Feed Trends: Corn Price Up 76%, Distiller’s Grain up 38%
Since Labor Day corn-based feed prices have skyrocketed, though closer analysis shows that not all feedstuff prices have increased equally. For example, using central Illinois prices, we find that the price of corn has increased from around $2 to $3.55 (up 76%) while dried distiller’s grain (DDG) only increased from $79 to $109 (up 38%). Here in Ohio , the difference is even more pronounced: for that same time period, Toledo corn was up 67% while DDG from Lawrenceburg , Indiana (just west of Cincinnati ) increased only $7 (9%). These simple trends suggest that, if you haven’t considered incorporating ethanol co-products into your livestock rations, now might be the time to consider it. In this issue, I will talk about recent price trends for some ethanol co-products and the possible profitability of a switch to co-products. I will also link you to some ethanol co-product price data I have assembled and to some new USDA reports that track these increasingly important prices.
Every bushel of corn put through an ethanol plant yields about as much distiller’s grain as it does ethanol (about 18 pounds of each). Dried distiller’s grains have as much dry matter (about 89%) and energy (0.89 mcal/lb) as corn and soybean meal and have much more protein than corn alone (31% compared to 9%). The high protein of DDG means it can replace both corn and bean meal in many rations. However other traits of DDG, including its high fat content, mean that there are limitations to how much can be fed, particularly for hogs and poultry. Other issues also arise with a switch to distiller’s products, e.g., rations often need to be ‘tweaked’ to accommodate different nutrient and fiber profiles of DDG. Also, manure must be more intensively monitored and managed because DDG-based rations often generate manure with more phosphorus. Other forms of distiller’s grains can also be created, with wet distiller’s grain (WDG) and modified wet distiller’s grain (MWDG) being two of the more popular variants. Prices for dried distiller’s grain have been tracked the longest, and I will focus on this co-product most closely.
What determines the price of DDG? Well, the cost of its key input, corn, is the most important factor. The two price series often move together (see Figure 1), though there are notable exceptions. Analysis of the cost of central Illinois DDG suggests that, from 1999 through 2006, the average price of DDG was $85 when south central Illinois corn was at $2. In fact, over that time period, the average DDG price reported in central Illinois was $85.10 while in Lawrenceburg , Indiana , it was $87.90. For every dime that corn increased, the price of DDG went up by $2.58 (see Figure 2).
Figure 1.
Figure 2.
However, when you look at figure 2, you note several observations circled – these are the observations from the last 4 weeks. Note that these are well south of the thick straight ‘trend’ line draw through the bulk of the observations in figure 2. Whenever an observation is below this line it means DDG prices are cheap compared to corn prices relative to the average relationship observed over this time period. Over the past five weeks or so, if price relationships had stuck to historical trends, the DDG price would have been about $15 higher.
This poses a fundamental question – is the relatively cheap DDG price of the past few weeks a temporary aberration or the new standard? It is a question that only time will fully answer. Some will argue that the rapid expansion in ethanol plants will alter this relationship so that DDG will be cheaper relative to corn than the historical trends documented in figure 2 suggest. Perhaps this aberration could persist for several years, until adoption of DDG and other by-products by livestock producers increases to catch up with increases in ethanol production. The more quickly livestock producers respond, the shorter will be the window for DDG ‘bargains’ meaning, as usual, that early successful adopters will reap the greatest benefits.
Others will argue that, if all the ethanol plant construction occurs and plants run at planned capacity, the livestock cannot realistically utilize all the DDG. Take Ohio for example. Two plants are under construction in the western part of the state. Together they have a planned capacity of 160 million gallons per year, which at 2.72 gallons per bushel, would require about 59 million bushels of corn and generate more than 500,000 tons of DDG. At a 33% inclusion rate in finishing feedlot cattle rations, this would be enough for 700,000 head to gain 600 pounds. Ohio listed 180,000 cattle on feed last January. For a 10% inclusion rate in hog finishing rations, this would be enough to finish more than 12 million hogs. Ohio listed 1.5 million hogs on feed in September. What about exporting DDG to Indiana and Michigan ? Well, these states have their own ethanol plants under construction as well. This suggests the potential for excess DDG supply and the potential that the price relationship between corn and DDG observed in the past few weeks may be more the rule than the exception.
