DDG impact is topic of Roundup

By Larry Dreiling

The impact of the burgeoning ethanol market on the cattle industry was a highlight of discussion during the recent annual Roundup at the Kansas State University Agricultural Research Center-Hays.

K-State researchers offered their suggestions to cattlemen facing high corn prices, particularly by feeding dried distillers grains (DDGs).

Dr. Jim Mintert, K-State professor and Extension state leader in agricultural economics, told producers that the dramatic increase in ethanol production has created a big corn crop expansion in 2007.

"In the late 1990s and into the early part of this decade, we've seen ethanol production in the U.S. hover at around two billion gallons a year," Mintert told the gathering of about 150 persons. "In calendar year 2006, ethanol production was in the ballpark of five billion gallons a year. This year, it will be over six billion gallons. Into '08 it will be over eight billion gallons and by 2009, somewhere between 11 and 12 billion gallons."

"I see us having the three largest corn crops on record in 2004 to 2006. The 2006 crop was smaller than the two previous crops, but they're the three largest on record."

A substantial rise in corn prices has unusually also come along with the big crops. Last June, cash corn in Kansas was averaging $2.00 per bushel.

"The last month I have is for February where it was $3.65, this despite these pretty large production numbers," Mintert said.

The production increase in corn is tied to increase of corn production for food, alcohol and industrial usage--that includes ethanol.

"In the 2006-07, we'll be approaching 35 percent of corn production tied to those uses," Mintert said. "For the 2007 crop we may see that approach 40 percent. corn use for ethanol estimated at a little over 2 billion bushels in the 2006 crop year, should approach 3.5 billion bushels for the 2007 crop year.

"This means we're going to see a rise in corn acreage. Last year, we planted 78 million acres of corn and the planting intentions report indicated about 95 million acres was planted for 2007. That's an increase of 15 percent and about two percent more than the trade had predicted."

Acres aren't a fix

The question Minter posed is: Will planting 90 million acres solve the problem of high-priced corn for cattle producers?

Probably not, Mintert said.

"When we see a run-up in corn prices it's usually a short-term phenomenon. Usually, it's a supply shortfall that causes an increase in prices, like with a drought," Mintert said. "In the next crop year we expand corn planting, yields rebound to normal levels and by the following year we have the supply situation back in line and prices collapse."

Examining trends Mintert sees corn yields in 2007 increasing about five bushels to the acre to 154 bushels per acre. Combing yield and acreage, Mintert sees total corn production at 12.8 billion bushels.

"As you start tracking the usage, we'll continue to have relatively tight supplies unless yields go higher than 154 bushels. At six or seven percent, that's a historically tight supply figure usually associated with low production, rather than high production," Mintert said.

"Higher corn prices are with us to stay. We can debate exactly how high, but we are looking at sharply higher corn prices relative to what we've experienced for a long, long time."

More price spikes seen

In the years Mintert has studied corn prices, he said he's seen only one year, 1996, where corn prices spiked to an extremely high level, $4.75 per bushel. He sees more spikes in prices ahead, particularly if the Renewable Fuels Standard is increased.

"We currently have the renewable fuels standard at 7.5 million gallons, which we'll blow the roof off that pretty soon and we're seeing proposals in Congress to increase it even more," Mintert said.

"What that does is make ethanol plants unresponsive to corn prices. If we haven't hit the mandate yet, how much can that ethanol plant pay for corn? They're going to outbid the livestock and export markets until they hit those usage totals. That substantially increases the likelihood of price spikes.

It also means livestock producers will need to be a lot more aggressive about managing corn price risk than ever before, Mintert said. There will be a lot more input price risk in the future.

"High feed grain prices are the 'new reality,'" Mintert said. "High corn price volatility is also the new reality. Incorporating DDGs can reduce your costs."

Seek DDG opportunities

Mintert said cattle producers should seek opportunities for purchasing DDGs since they often are priced as a low-cost high protein and energy feed. Distiller's grains complements low quality forage, including winter feeding programs such as grazing crop residue; feeding mature, poor quality grass hay; and feeding on drought stressed pastures. DDGs, Mintert explained, may also be used to extend summer pastures to carry more cattle on the same acres.

University of Nebraska researchers, Mintert said, found feeding supplemental DDGs reduced heifer wintering costs $10.47 per head on winter range in Nebraska compared to a conventional hay-based system.

"The study found savings from reduced hay and labor costs and cows had the same pregnancy rates--97 percent--as conventional hay," Mintert said.

Quoting an Iowa Beef Cow Business Records report, conventional feeding offered an average winter feed cost per cow of $1.01 per day. Mintert said feeding corn stalks with supplemental distiller's grains can cost much less.

"Baled corn stalks run $17 to $25 per ton," Mintert said. "Dried distillers grains, $70 per ton. "Taking into account processing, feeding loss, or vitamin and mineral supplements, late gestation costs would be 38 to 51 cents per animal per day, with early lactation costs at 57 to 72 cents per day."

Cattle feeding moves

That low-cost feeding scheme may mean the upper Midwest, with its large concentration of ethanol plants producing DDG by-products, will encourage feeding expansion to the north of Kansas, Mintert said..

"What you have to consider is that most of the ethanol plants in the country are within 250 miles of Des Moines, Iowa. It's what I consider the center of the ethanol universe," Mintert said. "That suggests to me that people in the upper Midwest are going to have a comparative advantage because of access to lower cost feeds. It's something we're going to struggle with in the future.

"The Kansas cattle feeding industry has been a beneficiary of gaining size over the years. The question is will this be true in the future?"

Already there are signs of states with large numbers of ethanol plants gaining on Kansas for cattle feeding. According to Mintert, the differences between the fourth quarters of 2005 and 2006 tell the story, with Kansas minus Iowa placements of cattle on feed dropping by 174,000 head, Kansas minus Nebraska placements by 165,000 head and Texas minus Nebraska placements by 195,000 head.

"I don't want to put too much emphasis on one quarter's data, which is random and not explainable by corn price relationships, but you have to be concerned about future expansion of the feeding industry north of Kansas rather than on the South Plains," Mintert said. "It could be one of the key things to look at as we move ahead."

Larry Dreiling can be reached by phone at 785-628-1117 or by e-mail at ldreiling@aol.com.

4/23/07

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