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Ethanol profit margins hit records

By Michael Hirtzer

CHICAGO — U.S. ethanol markers are seeing their best profit margins in more than five years on strong demand for the biofuel and cheap corn despite a looming reduction to the federal biofuels program, analysts and traders said on Wednesday.

The price of corn, the main feedstock used to produced ethanol in the United States, is hovering near a three-year low while ethanol prices have been buoyed by demand to meet the mandate requiring nearly every gallon of gasoline sold in the country to be mixed with the grain-based fuel additive.

Near-record export demand for the dried distillers’ grains, or DDGs, produced at ethanol plants also lifted margins to as much as $1 per gallon of fuel produced — the highest levels since before the Renewable Fuel Standard was instituted in 2007.

“The current level of profitability meets or exceeds the highs from 2011,” said Jerrod Kitt, a biofuels analyst at brokerage Linn Group in Chicago.

“We’ve been scraping tank bottoms for months in ethanol — (inventories) have been well below average since June — and demand just keeps humming along.”

Profit margins vary widely at the more than 200 ethanol plants in the country but in Midwest, where most plants are concentrated, the corn “crush” ranges from 70 cents to more than $1 per gallon of ethanol produced.

The profits top returns seen in early 2011, before Congress voted to end longstanding subsidies for the biofuels industry and the margins come as the U.S. Environmental Protection Agency takes comments on its proposal to reduce the federal biofuels mandate for the first time.

“Selling the ethanol covers the cost of the corn and the distillers’ grains is the gravy,” said a corn buyer at an ethanol plant in Wisconsin.

DDGs are a protein-rich dairy cow, hog and poultry feed that has seen huge exports this year, led by record sales to top buyer China, according to U.S. Agriculture Department data.

Many U.S. ethanol plants also installed corn oil extractors in recent years, an investment that pays for itself in six to eight months, said Wally Tyner, an energy economist at Purdue University.

Strong demand from fuel blenders that are mandated by the RFS program to use ethanol resulted in stocks of the biofuel dwindling to 14.96 million barrels at the end of October — the smallest in more than three years.

Ethanol production has surged since, hitting 944,000 barrels per day last week, the highest since January 2012, the Energy Information Administration said on Wednesday.

The lofty production figure was a sell signal for some traders, which weighed on ethanol futures at the Chicago Board of Trade.

The government could also approve early next year its plan to reduce the ethanol mandate, a proposal opposed by biofuel makers such as The Andersons Inc and Green Plains Renewable Energy.

“Without the mandate, there’s no demand to grow,” Tyner said. “The future is cloudy.”