Economic Impact of DDG’s on U.S. Grain, Oilseed and

Livestock markets

Dermot HayesCenter for Agricultural and Rural Development

Iowa State University

Presented at the NCPA’s 112th AnnualConvention—May 2-6,

2008 at the Hilton SandestinBeach Golf Resort

& Spa.

Overview

Existing biofuels industry The economics of biofuels Impact on grain and livestock prices New Energy Act Scenarios Impact on Cotton Seed Product Markets DDGS quality and quality concerns

Ethanol Explosion

Source: Renewable Fuels Association

Biodiesel Growth

Source: National Biodiesel Board

Current ethanol capacity: 147 plants, 8.6 billion gallons/year

Total capacity under construction and expansion: 5.1 billion gallons/year

55 new ethanol plants and 6 expansion projects underway

Source: Renewable Fuels Association

U.S. Ethanol Industry

2.2 billion bushels of corn were used in producing fuel ethanol in 2006/2007 marketing year.

3.1 billion bushels of corn are expected to be used in producing fuel ethanol for 2007/2008 marketing year.

Existing & Planned U.S. Corn Processing Plants

Blue = OperatingRed = constructionGreen = plannedPink = Expansion of Existing plants

Current biodiesel capacity: 171 plants, 2.24 billion gallons/year

Total capacity under construction and expansion: 1.23 billion gallons/year

60 new plants underway

Source: National Biodiesel Board

U.S. Biodiesel Industry

2.8 billion pounds of soybean oil was used in producing biodiesel in 2006/2007 marketing year.

3.8 billion pounds of soybean oil are expected to be used in producing biodiesel for 2007/2008 marketing year.

Source: CARD, ISU

Source: CARD, ISU

Historical Corn Utilization

Economics of biofuels

Would you invest in a new plant? Almost half the capital costs are covered by

tax credits and other incentives, assume that this rewards you for risk

This thought experiment helps drive our understanding of the ethanol market because it allows us to calculate the corn price that will stop you from investing

Long run ethanol investment decision Assume that ethanol will see for 0.67

times gas, plus the credit Calculate ethanol revenue per bushel Subtract all costs Add a DDG credit based on corn prices Calculate the break even corn price Stop building when corn hits this price

Calculating Break-Even Corn Price

Oil Price $/BBL 55 60 65 70 75 80 85

Gas Price $/Gal 2.07 2.258 2.446 2.635 2.823 3.011 3.199

Ethanol Price $/Gal 1.897 2.023 2.149 2.275 2.401 2.527 2.653

Ethanol Revenue $/Bu 5.311 5.664 6.017 6.37 6.723 7.076 7.429

Operating Cost $/Bu 1.56 1.56 1.56 1.56 1.56 1.56 1.56

Fixed Cost $/Bu 0.72 0.72 0.72 0.72 0.72 0.72 0.72

DDG Credit $/Bu 0.728 0.812 0.897 0.982 1.066 1.151 1.236

Total Corn Credit $/Bu 3.759 4.197 4.634 5.072 5.51 5.948 6.385

Historical Ethanol Margins

Projected Ethanol Margins

Impact on corn and other crop prices If corn prices are ever significantly lower than

the breakeven price then we will build more ethanol plants

This means that if we know crude oil prices we can predict corn prices

If corn prices are high then the prices of other crops plus hay will have to rise by a similar percentage amount

So long as speculators believe this logic crop prices will move with crude prices

Energy Act Signed in December 2007 Floor of 15 billion gallons of corn ethanol, gradual ramp

up to 2015 Gradual ramp up of cellulosic ethanol to 16 billion gallons

by 2022 Biodiesel to grow to 1 billion gallons by 2013 The Act mandates but does not provide details on how to

achieve its targets Act will penalize plants that do not meet carbon

requirements, this suggests more wet DDG’s Huge question is unanswered…will the $0.51 credit for

corn ethanol stay around after 15 billion gallons?

Renewable Fuels Standard

Source: Renewable Fuels Association

Motivation – CBOT December 09 Weekly Corn Contract

General Description of the Models

Broad modeling system of world agricultural economy Behavioral supply and demand equations for production,

consumption, ending stocks and net trade Domestic prices linked to world price through price

transmission equations Linkages between all agricultural commodity markets and

energy markets

Two Views of the World

Using data derived from:

FAPRI 2008 Baseline

CARD 2008 Preliminary Baseline

Same modeling structure, different underlying assumptions

Use FAPRI if you think the ethanol industry will stop at the mandated amount, use CARD if you think it has the political support to grow further

Crude Oil Price

Corn-based Ethanol Production

Cellulose-based Ethanol Production

Biodiesel Production

Corn Acreage

Corn Farm Price

Soybean Acreage

Soybean Farm Price

Cotton Acreage

Cotton Farm Price

Livestock MarketNo Credit $0.34 Credit Percentage Change

Beef Retail Price

(US$/pound)

4.52 4.71 4.2%

Pork Retail Price

(US$/pound)

3.30 3.44 4.2%

Broiler Retail Price

(US¢/pound)

196.07 205.32 4.7%

Turkey Retail Price

(US¢/pound)

126.28 136.96 8.5%

Egg Retail Price

(US¢/dozen)

162.98 177.07 8.6%

Milk Retail Price

(US$/cwt)

14.65 15.44 5.4%

Why does corn ethanol dominate?

