Why Are Ethanol Prices and Production Profits So High
The ethanol production industry is in the midst of a long “winning streak” in terms of profits. The current run of historically high profits began in March 2013 and was punctuated by a spectacular spike during February-April 2014. As highlighted in two recent farmdoc daily articles (March 14, 2014 and May 7, 2014), the high profits have been driven by a combination of steady or rising ethanol prices and falling corn prices. The latest article concluded that, “Economic logic suggests this situation is unsustainable, and either ethanol prices must adjust lower or corn prices higher to restore a long-run equilibrium in profitability. The most likely scenario is one where ethanol prices bear the brunt of the adjustment, eventually dropping as much as $0.40 per gallon from present elevated levels.” While ethanol prices are currently much lower than the peak in April, they persist at high levels relative to corn prices, which have continued to decline (Figure 1). As a result, ethanol production profitability remains about a dollar per bushel above the long term average that has been experienced since January 2007. The purpose of today’s farmdoc daily article is to propose an explanation for this pricing and profitability puzzle.