Ethanol margins shrink as gas prices fall

Falling gasoline prices are beginning to squeeze margins at Iowa ethanol plants, but renewable-fuels leaders say they expect to see continued profits, thanks to low corn prices and strong domestic and global demand.

Bruce Babcock, an Iowa State University economist, said it helps that ethanol producers are coming off near-record profitability. "We hadn't seen margins this good since 2006 and into 2007," he said. "But compared to just three, four, seven months ago, the margins are quite a bit tighter, and that's caused by lower gas prices."

Monte Shaw, executive director of the Iowa Renewable Fuels Association, said: "Some plants in the U.S. could be in a pretty tough spot if things continued this way, but most places in Iowa will keep their noses above water."

That's especially good news after high corn prices caused by a drought in 2012 pushed some plants in the red and closed others nationally, he said. "We don't see an impending catastrophe," Shaw said.

The fate of ethanol producers is important in Iowa, the largest maker of ethanol. Iowa's 42 ethanol plants are capable of making 3.8 billion gallons a year, about 30 percent of the nation's production. The industry also consumes about half of the state's corn production, according to the Iowa Corn Growers Association.

An index compiled by ISU shows ethanol's operating margins have shrunk from over $2 a gallon briefly this spring to less than 20 cents earlier this month.

Ethanol and gasoline prices move together because they compete for a place in Americans' gas tank, Babcock said.

The federal government requires oil companies to blend ethanol and biodiesel into the nation's fuel supply to reduce the country's reliance on foreign oil and to cut carbon emissions that can harm the environment. Ethanol is made primarily from corn, and biodiesel is made from soybeans and other feedstocks.

The U.S. Environmental Protection Agency has proposed reducing the renewable fuels mandate, and a long-awaited decision could come shortly after the November elections.

U.S. gas prices have fallen about 30 percent since June to $3 a gallon or lower across the nation. Babcock said a glut of oil, both domestically and globally, is pushing prices lower. Hydraulic fracturing in Texas, the Dakotas and Alberta, Canada, have boosted oil supplies. "Oil refineries are running at full tilt because of the abundance of oil," he said.

Global supplies are also plentiful because economies are slowing. "You see China easing off. Europe is not going gangbusters. Brazil is in a recession," he said. "That's causing the demand for oil to go down."

Crude oil prices have tumbled about 20 percent since July, data show. Ethanol futures have been cut about in half since the beginning of the year.

Babcock said it's unclear how big of an effect the smaller profits will have on Iowa's economy.

On one hand, tighter margins at Iowa's ethanol plants — and to their shareholders, often farmers who live relatively close by — mean reduced income. It comes at a time when farmers in Iowa and elsewhere also are struggling with profitability as corn and soybean prices have fallen, but the costs to plant and harvest crops remain high.

U.S. farm income is projected to drop 14 percent to $113 billion this year, the lowest level in four years, the U.S. Department of Agriculture reported. In Iowa, annual farm income fell 15 percent to $9.3 billion in 2012 from a record in 2011, the data show.

At the same time, the economy doesn't follow the ethanol plants' up-and-down profits. Ethanol production helps support corn prices, jobs and communities, Babcock said. "When they turn plants on, they run pretty much at a constant level, whether margins are good or bad," he said. "So as long as ethanol plants are running, the jobs are there, the support and demand for corn is there, and supply of distillers grains is there."

Dried distillers grain, a byproduct from ethanol production, is highly valued as livestock feed, particularly for cattle.

Ethanol leaders say the industry in Iowa should be able to weather a downturn.

"Corn prices are half what they were two years ago. While ethanol prices come down, so have our feedstock prices," said Rick Schwarck, president of Absolute Energy, a 125 million-gallon-per-year ethanol plant in St. Ansgar. He sees China lifting its ban on U.S. corn and opening up a large market.

"We'll have reduced, but still solid, profits," he said.

Todd Becker, CEO of Green Plains Energy, an Omaha, Neb.-based ethanol producer, said market demand for ethanol has remained strong, despite the uncertainty from the federal government.

Domestic demand is on average about 3 percent higher than a year earlier. "We're the cheapest molecule in the fuel tank anywhere in the world today," he said. "And we're producing it at a profit across the state of Iowa."

The industry has seen new — and stronger — demand for ethanol from countries such as India, United Arab Emirates and Canada. "While the U.S. continues to fight politically about what's the right thing to do, the world is saying, 'If the U.S. doesn't want it, we'll take your ethanol,' " said Becker, whose company has three ethanol plants in Iowa and employs 150 people.

Green Plains, a publicly traded company, reported net income of nearly $42 million, more than three times the same quarter a year earlier. Last year's results were still being hit by high costs from the 2012 drought. Becker said the results also were helped by an increase in the number of plants the company owns.