Economist: Distillers grains could replace ethanol as main product

Source: By Terry Anderson, Midwest Producer News Editor • Posted: Monday, January 28, 2013

LINCOLN, Neb. – Surprise results are nothing new in research. What was thought to be a potential product turns out not to be. Conversely, a sleeper may emerge from the research.

Distillers grains have been a by-product from ethanol production. Its use has grown among livestock feeders throughout the United States and to some degree abroad.

Now, an agricultural economics professor at the University of Nebraska-Lincoln says what has become a co-product could become the main product.

“We’re set on ethanol as the product and distillers grains as the byproduct, but that could shift,” said Dennis Conley, who is director of UNL’s graduate program in agribusiness. “Distillers may become the product and ethanol the byproduct. (Plant owners and managers) are figuring out ways to make money.”

Conley spoke Jan. 25 at the Nebraska Ethanol Board meeting held on UNL’s East Campus.

Todd Sneller, the board’s administrator, said he isn’t surprised.

“That mindset has begun in some markets,” he said.

Co-products of ethanol production include corn oil, carbon dioxide and distillers grains, a high protein, high energy animal feed consumed primarily by dairy and beef cattle. Three percent of revenue for Cardinal Ethanol in Indiana last year came from corn oil sales.

“While the primary product for the foreseeable future will continue to be ethanol, we are seeing a move toward a more diversified product stream,” stated Geoff Cooper, vice president of research at the Renewable Fuels Association. “In the third quarter of 2012, plants were commonly getting 25 or 26 percent of their revenue from distillers grains … something we’ve not seen in the past. Typically it’s been 15 percent to 17 percent if you look back five to seven years.”

Ethanol production plants have struggled at times, some shutting down permanently, others idled temporarily and some have been sold, sometimes from local ownership to larger companies.

If distillers grains continue to put pressure on ethanol production, Conley says there could be a second new normal for the price of corn, the main input for plants in Nebraska.

“If the trend line on corn continues as it has the past 20 years, the price per bushel could be off the chart,” he said.

Nebraska is one of 12 states that produce more distillers grains than it uses. Surplus states are determined by the number of animals’ maximum consumption compared to the amount produced. Conley said it’s not surprising that a map of surplus states is nearly identical to states’ corn production.

Deficit states, those that need more distillers than they produce, get some from the surplus states. Anything left heads to any of 14 U.S. export cities.

Mexico’s use of distillers grains has increased over time. Canada imports U.S. corn but could shift more to distillers grains. China, however, is the leading importer of U.S. distillers grains, partly because of the huge numbers of hogs and chickens being grown there to feed the expanding middle class.

About a dozen countries import 65 percent of U.S. exports of distillers grains, Conley said.

Corn prices in the 1960s stayed steady at about $1 per bushel because of government storage programs. In 1973, the Soviet Union bought U.S. corn, wheat and soybeans, and prices doubled.

In fall 2006, the price doubled again, to about $6 per bushel, with a wider variability, but still within the 20 percent range that has remained for decades.

A second new normal for corn prices could be established with several situations, including increased exports of distillers grains, continued weakening of the dollar, low carryover stocks and ease of shipping distillers grains if they are made into pellet form.

Conley noted that China is refilling its shipping containers with distillers grains for the return trip across the Pacific Ocean.

The economist said his research was triggered while watching export numbers for distillers grains.

“We can track distillers exports monthly, to China, to Mexico. We can see the growth,” he said. If exports continue to increase, corn prices would probably go even higher.

Nebraska Director of Agriculture Greg Ibach and other agriculture officials have visited China and say the Chinese are astute at trading distillers grains.

There remain enough variables to not be certain if this scenario will actually happen in the next five years or so, but it will promote some adjustments in how crops and livestock are produced.

“Seed companies know fewer bushels of corn are needed to produce ethanol,” Sneller said. “This may change that because ethanol production won’t be driving the market.”

Livestock feeders, already affected by the increasing price of corn to feed their animals, have turned to distillers grain as an alternative for the feed bunk.

Because of the drought, animal feed supplies already are tighter than usual. “There is strong demand for all animal feed products, distillers grain being one of those,” RFA’s Cooper said. “We saw record corn prices in the summer and early fall of 2012. If you have high corn prices, you have high distillers grain prices. There is very strong demand for it.”