Ethanol is win-win and win-lose

WEST LAFAYETTE, Ind. – Converting more corn into ethanol would be a high-octane boost to many, but not all, in the agriculture industry.
Corn growers, beef producers and the dairy industry stand to gain from an ethanol boom, according to Purdue University economists Chris Hurt and Otto Doering.
On the flip side, hog and poultry producers, grain elevator operators and grain shippers might be negatively affected. Soybean and wheat growers could go either way.
Thank Uncle Sam. Hurt and Doering outlined possible impacts to agriculture from a new federal renewable fuel standard.
“The standard calls for the production of 7.5 billion gallons of renewable fuel by 2012 – a near doubling of current annual production,” Doering said.
Ethanol and biodiesel are expected to make up most of the 7.5 billion gallons.
To meet that goal, ethanol plants would use 2.5 billion bushels of corn, an increase in current usage of 1 billion bushels, Doering said.
To put those numbers in perspective, U.S. corn production is estimated at 10.9 billion bushels this year, according to the USDA.
“The renewable fuel standard is very important, because it maintains the federal subsidy on ethanol production, at least through 2012,” Doering said. “That will certainly motivate people to be in the ethanol production business.”
Take a lot of corn. A plant capable of pumping out 100 million gallons a year will go through about 35 million bushels of corn a year.
“A plant able to produce a hundred million gallons of ethanol a year probably is going to increase corn prices at least 10 to 12 cents per bushel within 10 to 15 miles of the plant,” Hurt said.
“That certainly is going to be felt 40 to 50 miles out, as well. It may only be 2, 3, 4 cents a bushel higher at that distance, but there will be some positive influence on prices.”
Let’s plant more. Higher corn prices would encourage farmers to grow more corn, leading to fewer acres of soybeans and wheat, Hurt said.
Depending on market conditions, prices for those grains could rise or fall.
“On the soybean side we’ll probably see a reduction in acreage,” Hurt said. “Our crushing capacity in the state is fixed with the plants that we have, so if the demand stays the same for crushing beans but the supply drops that would say that the price impact would be upward.”
On the other hand, Hurt added, distillers dried grains from the ethanol plants will compete heavily for some of the soybean meal demand at the soybean crushing plants.
“My guess overall is we’ll probably see some weakening of soybean prices.”
Livestock feed impact. Distillers dried grain (DDG) is a byproduct left over when ethanol is extracted from corn.
DDGs primarily substitute for protein in rations for ruminant animals like cows and sheep. In hog and poultry rations DDGs are primarily energy substitutes, making the byproduct less valuable.
“About a third of the corn processed as ethanol remains as DDGs,” Hurt said. “This new alternative feed source could have a more positive impact for beef and dairy producers, while the economic impact to hog and poultry producers will be less, since the negative impact of higher corn prices is not likely to be offset by feeding DDGs.”
He said he growth of DDGs will likely have the largest impact on the animal feed industry “of any event since the advent of soybean meal in the 1940s.”
Hot commodity. Ethanol’s impact on the livestock industry could be far-reaching, the economists said. ”
Where is corn going now, that in a year or two years will not be headed in that same direction? Hurt said.
“Some of that would have gone into the Southeast poultry and hog markets. The Eastern Corn Belt is the largest agricultural shipper of rail cars from one region of the country to the other.”
Thirty-five million bushels of corn represents about 10,000 rail cars of grain that would not be shipped out.
“If one were feeding hogs with 35 million bushels of corn, they could produce more than 2 million head,” Hurt said. “When we have a large new demand like this, there are going to be some current users that will get crowded out.
“And we think that’s primarily going to be the feed users.”
More food for thought. Other possible impacts from higher ethanol production include: