After seven months of losses (February through August), the corn-ethanol supply chain (corn production plus ethanol production) is back in the black. Two major factors leading to this change are the recent increase in ethanol prices and the lower cost of production for the 2010 corn crop. In this article we will show the magnitude of this change on the corn ethanol supply chain along with the impact on the corn farmer and the ethanol producer.

Corn profitability

Corn production profitability since 2000 for three types of corn farmers is shown in Figure 1. The three cost of production lines represent the cost of production for each crop year for a cash rent farmer, a land owner (debt free) farmer and a combination of renter and owner.

Escalating corn prices, good yields and subdued corn production costs lead to a high level of profitability for the 2007 corn crop. This was followed by a year of continued profitability but at lower levels as corn prices declined and costs increased. A further decline in corn prices combined with a jump in production input prices pushed most cash rented land and farm situations with significant land debt close to or into a loss position for the 2009 corn crop. The major price spike was fertilizer, but herbicide and other input prices also contributed to the increase.

Figure 1. Corn Production Profitability 1/

The situation improved for the 2010 corn crop. After a spike in corn production input prices for the 2009 corn crop, input prices for the 2010 crop have settled back to levels similar to those for the 2008 crop. So, the newly harvested 2010 corn crop that has been supplying ethanol processing plants since September was produced at a lower cost than the 2009 corn crop that supplied ethanol plants previously. Moreover, corn prices are currently much higher for the 2010 crop and, from early indications, may continue at these levels throughout the year.

Figure 2. 2010 Corn Cost Breakeven Prices per Bushel under Alternative Yields.

Offsetting these expectations of strong profitability are situations where corn yields were significantly reduced by wet conditions during the growing season. In these situations, the production cost per bushel may be significantly higher because the cost per acre is spread over fewer bushels. An indication of how cost per bushel changes under varying yields is shown in Figure 2.

Ethanol profitability

Ethanol production profitability has increased recently due to rising ethanol prices as shown in Figure 3. A brief period of profitability also occurred in the fourth quarter of 2009 when ethanol prices temporarily rose. However, profitability during the first three quarters of 2009 and 2010 has been at breakeven levels.

Figure 3. Ethanol Production Revenue, Costs and Profits ($/gallon).

The current increase in ethanol profitability due to higher ethanol prices is being offset by higher corn prices. If ethanol prices stay strong, the increase in corn prices will limit ethanol profitability during the coming year. If ethanol prices drop, ethanol profitability may be pushed into the red. So, to absorb the corn price increase, ethanol prices will need to remain strong during the coming corn marketing year and possibly longer.

Supply chain profitability

The corn ethanol supply chain profitability shown in Figure 4 is a combination of corn profitability and ethanol profitability. Essentially this figure is a combination of the cash rent corn farmer profitability of Figure 1 and the ethanol producer profitability of Figure 3. The declining cost of corn production for the 2010 corn crop along with higher ethanol prices are causing a sharp increase in supply chain profitability. The last time supply chain profitability was at this level was in late 2008.

Figure 4. Corn Ethanol Supply Chain Revenue, Costs and Profits ($/gallon)

Figure 5 shows more detail of the supply chain revenues, costs and profits and also shows how the supply chain profitability is shared between the corn farmer and the ethanol producer. The two relevant lines on this chart are the red line (white dots) that represents the increasing ethanol sales revenue and the blue line that represents the declining corn production costs. The divergence of these two lines opens up a white area on the chart that represents profits.

Figure 5. Allocation of Ethanol Profits between Ethanol Producer and Cash Rent Corn Farmer ($/bushel) 1/

The colored areas represent costs. The tan area represents the cost of producing ethanol (not including corn), the green area represents the production inputs (fertilizer, seed, herbicides, etc.) for producing corn and the blue area represents cropland cash rent. The size of the white area is bounded by the orange line that represents the breakeven corn purchase price for ethanol producers and the blue line that represents the breakeven corn selling price for corn farmers.  If ethanol revenue is larger than these three costs, a white area appears that represents supply chain profits. If these three costs are greater than ethanol revenue, the colors overlap and represent losses.

Not since the fourth quarter of 2009, with the temporary rise in ethanol revenue, has profitability occurred in the supply chain. And this may be the first time since late 2008 that we will have a sustained level of profitability in the supply chain, assuming ethanol prices remain at their current level.

Corn price, represented by the red line (yellow dots), allocates the supply chain profits and losses between the corn farmer and the ethanol producer.  As shown in the Figure 5, corn price has tended to follow the ethanol breakeven corn purchase price since October of 2007.  This has occurred during periods of both profits and losses, keeping the ethanol producer at a relatively breakeven level and providing corn farmers with large profits during 2008 and significant losses during 2010.

Although projections for the coming year are tentative, it appears that high corn prices due to the reduced crop size indicated by the October USDA crop report will allocate any ethanol profits during the coming year to the corn farmer, at the expense of the ethanol producer.  If ethanol prices drop, it could result in losses for the ethanol producer that become profits for the corn farmer.

References

1/ The corn prices data series used in Figure 1 is as reported by National Ag Statistics Services, Iowa Office. It is the monthly price producers receive from elevators and buyers. Figure 5 is the monthly average corn price at ethanol plants as reported by the USDA Department of Ag Market News.