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Ethanol's Dark Livestock Legacy

March 1, 2011
By: Catherine Merlo, Dairy Today Western and Online Editor google + 
Nearly 40% of the nation’s 12.5-billion-bushel corn crop this season will make its way to ethanol production.  

What's the biofuel doing to your feed costs?

No matter how Jim Boyle pencils out his feed costs, he can’t find a way to escape the impact of high corn prices on his three Arizona dairies. 

Dairy Today red dot Bonus Content

Flaked corn to feed his milking string has risen to $280 per ton, up sharply from $180 in 2007. Dried distillers’ grains with solubles (DDGS), which account for about 10% of his herd’s rations, have jumped to $240 per ton, more than double what they were five years ago. Even local barley, which he sometimes substitutes for corn, isn’t a great deal at only $7 to $8 per ton less than flaked corn.

"Corn sets the price of everything," says Boyle, who milks 5,500 cows near Mesa and Casa Grande. "It’s had a massive impact on our feed prices. Before, even when there was a bad corn crop, we could expect the corn price to be $2.50 per bushel."

But those days are long gone, now that corn has hit $7 per bushel. Like many dairy producers, Boyle and California’s Peter de Jong blame their escalating feed costs not just on corn’s upward price leap but more specifically on the influence of corn-based ethanol.  

Peter de Jong 2 11 015   Copy
Peter de Jong has cut his corn purchases by half for the 15,000 cows he milks near Hanford, Calif. (Photo: Catherine Merlo)

"Corn prices have been artificially inflated by ethanol’s subsidies, tariffs and mandates, and the help the government gave to build ethanol plants," says de Jong, whose family business, Hollandia Farms, operates three dairies near Hanford, Calif.

"Our costs are up $2.50 per cwt. this year, and that’s largely due to ethanol," he says.

Hollandia Farms, which milks 15,000 cows, has increased its DDGS amounts from 4 lb. to 7 lb. per cow per day. But the ethanol byproduct isn’t the ideal feed, de Jong says, since DDGS provide no starch and their high sulfur, nitrogen and phosphorus levels limit their use.

While de Jong’s feed costs are up 60%, his fuel, land, water, fertilizer and labor expenses have also risen. "That can all be traced to corn, oil and the weaker dollar," he says.

Nearly 40% of the nation’s 12.5-billion-bushel corn crop this season will make its way to ethanol production, up from just 14% in 2005. Nearly 5 billion bushels of corn will be used to produce about 15 billion gallons of ethanol. Ethanol demand for gasoline use is dramatically boosting competition for the yellow-eared crop, affecting costs for food, livestock feed, land and more.

"There is a cause and effect of high corn prices and feed costs, and it’s coming from ethanol," says Normand St-Pierre, a professor and Extension dairy specialist at The Ohio State University. "Ethanol demand has a significant impact on corn prices and everything else. You cannot yank 40% of the corn production in a country that produces about 40% of the total world corn supply without having a substantial impact on the grain and feed markets."

Dairy feed costs spiked 60% from August 2006—not long after the ethanol boom hit—to December 2010, St-Pierre says. Total feed cost in that four-year span averaged $7.35 per cwt., compared to $4.60 per cwt. from January 2005 to July 2006. (These figures are for lactating cows only.) 

Peter de Jong 2 11 013   Copy
Since 2007, flaked corn (right) has jumped $100 per ton, and dried distillers' grain prices have more than doubled. (Photo: Catherine Merlo)

"The difference is even greater when the additional cost of feeding dry cows and replacement heifers is accounted for," St-Pierre says. "Producers used to say that feed costs represented 35% of their milk checks," he adds. "Now they would be happy if those were even at 50%."

The break-even cost of production for dairies nationwide has risen from $13 per cwt. to $17 per cwt., he adds. 

Five years ago, Arizona’s Boyle would have been "terrifically happy" with the milk prices he’s recently received: $17 per cwt. in December; $16.50 per cwt. in January. "Now, we’re not even breaking even," he says. "Ethanol has added $2 per bushel to corn prices."

Ethanol’s impact has radiated beyond corn costs, St-Pierre says. As more land goes into corn production, competition builds for other acreage, driving up prices for soybeans, wheat, alfalfa hay and other forages. Cotton’s dramatic price increase makes it another rival for farm plantings.

"The cost of renting and leasing land has gone up because of that competition," St-Pierre says. "Lease rates have almost doubled in the last five years."

Ten years ago, Ohio farmland was priced at $2,000 to $2,200 an acre, he says. The same land now costs $3,500 an acre.

With corn reserves at their lowest levels in 15 years and demand expected to remain strong, St-Pierre says the nation will be "scraping the bottom of the barrel" for supplies this year.

"We’ll need a record crop to balance supply and demand for corn and soybeans," he says. "The U.S. produces 40% of the world’s corn. If anything goes wrong—rain, drought, heat—brace yourself. We could see $10 corn."

