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Agricultural Issues Center University of California
November 2005
______________________________________________________________________________
The U.S. Ethanol Industry: Where will it be located in the future?
Kevin C. Dhuyvetter, Terry L. Kastens, and Michael Boland
November 2005
Agricultural Issues Center University of California
www.aic.ucdavis.edu
Kevin Dhuyvetter, Terry Kastens, and Michael Boland are professors of agricultural economics at Kansas State University. Please contact Kevin Dhuyvetter at [email protected] or 785.532.3527 for further questions about this report. Supported in part by the Agricultural Marketing Resource Center
Executive Summary
The ethanol industry has been growing rapidly in the last five years and often is viewed as a
“value added” opportunity for corn and grain sorghum producers. Over half of the ethanol plants
operating in the U.S. are farmer owned, however, less than one-third of the plants currently being
constructed are farmer owned. As plants continue to get larger and require more capital, farmer-
owned facilities likely will become less common in the future. Even though crop producers may
choose not to own plants themselves in the future, they likely will benefit from an increased
demand for the corn and grain sorghum required to meet mandated levels of ethanol production.
It is estimated that within the next 8-10 years 25% of total corn and grain sorghum production
will be required to meet this increased demand.
The ethanol industry is undergoing major expansion. Not only will plants currently under
construction increase capacity by 25.7%, but the industry will need to grow significantly more
within the next 8-10 years to meet mandated levels of future ethanol production. The majority of
existing production facilities are located in the upper Midwest (Illinois, Iowa, Minnesota,
Nebraska, and South Dakota). This has been driven by the large available supply and relatively
low price of corn in this region, as well as sufficient livestock numbers to provide a reliable
market for distillers grains which are a co-product of ethanol production. Several key factors
likely will drive where future ethanol plants will be located. Energy prices, both natural gas and
diesel fuel, are significantly higher today than just five years ago, which provides a strong
economic incentive to market distillers grains wet (WDGS) rather than as dry distillers grain
(DDGS) and at locations as close to plants as possible. Also, the market for WDGS is almost
exclusively driven by ruminants (i.e., cattle). If the net benefits associated with marketing
WDGS in close proximity to the ethanol plant exceed the cost of shipping in dry corn from major
corn producing regions, then it is likely an increased number of ethanol plants will locate in the
High Plains regions of southwest Kansas and the Panhandle of Texas where large numbers of
cattle are concentrated.
It is important to remember that the ethanol industry is a commodity industry, which means that
being a low cost producer will be critical for long-term survival in the industry. The feedstock in
ethanol production, typically corn, represents the single largest cost and thus is the input that
receives the most attention. However, with high energy prices, such as those faced in 2005, it is
important to account for all inputs and credit all co-products when determining the net cost to
produce ethanol. This is especially true given that there is very little relationship between
ethanol and corn prices. That is, high corn (input) prices do not imply high ethanol (output)
prices. This paper provides an overview of the potential demand for distillers grains based upon
the location of U.S. animal agriculture.
1
The U.S. Ethanol Industry: Where will it be located in the future?
Introduction
For the last several years one of the big buzzwords in agriculture has been “value-added.”
Although the specific definition of value-added often varies considerably from one producer to
the next, the concept is fairly well agreed upon—increase the value of something that is
produced at the farm level. Put another way, value-added might be viewed as increasing the
return to resources used in the farming operation. This is typically accomplished in one of two
ways, producing something new to the market that was not previously produced, or doing
something at the farm level that was previously done closer to the consumer in the supply chain.
One concern of many value-added ventures is that they often involve a considerable amount of
risk (e.g., many value-added ventures have failed). This risk is due to many factors, including
insufficient equity for business startup, poorly defined market(s), production practices that are
not well known or understood, lack of relevant management expertise, and many others.
However, where there are risks there are often potential rewards and thus there continues to be
much interest in agriculturally related value-added ventures in the U.S.
A common value-added venture in recent years has been grain producers investing in ethanol
production facilities. It is estimated that farmer-owned cooperatives accounted for nearly half of
all U.S. fuel ethanol production in 2004 (Hansen). Ethanol is described as value added for two
reasons. First, for producers investing in ethanol production facilities, this represents doing
something with farm resources (i.e., capital) that previously had not been done. Second, the
growth of the ethanol industry reflects production of a product new to the market.1 Four factors
driving the high interest in ethanol production are (1) relatively low grain prices, (2) high crude
oil prices, (3) elimination of methyl tertiary butyl ether (MTBE) use in some states, and (4)
concern about national security due to the reliance of imported crude oil (Coltrain). The purpose
of this paper is to provide an overview of the potential demand for distillers grains based upon
the location of animal agriculture in the U.S. This information should prove useful for future,
1 As Hansen points out, ethanol has been around for hundreds of years and thus in that sense it is not new. However, the fact that the industry is growing quite rapidly suggests that much of this production is “new” to the market.
2
more in-depth analyses that ultimately will help farmers and investors alike better position and
manage their ethanol plants for long-run success.
