The US ethanol industry is in a financial pinch. Some plants and some multi-plant companies have had some fits, and starts, and burps in the past year. Some are history and others are living on their past financial laurels. Economic factors have changed since the go-go days of 2007 and 2008 when oil prices were rocketing upward, carrying ethanol and corn on its back. With oil prices playing on both sides of the $40 mark, can ethanol remain financially viable?

The future of ethanol is ruled by many masters. Federal mandates require 10.8 billion gallons of production this year, enroute to 15 billion gallons by 2015. EPA rules call for fuels that cannot be blended without ethanol. And the motoring public and friendly farmers would not know what to do if the gas pump did not have an ethanol decal on it.

But ethanol economics are being squeezed in a vice with one jaw that is the oil market and the other jaw that is the corn market. And Nebraska economist Richard Perrin says something has to give, as he writes in the current issue of Cornhusker Economics. He’s not only concerned about the economics, but the parade of academic studies that assail ethanol, blaming it for everyone’s ills. He questions the sustainability of the ethanol industry without mandates and subsidies, pointing to the current cost structure to refine ethanol at a profitable level.

Perrin says a recent survey of 7 ethanol plants in the Cornbelt found a surprising degree of efficiency, as he evaluated operating costs. The costs of making ethanol, which include electricity, natural gas, a denaturant (to remove water) enzymes, labor, maintenance, and miscellaneous costs totaled 45.4¢ per gallon, corn at $1.06 per gallon, and subtracting DDGS sales at 22.9¢ revenue per gallon, combined to total $1.288 in operating costs per gallon of ethanol. Adding the capital cost of 35¢ per gallon requires the product to sell at $1.638 per gallon.

The key is the cost of corn, and Perrin says today’s cost of corn is higher than the example, adding 20¢ to the total cost. He says profitability at that level is even more at risk if the plants have to operate with mandates and subsidies, which can be politically removed.

The current oil price of $40 per barrel puts wholesale gasoline at $1.30 per gallon. Since ethanol has a lesser energy value, pricing it at $0.85 per gallon. Adding the blenders’ credit of 45¢ per gallon makes ethanol $1.30 per gallon, and gives corn a value of $2.50 per bushel. Perrin says corn ethanol cannot compete with $40 oil unless the corn price is below $2.50 per bushel with the blenders’ credit, or $0.85 per bushel without the blenders’ credit. With corn at $3.55 per bushel, Perrin says oil prices have to rise to $55 per barrel for ethanol to be competitive, but as high as $80 per barrel if ethanol did not have the blenders’ credit.

As the federal mandate pushes ethanol production to 15 billion gallons in 2015, Perrin says price premiums for ethanol will rise until the quantity is achieved. While corn will be profitable, Perrin says the mandates and the blenders’ credit could be removed by public outcry. And if that happens, the ethanol industry will only be profitable and continue as a dynamic in the corn market if the price of oil rises to $80 per barrel. At that point the ethanol industry will be able to pay $3.50 to $4.00 for corn.

Summary:
While the demand for corn is dependent upon the ethanol industry, ethanol cannot remain profitable at current corn prices when crude oil is $40 per barrel. Due to ethanol production costs and the lesser energy efficiency of ethanol, $3.50 corn makes ethanol an unprofitable venture unless crude oil is selling for $80 per barrel. The ethanol mandate and blenders’ credit will be required to sustain the ethanol industry.

Do you agree with the economics? Should the mandate and the blenders’ credit be maintained? What other issues are involved, from your point of view?