Commentary: Corn, Cattle and Ethanol
Jan 23, 2007 8:33 PM
By Greg Lardy, North Dakota State University Extension Beef Cattle Specialist
The sudden upswing in demand and prices for corn due to the expanding ethanol industry has placed new stresses on beef cattle producers. The slide in feeder cattle prices this fall leaves little doubt that the price of corn has a huge impact on what feedlot operators can and will pay for feeder cattle. In most cases, feeder cattle futures contracts are off $20 or more per hundredweight from their highs early this fall, while corn is up over $1 per bushel during the same time period. Very few people predicted this rapid rise in corn prices, but yet here it is. So, what does the future hold?
Ethanol Industry Consuming More Corn
It's no secret that the ethanol industry has been expanding rapidly. There are currently 109 ethanol plants in operation in the United States, another 56 under construction, and 7 in the process of undergoing major expansion. The plants currently in operation have the capacity to produce slightly more than 5.25 billion gallons of ethanol annually. Those plants under construction and in expansion (most of which will be completed in the next 12 to18 months) will add almost 4.4 billion gallons annually to that capacity.
The ethanol industry standard is 2.7 to 2.8 gallons of ethanol per bushel of corn. Like any business, some producers are more efficient than others. If we use an average figure of 2.75 gallons of ethanol per bushel of corn, the plants currently operating will use approximately 1.85 billion bushels of corn and those under construction will use an additional 1.49 billion bushels. Recent USDA estimates of the 2006 corn crop have the harvest pegged at 10.745 billion bushels. Using that figure, current ethanol plants are consuming 17.2% of the 2006 harvest. The new plants will consume an additional 13.85% of the 2006 crop. The total consumption will be 32.1% of the projected 2006 harvest! This is a staggering figure.
It is also important to note that, across the country, many additional plants are undergoing equity drives or are in some form of planning phase. When they are built, it will exert further upward pressure on the corn market.
Ethanol Industry Producing More Distiller’s Grain
The main byproduct of corn-based ethanol is dried distillers grains plus solubles (DDGS). Some of this byproduct is sold wet, but for the sake of this column, we’ll focus on calculations based as if all the byproduct produced is DDGS. A good rule of thumb for DDGS production is about 17 to 18 pounds of DDGS for every bushel of corn fermented in an ethanol facility (roughly 31% of the original weight of the incoming corn).
In the United States, the bulk of the DDGS produced is fed to ruminant livestock (beef and dairy cattle), with some use in pork and poultry diets. The usefulness of DDGS in pork and poultry diets is somewhat limited, however, because the fat level and amino acid profile are not ideal for those species. Also, there is an increasing amount of DDGS heading to the export market. Dried distiller’s grains with solubles will become more and more common in the feed industry, both as a commodity and as an ingredient in commercial feedstuffs. The current limitations are mainly due to pelleting characteristics of feeds produced with high levels of DDGS. In part because of the fat level, DDGS makes a relatively poor quality pellet with a high proportion of fines. However, I feel innovations will eventually make this less of a problem.
Short-Term Impacts on the Beef Industry
The short-term impact on the beef industry should be painfully obvious to producers who still own this year’s calf crop but are wishing they would have contracted these calves in August or taken advantage of some form of price protection. In most cases, $100 or more has been left on the table with the upturn in corn prices. The question on everyone’s mind is whether or not this situation will correct itself in the next few months. I’m not willing to offer a prediction on this one.
Part of the increase in corn prices has been caused by an effort on the part of the ethanol industry to "buy more corn acres" for the 2007 planting season. How long prices will need to stay in the current range for this to be accomplished is an uncertainty. It is likely that significantly more corn acres will be planted in 2007, which should provide some corn price relief; provided there are no weather-related growing concerns.
I am willing to predict that fed steer and heifer carcass weights will likely decline in the next few months as feedlot operators respond to high corn prices. This should be favorable to beef supplies, fed cattle prices, and ultimately to feeder cattle prices. However, how soon this ripple effect will be felt in ranch country is an unknown. High corn prices have already reduced the number of egg sets produced in the broiler industry, and reduced broiler and hog carcass weights. This should also be favorable to the overall meat complex.
Long-Term Impacts on the Beef Industry
There are several scenarios that could unfold over the next few years with regard to long-term impacts. If, in fact, we are in a new era for corn prices, we’ll see shorter feeding periods, more emphasis on yearling cattle, backgrounding, and stocker programs, and less emphasis on calf-feds. We’ll also likely see the value of grass (especially good grass) increase.
On a nationwide basis, the number of beef cows could shrink, while yearling and stocker cattle numbers could increase. How far this pendulum will swing will depend on a number of factors, but a "new plateau" for corn prices in the current trading range will likely force this movement faster than many people think. In areas close to ethanol production facilities, there may be an increase in fed cattle production. This would be a major structural change in the industry and would not happen overnight.
Some ethanol plants are investigating alternative uses for DDGS. These include additional fermentation steps to convert the corn fiber to ethanol and the use of DDGS as a fuel source for the plant itself. If these technologies are widely adapted, there would be a lot less byproduct available as a feedstuff for the livestock industry. I think this scenario is unlikely, except where plants are located some distance from feed markets; but it is a possibility worth watching out for.
One of the major questions facing the beef industry is the impact of feeding large quantities of DDGS (or wet distillers grains with solubles) to feedlot cattle. We know it can be fed at levels up to about 30% of the diet with either no change or improvements in cattle performance and very few, if any, negative effects on beef quality and consumer sensory panel evaluations of taste and tenderness.
The question is, can greater levels be fed and the same results achieved. If higher levels do have negative effects on consumer sensory characteristics of beef, then we have some real challenges ahead of us.
The ultimate outcome is unknown at this point; but be assured, the impacts of increased use of corn by the ethanol industry are going to fuel change. You need to ask: Are you prepared to take advantage of the changes?
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