# Corn Ethanol Economics

Someone e-mailed a few days ago and asked some questions about the present economics of corn ethanol. I did a few calculations, which I think are interesting enough to share. (Note that because this is a snapshot, the numbers will change over time. But you should be able to use the methodology here to roughly calculate the economics at any point in time.)

I found multiple references for all of the numbers I am going to use, but I will only reference a single source. According to Ethanol Reshapes the Corn Market, one 56-pound bushel of corn will yield up to 2.7 gallons of ethanol and 17.4 pounds of distiller’s dried grains with solubles (DDGS).

The current spot price of corn as of this writing is about \$5/bushel, so each gallon of ethanol contains \$5/2.7, or \$1.85 of corn per gallon of ethanol. However, the DDGS can be sold, so a credit is applied for that. The current price of DDGS as of this writing is \$170/ton, which is \$0.085/lb. Given that a bushel of corn yields 17.4 pounds of DDGS, there is then a \$1.48 credit, which spread over 2.7 gallons is equal to \$0.55 gallon. This reduces our cost per gallon to \$1.85 minus \$0.55, or \$1.30 for just the corn input. (Note that there is sometimes a credit for carbon dioxide sales, but it is very small relative to the other costs and credits).

I still have to consider utilities (natural gas is a major cost), labor, enzyme and yeast costs, and depreciation. I have a spreadsheet from an actual ethanol plant, but there isn’t much in the public domain that I could find on this. The closest thing to a source on these is the spreadsheet in the presentation Fossil Fuels and Ethanol Plant Economics (for a standard dry mill process). If you look at Page 16 of the presentation, you can see that all of the miscellaneous costs together total approximately as much as the corn inputs. If you take the spreadsheet on Page 24 and change the natural gas price to the current price of \$8/MMBTU, you get an overall energy cost of \$0.33/gal of ethanol. The sum of enzymes, yeast, and other chemicals comes out to be \$0.14/gal, and labor, maintenance, and various miscellaneous expenses add another \$0.23/gal.

On depreciation, I have several sources for capital costs that are pretty consistent. In the EIA’s Energy Outlook 2006, capital costs per daily barrel of corn ethanol ranged from \$20,000 to \$30,000, depending on the size of the plant. This breaks down to between \$1.30 and \$1.95 per gallon of installed capacity. This is also consistent with A Guide for Evaluating the Requirements of Ethanol Plants, which states “Current capital cost per annual gallon of installed capacity for an ethanol plant ranges from \$1.25 to \$2.00.” So let’s be conservative and say that we want to build a big plant, so the capital costs are on the low end at \$1.30/gallon. Depreciate that over 15 years and this portion amounts to about \$0.08 per gallon (but is captured above already).

However, for biomass to liquids facilities – which would include the biomass gasification to ethanol that some are calling cellulosic ethanol – the capital costs in the EIA’s Energy Outlook 2006 are listed at around 5 times that of a conventional corn ethanol plant. Thus, the capital depreciation portion is going to be around \$0.40 per gallon of ethanol. (On the other hand, the feed costs should be much lower).

Summary

Times are tough for ethanol producers. This is what the economics roughly look like at \$5 per bushel of corn and \$8/MMBTU of natural gas. To produce 1 gallon of ethanol requires:

• \$1.85 of corn
• \$0.33 of energy
• \$0.14 of enzymes, yeast, etc.
• \$0.23 of labor, maintenance, and various miscellaneous expenses

There is a DDGS credit per gallon of ethanol of \$0.55. Thus, the total cost to produce a gallon of ethanol today is \$1.85 + \$0.33 + \$0.14 + \$0.23 – \$0.55, or exactly \$2/gallon of ethanol. For reference, the February contract for ethanol in the Midwest as of this writing is \$2.15. And \$2/gallon is merely cost of production. It doesn’t take into account any return on investment.

Also note that due to the lower energy content, this production cost is equivalent to a \$3 per gallon production cost for gasoline – and that this production cost is a moving target: As long as the ethanol mandates are driving up the price of corn and increasing the demand for and cost of natural gas, corn ethanol producers must chase their tails in a vicious cycle. Producers are going to be hard-pressed to ever match the 2006 windfall that was given to them when the MTBE phaseout drove ethanol prices sky-high.

