U.S. corn has been the poster child for weak exports this year, but that’s good news for the ethanol sector.
“Just in the recent third quarter, we saw a healthy summer demand and a favorable ratio of ethanol price to corn and natural gas,” says Kenneth Scott Zuckerberg, CoBank lead economist for farm supply and biofuels. “That led to very strong profits.”
Zuckerberg adds ethanol profitability has risen substantially through the year: from $0.07/gallon in January all the way to $0.79/gallon in September.
Looking to 2024, several factors are leading economists to believe the price of corn will keep ethanol profits steady in the near future.
Price of Corn is Biggest Swing Factor
Zuckerberg shares the average price for 2024 corn futures as of mid-October was $5.17/bu., but USDA is forecasting $4.95/bu.
“That $4.95 is quite a bit lower – about 5% below what the futures market is telling us,” he says. “So that provides us a signal that ethanol profits might be a bit better.”
Research from the University of Illinois is predicting an even lower average price.
“The probability, at least based on the U of I work, is that U.S. #2 yellow corn could trend lower, specifically toward $4.61 per bushel rather than the $4.95 USDA is predicting,” Zuckerberg says.
Another factor causing economists to predict lower corn prices is the comparison of stocks-to-use and average corn price.
Andrick Payen, grain and oilseeds analyst at Rabobank, shares that though yield estimates from USDA have lowered, production is still high and corn stocks show to be building.
“We do have a massive acreage of corn that has helped U.S. production,” Payen says. “We’re likely to see stocks replenish and that’s what is keeping corn prices lower.”
The last time corn stocks were at this level – between 2016 to 2020 – the price of corn was below $4.00.
Zuckerberg shares he isn’t sure if the $4.61 level will be hit during 2024, but the stocks are a good indicator of the direction prices are headed.
A Look at What’s To Come
Despite the typical seasonal slowdown in usage during the winter, Zuckerberg says the environment for ethanol looks favorable for the next three to six months.
The risk for next year, however, lies in the chance of overproduction.
“It’s a funny industry and when you have record margins, sometimes undisciplined players push the envelope,” Zuckerberg says. “Overproduction by certain players seeking to capture excess margins would result in excess supplies and depressed profit margins.”
In the longer-term outlook, the increased adoption and usage of all-electric vehicles weighs on the ethanol industry. However, there are two potential offsets to that loss for producers.
“Higher ethanol blends will mitigate a portion of that demand destruction,” Zuckerberg says. “There is also the potential for an exciting encore performance for ethanol in the form of sustainable aviation fuel.”
