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Ethanol Expansion in the United States - How Will the Agricultural Sector Adjust?

by 5m Editor
11 June 2007, at 12:00am

By Paul C. Westcott, a report from the Economic Research Service, USDA.

Abstract

A large expansion in ethanol production is underway in the United States. Cellulosic sources of feedstocks for ethanol production hold some promise for the future, but the primary feedstock in the United States currently is corn. Market adjustments to this increased demand extend well beyond the corn sector to supply and demand for other crops, such as soybeans and cotton, as well as to the livestock industries. USDA’s longterm projections, augmented by farmers’ planting intentions for 2007, are used to illustrate anticipated changes in the agricultural sector.

Introduction

Ethanol production in the United States totaled almost 5 billion gallons in 2006, about 1 billion gallons more than in 2005. While this was a significant increase, further expansion in the industry is continuing, with production expected to exceed 10 billion gallons by 2009. This large and rapid expansion of U.S. ethanol production affects virtually every aspect of the field crops sector, ranging from domestic demand and exports to prices and the allocation of acreage among crops. Many aspects of the livestock sector are affected too. As a consequence of these commodity market impacts, farm income, government payments, and food prices also change. Adjustments in the agricultural sector are already underway and will continue for many years as interest grows in renewable sources of energy to lessen dependence on foreign oil.

Livestock Production Reduced

Higher corn prices affect the livestock sector because of corn’s importance as an animal feed. In response to higher corn prices, red meat production declines and growth in poultry output slows in the United States, particularly during the next several years as ethanol production ramps up. Higher corn prices reduce the profitability of meat production, although the greater availability of distillers grains from dry-mill ethanol production partly offsets this effect.

Effects are different across the livestock types due to differences in feed conversion efficiencies and the ability to use distillers grains in rations. Ruminants can use distillers grains more readily than monogastric animals, which favors use by beef cattle over hogs and broilers (see box, “Livestock Feed Use of Distillers Grains”). However, broilers and hogs are more efficient feed converters than cattle. Although cattle feeding practices can adjust to higher corn prices by keeping animals on grass to heavier weights before entering feedlots, feed requirements for finishing weight gain for beef cattle are the highest among these meat animals.

Livestock Feed Use of Distillers Grains






With expansion of the U.S. ethanol industry and higher prices for corn, a reduced share of the corn crop is used directly for domestic livestock feeding. However, distillers grains, a coproduct of dry-mill ethanol production, can be used in livestock rations.

Ruminant animals, such as beef and dairy cattle, can use distillers grains more readily. Meanwhile, distillers grains are less suitable in rations for monogastric animals, such as hogs and poultry. Thus, the growth of ethanol production and increased supply of distillers grains result in different adjustments across U.S. livestock industries.

Distillers grains produced in a dry-mill ethanol plant are relatively wet, with as much as 65-70 percent moisture content. This coproduct can be used in livestock feed wet or can be dried and used in a form with lower moisture content. Using wet distillers grains avoids drying costs, but increases handling costs. Also, wet distillers grains must be used relatively quickly to avoid spoilage, limiting how far they can be transported. Dried distillers grains incur costs of drying, but can be shipped over greater distances, including for export. For each 56-pound bushel of corn used in the production of ethanol, about 17.5 pounds of dried distillers grains (or wet-product equivalent) are produced.

Whether used in a wet or dried form, distillers grains used in livestock feed replace some direct corn use, as well as soybean meal in some animal rations. Animal nutrition studies suggest optimal inclusion rates of 30-40 percent for beef cattle rations, although higher rates can be used (Vander Pol et al.). Recommended maximum inclusion rates are 20-25 percent for dairy, 20 percent for growing and finishing hogs, and 15 percent for the grower and finisher stages of poultry feeding (Anderson et al., Shurson et al., and Lumpkins, Batal, and Dale). These studies also indicate that distillers grains (on a dry matter basis) can replace corn in beef cattle rations pound for pound; dairy rations, 1 pound distillers grains for 0.45 pound corn; hog rations, 1 pound distillers grains for 0.85 pound corn; and poultry rations, 1 pound distillers grains for 0.55 pound corn. For each animal type, other feed components are adjusted to rebalance the ration. Protein adjustments affect soybean meal feeding for hogs, poultry, and dairy cattle. Most distillers grains used for cattle feeding displace urea rather than soybean meal as the protein source.

Based on these results and other assumptions, distillers grains from each bushel of corn used to produce ethanol substitutes for about a fifth of a bushel of direct corn feeding in livestock rations. Since beef cattle are large users of distillers grains, only a small reduction is expected in soybean meal use due to the substitution of distillers grains in rations.


Figure 14
Red meat and poultry production slowed by higher corn prices

Source: USDA Agricultural Projections to 2016, February 2007.


With reduced production, prices for meats at both the producer and retail level rise, and per capita consumption declines. Since beef cattle can use distillers grains most readily, an important development will be how feeding performance and beef quality are affected if distillers grains are included at greater than 40 percent of beef cattle rations.

A related issue in the livestock sector has been the variability of distillers grains from different sources and from the same source at different times. This lack of consistency in nutrient content makes determining the best inclusion rate for distillers grains and the overall feed formulation for livestock rations more difficult. Over time, adjustments in the market for distillers grains are likely to address these concerns (see box, “Potential Market Adjustments to Variability of Distillers Grains”).

Potential Market Adjustments to Variability of Distillers Grains




Variability of distillers grains makes their use in animal rations more challenging. Consistency in the nutrient makeup of feed is important to ensure the overall balance in rations. Both supply and demand adjustments can address this problem.

On the supply side, this variability has resulted in part from ethanol producers focusing more on the production of ethanol than distillers grains. Since ethanol production has been so profitable, distillers grains have been considered an economic “byproduct” by ethanol producers. Once ethanol margins narrow, however, ethanol producers will have a greater incentive to pay more attention to the value of distillers grains and thus treat it as an economic “coproduct.” These economic incentives suggest that adjustments in the ethanol production process will improve the consistency of distillers grains for use in the livestock sector.

Adjustments can also occur on the demand side. The increased quantity of distillers grains now available for feed use is a new market development. As the market develops further and variability of distillers grains is reduced, the livestock sector will become more familiar with the product and learn how to better manage it in ration formulation.



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May 2007