As Corn Prices Shoot Up, Ethanol Margins Turn Negative

By Brad Zigler

Last week, as reported in "Soybean Crush Crushed," soybean processing margins were compressed to a year-to-date low of 4.6%, or 63 cents a bushel.

Then it was corn's turn. As corn prices shot up over the $6.50 mark on the Chicago Board of Trade, ethanol processing margins actually turned negative. Unsubsidized gross refining revenues, which were 63.5 cents a bushel at the end of May, turned to a loss of 7.25 cents a bushel by the first weekend of June when ethanol prices slumped.

In the U.S., corn is the primary feedstock for ethanol production. The gross processing margin, or "corn crush," represents the difference between the sales proceeds of fuel ethanol and the price of its corn feedstock. One bushel of corn can be converted into about 2.75 gallons of ethanol (see "Are We At The Bottom Of The Ethanol Barrel?").

Heavy rains in the Midwest growing regions are mostly to blame for corn's breakout rise. Flooding and crop damage following the weekend's rains will likely put an end to this year's corn planting season for the upper region of the U.S. Corn Belt.

The question weighing heavy on everybody's minds is just how many corn acres got planted before the recent deluge and how corn acres were lost. Planting was already behind trend lines going into the week. With field activity further limited by weather, planting estimates for this year's crop are coming up 3 to 4 million acres short.

Corn and ethanol prices are not the only factors affecting crush margins. In the real world, other components on both the revenue side (such as subsidies and proceeds from by-product sales), and on the expense side (costs for fuels and enzymes, for example), exert some influence, but the corn crush is widely followed because it offers a thumbnail sketch of ethanol refining profitability.

Spot prices for both ethanol and corn put the corn crush back into positive territoryA ahead of the USDA crop summary, but last week's closing margin points to the current fragility of the ethanol refining business.

Comments

[Eric Fox:]

What is the source of your margin info on Ethanol.

2008 Jun 11 11:46 AM

[ValueInvestor:]

Another reason why corn ethanol should be abolished. Sugar ethanol is so much more efficient, cost effective and enviro friendly.

Its too bad the corn lobby in this country is so strong. Thats why they just gave an extra $20 billion is subsidies to farmers in the latest farm bill even though agricultural prices are threw the roof. Way to go Washington.

2008 Jun 11 06:35 PM

[User 208736:]

Yes, corn ethanol should be abolished. Unfortunately, until biomass/cellulose technology is developed, this nonesense from D.C. will continue as sugar cane production of ethanol is limited to South America where sugar is a major crop and too expensive to ship here. If you want to invest in agricultural commodities and take advantage of this boom, DBA is my favorite ETF for doing so.

2008 Jun 11 07:43 PM

[Eric Fox:]

I understand that Sorghum can be used to make Ethanol as well. It can grow in harsh conditions and it is not a major food source.

2008 Jun 11 10:11 PM

[ValueInvestor:]

There are essentially limitless ways to produce ethanol. Another one is Jatropha. Its a weed, so it needs very little water, can grow in harsh conditions and its seeds produces a lot of oil relative to other crops.

2008 Jun 16 02:04 PM