An Iowa State University agricultural economist says the ethanol industry is facing a “good news – bad news” scenario with profit margins becoming very slim. Economist Chad Hart says lower corn and gas prices are starting to put the squeeze on ethanol producers.
“When we look at our ethanol plants, yes it’s good to have these lower corn prices, that means lower inputs costs. But as oil and gas prices drop, that means ethanol prices in order to remain competitive, have to drop,”Hart explains. “It’s squeezing those profit margins at those ethanol plants, and my guess is they are likely going to slow down here as we move into these next few months. The longer the oil price stays down, the slower they go.”
He says the current conditions show the need for the Renewable Fuel Standard to be in place to dictate how much ethanol is used. “It is still a developing bio-fuel that at times will need some support. Now when oil prices were about say 60, 70 80 dollars a barrel, no, the market drove where the ethanol industry goes. Now that oil prices have gone down again, yeah, maybe it does need that support from the renewable fuel standard.”
Hart says the problem for ethanol is not demand. “Demand is actually really good, but the problem is that supplies are just that large,” Hart says. “And the potential for supplies are to continue to grow. As we look at the 2015 crop year coming up as we look out there we are going to see a lot of acreage in play, we’ll see a lot of corn and soybean production in ’15, and that’s likely going to hold prices down as we go through the next year.”
The grain marketing specialist says if there is a possibility for hope in the grain markets, it could be overseas. “If we’re looking for that positive surprise, it would have to be exports. So far so good on that, we have seen a little bit of improvement compared to last year,” Hart says. “But, and this is a fairly large but in this case, the idea is as we look out there, with the global economy seemingly softening, as we look at crude oil prices and the value of the dollar continuing to strengthen, that’s holding back where exports can take us as well.” Hart made his comments at a seminar in Le Mars.
(Reporting by Dennis Morrice, KLEM, Le Mars)