Corn Futures Still Well Above Ethanol Break-Even

Current corn futures prices remain far above the break-even point for some American ethanol plants, according to an analysis conducted by the American Farm Bureau.

In a Market Intel piece Wednesday, farm bureau chief economist John Newton used Iowa State University’s so-called Ethanol Plant Model profitability benchmark to determine the price of corn at which an ethanol plant can no longer cover its variable operating costs – which includes but is not limited to the price of corn, natural gas, chemicals, electricity, transportation and water.

Subtracting the variable costs from the total revenue – based on the DDG value and the May ethanol futures value – and then assuming a conversion rate of 2.8 bu/gallon, Newton found the break-even value of corn is approximately $2.67/bu, down sharply from just two weeks ago when the break-even corn price was $3.79.

Using this estimate, which Newton admitted is likely conservative, the difference between the current corn futures price and the estimated break-even price now stands at minus 76 cents/bu – and explains the reduction in cash corn prices in portions of the Midwest.

“This estimated – and simplistic – break-even analysis based on the Iowa State University ethanol model suggests the purchase price for corn should be $2.67/bu – well below the May futures value of $3.43,” Newton wrote. “Other ethanol plants obviously will have different cost structures and different corn prices that will allow those plants to stay open. However, as a result of these challenges, across much of the Midwest, local grain bids are now well below the Chicago futures price.”

Crude oil, and by extension ethanol, have been pounded in recent weeks by not only the global economic slowdown caused by the covid-19 pandemic but also an oil price war between Saudi Arabia and Russia.

The dramatic effect has been a 61% drop in the May crude oil futures value, which has fallen from more than $60/barrel to $23. The lower price of oil contributed to a 36% decline in the May ethanol futures price, from $1.41/gallon to 90 cents. As the primary feedstock in the production of ethanol, corn futures have also been dragged lower.

Source: DePutter Publishing Ltd.

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