What’s the answer to the
ethanol-feed cost problem?

De Jong and Boyle believe that ethanol incentives, which Congress extended in December, favor the nation’s corn growers at the expense of livestock producers. Those incentives include tax credits for blenders; tariffs on ethanol imports from most countries; and the Renewable Fuels Standard, which mandates minimum levels of biofuels use.

"The entire package of subsidies that ethanol and corn growers receive is ridiculous," Boyle says. "You can’t find a more subsidized industry in the U.S. I’m not in favor of subsidies for dairies either. All that needs to be thrown out the window."

Legislative amendments that seek to block the expanded use of E15 (gasoline that uses up to 15% ethanol) and to limit the amount of ethanol incentives have been offered by Republicans, who are looking hard at budget cuts. Whether these amendments pass remains to be seen.

De Jong says more drilling for oil would help lessen the need for fuel alternatives like ethanol.
Ohio State’s St-Pierre believes margin protection is the best cure for dairies for now. "Try to lock in a margin," he advises, "and don’t look at milk as separate from feed." 

Unpeeling Ethanol’s Influence

Back in 2009, Scott Brown, associate director of the Food and Agricultural Policy Research Institute (FAPRI), could say with some certainty that eliminating all of ethanol’s biofuels policies would lower corn’s price by 53¢ per bushel.

But calculating ethanol’s role in the price of corn isn’t so clear in 2011. Several changes have occurred to alter Brown’s analysis, starting with corn’s dramatic price jump.

In 2009, he calculated that if corn was at $4.04 per bushel, you could subtract 53¢ per bushel as ethanol’s portion if there were no Renewable Fuels Standard, credits or tariffs.

But today, Brown says an across-the-board assumption based on his 2009 research would not be valid, even with the knowledge that ethanol’s incentives were recently extended and corn has leaped to $7 per bushel.

"Getting rid of the ethanol policies wouldn’t lower corn prices to levels we would have seen before the run-up around 2005 when ethanol became a major corn user," Brown says.

In 2005, corn averaged $2 per bushel and U.S. ethanol production consumed 1.6 billion bushels. In 2011, with corn expected to average $5.32 per bushel for the season, ethanol use will reach 4.9 billion bushels.

"Yes, ethanol has had an effect on corn prices," Brown says. "The biofuels infrastructure would likely be different today had we not had these policies. But energy and demand for corn outside the U.S. are also factors in driving corn prices higher."

In 2005, national corn prices averaged $2 per bushel and the U.S. exported 2.1 billion bushels, Brown says. For the 2010/11 crop year, with a seasonal average of $5.32 per bushel, U.S. corn exports are projected at 1.95 billion bushels. "So we’ve more than doubled corn prices and exports have barely fallen," Brown says. "Something is shifting the demand for exports."

While Japan is the largest customer for U.S. corn, China could emerge as a major U.S. corn buyer as it channels purchases to its rapidly growing livestock sector. Drought in other parts of the world, including Russia and Eastern
Europe, has bolstered grain prices. Moreover, oil prices are key.

"Tell me where crude oil is going," Brown says. "If it gets to $100 per barrel, that’s certainly an incentive to turn more corn into ethanol, regardless of biofuel policy. If you believe crude oil will go lower, then the ethanol policies matter a lot more."

Brown, who has taken heat from people on both sides of the ethanol issue, says pinpointing the biofuel’s true impact on corn prices isn’t easy. "You can’t say that corn prices are where they are because of ethanol," he says. "But you can’t say that ethanol hasn’t had an impact either. The answer lies somewhere in between."


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FEATURED IN: Dairy Today - March 2011

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COMMENTS (13 Comments)

NW Iowa Farmer - IA
I prefer ethanol fuel. Anything that keeps money in our country is a good thing.

It's really Ironic the livestock guys are crying about ethanol and how their profits aren't like they use to be. I guess they are introduced to what the grain producers have been dealing with for previous decades. A difficult time in making a profits. Supply and demand is simply telling the diary industry that they are oversupplying if they can't make money producing milk. Looks like it is the time for the inefficent diaries to get out, and let those who can produce milk and make money continue on. Hearing this 15,000 head dairy cry makes me sick. It's like hearing a 30,000 acre grain producer telling everyone that he just can't make it yet is over 60 tims larger that the average size family farm of 500 acres on which a family makes a living. Maybe the person who's greed lead them to having to be this large will be the undoing of them. I just can't believe this guy want's to cry when he's got 60 times what a normal person has. I have an Idea. If he can't make money sell the 15,000 head of milk cows for $1,500 each take the $22,500,000 and live a comfortable life on 1% intrest giving you $225,000 a year. That way you will be under the Obam limit of $250,000 and not have to pay the high taxes. Milk prices will start to come down and the rest of the industry can make enough money to survive.
12:29 PM Sep 29th
Gary - Menlo, KS
Why are all commodities up? Because the Federal Reserve is inflating the dollar to worthlessness with Quantitative Easing 1 and 2. The FED currently "buys" 70% of all US Treasuries. Crude oil is not high because of a production shortfall. WTI is at a $20 discount to Brent, and Cushing, OK is full because of the success of shale oil and gas with NGL's. Crude is up because the dollar is weak. The higher price of crude oil is embedded into the price of everything.

