Despite Big 2018 Losses, Ethanol Still Safe Investment

(URBANA, IL) The U.S. ethanol industry faced considerable headwinds in 2018, including the lowest prices over the last decade, policy setbacks in the implementation of the RFS, and political resistance to granting a year-round RVP waiver for E15. The impact of these headwinds on ethanol production profits is certainly of interest to those in the ethanol industry, as well as policymakers and legislators interested in the financial health of the U.S. renewable fuels industry says University of Illinois Agricultural Economist Dr. Scott Irwin. Net profits in 2018 averaged a loss of 2¢ per gallon, compared to gains of 3¢ in 2017, 12¢ in 2016 and 7¢ in 2015. In reality, the pattern of net profits in 2018 was a tale of two periods. The average net profit from January through July was a respectable 5¢ per gallon. Mirroring the sharp decline in ethanol prices, returns from August through December averaged a loss of 11¢ per gallon. Net profits turned negative in the second week of August 2018 and have remained so through the most recent week of available data; a run of 26 consecutive weeks of losses and counting. The market price dipped below the shutdown price in late November 2018 for the first time in six years. The market price remains very close to the shutdown price. While domestic and export use for U.S. ethanol has increased since 2014, both production capacity and actual production have increased even faster. Assuming all plants in the industry earned a net loss of 2¢ per gallon and that total ethanol production for the U.S. was 16.1 billion gallons in 2018, aggregate ethanol industry (pre-tax) losses can be estimated at -$354 million. Even with this loss, ethanol plants have a more than a respectable record of investment performance over the last dozen years. The evidence points to overproduction as the driving force behind the low prices and financial losses experienced by ethanol producers during 2018. The fortunes of the U.S. ethanol industry are unlikely to improve until production and use are better balanced. This will require shuttering some production capacity, additional demand, or some combination of the two.