Ethanol profit margins zeroed, some negative
Even with generous government subsidies and a growing market for ethanol and alcohol fuels, the profit margins for ethanol producers are their smallest ever. The possibility of profit has been wiped away by corn and natural gas prices. Natural gas is very important in the process and is where the majority of the energy input comes from.
Flooding in the Midwest is likely to wipe out much of the corn crop intended for ethanol. As prices rise for corn, the chance of profit is diminished as the gains in oil are neutralized by the gains in ethanol. Both fuels are extremely exposed to wild price swings, something that could have never been predicted early in what appears to be the ethanol bubble.
Right now it appears that ethanol should not be a part of anyone’s future investment perspective. Absent any new bill to prop up the ethanol market in Congress, the ethanol market will likely starve itself out. Currently the annual budget for ethanol from the Federal government is $8.7 Billion per year which works out to a huge dollar sum per gallon– around $1.20 for each gallon of ethanol produced. As you can see, much of the profit potential in ethanol was not from the end user but from the Federal Government subsidizing the grain alcohol.
If you’re in on an ethanol play, you might as well hold out. At current prices you’ve probably lost considerably almost to the point where you’re locked in. Lets hope the floods didn’t do as much damage as expected, and hey, maybe Congress will throw you a bone. Either way, ethanol needs something to whip it back into shape.
