Ethanol Impact on Feed Prices

Fueled by its desire for conflict, and a well-funded and organized public relations blitz by food and livestock industries, the media has spent a great deal of time in the past two years trying to portray an epic battle between America’s need for renewable alternatives to gasoline and its role as breadbasket to world.

Despite unsupported and hysterical claims, the battle between ethanol production and food and feed resources is not a battle at all. In fact, it is a symbiotic relationship that promises to provide long term financial gain for livestock and ethanol producers alike.
First, it is critical that all sides in the debate agree to the facts. Ethanol production from corn is not leading to a shortage of grain for livestock feed. Quite the opposite is true. Because ethanol production produces both fuel and livestock feed, its quickly becoming a driving market force in the location and production of beef and dairy cattle.
 
Specifically, the production of ethanol from corn requires just the starch in each kernel. In the dry mill ethanol process, the entire corn kernel or other starchy grain is ground into flour (or “meal”) and processed without separation of the various nutritional component parts of the grain. The meal is slurried with water to form a “mash.” Enzymes are added to the mash, which is then processed in a high-temperature cooker, cooled and transferred to fermenters where yeast is added and the conversion of sugar to ethanol begins.
After fermentation, the resulting “beer” is transferred to distillation columns where the ethanol is separated from the remaining “stillage.” The stillage is sent through a centrifuge that separates the coarse grain from the solubles. The solubles are then concentrated to about 30 percent solids by evaporation, resulting in condensed distillers solubles (CDS) or “syrup.” CDS is sometimes sold into the feed market, but more often the residual coarse grain and the CDS are mixed together and dried to produce distillers dried grains with solubles (DDGS). In some cases, the syrup is not reapplied to the residual grains; this product is simply called distillers dried grains (DDG).
If the distillers grains are being fed to livestock in close proximity to the ethanol plant, the drying step is avoided and the product is called wet distillers grains with solubles (WDGS). Because of various drying and syrup applications practices, there are several variants of distillers grains (one of which is called modified wet distillers grains), but most product is sold as DDGS, DDG, or WDGS. The vitamins, fibers, and nutrients that remain are processed into a high-value livestock feed most commonly referred to as distillers dried grains with solubles, or DDGS. 
 
In the wet mill ethanol process, the grain is soaked or “steeped” in water to facilitate the separation of the grain into its basic nutritional components. After steeping, the corn slurry is processed through a series of grinders to separate the corn germ. Corn oil from the germ is either extracted on site or sold to crushers who extract the corn oil. The remaining fiber, gluten and starch components are further segregated. The steeping liquor is concentrated in an evaporator. This concentrated product, heavy steep water, is co-dried with the fiber component and is then sold as corn gluten feed (CGF). Heavy steep water is sometimes sold by itself as a feed ingredient. The gluten component is filtered and dried to produce the corn gluten meal (CGM), a high-protein product used primarily as a feed ingredient in poultry operations. The starch and any remaining water from the mash can then be processed in one of three ways: fermented into ethanol, dried and sold as dried or modified corn starch, or processed into corn syrup. The wet mill fermentation process for ethanol is very similar to the dry mill process described above.
 
New and emerging technologies are allowing ethanol producers to also produce corn germ, corn oil, high-protein DDGS and other value added products. As ethanol production in the United States has grown, so too has the production of DDGS and other feed co-products such as corn gluten feed and corn gluten meal.
 
In 2009, ethanol biorefineries converted 3.8 billion bushels of corn into a record 10.75 billion gallons of ethanol and a record 30.5 million metric tons of high-value livestock feed, distillers grains and corn gluten feed and meal. To put that into perspective, the 30.5 million metric tons of feed generated by the industry in 2009 is roughly equivalent to the total amount of grain fed to cattle in the nation’s feedlots.
This point is one that doesn’t get a lot of press attention, but is critical to both an informed debate on biofuels policy and the bottom lines of ethanol and livestock producers alike.
 
As cattle producers across the nation know, it is ruminants that dominate the consumption of this increasingly important component of the feed ration. It’s estimated that 77 percent of the 30.5 million metric tons of DDGS produced in 2009 were fed to beef and dairy cattle. A growing percentage is also being fed in wet form to animals, meaning that the drying process to reduce weight and water content of DDGS is bypassed, better preserving the nutritional value of the feed while providing it in a form cattle find more palatable. Much of this moisture-rich product is fed to livestock in relatively close proximity to the ethanol plant itself. As such, the return of cattle herds to areas of concentrated ethanol production is being seen across much of the Corn Belt.
It isn’t just cattle raising that benefits from ethanol’s feed production. Though often in lower percentages of the feed ration, swine, poultry, and other livestock industries are seeing increased use of DDGS to displace the need for other sources of energy and protein, such as soybean meal.
 
Additionally, livestock herds around the world are benefiting from the concentration of the nutrients in corn through the ethanol/DDGS production process. Last year, the industry set a record for exports of DDGS. More than 5.6 million metric tons of DDGS were exported, valued at nearly $1 billion, an increase of 24 percent from 2008. While the majority of DDGS are sent to our neighbors in North America, Asian nations with increasing livestock and poultry populations are quickly becoming major markets for U.S. exports.
 
