Friday, January 4, 2008

$100 Oil

With oil reaching $100 per barrel, the entire energy market has seen reverberations. Most would agree that an ideal situation in the future will be one in which we can uncouple the oil markets from the ethanol and corn markets but right now that simply can not be done. Some of the growing pains seen in the ethanol and ag markets in the past year are a direct result of traders, such as those on the Chicago Board of Trade (CBOT), trying to find a level at which corn is priced correctly relative to ethanol relative to oil. The only way to uncouple this phenomenon is to transition towards an ethanol industry built on corn but made of cellulosic feedstocks that don't impact the grain markets. However, with oil, corn, and ethanol tied together, their prices are guaranteed to move in tandem.

This fact was pointed out in the Des Moines Register's article "Crop, ethanol prices mirror oil's rise," and can be linked to by following the link shown below.

The article points out that as oil has approached $100 a barrel in recent days, ethanol has moved up 22 cents per gallon on the CBOT to $2.22 per gallon and corn prices have continued to rise; reaching $4.66 per bushel on Thursday. Many of my friends would clamor to claim fowl against the ethanol industry or the corn farmers for the record profits that they must be making with these amazing new prices. However, the ethanol plants are only averaging around 3.5 cents per gallon of ethanol produced because of their higher input costs (corn). Similarly, farmers should not be made out to be the culprits in some kind of price write-up scheme. There input prices to grow the corn, such as seed and fertilizer have also reached record levels this year, which serves to negate much if not all of the additional profits the farmers might be seeing. Unfortunately, baring the introduction of a new feedstock, such as switchgrass, or the removal of oil's volatility from the energy markets this new scenario of oil, ethanol, and corn prices moving together will probably be something the industries and consumers must be ready to deal with for quite some time to come.

Below is DTN's calculation for their hypothetical South Dakota ethanol plant with input costs calculated.

Note: The above green line is the net income seen for E100 per gallon, while the net profit is around 3.6 cents per gallon.

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