Cattle ranchers encouraged to work with ethanol industry

April 16, 2011

EDMONTON, AB, Apr. 16, 2011/ Troy Media/ – Cattle prices have increased recently, but all is not well in the industry. The improving price can largely be attributed to demand recovering after a sharp reduction in herd sizes. High feed costs had been eroding cattle farmer’s profit margins for some time and now it looks like they might be back with a vengeance.

Some of the industry’s woes have been attributed to government support of the ethanol industry, which has been accused of bidding up the price of corn. It might sound odd then to hear that many regions in the U.S. are encouraging cattle ranchers to work with the ethanol industry in order to lower their own costs and keep their industry healthy.

A real grind

An ethanol plant grinds corn into a powder and adds water and enzymes to break down the starch. Other ingredients are added before it is heated, fermenting the mixture, and the sugar content is then converted into ethanol. The remaining solids that are left over from the process are called distilled grains and soluble (DGS), which are then dried to be used as animal feed that is very high in energy and protein relative to corn. Feedlots can then replace up to 40 per cent of total ration dry matter in their feed rotation with the DGS.

The moisture content of the DGS makes an important difference. In order for the DGS to be transported and stored the same as any other agricultural commodity, it needs to be dried, but if it is to be used locally it can remain wet. The wet-DGS will also have better nutritional properties. The increased costs associated with drying, transportation and storage results in dry-DGS being significantly more expensive ($65/ton for wet vs. $210/ton for dry according to the United States Department of Agriculture).

The key point is that feedlots located near ethanol plants will have a significant cost savings advantages. This doesn’t only come from the reduction in the need to compete with ethanol producers for corn, it also reduces the need to purchase another expensive input, soybean meal (although there are minor added expenses related to the management of manure). Of course, how much savings are realized depends on the relative prices and inclusion rates but, back in 2007, Dr. Allen Trenkle of Iowa State University estimated that, for each $0.25 increase in corn, the value of wet-DGS as a feed for finishing cattle increased $3.75/ton.

Needless to say, the prevailing economics in the United States has resulted in a greater interest in feedlot/ethanol plant joint ventures – especially in regions that are over 100 miles from major ethanol plants. This gives the farmers better assurance that the ethanol co-product being produced, the wet-DGS, is of sufficient quality while at the same time substantially reduces storage and transportation costs. In short, the two are fairly symbiotic given their common demand for corn.

Major risks in investing in ethanol plants

There are a couple major risks in investing in ethanol plants, however. Without the ethanol producer subsidy, which might soon be scrapped, some plants might not be economically viable if the price of crude declines – especially if they didn’t receive capital subsidies to build the plant. The government is also calling on most of the increase in production to come from second generation cellulosic ethanol (such as switch grass). In either case, the economics of building a joint feedlot/ethanol plant change dramatically, but many are taking the plunge nonetheless.

Feedlots in Western Canada tend to use barley as opposed to corn, but with year-over-year feed barley prices up 33 per cent they face many of the same problems as their American cousins (if not more, when you include the high value of the Canadian dollar).

Currently there are no large scale ethanol plants in Alberta, but there is a $200 million dollar wheat-based ethanol plant scheduled to be constructed in Innisfail. If it finally gets built it will be thanks to large public subsidies, but there might be some benefit to feedlots in central Alberta who would be able to incorporate much of what is already being learned south of the border to help lower their costs.

Will Van’t Veld is an economist with ATB Financial.