirements in our fuel.
The Energy Department forecasts that U.S. drivers will consume 135 billion gallons of fuel this year. This translates to 13.5 billion gallons of ethanol to be used (per the current 10% blending rate).
If the mandate cuts the legal requirement of 14.4 billion gallons to only 13 billion gallons, this could mean an excruciating loss of profits in the ethanol sector.
Because less ethanol sold means less profit, the ethanol industry is holding its breath…
Gray Cloud #2 – Export Infrastructure
But even then, ethanol might not be in the clear.
As I mentioned earlier, exports of ethanol have been a boon to the industry. But they will become even more important if the EPA follows through this spring and cuts the domestic ethanol mandate.
Exports of ethanol have the potential of reaching one billion gallons this year…
But there’s a problem.
The vast majority of U.S. ethanol plants are located near the corn fields of the Midwest – far from the coast.
To export ethanol that’s being produced so far inland, it must be transported to shipping ports on the coasts. At the moment, this is done mainly by trucks – a method that drives up costs and slashes profits.
To increase exports by any great extent and actually profit from them, the industry will have to invest huge amounts of time and money in building plants that can be serviced by rail lines or waterways… an immense project that may not be necessary if there’s no corn to make ethanol.
Gray Cloud #3 – Corn Prices
Finally, the third gray cloud looming on the horizon of ethanol’s future is the current state of corn prices.
Initially the fall in corn prices was a blessing to the ethanol industry – hence the 2013 boom I mentioned earlier.
But the 40% dive in corn prices last year, while great for the ethanol industry, was bad for corn farmers.
And now, they’re responding. Farmers are planting less corn in 2014 and switching some of their acreage to more profitable crops like soybeans, which declined only 6% last year.
And the numbers can back this move up – soybeans are 2.4 times the price of corn at the moment. This is the highest average soybean-to-corn price ratio seen since 2008.
Corn likely saw its short-term bottom last year. Any price gain – corn is already up nearly 5% this year – will eat into ethanol producers’ profits.
Fighting off new EPA regulations, possible infrastructure crisis and a rise in corn prices, the ethanol industry is looking at a gray future in 2014.
I recommend keeping a cautious outlook for ethanol producers’ stocks in 2014.