A new report from CoBank’s Knowledge Exchange Division July 2 finds that operating margins for ethanol producers will likely remain weak for the remainder of 2019. The outlook for exports, however, is more optimistic.

The report explains that ethanol plant capacity has increased recently following several years of positive margins. This increased production coupled with stagnant growth in demand has weakened margins. “Today, the industry is trying to work through and absorb this excess production,” the report said.

According to the report, margins are expected to remain weak for the remainder of this year under the weight of abundant ethanol production. CoBank said declining corn production will also squeeze margins, with some plants expected to shut down or idle due to high corn prices or unavailable corn.

CoBank said that ethanol supply will have to move down in order for margins to improve. Higher-cost plants, including those with older technology, those that are smaller, and those located in areas with higher input costs, are expected to be the first to exit the industry. If some of these higher-costs plants can be run profitably with lower financing costs, other ethanol producers with strong balance sheets may purchase these assets, leading to increased consolidation.

While exports remain one area of optimism for the ethanol industry, CoBank cautioned that optimism precariously hangs on China’s plants to move to an E10 blend nationally by the end of next year. The report explains that China would require between 4.5 billion and 5 billion gallons of ethanol to meet its E10 mandated next year. Approximately 1.5 billion to 2 billion gallons of that volume would have to come from imports. For exports to China to have a significant impact on the U.S. ethanol industry China will need to follow through with its E10 initiative on time and trade relations between the two countries must be normalized in time for the U.S. to benefit.

In the U.S., demand for ethanol in the U.S. is expected to be flat over the next two years. Long-term, the report predicts ethanol plant profitability will come from diversified revenues and growth in E15 sales. Margins are expected to move slightly higher in 2020 and 2021 as demand and supply come into better balance.

A full copy of the report is available on CoBank’s website.