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Increasing Fuel Demand Helps Ethanol Plants to Improve Profit Margins

Profit margins for typical dry-mill ethanol crops have improved dramatically since May, because the {industry} was caught within the mire of the COVID-19 financial shutdown and nearly no demand for fuels.

As an growing variety of individuals are touring for the summer season months and extra states are opening up, enhancing demand for gasoline has led to rising costs for ethanol.

As a end result, revenue margins at DTN’s hypothetical 50-million-gallon ethanol plant in South Dakota have improved since our final replace on May 22.

Since then, the plant reported a web revenue of four cents per gallon of ethanol produced, in contrast to a 16.1-cent loss on May 22. Most ethanol crops are usually not paying debt. If the hypothetical plant was not paying debt, it will be seeing a 35-cent-per-gallon revenue on this newest replace. That represents an enchancment of 20 cents per gallon.

The improved margins come on account of a spike in ethanol costs in latest weeks.

For this replace, the hypothetical ethanol plant obtained $1.63 per gallon for its ethanol, primarily based on the rack value — a big leap from $1.27 since May 22.

Early within the COVID-19 shutdown, ethanol costs plummeted to historic lows within the 60- to 70-cent vary.

In addition, the plant paid much less for corn at $3.40 per bushel for this replace, primarily based on the Chicago Board of Trade Futures Price for July. That represents a 40-cent drop from our final replace.

The value obtained for dried distillers grains got here in at $113 per ton, down from $135 on May 22.

Mary Kennedy, DTN money grains analyst, mentioned the ethanol market additionally obtained a lift from the Illinois River closing on July 1 for repairs on 5 lock and dams, stopping barges from transferring downriver from the Kinder Morgan Argo, Illinois, terminal.

The closure is predicted to final via September 2020, she mentioned, inflicting patrons to search for different choices.

“As for DDG prices helping plant margins out, that hasn’t been much of a factor lately,” Kennedy mentioned.

“DDG demand is still weak as maintenance diets are still being used by feeders and the recent stretch of hot weather brings down caloric intake for livestock. DDG prices have also needed to stay competitive with other corn coproduct and byproduct feed prices, most of which have been weaker as well due to the effects of COVID-19 on slaughterhouses.”

According to a July 2020 CoBank evaluation, the {industry} continues to face headwinds through the subsequent few months.

“However, looking out three months, the industry faces both challenges and opportunities,” CoBank mentioned.

“Coronavirus is resurging in several states, and renewed activity restrictions will arguably reduce driving and fuel demand. As for opportunities, road trips and family vacations during the summer months typically means increased fuel consumption, but resurgence of COVID-19 could dampen travel plans.”

In addition, the report mentioned it expects the {industry} to proceed to get well into 2021.

“We believe that ethanol fuel demand may recover to only 85% to 90% of pre-COVID levels,” CoBank mentioned.

“We conclude that the industry will transform and rationalize excess capacity and continue diversifying into higher-margin co-products.”

DTN established Neeley Biofuels in DTN’s ProphetX Ethanol Edition to monitor ethanol {industry} profitability. Using the real-time commodity value knowledge that flows into the “corn crush” in ProphetX, and a few industry-average figures for curiosity prices, labor and overhead, DTN is in a position to monitor present earnings. It additionally tracks how a lot Neeley Biofuels would make or lose beneath an infinite variety of “what-if” situations.

DTN makes use of industry-average figures from Iowa State University. Included within the figures are annual labor and administration prices, transportation prices, debt-servicing prices, depreciation and upkeep prices. Although Neeley Biofuels is paying debt-service and depreciation prices on its plant, many actual crops are usually not in debt.

Also, it ought to be famous the calculations embrace all different prices, akin to chemical substances and yeasts, electrical energy, denaturant and water. While DTN makes use of pure gasoline spot costs for these updates, many ethanol crops lock in costs on the futures market, so they aren’t as susceptible to pure gasoline market volatility.

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