The growth of the ethanol industry has been tremendous in the last decade. However, given the current farm economy, the ethanol industry could be ripe for consolidation. According to a new report from CoBank, slim-to-negative profit margins could push the industry toward consolidation.
“I agree that with thin profit margins there may be some consolidation in the ethanol industry,” says Ted Seifried chief market strategist for Zaner Ag Hedge. “It is quite similar to what we have seen for grain producers with low prices in grains markets during the last few years.”
Seifried says operations with weak balance sheets cold be targets for acquisition which is in accordance with the CoBank report. He also adds that older and less efficient operations may be pushed out of service.
“However, if corn prices stay low there may be less pressure on profit margins than what was outlined in the report,” he says. “We continue to be optimistic about the increase of the blend as well as demand for e85.”
According to the report, domestic demand for gasoline blended with ethanol has been strong over the last 18 months, as low fuel prices resulted in consumers driving more. In addition, blend rates continue to increase. CoBank says the longer-term picture for ethanol in gasoline is less optimistic. In 2017, export weakness and lower distillers grains (DDGS) prices have hurt margins. The report says exports of ethanol, particularly to Brazil and China, have been strong over the last year, but that picture has changed significantly and the outlook for future ethanol exports suggests a continued decrease over the foreseeable future.
Seifried doesn’t think the DDG and export outlooks are quite that doom and gloom.
“Domestic DDG usage could be strong than expected as livestock production continues to grow,” he explains. “And, while export business to China for DDGs and ethanol will likely fall due to tariffs, the drop in exports to Brazil may not be as bad as expected because sugar producers may choose to try to be more competitive on the global export market.”
You can read CoBank’s full report, “Ethanol’s Growth Path: Output and Export Uncertainties Both Rising” here.