Ethanol Production and Corn Prices: Implications for Dairy Producers in Utah

Dr. E. Bruce Godfrey
USU Extension Farm Management Specialist

I had the opportunity of being in Texas several weeks ago. During lunch one day, two of my colleagues were visiting about the number of ethanol plants that were being built in the mid-west and what this implied about the price of grain and the economics of cattle feeding operations. These developments were only vaguely familiar to me so I listened closely to their conversation.

One indication of the interest in ethanol production in the mid-west is the number of plants and their capacity that are currently in operation compared to the number of plants and their capacity that are under construction. Data from the Livestock Marketing Information Center (LMIC) working group that is evaluating the impact of ethanol plant construction indicates that there are currently 24 plants in (or near) Iowa with a capacity of about 950 million bushels. This compares to the 58 plants that were under construction or announced by mid-August. These new plants had a capacity of over a billion bushels of corn. This would more than double the use of corn for production of ethanol in Iowa. This use would also be nearly equal to Iowa�s 2004 corn crop of 2.2 billion bushels. These plants, and others that are expected, could therefore use essentially all of the corn produced in Iowa. A map of the state of Iowa that outlines the location of the plants that are or will be in production indicates that almost every county would be covered by at least one ethanol plant. This trend is not unique to Iowa. To say the least, ethanol is a �hot topic� in the mid-west.

This development however, got me thinking. What impact will this high demand for corn have on the price of feed that milk producers have to pay? Will the demand for corn as a source of energy drive the cost of grain up enough to make milk production less (un) profitable? A presentation by John Lawrence of the Iowa Beef Center provided some preliminary answers.

One of the primary by-products of ethanol production is distillers grain. Over 30% of the corn used for ethanol becomes distillers dried grain (Kiplinger Agricultural Letter, August. 25, 2006). This feed can be effectively used by ruminant animals including dairy cows. It is also a major feed source for finishing animals for slaughter because it is an excellent source of protein, energy and several minerals. Research in the mid-west indicates that distillers grain can replace essentially all protein supplements in a dairy cow diet that is 50% forage (alfalfa and corn silage) and concentrate diet. The publications I read also indicate that wet distillers grain has higher feed value than the dried product and that drying the distillers grain is relatively expensive. One can therefore ask, �so what.� The bottom line is that the price of corn and similar grains used in livestock rations will likely increase in the future as these grains are used to make ethanol. But the by-products of this process will result in a feed source that will likely be relatively inexpensive. The ability of producers in the mid-west to use wet distillers grains will favor production in that area because producers in other areas will need to use dried distillers grains, but it is unlikely that they have the capacity to use all of the distillers grains that will become available. All of this suggests that producers in Utah will need to begin to consider distillers grains, if you haven�t already, as a major source of feed in the future. Contact your nutritionist about using this feed. In the short run other feed sources (e.g., barley) need to be considered and compared to the use of dried distillers grain. As new ethanol plants come on line and begin to use a larger percentage of corn being produced, distillers grains are expected to become an increasing important source of feed.

One other indication of the expected demand for corn is currently manifest in the futures market. For example, as one writer indicated �storage bins are like a license to print money this year� (Doane�s Agricultural Report, August 25, 2006). As a result, harvest selling is expected to be light. This suggests that prices will be at their low point this fall. Producers who are able to do so should therefore seriously consider either: (a) purchasing corn that they plan to use in the coming year this fall instead of waiting until later in the year; or (b) hedging the purchase of this grain. The futures market also suggests that corn prices in the fall (September) of 2007 are expected to be nearly a dollar higher than they are today. This suggests that dairy producers will likely be faced with increased feed costs in the coming year when milk prices are not expected to increase at a similar rate.

Editor�s Note: We will be providing more information on this topic in the future. ©