Anyway, this was a useful exercise for me to understand the magnitude of the various inputs (and the DDGS offset) in corn ethanol production. I hope you found it of some value. If you see errors or have suggestions, please let me know.

## 27 thoughts on “Corn Ethanol Economics”

1. Very interesting article Robert. One question is, when you quote the EIA on “biomass to liquids facilities”, are you referring to BTL plants like what Choren is building where they’re making diesel or are you talking about ethanol plants like RangeFuel and Coskata?

2. Terry, I think they will all be in that ballpark, because they all have the same biomass handling issues. I think even Khosla admitted to 3 times the capital cost for Range Fuels (which means it was probably 5 times), which is why they needed the government help.

3. A wee bit off-topic, but our crane has been on site finishing the Terra Fuels Wheat Ethanol plant since November. This will be the largest wheat based ethanol plant in North America, scheduled to open early this year.

Their website has many construction pictures as well as a live cam of the site. Our crane is a Terex T-560 60 ton mobile crane and you can see it in the live cam when it’s parked for the night.

Terra’s FAQ has some economics of wheat based ethanol information.

4. I presume that is \$130,000,000.00 Canadian? When I have a minute I will compare that to capital cost per gallon of corn ethanol.

Wheat is more problematic to deal with, which is why there aren’t more wheat ethanol plants. There are viscosity issues that have to be dealt with. My guess is that overall, it’s going to be more expensive to produce ethanol from wheat, but I can’t say that with certainty.

5. An interesting sidelight is the question of tax revenue.

If ethanol successfully displaced gaoline, there would be a major loss of tax revenue for Federal & State governments. Since no politician wants to lose tax revenue, it is a reasonable guess that the eventualy consumer cost of ethanol would go a lot higher than the \$3/gal gasoline equivalent cost of production.

Another aspect is the use of natural gas in ethanol plants. Natural gas is currently selling in the US for about half the Btu cost of oil. That gas price is likely to go up if ethanol manufacturing becomes a major new source of demand.

And then there is the long-term sustainability issue of ethanol if it requires fossil fuel inputs for agriculture and for processing.

6. Benny "peak Demand" Cole says:

I think RR has pretty well demonstradted that first gen corn ethanol plants are economically a no-go. But there are some reasonable arguments about national security and foreign policy to be made.
Another argument I have seen little about is the touchy nature of global oil markets. Some suggest that if world oil demand is, say, 86 mbd, and world supply is, say, 85 mbd, then we get a price surge. In this case, it would behoove the world’s oil consumers to increase supply of biofuels by a few mbd. This would bring fossil crude prices back down — a huge savings.
We have very strong corn state senators, and they are hooked on corn now, worse than any crack whore on coke ever was. All we can hope for is that second-gen corn plants become more efficient, and that corn yields continue to improve.
There may be a future yet for biofuels.

7. doggydogworld says:

Nice article, Robert. I was familiar with all these numbers except the DDGS value, which was higher than I expected. There were times last year when corn was \$4 and ethanol \$1.60 and I couldn’t figure out why ethanol plants were still running because I didn’t properly account for the DDGS credit.

BTUs of NG required per gallon of ethanol in the study you linked are about 30% lower than I’ve seen elsewhere. Not sure who to believe.

8. BTUs of NG required per gallon of ethanol in the study you linked are about 30% lower than I’ve seen elsewhere. Not sure who to believe.

Only the BTUs to ferment and distill the ethanol were embedded in the spreadsheet. There are other BTUs embedded in the corn farming step, but they were just captured as \$ in the price of corn.

9. One other cost factor, though I’m not sure how important it is: As you know, ethanol can’t be transported via conventional pipelines. So there will be some additional cost for rail/barge/truck transportation of the product.

10. oxymaven says:

DoE recently published (but has not promoted) a report “World Biofuels Assessment” http://www.osti.gov/bridge/servlets/purl/921804-YbDwya/921804.PDF
that provides a lot of cost info for different ethanol production process – corn, cane, cellulosic (biochem and thermal). It’s a good reference for methodology, but it uses old data (probably 2005 or earlier) for the most part. I think it’s clear that economics are troubling for further corn ethanol expansion. The energy bill passed in Dec2007 mandates and caps corn ethanol at ~15 bil gal/yr. If market was favorable, I’d think you’d see a new surge of plant construction, trying to get piece of that. But plants keep getting delayed or canceled.

