Ethanol Blog

A recent FarmDoc Daily post examined the price risk of dried distillers grains with solubles on the profitability of ethanol plants.

The article, "Ethanol Production Profits: the Risk from Lower Prices of Distillers Grains", by University of Illinois economists Scott Irwin and Darrel Good (http://bit.ly/…), looked at the history of ethanol production. It focused on high profitability in 2014 and how falling crude oil, gasoline and ethanol prices are driven by recent profit declines.

However, the article also stressed the role distillers dried grains with solubles play in offsetting ethanol price declines and examined the risk of declining DDGS prices to ethanol profits in coming months.

Prices of DDGS have varied, but tend to mirror the price of corn, so that higher profits from DDGS are associated with higher ethanol production costs. If the ratio of the price of DDGS to the price of corn is high, DDGS contributes more to profits and vice versa. So a decline in DDGS prices would result in a decline in net returns, if all other prices are unchanged.

The authors suggest the possibility of a risk for falling DDGS prices in coming months, even with a decline in corn/soybean meal prices. Such a decline would result in decreased profits for plants unless adjustments are made in prices of other parts of production returns and/or costs. Some plants could experiences profits below the cost of production for at least a time.

The article suggests that the good news is that domestic and export ethanol demand will be strong enough to prevent a large reduction in production. Therefore, it will be necessary to increase ethanol prices to motivate sufficient production, even if DDGS prices fall and no prices adjustments for corn occur.

Cheryl Anderson can be reached at Cheryl.anderson@dtn.com

(ES)

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