US ethanol industry poised for thin margins through 2016

US ethanol producers are expected to see thin but still positive profit margins through 2016, according to a report from last week by US cooperative bank CoBank.

Profitability will largely depend on the volatility of energy prices and the ability of the industry to maintain strong exports. The direction of earnings will be determined by the prices of distillers grains and ethanol as corn prices are forecast to stay relatively unchanged, says the report's author, Dan Kowalski.

The prospect for little growth in domestic sales is being counterbalanced by the potential for increased export sales. "Brazil has increased its domestic ethanol blending rate to 27 percent, which has impeded its ability to supply product to foreign markets, and U.S. producers will continue to benefit as their share of world trade increases," said Kowalski.

At home, growth is being held back by the improving fuel efficiency of vehicles and the proposed change in the renewable fuels blending mandate, which is expected to be approved later in 2015 and will not incentivise retailers to sell higher ethanol-blended fuels than the current 10% blending level.

Yet, in foreign markets ethanol producers face a risk that could significantly impact their bottom lines. This is an expected change in China's policy designed to discourage the import of corn-alternative feed grains. China currently imports 60% of US distillers grains.

The report, titled "Ethanol Industry Rebalances," said that the US ethanol industry has rebalanced in 2015 after a year and a half of record earnings. The collapse of energy prices in late 2014 led to a collapse in ethanol prices and plant margins but as ethanol's supply and demand have remained balanced, producers have maintained positive earnings.

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