Corn ethanol REDUCES the price of meat because it reduces the amount of corn required by 20% and supplies ALL the protein cheaper than cotton seed meal or SBM.

Distillers is high in FAT. Until ethanol plants start pulling the corn oil out, it's use in dairy is limited to replacement heifers. Fat can not exceed 5% in a lactating dairy ration.

But, don't scapegoat ethanol for high feed prices and give the FED Reserve a pass.

I'm sure Big Oil, OPEC, and the radical Muslims who you finance every time you fill up would love it if corn ethanol were outlawed.
1:31 PM Mar 9th
PullMyFinger - Chappell, NE
We stuck with 18th century grain prices far, far too long. Welcome to the 21st century and save your breath to whine about any one of Ag's many input costs that have risen far faster and higher than grain has.
7:00 AM Mar 9th
I think that ethenol is the whipping boy for where we find ourselves today as it relates to commodity prices, especially corn. Let me explain. It seems counterintuitive that DDG prices would be higher now than before the ethanol boom. There should be mountains of the stuff piled all over but there isn,t. The reason there isn't is because of the huge international demand for DDG, especially from Asian Markets. With the value of the dollar at rock bottom and declining , our products are extremely attractive to international buyers. Most of these exports are going to feed an ever increasing livestock sector in China. As their standard of living increases their meat industry also increases. These animals have to eat something. If they were not importing the DDG from the ethanol industry they would be inporting something else. Remember there is a finite number of acres that are constantly being fought over by various crops. Since DDG is primarily a protein source the corn acres that are going to these ethenol plants would be "bought " by soybeans to replace this lost protein source. If you do the math 1 acre of corn is almost the same pounds of protein as 1 acre of beans. Therefore if we were to close every ethenol plant in the country tomorrow, In the long run it would not make one bit of difference to the cost of production to the dairyman . (I am one) Soybean prices would rise dramatically and offset any benfit gained from lower corn prices.
6:49 AM Mar 9th
Rowen - LaHarpe, IL
How many smaller dairies did you displace growing to 5500 cows? How many bushels did you buy ahead when prices were lower? You located in an area short of corn and water. I can't be sorry for you.
Fermentation uses the starch and leaves the protein. Corn goes into an ethanol plant 9% protein. DDG's are 28% protein. DDG's are the best feed value on the market.
Dry weather in Russia and Argentina, wet weather in Australia cut feed grain supplies. Growing demand in Asia drives up prices. You cannot lay all this on ethanol. Corn farmers promoted ethanol to boost low corn prices. For once I am making some $$$ and I'm going to make the best of it.
9:15 PM Mar 8th
We used to dairy and raise hogs. It wasn't high priced grain that run us out of business. In those days everything was cheap except what you needed to buy.When these big outfits were getting corn for $2.50 per bushel, we were getting about $1.85 per bushel on the farm. The government gave us a program to just, breakeven, just to keep us in business so those big outfits could have cheap corn. I guess they can go raise their own corn, that way they would know what it is worth.
8:40 PM Mar 8th
Gary - Manson, IA
For most of my life the livestock people have had Cheep feed. Now when we grain farmers can be the ones making money we and a product we had to develop to make a boost in our price received for what we grow is to blame for their higher cost. Its about time grain prices went up. Milk and meat prices will go up also in time like grain did and cheep food in the USA will be more inline with what the rest of the world has paid for food.
7:43 PM Mar 8th
Kenny - KS
Can one of the ethanol bashers please explain why corn prices were a dollar higher in June of 2008 than they are now. For the record, this was when crude oil hit the all time high but ethanol use at that time was much lower than it is now. It should be obvious to everyone, crude oil causes the high prices of corn, gasoline, and most of the other things consumers buy. I raise corn but also feed cattle and use ethanol byproducts to hold down feeding costs. How much higher would beef and other meats be if not for the cheaper gains possible by feeding ethanol byproducts
7:17 PM Mar 8th
Why do people fail to see that oil above all else controls prices of basically all goods and services. Without the use of ethanol what would fuel prices currently be? Until there is a better alternative to corn for ethanol production we should be thankful for its existence. More effort needs to go toward eliminating dependence on foreign oil rather than condemning the few processes that do. I can relate to the dairy farmers tough situation since I have seen many a tough year raising corn and beef cattle as well.
6:46 PM Mar 8th
6:13 PM Mar 8th



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