Second, the impact of ethanol on America’s corn market has been to drive increased production, not diminishing supplies. Despite the kind of growing season that few farmers can remember (or would care to), America produced a record 13.2 billion bushels of corn, breaking the previous record set in 2007. While impressive in its own right, the true story is the staggering growth in yield that accompanied this record production.
American farmers averaged 165.2 bushels of corn per acre in 2009. That shattered the previous record of 160.4 bushels set in 2004. All of this was done on 7 million fewer acres than was needed to produce 13 billion bushels in 2007. This kind of productivity has ensured that ample supplies of corn are available to feed livestock, export to our trading partners, produce ethanol, and still have historically high levels of carry out left over at the end of the year.
 
The increased productivity of the American farmer is often overlooked as it undermines claims that feed and fuel markets must compete. Corn yields have essentially doubled since 1981, in part as a response to the new demand pull presented by ethanol production. Seed technology companies, responding to the dynamics in the marketplace, have allowed farmers to dramatically improve their productivity and continue to play their traditional roles of food and feed providers.
 
The new value-added market in ethanol production has also allowed farmers to get a greater share of their income from the market and not the federal government. Because corn prices have stayed above levels that would otherwise trigger certain government payments, the federal government has saved billions of dollars and farmers are enjoying the benefits of a demand-driven marketplace.
 
Critics of ethanol production, including some in the livestock industry, will point to that as evidence that ethanol’s role in the corn market is ruinous for other industries reliant on corn. While ethanol has helped provide a better return for farmers, it has not been responsible for driving corn prices to unsustainable levels.
 
It is worth pointing out that many critics of ethanol’s impact on corn prices point to their increased production costs and the tax incentive that exists for ethanol blending. What rarely accompanies such a discussion is the fact that prior to ethanol, farmers were getting a large percentage of their income from farm payments. As such, end users of corn were able to buy large volumes of grain below the cost of production and forcing the federal government to make the difference up to the farmer. By one estimate from Tufts University, the livestock industry saved $35 billion in feed costs between 1997 and 2005 as a result of artificially depressed corn prices. 
 
Perhaps more salient is the connection between speculation and the commodity markets. Many in both livestock and ethanol production remember the uncomfortable and ruinous events of the summer of 2008. Driven by speculation, oil prices soared to previously undreamt of heights, hitting nearly $150 per barrel in June of that year. Not to be outdone, many of the same Wall Street speculators helped drive corn prices to equally absurd levels, well in excess of $7 per bushel during the same period of time.
 
It was only the subsequent meltdown of the global economy, brought on in large measure by the bursting of energy price bubble that returned rational behavior to all commodity markets. While the extraordinary volatility that marked 2008 has many causes, the production of ethanol in the United States was not one of them. In 2008, Texas A&M University concluded that the “…underlying force driving changes in the agricultural industry, along with the economy as a whole, is overall higher energy costs, evidenced by $100 per barrel oil.”
 
The fact remains that ethanol and livestock production are forever linked. As both industries evolve, so too will the nature of that relationship. Continued expansion of the grain ethanol industry means feed co-product output will continue to grow substantially. Further, a number of new and emerging technologies promise to amplify the ethanol industry’s role in producing high-quality feed co-products.
 
In an attempt to extract more value from the corn kernel, a number of dry mills are installing technology that allows them to separate crude corn oil from the stillage on the back end of the process. This crude corn oil can be sold into the feed market (particularly for poultry), further refined and sold into the human food market, or used as a feedstock for biodiesel. When used as a biodiesel feedstock, corn oil displaces higher value vegetable oils that are typically used in food applications.
 
The feed co-products resulting from oil separation practices typically have lower fat and higher protein content than conventional distillers grains. This form of distillers grains is often called high-protein DDGS. Dry fractionation is another technology that is emerging in the dry mill ethanol industry. Essentially, this practice allows dry mill ethanol producers to separate the corn germ and other components from the starch on the front end of the ethanol process. The germ can then be processed and sold as feed or as feedstock for further processing for other uses. This separation allows ethanol producers more flexibility in feed manufacturing and potentially provides customers with products that are more tailored to their specific nutritional needs.
 
Additionally, a number of new and emerging ethanol processing aids are likely to improve the nutritional quality and utility of ethanol co-products. For instance, technologies are under development to reduce the presence of certain minerals in distillers grains, while other processes are being designed to improve the availability of amino acids in the feed. Ultimately, the success and deployment of these new technologies will depend on the demands of the ethanol industry’s customers in the animal feed market.
 
Animal scientists and nutritionists continue to study the feeding of ethanol feed co-products to animals. Though beef, dairy, swine and poultry have been the primary consumers of these co-products historically, an increasing amount of research is being conducted that examines the effects of feeding co-products to other species, such as goats, sheep, and fish. The use of ethanol co-products in human food applications is another area of increasing scientific interest. As innovation in feed co-product technology grows, so too will the volume of co-products available. The 15 billion gallon allotment for corn starch-based ethanol in the Renewable Fuels Standard implies distillers grains production of roughly 38 million metric tons—enough to displace approximately 1.6 billion bushels of corn from feed rations. 
 
While new technologies and practices promise to change the complexion of the ethanol co-products market in the years ahead, one certainty exists about the future of feed co-products: the ethanol industry will continue to take very seriously its role as a producer of safe, quality feed. Not only are U.S. ethanol producers helping to meet future demands for energy, but they are also helping the agriculture industry meet the increasing food and feed needs of a growing world.