U.S. weekly ethanol margins rise to above break even

NEW YORK Fri Feb 13, 2009 4:01pm EST

NEW YORK (Reuters) - Average U.S. ethanol distiller profits returned to slightly above break even this week as prices for corn, the main input cost for producers, fell on worries about the economy.

March corn closed at about $3.66 a bushel on Thursday, down about 5 cents from last week and down 16 cents from two weeks earlier.

"The reduction in corn cost ... helped to slightly improve margins," ethanol expert Rick Kment at DTN in Nebraska said.

Spot ethanol prices rose about 3 cents to $1.60 per gallon in the Midwest market, which also helped profits rise a few pennies, dealers said.

The ethanol crush spread rose about 5 cents to 29 cents a gallon, using the formula of the Midwest ethanol price, minus the corn price divided by 2.8.

Operating costs such as natural gas prices and overhead trim the crush spread by about 20 to 30 cents per gallon, bringing net margins to about +5 cents a gallon.

Ethanol makers have been suffering negative or low margins for months on weak fuel demand, particularly as ethanol prices have traded well above gasoline prices, which discourages oil refiner demand for the renewable fuel.

Some 21 percent of U.S. ethanol capacity has been idled since peaking sometime last year, according to Archer Daniels Midland.

Many producers make the livestock feed distillers grains as a byproduct of making ethanol, which can improve profits. Producers near feedlots can sell wet distillers grains, which are cheaper to make. Ethanol plants that are farther from feedlots sell dried distillers grains, but have to spend money on natural gas to dry them.

The dismal ethanol margins have deepened a series of production shutdowns and curtailments as the hardest-hit distillers slow operations.

U.S. ethanol company VeraSun Energy Corp., which filed for bankruptcy protection in October after making expensive hedges on corn and amid the credit crunch, said 12 of its 16 plants were closed.

The U.S. Renewable Fuels Standard mandate requires 10.5 billion gallons of grain-based ethanol to be blended into gasoline in 2009.

In the long term the RFS could be in trouble. The Energy Information Administration, the top U.S. energy forecaster, said in December that the United States would likely blend just 30 billion gallons per year of biofuels by 2022, not the 36 billion gallons the mandate requires.

(Reporting by Timothy Gardner; Editing by Christian Wiessner)