Table 7. Assumptions to obtain the amount of biofuels produced by acre of land and

the payments that would result under the current scheme.

Yields Biofuel production

gal/acre

Current Subsidy*

$/acre

Corn (bu/acre) 153 428 218.5

Soybean (bu/acre) 45 63.1 63.1

Corn Stover (kg/acre) 1600 112 57.1

Switchgrass (kg/acre) 5,000 350 178.5

U.S. Cottonseed Production

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18

Thousand Tons

CARD FAPRI

U.S. Cottonseed Domestic Use

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18

Thousand Tons

CARD FAPRI

U.S. Cottonseed Crush

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18

Thousand Tons

CARD FAPRI

U.S. Cottonseed Farm Price

0

20

40

60

80

100

120

140

160

180

200

1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18

U.S. Dollar

CARD FAPRI

U.S. Cottonseed Meal Price

0

50

100

150

200

250

1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18

U.S. Dollar

CARD FAPRI

U.S. Cottonseed Oil Price

0

10

20

30

40

50

60

70

80

1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18

U.S. Dollar

CARD FAPRI

U.S. Cottonseed Crushing Margin

0

20

40

60

80

100

120

140

1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18

U.S. Dollar

CARD FAPRI

U.S. Cottonseed Meal Total Use

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18

Thousand Tons

CARD FAPRI

U.S. Cottonseed Oil Production

0

200

400

600

800

1,000

1,200

1,400

1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18

Million Pounds

CARD FAPRI

U.S. Cottonseed Oil Exports

0

50

100

150

200

250

1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18

Million Pounds

CARD FAPRI

Thanks to Harold Tylstra for the next several slides

Where do exports originate from?

The Distillers Grains Industry-an estimate of market potential

4 MMT

10%

5 MMT

10%

6 MMT

10%

20 MMT

25%

Bold print = estimated annual total use

Percentages = percent of the diet

Theoretical potential use:

Domestic feed use 35 MMT

Exports 2 – 4 MMT

Non-feed uses ??(next slide)

Total: 36 - 40 MMTannually

1.51.9

2.32.9

3.7

4.6

5.7

7.2

8.9

11.2

1.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Year

MM

T

Source: The ProExporter Network®

DDGS Production CARD Run

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17

Year

Thou

sand

Met

ric

Tons

ProductionUse

Distillers Grains price trends

Often stated as a percentage of corn price 35.7 bu/ton @ $4.68 = $167.07 DDGS @ $162 = 97%

Interesting way to look at historical prices Has tended to be slightly to moderately higher than corn Early fall; trending lower than corn (per ton basis) Early winter; slightly higher than corn Slightly lower than corn (in sync with energy levels?)

Not to good at predicting future prices Because corn is just one of the ingredients distillers grains

replaces in the diet Because of the rapid increase in supply of distillers grains

products

CORN VS. DISTILLERS GRAINPRICE PER METRIC TON

JANUARY 2004-PRESENT

6080

100120140160180200220240260280

$ P

ER

ME

TRIC

TO

N

6080100120140160180200220240260280

$ PE

R M

ETR

IC TO

N

DISTILLERS FOB STOCKTON WHOLE CORN FOB TURLOCK

From Dan Keefe, USGC meeting, February 2008

DDGS Prices from FeedstuffsLocation 8-2006 11-2006 1-2007 7-2007 9-2007 12-2007 1-2008

Atlanta 116.00 155.00 169.00 155.00 165.00 188.00 228.00

Boston 115.00 162.00 167.00 131.00 143.00 174.00 197.00

Buffalo 100.00 135.00 142.00 111.00 117.00 154.00 172.00

Chicago 78.00 115.00 127.00 110.00 115.00 135.00 162.00

Fayetteville, NC 134.00 160.00 172.00 157.00 166.00 188.00 225.00

Kansas City 90.00 113.00 125.00 120.00 110.00 122.00 140.00

Los Angeles 112.00 163.00 168.00 138.00 150.00 188.00 226.00

Minneapolis 70.00 110.00 125.00 95.00 100.00 135.00 155.00

Okeechobee 116.00 157.00 164.00 153.00 162.00 188.00 225.00

Portland 119.00 172.50 N/A 151.50 159.00 187.50 222.50

San Francisco 112.00 163.00 168.00 138.00 150.00 188.00 226.00

Twin Falls 118.00 173.00 174.00 148.00 155.00 192.00 234.00

Estimated Value of DDGS KSU DDGS Calculator.xls

Corn, $/bu $ 4.68    

SBM, $/ton $ 344.00    

Monocal, $/ton $ 490.00    

Limestone, $/ton $ 40.00    

Lysine HCl, $/lb $ 1.00    

DDGS, $/ton $ 162.00    

       

    DDGS, %

  10% 20% 30%

Change in diet cost, $/ton -$6.85 -$11.99 -$15.86

       

Approximate savings, $/pig $2.05 $3.60 $4.76

       

Breakeven price, $/ton $230.49 $221.93 $214.87

DDGS – inclusion levelsBold = typical; Italics = maximum

10 - 20%

30% (G/F)

>40% (gestation)

5 – 12 %

15%

5 – 15%

20%

15 - 25%

40%

What about fractionation?

