If ethanol production remains relatively high for the remainder of 2017, as the U.S. Energy Information Administration currently expects, 2017 will set a record for annual ethanol production.1

Upon first reading, that may sound positive for the ethanol industry, and, with respect to output, it is. However, current high ethanol inventories and the record production of ethanol have depressed its price. According to Markets Insider, as of October 11, 2017, the price of ethanol has fallen by 42.5% over the last five years.

Commensurate with the low prices for ethanol, ethanol producers’ profit margins have also eroded. According to research by the Iowa State College of Agriculture and Life Sciences, return over operating costs for ethanol production has struggled to break $0.25 per gallon this year, while ethanol producers were able to consistently obtain over $0.50 per gallon prior to 2015. In fact, for brief periods, the return dropped to $0.2

With such slim profit margins, certain ethanol producers have been forced to idle their production facilities while hoping that prices rebound. For example, Green Plains Inc. reported idling approximately 50 million gallons of ethanol production capacity during the second quarter of this year due to low margins. Such idling of production facilities is becoming commonplace.3

While idling has become commonplace, several large ethanol producers have, instead, turned to alternative uses for their facilities in order to combat their dependency on fuel ethanol and diversify their product output. Just recently, two of the largest ethanol producers, Archer Daniels Midland Co. and Green Plains Inc., decided to convert portions of their fuel-ethanol capacity into beverage and industrial alcohol production. This is a logical move, given that ethanol production facilities require minimal alterations in order to accommodate beverage and industrial alcohol production. After all, ethanol, or ethyl alcohol, is one type of alcohol.

In addition, companies like Abengoa, and other major chemical companies around the world, have developed proprietary technology to convert ethanol into n-butanol, using an environmentally-friendly production process. N-butanol is an alcohol, serving as a feedstock, to produce (among other things) specialty solvents used in a number of formulated products, such as paints and coatings, adhesives, sealants, engineering plastics, and cosmetics and fragrances. Using this proprietary technology, ethanol producers can retrofit the existing ethanol plants, or add on to the existing ethanol plants, to produce n-butanol at a competitive cost that would allow for product diversification, and participation in a market that, in some circles, is valued to be over $9 billion by 2020.

While forays into alternative products always carry risk, the five year ethanol profit depression suggests that ethanol producers’ long term success may well depend on successfully diversifying their production.