By Stu Ellis
Farmgateblog
Cornbelt farmers continue to hear messages that profitability might be low or non-existent in 2014. Commodity prices have dropped considerably compared to the last 5 years. At the same time production input costs have risen. On top of that cash rents for farmland have increased due to higher land values.The cost-price squeeze will pinch many farmers who will not have high corn prices to rely upon for profitability. At the same time, ethanol refiners are enjoying good profitability.With the EPA considering cutbacks of ethanol use in motor fuel, will this hurt the ethanol refiner or the corn grower? What happens if all of these planets line up, anyway?
Answers to that last question are guided by retired Iowa State University agricultural economist Don Hofstrand, in the latest newsletter of the Agricultural Marketing Resource Center. Hofstrand lays out the profitability dance between corn growers and the ethanol industry, which sometimes benefits the farmer and other times the refiner. And you may suspect, the refiner is now the leading dance partner.
In the past year, revenue from ethanol and DDGS sales has come from a near record high of nearly $3.50 per gallon to just over $2.50 per gallon. The cost of production has also dropped from nearly $3.50 per gallon to just over $2.00 per gallon in that same time period. Hofstrand says the lower cost is due to declining corn prices. He says since the cost of production has dropped faster than revenue received, ethanol returns have increased reaching a peak profit of more than 50 cents per gallon. That is parallel to the revenue peak late in 2011, but in the interim, there were several months that refineries were operation in the red. These recent margins are slim, according to Hofstrand, when they are compared to 2005 through 2007 when margins were substantial and net returns reached as high as $2 per gallon.
Farmers initially promoted ethanol production to assist with profitability for themselves, not just for the ethanol refiners. And from time to time, the magnitude of profitability will shift from one to the other. Hofstrand says profits are more recently being allocated to the refiner in conjunction with lower corn prices. But at that same time when farmers are not profiting much from ethanol production, higher input costs and cash rents are squeezing their profitability from corn production.
Hofstrand says, “During 2006, virtually all of the profits accrued to the ethanol producer. However, as the ethanol industry expanded from large profits, it bid up the price of corn during 2007 resulting in a division of profits between the ethanol producer and the corn farmer. The continued expansion of the ethanol industry in 2008 bid corn prices up to the level where virtually all of the profits accrued to the corn farmer. Only in recent months has the corn price allocated most of the profits to the ethanol producer.”
And Hofstrand says several trends are identifiable:
- The continued upward trend in corn production costs is eating into farmer profits.
- Since 2008, corn prices have tended to track the breakeven price of ethanol, allocating profits to farmers.
- If ethanol use continues to expand, this trend may continue, because expansion of ethanol production will continue to bid up the price of corn to breakeven levels.
- If ethanol use plateaus or declines, reduced demand for corn will result in lower corn prices and shift profits to the ethanol producer.
- Corn prices could decline even below the cost of production, which does not drop very quickly.
Summary:
Over time, profits from ethanol production shift from ethanol refiners to the corn grower. Corn growers have enjoyed those profits during times of high corn prices, but with the declining price of corn, those profits have shifted back to the ethanol producer. This is coming at a time when production costs are rising, and farmers will share very little of the profitability of ethanol. The future depends on the demand and resulting price of ethanol, which determines the overall profitability of refiners and corn growers.
Source : farmgateblog