Plant Loses Money Without Tax Credit 01/09/07 4:25:42 PM
By Todd Neeley
DTN Staff Reporter
OMAHA (DTN) -- Experts have suggested the ethanol industry could survive and even profit without the 51-cent-per-gallon federal Volumetric Ethanol Excise Tax Credit for gasoline blenders who use ethanol, but this is not the case for Neeley Biofuels Inc., a hypothetical 50-million-gallon ethanol plant created using DTN's new ProphetX Ethanol Edition.
Wallace Tyner, a Purdue University agriculture economist, said ethanol producers actually receive the full benefit of the tax credit to blenders and removing it would mean ethanol plants would lose 51 cents per gallon on the average sales price for ethanol -- a direct hit to an ethanol plant's bottom line.
The 51-cent tax credit was put in place by the federal government as an incentive for blenders to use more ethanol in gasoline. The blenders can pass on all or part of that credit to the ethanol producers, depending on how much ethanol is available and other market factors. Ethanol producers currently see the full benefit from the tax credit, Tyner said.
"If they did not want to pass that on to the ethanol producer, there would be some other blender ready to do so, and that blender would get the ethanol," Tyner said.
While ethanol producers could have done without the 51-cent credit in the summer of 2006 when ethanol prices were high and corn prices low, hypothetical Neeley Biofuels, located in Union County, S.D., experienced more than a 200-percent drop in per-gallon profits when the tax credit was removed Monday.
I established the plant as a way of tracking ethanol-industry profitability. Using the real-time commodity-price data that flow into the "corn crush" in ProphetX along with some industry-average figures for interest costs, labor, overhead and the like, I am able to figure out not only my current profits but how much Neeley Biofuels would make or lose under an infinite number of what-if scenarios.
Using ProphetX, I am able to see how changing markets affected my plant's net-profit margin per gallon of ethanol sold -- the difference between total costs and revenues.
Based on a Monday Chicago Board of Trade price for March corn at $3.64 a bushel with a 14-cent basis and an average sales price for ethanol of about $2.29 a gallon, which includes the 51-cent tax credit, Neeley Biofuels made about 23 cents net profit per gallon.
Without the tax credit the price of ethanol in this example is about $1.78. At that price plant profitability dropped to about minus 28 cents per gallon.
To compute net margins -- what's left in profits after all costs are deducted -- I used industry-average figures from Iowa State University economist David Swenson. These included annual labor and management costs of $2.8 million, transportation costs of $10 million, debt-servicing costs of $7.8 million, depreciation costs of $8 million and maintenance costs of $800,000.
With a recent change in ethanol economics that includes higher corn prices and lower ethanol prices, the tax credit becomes more important, especially for plants still paying debt.
It should be noted that while Neeley Biofuels is paying nearly $16 million in debt-service and depreciation costs on its plant -- or about 32 cents per gallon of ethanol produced -- many real plants are not in debt and are more profitable than those in debt.
Assuming Neeley Biofuels is debt-free, the plant would be turning out a profit of about 4 cents per gallon without the 51-cent tax credit. With the tax credit in effect, a debt-free plant would be making a profit of about 55 cents per gallon in this example.
To see how my plant would have fared without the tax credit during ethanol's summer of 2006 heyday, I subtracted 51 cents from the average sale price for ethanol Neeley Biofuels received in July.
In July my plant paid $2.18 for corn and sold its ethanol for $3.28 a gallon, which was the average DTN spot price for ethanol on July 7. In addition, the plant paid $6.69 per million British thermal units for natural gas, based on July price information from the Energy Information Administration for industrial customers.
Based on these favorable conditions, Neeley BioFuels turned out an 85-cent net margin, or profit, for each gallon of ethanol sold in July.
Without the 51-cent tax credit, that profit is still favorable at 34 cents per gallon.
Todd Neeley can be reached at Todd.Neeley@dtn.com.
(SS)
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