Margins in processing corn to ethanol improve to reach new highs

US ethanol output set to break records on robust margins and demand in the near term

By Mark Shenk and Jocelyn Garcia for Fastmarkets AgriCensus

US ethanol production is set to break records as improving margins and robust demand show no sign of abating in the near term.

Production climbed to 1.106 million b/d in the week ended October 22, just 2,000 b/d short of the all-time high reached in the week ended December 1, 2017, according to data published by the US Energy Information Administration (EIA).

“Margins are the primary driver and increased availability of new-crop corn amid harvest,” Terry Reilly of Futures International told Fastmarkets AgriCensus, explaining the driving factors behind the huge pick up in output.

The margin for processing corn into ethanol was $0.91 cents per gallon as of October 22, up 435% from $0.17 cents per gallon at around the same point of 2020, according to calculations based on a model from Iowa State University that reflects the typical economics of an average Midwest producer.

While it is important to note that 2020 was an atypical year as transportation fuel demand was severely reduced because of Covid-19 restrictions and lockdowns.

Nonetheless, when comparing current margins to the comparable data from 2019, prior to the pandemic, they are up 355% from the $0.20 cents per gallon recorded back then, and at over $0.90/gal, the margin is the highest since December 2014, according to ISU data.

Reilly further noted that he does not believe production has peaked as he estimates to see an additional production figures of more than 1,100 b/d over the next month - a level that would set a new record and could re-write some of the domestic demand expectations surrounding US corn.

In late August, prior to this rebound in ethanol output, Fastmarkets AgriCensus reported that production declines during what is considered the peak driving season were due to facility maintenance and lack of corn availability as the 2020-2021 supply neared its end.

Scott Richman, chief economist at the Renewable Fuels Association (RFA) remarked that, “ethanol production throttled back, which resulted in declining inventories. This, in turn, led to higher prices and margins, incentivizing producers to dial output back up.”

Richman also said that near recent production levels should continue supported by strong gasoline demand, which he noted has rebounded to pre-pandemic levels or slightly higher over the last month.

“Demand for ethanol will continue to be strong unless gasoline plummets,” Brian Hoops, president at Midwest Market Solutions, told Fastmarkets AgriCensus, adding his voice to others stating that ethanol consumption will continue to rise supporting higher margins and ultimately leading to continued higher production.

Daily gasoline consumption is expected to increase by 2% in 2022 to reach 8.96 million barrels per day, following a 9.07% gain this year, according to the EIA’s Short-Term Energy Outlook (STEO).

“Ethanol is following the bullish fundamentals of gasoline, and it’s pulling corn higher,” Hoops said.

As we move through the new 2021-2022 marketing year, strong ethanol demand and adequate corn inventory, among other factors, are supportive of continued increased ethanol production, which will help surpass the 1.108 million b/d record set back in December 2017.

The USDA currently expects ethanol production to consume 5.2 billion bushels of corn in the 2021/22 marketing year (132 million tonnes), which would already make it the busiest year for corn in the ethanol grind since the 2018/19 marketing year.

Back then, ethanol consumed 5.378 billion bu (136.6 million tonnes), equating to 37% of total US corn production.

United State ethanol production chart

Return over operating costs chart

This article, by Mark Shenk and Jocelyn Garcia, was originally published to on Wednesday October 27.

Stay up to date with the critical forces influencing price and market movements across the agriculture market. We look forward to regularly sharing more insights, trends and trade news with you on the Fastmarkets oilseeds and grains insights hub.

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