Ethanol Price Relief Requires Further Production Cuts

The price of ethanol per gallon dropped to its lowest level in more than a decade on November 29th to $1.0928 (FOB Omaha).

Based on monthly data from the USDA, the price of ethanol has even been less than the corn cost per gallon of ethanol (based on one bushel or corn yielding 2.7 gallons of ethanol) in ten of the past thirteen months.

The problem has been that growth in production has exceeded growth in demand, creating an inventory glut.

The market solution is the continuation of low prices and negative margins to rein-in production. Recently, year-over-year production growth rates become negative.

 Conclusions

Lower production trends will eventually correct the oversupply, enabling ethanol margins to return to profitability.  Ethanol producers should consider hedging their margin risk to minimize losses and to lock-in future profits in the event of a corn price spike in 2019 (see Hedging Ethanol Production).