The key question for livestock producers is: When does it make sense to displace corn and soybean meal from a ration to accommodate DDG? From the burgeoning literature I’ve read, there are many different substitutions rates between DDG and the more traditional corn and soybean meal feedstuffs. Furthermore, appropriate substitution will vary by species and by stage of development and will require other modifications to the ration beyond these three ingredients. One example I’ve seen – in the context of a hog grow-finish ration – is to substitute one ton of DDGS for 26.1 bushels of corn and 420 pounds of soybean meal. For the central Illinois case, I plot out the average cost savings from this substitution (Figure 3).
Figure 3.
Over the 1999-2006 timeframe examined, the average savings from such a substitution was $92.90 for each ton of DDG added to the feed ration. Furthermore, this has spiked during the past 2 months, rising to nearly $130 per ton. This seems like a large savings but remember: this differential has to cover any additional transportation costs that might be associated with using DDG instead of the old standby ingredients. While DDG is similar to bean meal and corn in dry matter, most livestock operations may be located further from an ethanol plant than from existing sources of corn and bean meal, which will mean higher transport costs and less savings than the simple calculations would imply. The cost savings from another substitution I’ve seen – using 1 ton DDG in place of 31.8 bushels of corn and 190 pounds of SBM – is also plotted in figure 3. If this is the appropriate substitution for your situation, then recent prices suggest that cost savings available this past week are at there all-time high for the timeframe examined.
For feedlot cattle and dairy cows wet distiller’s grains (WDG) or its cousin, modified wet distiller’s grains (MWDG), are often the preferred ethanol co-product. Additional issues arise due to the higher moisture content, including higher transport costs relative to DDG, corn and bean meal, and storage challenges (it must usually be fed within a week or be stored in an anaerobic state). Adding WDG to feedlot diets means a corresponding reduction in corn and urea. While USDA has relatively good information on DDG, it only began tracking WDG and MWDG prices in late February, 2006. These prices are gathered from 9 different ethanol plants and distilleries in Illinois , Indiana , Michigan and Ohio and are published as USDA-AMS report number GX-GR212 ( http://www.ams.usda.gov/mnreports/gx_gr212.txt ). A similar series has been developed for Iowa ethanol co-products (NW_GR111). These Eastern Corn Belt prices, contrasted against south central Illinois corn, are plotted in figure 4. A similar trend appears: wet and modified wet distiller’s grains have increased only 22% and 26% compared to corn, which is up 76% since Labor Day.
Figure 4.
If you take the plunge and incorporate a distiller’s product into your ration there are likely to be several transition costs. First you’ll need to consult with a nutritionist to closely examine how much DDG (or other co-product) to add to the ration. There will be other ration ‘tweaking’ that will need to occur, and these adjustments may incur additional costs. Also, you’ll need to spend time during the transition monitoring the quality of incoming feed (darker DDG can cause problems) and seeing how the animals are responding to the change in ration both in terms of palatability and performance. Second there may be additional capital and labor expenses as these feeds may require new bins or modifications to existing facilities. Again, you may need to ‘step up’ your management effort to make sure the new feedstuff is being stored properly and protected from the elements and moisture. Next there is the additional leg work involved in sourcing the co-product, e.g., finding out where to get it, possible quirks of scheduling delivery, etc. Finally there may be changes in manure management that will have to implemented to deal with its higher phosphorus conent.
To help conduct your own planning, I have posted on my website data on various Eastern Corn Belt and Midwestern price series, including historical data on DDG from central Illinois , Lawrenceburg , Indiana , Nebraska , Minnesota and Iowa (only Illinois and Indiana go back to 1999). I have also entered this year’s data on the wet and modified wet products for the Eastern Corn Belt , and provided several corn and soybean meal prices series (including futures prices). To access these, go to http://aede.osu.edu/people/roe.30/livehome.htm . I’ll also mention two good websites that feature a variety of useful information. One is at Iowa State and one is at the University of Minnesota ( http://www.iowabeefcenter.org/content/ethanol.htm and http://www.ddgs.umn.edu/ ).