When gasohol came onto the scene in the early 1980’s and proponents worked hard to introduce it to motorists, gasohol came with some baggage. At the time it was wet corn gluten meal and was widely known as a “by-product” of ethanol refining. Because of its perishability and cost of transportation, it usually raised the overall cost of ethanol. But as its problems were worked out, it became a “co-product” of ethanol refining and had its own value. As ethanol began to be refined in dry mills, the “co-product” became distillers’ dried grains or DDGS and its plays one of the leading roles in the livestock feed market. So the question of the day is what happens to DDGS supply, demand, and value if the EPA changes the maximum ethanol blend to something more than 10%?
Would conventional wisdom say that more ethanol would mean more DDGS and more DDGS would mean lower prices and lower costs for livestock producers? In the past couple of years livestock producers have taken a hard line against ethanol because of its impact on corn prices, but would an increased supply and lower cost alternative change any feelings?
Kansas State University economist Dan O’Brien explored the impact of the potential expansion of the blending limit on supplies and use of both corn and DDGS. One of his initial assumptions is that corn and DDGS are equal substitutes in livestock feed rations on a pound for pound basis; and he also assumes that feed demand will be maintained at the expense of corn exports. O’Brien also assumes that ending stocks will not drop much below 900 million bushels and that DDGS is totally consumed by the end of the marketing year.
O’Brien says each 1% increase in the ethanol blending rate will require 1.3 billion additional gallons of ethanol. While he says the industry may not be able to meet the initial year demand, it will fulfill subsequent demand for the balance of the decade and surpass 21 billion gallons with 15% ethanol by 2015. Based on a production rate of 2.8 gallons of ethanol per bushel of corn, each 1.3 billion gallons would require 464 million bushels of corn. That would produce an extra 4 million tons of DDGS for each 1% increase in the blend rate.
If the blend limit were raised by EPA to 12%, O’Brien says exports would drop about 26% and corn ending stocks would be about 14%. But he says it would take further adjustments in reducing exports to maintain a sufficient carryout. An additional 929 million bushels of corn would be used along with enough DDGS to equate to nearly 200 million bushels of corn. He says the net result is tighter corn supplies than with a 10% blend and part of DDGS that are produced will compensate for the reductions in corn exports.
If the blend limit was raised to 15% ethanol in the gasoline supply, O’Brien says major changes would occur with DDGS production, feed use and exports. It would mean a 69% cut in corn exports from the current 2 billion bushels. Ethanol would require an additional 2.3 billion bushels of corn, and DDGS use would increase by an equivalent to 621 million bushels of corn. While increased DDGS will not offset reduced corn feeding, O’Brien says part of the increased amount would have to be exported. Under the 15% rate, the stocks to use ratio will drop below the 6% rate for the latter half of the decade.
O’Brien said the projected tightening of US corn and DDGS supplies would create more volatile corn prices, and any weather or disease threats would spark more market concerns. The reduction of corn available for export would have marked consequences on the world feed market, since 56% of world corn exports are from the US. He says there is uncertainty whether domestic or foreign use of corn and DDGS would be more affected, and how it would affect farm profitability and sustainability.
Summary:
If the EPA allows an increased ethanol blending rate, the decision will have an impact on the supply of DDGS, which is obtained from dry milling plants producing ethanol. Compared to current production with a 10% blend rate, increases to 12% or 15% will ratchet down the amount of corn available for export, in an effort to maintain a 1 billion bushel carryout. The reduced amount of corn will result in more price volatility, particularly if there is a weather or disease threat to the corn crop. The change will also have a marked outcome on the world supply of corn, since the US provides more than 56% of the global trade in corn, and that would be cut by more than 70%.