Expected profitability for US ethanol producers

16th January, 2008

A record 92.9 million acres of corn were planted this year, with commodity analysts predicting a record-setting yield of 13.3 billion bushels.

Companies, both in the US and abroad, originally believed the ethanol industry would be an instant moneymaker for US farmers and ethanol producers.

Looking forward, this might not be true for a number of years as farmers appear to have planted more corn than needed and subsequently an ethanol glut.

As with any biofuel, input costs, in this case the price of corn, are one of the key factors in determining an ethanol plant’s profitability. Before 2007, ethanol producers were turning a profit of more than $2 (€1.40) per gallon. However, this level of profitability did not last long. In the 2007 State of the Union address, President Bush declared his initiative to increase the US production of ethanol and his goal to lower the country’s dependence on foreign oil. Soon after this speech, speculative and non-commercial traders entered the corn market and prices began to rise past the $4 mark. Motivated by high corn prices and the perceived possibility of a corn shortage, US farmers eagerly planted a record crop.

During the summer months, the corn prices returned to more reasonable levels as speculative and noncommercial traders backed out of the market. Levelling out at a more comfortable $3 per bushel, the lower corn and higher petroleum prices allowed ethanol producers to remain somewhat profitable. At these prices, ethanol producers were averaging approximately $0.50 per gallon.

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