Monday, May 31, 2010
Whether Livestock Feeders Are Using Corn Or DDGS, Watch For An Increase In The Ethanol Blend Rate.
Sometime this summer the US EPA is scheduled to announce its decision on whether the amount of ethanol in motor fuel can rise above the current 10% cap. While the proposal is for a 15% blend, the increase may come in steps or could be capped somewhere between 10% and 15%, if an increase is approved. While this is desirable to the corn grower organizations and the ethanol refiners, there are some potential impacts on the supply and demand for corn, for distillers dried grains, and the pricing of the two feed products. If you are feeding livestock, will your DDGS be cheaper or more costly?With a 10% cap on ethanol in motor fuel, the so-called “blend wall” is reached when 14 billion gallons are produced to meet the demand of the 140 billion gallons used for gasoline. For all practical purposes, we have reached the “blend wall” and the EPA was asked for the authority to increase the blending rate above 10%. Kansas State University economist Dan O’Brien and Iowa State University economist Bob Wisner explored the impact on feed purchased by the livestock industry should there be more free supplies of corn or if there is a larger supply of DDGS accompanying a higher blend rate.
At the outset, the economists say there will be enough livestock in the US to make use of the DDGS produced from a 10% blending rate, as well as for an 11% blend and a 15% blend. They also say if DDGS replaces corn pound for pound, but is priced at 88.5% of the price of a pound of corn, then the cost savings for the livestock feeders through the next 10 years will be over $600 million annually for E-10, about $700 million annually for E-11, and over $900 million annually for E-15.
For the purposes of comparison of the different formulations, Wisner and O’Brien equated corn and DDGS and treated them as a single supply of feed for livestock.
1) For an 11% ethanol blend, and keeping corn production, exports, and ending stocks constant, the increased formulation has a small impact on corn supply and use over time. It would require 470 million more bushels of corn annually and DDGS use would increased by 110 million bushels annually. There would be a tighter corn supply than with a 10% blend because the increased DDGS use will not fully offset the lower use of corn.
2) For a 15% ethanol blend, and keeping corn production, exports, and ending stocks constant, the amount of extra corn refined into ethanol would be 2.32 billion bushels, but there would be a 2.52 billion bushel decline in corn being fed to livestock. There would be an increased use of DDGS by a 560 million bushel equivalent annually.
3) For a 15% ethanol blend, but with a 1.25 billion bushel decline in exports and a 500 million bushel decline in carryout, then the 2.32 billion more bushels being refined for ethanol would lead to declines of only 510 to 570 million bushels being fed to livestock. However that amount would be replaced by 560 million bushels of DDGS equivalent.
Wisner and O’Brien based their projects on USDA’s current 10 year economic projections. They also assumed that for each 1% increase in the ethanol blend, then 1.3 billion gallons more ethanol would be produced annually. When that occurs an additional 464.3 million bushels of corn are used and 3.95 million tons of DDGS are produced.
There is no secret that different livestock species can tolerate different levels of DDGS inclusion in their ration. Based on USDA’s projection for the US livestock herd over the coming decade, the dairy industry will be consuming 10.9% of DDGS, beef cows will consume 17.2% of DDGS use, other cattle will consume 24.7% of DDGS supply, cattle on feed will consume 26.8% of the DDGS supply, hogs will consume 7.l4% of the DDGS supply and poultry will consume the remaining 13%.
Wisner and O’Brien say when DDGS is added to the corn supply on an equal basis, then ending stocks would be about 1.9 billion bushels for the current corn marketing year, and that amount fades slightly to 1.76 billion over the course of the next 10 years. But would that amount decline faster if higher rates of DDGS were fed? The economists say livestock feeders now are feeding more DDGS then when they were surveyed in 2007, but it is less than what could potentially be fed according to maximum limits for each livestock specie. Since DDGS is priced at 88.5% of the price of corn, the economists say livestock feeders and foreign buyers will spend $518 million per year less on feed and $138 million per year less for exported feed. That represents about 43 cents per bushel savings.
Speaking of pricing, the economists say that if a 15% ethanol blend were allowed by the US EPA, then strong pricing competition would develop between corn and DDGS as the livestock industry, foreign buyers and the ethanol industry compete for the remaining supplies of corn. As a result, they say the capacity for DDGS use is about at its maximum, and there will be local and regional areas where oversupply and saturation problems may occur. Subsequently, the competition between corn and DDGS may affect or eliminate the DDGS price discount to corn.
Summary:
If the nation’s motor fuel supply allows an increased percentage of ethanol, then that means more corn will be used for ethanol refining and more DDGS will be entering the market for livestock feed use. Depending on the percentage allowed, those amounts will vary. If the new blend allowed is as much as 15%, there will be sufficient corn to supply the ethanol demand and a sufficient amount of livestock to consume the additionally DDGS supply. However, the capacity will be nearly reached and that will mean some locales will have oversupplies and undersupplies, which will tend to equate corn and DDGS in the pricings, which eliminates the current discount enjoyed by DDGS.
Posted by Stu Ellis on 05/31 at 01:26 AM | Permalink