For corn ethanol facilities:Pre-fermentation - separating kernel into

component parts: germ, endosperm, and bran.

Post-fermentation – centrifuge distillers grains into component parts and separating corn oil from solubles.

Fractionation considerations: “High protein” distillers grains

lower oil content, lower caloric levels? Example: Verasun removing 7 – 8 million gallons of corn oil from

390,000 tons of distillers grains.* corn oil ~ 3900 Kcal/pound (ME-swine) DDGS ~1480 Kcal/pound (ME-swine) #2 yellow corn ~ 1530 Kcal / pound (ME-swine)

Higher protien, but lysine ratio? Importance of ME-swine and lysine in feed formula

Germ meals Have not been fermented

Phosphorus still in unavailable form for pigs About 60% of the phosphorus in DDGS is available for pigs

If corn oil is removed, energy levels?

*Feedstuffs, January 7, 2008, page 17.

AS OF: Fall 2007

= Oil extraction

= Fractionation

Orange = Operational

Blue = Development/Construction

Note: This map is not guaranteed to be all-inclusive of facilities utilizing fractionation or oil extraction processes. The map show only those locations that the study’s author is aware of.

This study is the property of the National Corn Growers Association and may not be reprinted or redistributed without express written consent from NCGA.

Nutrient composition of new, fractionated corn distiller’s by-products (dry matter basis)

Company By-Product Dry matter, %

Crude protein, %

Crude fat, %

Crude fiber, %

Ash, %

Typical corn DDGS 89.3 30.9 10.7 7.2 6.0 Poet Dakota Gold HP 91.6 44.8 3.9 7.3 2.1 Poet Dakota Bran ND1 14.6 9.8 3.8 4.6 Poet Dehydrated Corn Germ 93.2 16.9 18.9 5.5 5.8 Maize Processing Innovators Quick Germ/Quick Fiber DDGS

ND 49.3 3.9 6.8 3.2

Maize Processing Innovators E-Mill DDGS

ND 58.5 4.5 2.0 3.2

Cereal Process Technologies Hi-Protein DDGS

ND 35.0-37.0 4.0-6.0 4.0-6.0 ND

Renessen Enhanced DDGS ND 40.0-50.0 2.5-4.0 7.0-11.0 ND Solaris NeutraGerm 97.0 17.5 45.0 6.0 1.9 Solaris Probran 90.0 9.5 2.0 16.6 1.0 Solaris Glutenol 90.0 45.0 3.3 3.8 4.0 Solaris Energia 90.0 30.0 2.5 8.2 2.5 FWS Technologies Enhanced DDGS

ND 35.0-37.0 6.5 ND 3.8

De-Oiled DDGS 89.9 31.3 2.3 ND 6.2 J. Jireh Products Dried Condensed Solubles

93.4 21.6 4.7 3.1 8.3

Variability (Coefficients of Variation, %) of Selected Nutrients Among 32 U.S. DDGS Sources vs. 6 U.S. Soybean Meal Sources. (Shurson)

Nutrient DDGS Soybean Meal

Crude protein 4.5 2.3

Crude fat 17.1 30.9

Crude fiber 18.9 9.5

Ash 27.2 6.6

Lysine 12.1 3.0

Methionine 8.5 5.3

Threonine 5.8 4.2

Tryptophan 12.0 7.3

Calcium 117.5 25.8

Phosphorus 19.4 9.1

Distillers Grains topics:

Mycotoxins Feed stock levels are multiplied in distillers products Best prevention is proper BMP’s at ethanol plant. Testing

Many of the kits available for grain are not dependable for distillers grains

Use laboratories to confirm kit accuracy

Recent examples: Aflatoxin – 2007 Sioux City, IA area Vomitoxin – 2006 southern Ontario

Distillers Grains topics:

Use of antibiotics at the ethanol plant LactrolTM is a virginiamycin containing product from Phibro.

has a “letter of no objection” from FDA permitting use at ethanol plants to control Lactobillus sp. Infections in fermenters.

FDA has not made “official” comment on use of other antibiotics in ethanol plants: penicillin, streptomycin, neomycin, etc.

Not aware of any antibiotic residue issues from distillers grains in swine feed.

Use of distillers products in “natural” pork programs needs to be carefully evaluated.