Nearly all farmers jumped on the ethanol bandwagon when it took off over 25 years ago. They saw its potential to create a new demand alternative for corn that would raise the price. Now that grain producers have been getting a suntan from the ethanol star and livestock producers have been getting a sunburn, it is not hard to see that ethanol has been driving corn prices and its co-product distillers’ dried grains (DDGS) has been driving the feed market.

Government subsidies and mandates, high crude oil prices, and the need to replace MTBE created the perfect scenario to thrust ethanol onto the stage with a fanfare of rising grain prices. Kansas State University economists Kevin C. Dhuyvetter, Terry L. Kastens, and Ted C. Schroeder analyzed the impact ethanol has had on the Cornbelt economy. They note that corn-based ethanol production has expanded six-fold in the past 10 years, but grew more than 33% just between 2006 and 2007, which they say will impact acreage, grain prices, and DDGS supplies.

As a point of reference, one bushel of corn provides 2.8 gallons of ethanol and 17-18 pounds of DDGS. As of December, 135 ethanol plants were operating with a capacity of 7.42 billion gallons per year. Another 74 were poised to begin operations, adding another 6.06 billion gallons of capacity per year. The economists say, “The key points are that the current economic conditions in the ethanol industry are such that rapid expansion going forward is unlikely. Furthermore, current media reports suggest that planned expansion has dampened the last few months.” Parallel to that, Congress has mandated the production and use of 15 billion gallons per year by 2015, but the economists doubt that goal will be much of a challenge to reach.

To have enough corn to reach the goal will be a point of concern. The economists predict total corn use exceeding 14 billion bushels by 2015 and a need for over 13 billion bushels every year from 2011 forward. That size of crop will depend on acreage and yield, and with yields increasing, they say, “The U.S. does not need to plant as many acres in the next several years as were planted in 2007. However, it does need to plant considerably more acres than the 80 million acres or so that has been planted in the past.” But they also acknowledge that a short crop at anytime will result in a significant bidding war for limited bushels.

Addressing the analysts who say we are in the middle of a price run up and it will fall back, the Kansas State economists say the current high prices are on the heals of some of the largest corn crops in history and they are the result of demand, not a supply shock. They predict, “We will continue to have a strong demand and the market will need to “buy corn acres” by offering higher prices than long-term averages.” And they remind us that ethanol impacts all crops, including hay, and that prices are above their long term averages for as far out as are being traded, with the expectation they are here to stay.

The DDGS co-product is offsetting 18 pounds of corn, but not all animals can consume large quantities of DDGS as they can corn. Another economic study at Kansas State calculated that based on the maximum daily consumption of different type of animals, the average livestock inventory could consume 52 million tons of DDGS per year. With the upward rate of ethanol production (and DDGS production) the 50 million ton mark would be reached in 2016. But not every animal will be forced to eat its share of DDGS, so some would be available for export, and prices would likely fall for DDGS supplies to be cleared out before spoilage occurred. DDGS prices rise, to some extent, along with corn prices, however based on prices of DDGS at a variety of US locations, the $40 variation suggests the basis between corn and DDGS is high.

Summary:
A 13-15 billion gallon ethanol production level will be reached in the next 5-7 years, and 86-90 million acres of corn need to be planted annually, even with the growing trend yield. They predict that crop prices will remain higher than long term historical averages, but there will also be increased variability. Prices of DDGS can be correlated with corn prices, so livestock producers will need to be concerned about feed costs.