Going Green

Friday, November 16, 2007

More Thoughts on Ethanol

I had the privilege last week of hearing a number of speakers address some of the issues concerning ethanol and its impact on the beef industry. Much of what I heard was technical in nature – specifically related to the impact of ethanol co-products on cattle nutrition. However, there was much that was general in nature. The thoughts below are capsules of some of that information after it has been distilled through my own thinking.

Ethanol is an explosion into agriculture that is in the process of creating some of the most dramatic change since World War II. It has created a level of fear and uncertainty at all levels of production as well as in industries dependent upon agriculture.

Ethanol is here to stay. There will likely be restructuring as the industry moves beyond its infancy into a more mature phase. Because they are stainless steel, most new plants have an estimated 85 year life expectancy. Even if the current owner of the plant goes out of business, it will be bought for cents on the dollar and kept in production.

Today, logistical issues are the most important factor slowing its growth. Ethanol plants are not hooked into the national pipeline system. Although most plants are located on rail lines, their product must be shipped to blenders that sometimes are not. Therefore, trucking to blending locations from rail terminals can be an issue.

The large expected corn crop this year is great news for the new plants coming on line. What happens when we have a drought in the Midwest? It has happened before. New corn genetics have mitigated the potential impact, however, high and volatile corn prices will likely be the norm for many years.

We should expect to see wide variation in the cost of feeding cattle between different regions of the country. Those lots near concentrations of corn and ethanol plants will have an advantage on cost of feed over those feedlots at a distance from corn growing areas. Although ethanol plants are locating near existing feedlots, they will be importing corn. High transportation costs associated with high fuel prices will place areas like the High Plains of Texas at a disadvantage. Feedlots near heavy concentrations of ethanol plants will be able to substitute ethanol co-products for a high percentage of their ration. This will offset to a large extent, the competition for corn. Many will be able to remove corn from their ration altogether and feed rations consisting primarily of distiller’s grains and ground straw or corn stalks.

The cost of feeding variations coupled with high transportation costs will create large price disparities in feeder cattle on a regional basis. We are already seeing large variations in the price of feeder calves between South Texas and the Nebraska Sandhills that is not strictly a function of quality. It is a function of fuel prices, corn prices, and the availability of ethanol co-products. This regional price disparity will continue to be an issue.

With wheat prices remaining above $8 for the foreseeable future, wheat pasture will be at a premium if available at all. This will further erode the market for beef calves located at great distance from the lower-cost feeding areas such as Nebraska and Iowa. Competition for pasture will increase nationally.

The next few years will see the beef industry – and in particular, the cattle feeding industry – struggling to find a point of equilibrium in the marketplace. Those who are able to adapt and capitalize on the turmoil will succeed. Those who do not make the adjustment will fail. What we have known is in the process of being destroyed by this new behemoth of ethanol. Out of the chaos that it is creating will rise a new and stronger industry as it is re-created in an image that reflects the changes of the new renewable energy economy.

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