Historical Biofuel Operating Margins

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The return over operating costs is one signal of the level of profitability to producing ethanol. This return is calculated as the difference between the revenues from ethanol plant outputs (ethanol and dried distillers grains with solubles [DDGS]) and the costs of variable production inputs (corn, natural gas, and other costs such as enzymes, labor, electricity and water).

CARD tracks ethanol returns over operating costs based on an updated dry-mill production technique for a representative Iowa corn ethanol plant. In the returns calculations, we assume that one bushel of corn and 72.8 thousand British thermal units of natural gas are required to create 2.80 gallons of denatured ethanol, 17 pounds of DDGS and 0.7 pounds of corn oil. Other operating costs of $0.30 per gallon of ethanol and $0.05 per pound of corn oil extracting cost are also included.

We base our corn price on the daily nearby futures price in Chicago plus Iowa corn basis. Weekly corn basis is calculated as the difference between the price that Iowa ethanol plants pay, as reported by USDA’s Livestock and Grain Market News, minus the CBOT nearby futures price. We base our daily ethanol price on the nearby futures contract for ethanol in Chicago plus Iowa ethanol basis which is calculated based on the USDA’s weekly Ag Energy Roundup, which also include the weekly crude oil price we used. The natural gas price is taken from the nearby futures contract on New York Mercantile Exchange plus basis calculated from the average price paid for natural gas by industrial users in Iowa as reported by the US Energy Information Agency. We base our DDGS price off of the corn price adjusted for the previous month’s average ratio of the price of DDGS to corn.

By definition, per-gallon returns over variable costs plus variable costs equals the price of ethanol. The chart below shows how the price of ethanol is split between the various cost components—the net cost of corn in ethanol (corn costs less distillers grains value) and other operating costs (includes the cost of natural gas)—and returns over variable costs. A positive operating return does not necessarily imply profits because other costs, such as plant financing, and returns to capital, must be taken into account. But a positive operating return does signal the potential for profits in the industry. The horizontal line (at $0.25 per gallon) attempts to capture the costs of capital and other fixed costs. Profits are implied under the current set of assumptions when operating returns exceed the horizontal line.

Prices for Ethanol, Corn, and Natural Gas
Last UpdateEthanol PriceCorn PriceNatural Gas Price
4/5/2024$1.51/gallon$4.46/bushel*$2.79/mmBtu
* Starting in the first week of November 2016, we include corn oil, another by-product of ethanol, into the calculations.

CARD is tracking biodiesel returns over operating costs based on a typical continuous flow plant that uses soybean oil as feedstock for biodiesel production. In the returns calculations, we assume that 7.6 pounds of soybean oil are needed to produce a gallon of biodiesel and 1.04 pounds of glycerin as the main co-product. Other operating costs include methanol as their main component. Given soybean oil and biodiesel prices for Iowa reported weekly by the Agricultural Marketing Service, and methanol prices reported monthly by Methanex, we have computed the biodiesel operating returns from April 13, 2007, to the present.

The graph below divides the price of biodiesel into three components: the cost of soybean oil in biodiesel, other operating costs (net of glycerin, and other co-products), and the biodiesel operating returns. A positive operating return does not necessarily imply profits as other costs, such as plant financing, and returns to capital, must be taken into account. But a positive operating return does signal the potential for profits in the industry. The horizontal line (at $0.12 per gallon) aims to represent the costs of capital. Profits are implied under the current set of assumptions when operating returns exceed the horizontal line.

NOTE:

  • Starting from December 1st 2023, the biodiesel price is based on B100 IL price minus 20cents/gallon transportation cost from USDA report-3616 (National Weekly Ethanol Report). In times there is no price informaiton in the weekly report, we used the most recently available price information. The last available B100 price for IL from National Weekly Ag Energy Round-Up report was from the report on Jan 05, 2023.
  • A customization option is added into the margin graph with the options to choose the source of Biodiesel prices and a few other changeable technical Configurations. A new price serie based on OPIS B100 price is included. When we have the raw OPIS price (from Jan, 2020), the price is calculated by substracting 20cents/gallon transportation cost. When unavailable, we use the price from USDA reports to fill the gap. A recent article (Irwin, 2023) found that before 2021, the two price series followed each other closely. The real departure between each other started in recent two years, especially in 2023. With this option, we hope users can have an alternative view about the biodiesel operating margins.

Prices for Biodiesel, Soybean Oil, and Methanol

Acknowledgement

  • Historical OPIS price data (Jan, 2020 to Oct, 2023) was given permission by OPIS and shared by Andrew Lipow, President of Lipow Oil Associates.
  • Current OPIS biodiesel Chicago price data (Nov, 2023 onward) was shared by OPIS, a Dow Jones Company.