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Ethanol's overlooked source of food supply

Chicago, 5 April 2011: Reuters

Ethanol producers often get much of the blame for driving the price of corn to its current multi-year high levels due to that industry's strong usage of corn to make fuel. But critics overlook the growing production and distribution of Dried Distiller's Grains (DDGs), a by-product of ethanol output used in animal feeds as an alternative to corn.

Lax reporting of DDG sales and shipments make it hard to quantify the exact degree of corn displacement by DDGs, but with DDG output projected to be more than 40 million short tons in 2011 - or the equivalent of over 1 billion bushels of corn - their supply contribution to the feed industry is substantial and worth tracking.

FOOD FROM FUEL

Contrary to popular opinion, the ethanol manufacturing process does not take corn out of the food stream entirely. It is estimated that between 15 and 18 pounds of DDGs are produced for every bushel of corn used to make ethanol. And with 4.95 billion bushels of corn set to be consumed by ethanol producers in the current grain marketing year, that equates to around 40 million short tons or 1.4 billion bushels of corn-equivalent feed.

In other words, between a quarter and a third of the corn crop's matter re-emerges from the ethanol manufacturing process as a nutrient-rich product highly suited for inclusion in animal feeding rations.

Indeed, DDG's can contain higher protein and energy levels than traditional corn feed, and can cause fewer digestive issues because of lower starch content. But the relative newness of DDGs as an abundantly available feed ingredient has meant that many feedlot managers have had very little experience in accommodating the product in large quantities within animal diets. This has resulted in uneven uptake levels across the animal feeding industry, with cattle and dairy producers - who routinely feed their herds large quantities of corn - proving faster adopters of DDGs than hog and poultry farmers, who rely on more balanced animal diets and often need to vary feed components over the course of an animal's life.

That said, extensive studies have been conducted at U.S. university farm extension offices on the impact of varying quantities of DDGs in animal diets, and findings suggest that most feed rations can accommodate double-digit proportions of DDGs and deliver improved animal weight gain rates as well as improved economics while reducing expenses on corn feed.

Still, feedlot managers remain cautious about experimenting with DDG ration mixes for fear of herd weight gain or health issues, and have enduring concerns about the variability in DDG quality and how that may impact animal appetites.

This conservative approach to DDG uptake means the feeding industry has far from reached capacity in terms of DDG demand, and highlights a continuing need for improved animal science studies on the optimal proportion of DDGs in animal diets.

SHODDY BOOKKEEPING, CAUTIOUS BUYERS

The cautious behavior of feedlot managers also reveals a demand for better quality control metrics regarding DDG production and sale, as many batches of DDGs continue to be peddled by ethanol manufacturers as if they were a residual product from the ethanol production process rather than as a key commodity in its own right with its own established market.

This behavior results in wide variations in the quality and consistency of the DDGs produced, which are not immediately discernible to would-be buyers but have the potential to be detrimental to the herds that product is being fed to.

Some of the quality fluctuation can be attributed to the state of the corn going into the processor to begin with, and over which the ethanol plant operator can have little influence.

But a lack of any standardized grading system that can be applied to all batches of DDGs to ensure potential buyers understand what they're paying for is also to blame, as there remains a certain randomness to DDG shipments that does not induce confidence among feedlot managers where consistency in nutritive impact can often take precedence over price.

DATA FOG STARTING TO CLEAR?

Much of the lack of quality control stems from a lack of general accounting as to the amount of DDGs produced in total. Unlike in the grain market, where the U.S. Department of Agriculture conducts a monthly survey of national supply and demand of agricultural products, or in the energy market, where the Energy Information Administration provides regular updates on the state of production and reserves of energy products, no single institution has taken ownership of reporting on the state of DDGs.

This lack of any organized accounting of production, inventories and sales of DDGs has led to the current state of fragmented reporting of shipments, no enforceable quality controls and little understanding at the end user level of how DDGs may impact their operational efficiency.

But strides may to be underway at the governmental level to start to take a more organized approach to reporting on DDGs. Recently, the USDA reported that it was reviewing how it "can better clarify the use of corn in ethanol production as reported in the balance sheet." It added that currently the corn balance sheet reporting stops once corn has entered the processing system, but that processed corn products contribute significantly to livestock demand.

"Accurately accounting for co-product use is complicated and imprecise. The degree to which corn co-products replace other feedstuffs is not clear. Various co-products have different uses and substitution rates in rations among species. The same applies at different stages of growth within species," it added, revealing that discussions are underway to try to get a better handle on the extent to which corn co-products interact with corn grain the supply and demand arena.

Due to the complications noted above by the USDA, it may be some time before a more concrete set of guidelines and reporting systems emerge on the DDG market that allow it to be better understood by key market participants.

But the fact that the USDA has acknowledged that it is an area worthy of closer examination highlights the significance of the supply contribution made by the ethanol processing industry, and may start to set the stage for a more enlightened discussion about the real impact of ethanol on the U.S. food production industry.

Ends --


By Gavin Maguire, Reuters market analyst. The views expressed are his own.