Positive Margins Return to Ethanol
No sector of Nebraska agriculture was hit harder by COVID-19 than the ethanol sector. People working from home and stay-at-home orders meant less travel, less gasoline sales, and less ethanol sales. Scott Irwin, an agricultural economist at the University of Illinois, reports gasoline use this year dropped 48 percent compared to last year between March 13 and April 3. Ethanol use also dropped 48 percent, the only difference being the bottom in ethanol use came two weeks after the bottom in gasoline use.
The slowdown in the ethanol use negatively affected ethanol plants’ operating margins. Figure 1 illustrates weekly estimated ethanol net profits for a representative Iowa plant. As Figure 1 shows, plants were already operating in the red entering 2020 and COVID-19 only made it worse. Margins plummeted in March, at one point falling to a loss of $.20 per gallon. Many plants could not absorb the losses and were idled. However, for those plants able to withstand the demand shock and remain open positive margins returned beginning in May.
Irwin attributes the return of positive margins to relative price movements for inputs and outputs of ethanol production. Ethanol prices recovered faster than corn prices, the primary input in ethanol production, and corn oil prices, a byproduct of ethanol production, also improved. The combination of rising output prices and lower input costs helped ethanol plants regain positive margins. The return of positive margins helped offset some of the losses which occurred, roughly $371 million by Irwin’s estimate. Some ethanol plants remain shut down. In Nebraska, two plants remain idled. These plant shutdowns continue to cost the industry. When considering the costs of shuttered plants, and the offsetting profits since May, Irwin estimates the losses from the COVID-19 industry ranged from -$37 million to -$116 million.
Figure 1. Weekly Ethanol Production Net Profit*
*Profit net of all variable costs at a representative Iowa ethanol plant
Source: Irwin, S. “Ethanol Production Profits during the COVID Pandemic.” farmdoc daily (10): 148, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, August 13, 2020.