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Ethanol Makers are Getting Squeezed

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July 27th, 2012

The Wall Street Journal issued a report today on how Midwest Ethanol makers are getting squeezed by the rapid increase in corn prices (to read the article, you may need a subscription).  Production earlier in the year was running at about 950 million barrels per day.  The current run rate is about 800 million barrels down about 16%.

Meanwhile, margins have shrank from about 31 cents per gallon in the first quarter of 2011 to about 11 cents in this year’s first quarter.  Archer Daniels Midland just reported that their ethanol margins are now negative by the “high 20′s” per gallon.

The article indicates that the ethanol industry consumes about 40% of the annual corn crop, however, for 2012, this percentage may increase closer to 50%.  The one statistic that never seems to be mentioned in these articles is that the ethanol industry also produces about 1.5 billion bushel equivalent of dried distillers grain that used as livestock feed.  Therefore, the net 40% used by the ethanol industry is really closer to 25% or less.

If corn prices rally much more, we may see Congress reduce the mandate, but more likely, we will see continued decreases in Ethanol production and reduction in these inventories to meet the mandate.

Paul Neiffer

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation.

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