Clearly almost all ag economists think that corn costs are expected to remain high the next several years, and construction costs have almost doubled in last 5 years. This whole goofy game was predicated on \$2.50 bu corn, and \$1 gal annual capacity construction costs (e.g., \$50 mil for a 50 mil gal yr plant). Obviously it is not viable even with subsidies in today’s markets, or likely in the foreseeable future.

Basic reasons corn and construction costs have doubled are the same as the reasons for crude oil prices doubling – limited resource availability, and accelerated demand from China, India etc. for those same resources. . . . There’s no free biofuel lunch.

Same game is currently being played by cellulosic advocates, but their capital costs are going to be 3-5x that of corn biorefineries (once they actually figure out a process that might actually be practical), and feedstock prices (switchgrass, corn stover) are never going to come near the \$35 dry ton that DoE always assumes.

Record high prices for wheat, corn, & soybeans drive land prices higher, meaning growing energy crops is going to be that much more expensive, probably closer to \$70+ ton. Oh yeah, and if DDGs are shown to promote E. coli problems in beef cattle, http://www.ethanolproducer.com/article.jsp?article_id=3513
that co-product credit might not go as far.

11. Gary Dikkers says:

Kinuachdrach said: “If ethanol successfully displaced gaoline, there would be a major loss of tax revenue for Federal & State governments.”

What tax revenue are you talking about?

The fuel tax revenue from the sale of ethanol-blended fuels would likely increase because average fuel consumption increases. Because of the lower fuel mileage, drivers have to buy more fuel. I once figured that drivers in Minnesota — where they have mandated E10 and where the fuel tax is \$0.22 per gallon — would have to pay \$69.5 million dollars more in road fuel taxes than they would if they bought straight gasoline.

And speaking of distillers grains:

The market for selling all those distillers grains to cattle feeders may not turn out to be as large as the ethanol industry expects.

Regards,

Gary Dikkers

12. David asks about transport cost for shipping ethanol. I’m assuming that is outside your system boundary, as that is not production. One other cost I thought of is that of shipping the DDGS. I understand there are a few ethanol plants built next door to feedlots, which would eliminate that cost, but usually this product would have to be trucked out. But this too would be outside the system boundary, and perhaps is the DDGS buyer’s cost.

13. “one 56-pound bushel of corn will yield up to 2.7 gallons of ethanol and 17.4 pounds of distiller’s dried grains with solubles (DDGS).”

We would need to know how many BTUs per fortnight this would produce…

Damn you Americans and your wacky units ;^)

14. “one 56-pound bushel of corn will yield up to 2.7 gallons of ethanol and 17.4 pounds of distiller’s dried grains with solubles (DDGS).”

I think I can help you out here. Try this: “one 4-stone portion of corn will yield up to 10.2 liters of ethanol and 1.2 stone of distiller’s dried grains with solubles (DDGS).”

🙂

15. Anonymous says:

If every American ethanol producer could import without taxes ethanol from outside, they could get better profits and will be encouraged to produce more. This would be a win win solution. Besides the USA enemies are the great oil producers, their huge profits will come back as terrorists attacks, I am not even talking about that the oil is destroying the environment, and the ethanol produced by a friend country like Brazil is being with taxes like we were USA enemies and we were destroying the world

16. Just chuck everything into a gasifier (corn, husks, stalk, roots) and be done with it. Convert the syngas to ethanol or methanol and call it good.

Won’t qualify for the ethanol blend credit, but heat and pressure work much faster than yeast!

17. doggydogworld says:

Only the BTUs to ferment and distill the ethanol were embedded in the spreadsheet. There are other BTUs embedded in the corn farming step, but they were just captured as \$ in the price of corn.

