Green Plains Inc Sinks Into The Red.. And Maybe The Black

A second punch came from the trade wars. Green Plains has estimated that the impact on the trade wars has been a 20-30c a gallon decline in margins.

I don’t know if I buy what they are saying at face value. Margins were slim in the fall of 2018 (before the trade war really erupted). Today, oil is lower and corn is higher. Changes in margins have been more complicated than that.

But there's no question that the regulatory environment hasn’t been favorable. However, with the election approaching that’s changing.

Big picture is Trump wants to help farmers. He’s hurt them with the trade war.  He knows it.They know it.

An easy bone to throw is to mandate increased ethanol demand. There are two ways Trump is doing that. At the end of May the EPA announced changes that would roll back the summertime ban on E15 fuel. This is a blend of 15 percent ethanol and 85 percent gasoline. The restriction had previously limited ethanol blending to 8 months of the year.

Ethanol is cheaper than gasoline (although it has less energy content). Blenders capture more margin when they blend more ethanol. Those with access to ethanol will blend as much as they can.

This one is a done deal. It likely isn’t going to have an immediate impact. But come next summer we should start to see more ethanol blending.

The second and potentially bigger impact could come from a deal with China. Tariffs on ethanol to China are 70% right now. Ethanol exports to China have been part of the trade negotiations. The numbers being bandied about have China buying between 400 million gallons to 800 million gallons a year.

400 million gallons is around 10 million barrels.That is about ½ the level of current inventories. 800 million gallons would be the entire US inventory.

If those numbers happen, it will mean a boost for ethanol margins.

More important for a prospective short-seller, it likely means a pop in the share price of Green Plains. So that is the risk.

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