Robert, the numbers I spoke of apply to the ethanol plant alone, they do not include farming, transport, etc. I’ve typically seen about 50k BTU per gallon of ethanol. This includes fermentation and distillation, plus also drying (DDGS) and so forth. There is significant variation between plants. Heat recycling improves with newer designs, and advances like molecular sieves save a lot of energy. Still, 33k BTU/gal is the lowest I’ve ever seen.

18. Optimist says:

Damn you Americans and your wacky units ;^)
Ah yes, the British Empire’s last enduring hold on the colonies: those backwards units. How much money does using these weird units cost America every year?

19. Just chuck everything into a gasifier (corn, husks, stalk, roots) and be done with it. Convert the syngas to ethanol or methanol and call it good.

Isn’t that what RangeFuels, Coskata, and a few others are trying to do? Based on everything I’ve read this seems like the best route though I think making diesel instead of ethanol would be more efficient. I wonder if Robert could try and put together an analysis like he did here but with a biomass gasification as the first step. 🙂

20. Based on everything I’ve read this seems like the best route though I think making diesel instead of ethanol would be more efficient.

Diesel requires more capital investment and more steps. Diesel is a mixture of a number of hydrocrabons, not a single molecule like methanol (CH40H) or ethanol (C2H5OH). Fischer Tropsch reactors produce some lighter and some heavier components which must be recycled back. The FT diesel needs hydrotreating to eliminate olefins, which can cause problems in the finished product. Even then FT diesel has to be blended to get a usable product.

Methanol or ethanol is much easier to do.

21. “Just chuck everything into a gasifier (corn, husks, stalk, roots) and be done with it. Convert the syngas to ethanol or methanol and call it good.”

That won’t work. We’ve been over this before, but you need to leave the stover on the fields to keep organic matter and maintain soil fertility. Take that away, and farmers will have to use still more fertilizer, which is much more expensive these days.

Ideas like this come from people who’ve never farmed, or have unlimited fertilizer budgets.

22. A bit more on this. Recent research shows that at least a certain amount of stover must be left on fields, which leaves much less left for biofuel production than you think.

http://www.greencarcongress.com/2007/04/usda_research_s.html

Now, I also have some dairy farming experience. Stover is also made into silage.

http://en.wikipedia.org/wiki/Silage

Take the stover away, and farmers will have considerably higher outlays for cow feed. Therefore, this idea of just razing corn fields of stover to feed cars is totally unrealistic.

23. I was being a bit dramatic. You wouldn’t grow corn to chuck into the gasifier either. I’d rather make something a lot more useful out if like this: liquid corn

You would need some crop that yields a lot of biomass per acre. Just leave some of it to return to the soil.

24. Optimist says:

That won’t work. We’ve been over this before, but you need to leave the stover on the fields to keep organic matter and maintain soil fertility. Take that away, and farmers will have to use still more fertilizer, which is much more expensive these days.
We have. You can return the ash from the gasifier, containing most of the fertilizer to the land. You could also leave part of the stover (as opposed to all of it), if you are so concerned with organic matter.

I am still not convinced you need any organics in the soil, unless it is cheaper than the alternatives. Any data showing the cost-benefit of keeping organics in the soil?

25. You need organic material in the soil to prevent erosion. That is obvious to anyone who has farmed. I put ash on my fields, but it’s no good for preventing erosion (it keeps the soil from becoming acidic). Compare fields with lots of organic matter and those which use only chemical fertilizer. Do it on a dry windy day or a day of heavy rain. You’ll immediately see the difference.

Besides, your plan reminds me of the plans for agrichar because you are going to truck out the organic matter to a factory, process it, then truck the product back to the fields and apply it. That’s a lot of fuel! Is your biofuel plant going to provide all of that?

26. EtOH says:

I work in an ethanol plant. Those numbers are pretty accurate, but the price we get for ethanol has been going up lately. Our margins have been poor lately, but are improving. But you did capture the important economic factors that have hurt us lately.

27. Optimist says:

You need organic material in the soil to prevent erosion. That is obvious to anyone who has farmed.
That’s it? There’s gotta be more ways to prevent erosion.

That’s a lot of fuel! Is your biofuel plant going to provide all of that?
Markets will decide, I guess.

If the Mad Max version of the future you POers believe in comes to pass, that organic matter will be worth a lot of dough. Even rice farmers would consider selling, I suspect…