That farmers are interested in ethanol is evidenced by the large number of recent popular press
articles related to ethanol. In fact, it is likely that most major farm magazines have averaged at
least one ethanol article per issue over the last several years. Even stronger evidence of the
interest in ethanol production is the large increase we have seen in production in recent years
(figure 1). The annual increase in ethanol production from 1980 to 2004 (25 years) has averaged
13.2% (average increase of 134.8 million gallons per year). However, in more recent years the
growth rate has increased. For example, the annual growth rate over the last five years (2000-
2004) has been 20.3% (average of 445.0 million gallon increase per year).
0
500
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Etha
nol p
rodu
ctio
n (m
illio
n ga
llons
)
Source: Renewable Fuels Association (2005b)
Figure 1. U.S. fuel ethanol production, 1980-2004
As the production of ethanol increased over the last 25 years, the amount of corn and grain
sorghum used for ethanol also has increased, both in terms of total bushels and percent of U.S.
3
production (figures 2 and 3). In 1981, 86 million bushels of corn were used for ethanol
production, which represented approximately one percent of total corn and grain sorghum
production. By the year 2004, over 1.4 billion bushels of corn were used for ethanol, which was
just under 12 percent of the total production of corn and grain sorghum. The amount of corn
being used for ethanol has been over 10 percent of total production since 2002, which is a
significant increase from the previous two decades when ethanol only accounted for about five
percent of production.
0.0
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Corn
con
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anol
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Source: Baker and Allen
Figure 2. Corn used for ethanol production, 1981-2004
4
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1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Perc
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f tot
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and
sorg
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us
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r eth
anol
Source: Kansas State University
Figure 3. Estimated percent of total corn and grain sorghum production used for ethanol production, 1981-2004
The growth in the ethanol industry is viewed by many as positive for agriculture because it
creates additional demand for crops such as corn and grain sorghum and, thus, is expected to lead
to higher grain prices. The impact on local prices due to the existence of an ethanol plant have
been estimated to range from an increase of 2¢ to 25¢ per bushel (Coltrain; Farm Journal;
National Corn Growers Association; Top Producer; and Urbanchuk and Kapell), with most of the
quotes in the 5¢ to 10¢ range. In a study of corn prices surrounding 12 ethanol plants that
opened from 2001 to 2002, McNew and Griffith concluded that prices increased an average of
12.5¢ per bushel at the plant site and that prices were positively impacted up to 68 miles away
from the plant.
While higher grain prices might be viewed as positive for farmer investors, it is important to
recognize that as the ethanol industry continues to grow, ethanol increasingly will become more
of a commodity and less of a “high-value, value-added product.” The fact that ethanol
5
production will quickly become a commodity is not necessarily an issue for feedgrain producers
that want to invest in an ethanol plant as a means of adding value to the grain they produce. For
example, investing in an ethanol facility might be viewed as similar to when corn producers
added a hog enterprise, which is clearly a commodity, to add value to their corn. But, that
analogy should not be carried too far. This is because farmers who feed their own grains to their
livestock generally share substantial resources (e.g., labor, machinery) across the two enterprises.
Except for the early ethanol producers, who actually produced ethanol on their own farms, there
is little resource sharing across crop and ethanol production in today’s industry. Farm capital
expended in ethanol investment often will directly compete with its on-farm use. Therefore,
ethanol as a commodity poses some important implications. As the ethanol industry grows and
matures, it will become similar to other industries that are characterized as being in a competitive
market—where profitability is highly correlated with being a low-cost producer. Thus, for the
ethanol plant to remain competitive, it may be that the higher initial grain prices cannot be
sustained over time. Returning to the corn-hog example, the swine industry has rapidly
consolidated to where production is concentrated in large efficient operations and high-cost
operators have gone out of business. There is little reason to believe the ethanol industry will be
immune to these same market forces. In fact, already today, there is little connection between
ethanol investment and the source of grains used as feedstock for ethanol production.
Even though farmer-owned ethanol plants have been quite common in the past, it appears there
might be a slight trend away from farmer-owned plants. Based on data reported by the
Renewable Fuels Association, of the 90 ethanol plants operating in August 2005, slightly over
half (51.1%) were farmer-owned. These plants represented 40.3% of the total production
capacity. However, of the 18 plants identified as being under construction or expansion, only
five (27.8%) of them were farmer-owned, and they represented only 26% of the expansion
capacity. After these plants begin production, farmer-owned plants will represent just under half
(47.2%) of the total plants and 37.4% of the production capacity. This move away from the
model of farmer-owned plants likely is driven by two factors. First, continued expansion of the
ethanol industry draws the attention of outside capital to potential investment opportunities. For
example, Demeter Enterprises, LLC (a joint venture of AS Alliances Holdings, LLC; Cargill,
Inc.; and Fagen, Inc.) recently announced plans to build three 100-million gallon per year ethanol
6
plants (Cargill). Second, the economies of size associated with ethanol plants has led to larger
plants, making it more difficult for a group of local farmers to produce sufficient grain for a
large-scale plant (as was often the case with early farmer-owned plants). If the ownership
structure in the ethanol industry shifts away from farmer-owned plants, this simply means that
crop producers will benefit from an increased demand for the commodity they produce, as
opposed to being directly involved with investing in a value-added processing plant. Moreover,
if it happens that new ethanol production capacity becomes over-built and under capitalized,
which is not unusual in times of rapid change induced by high profits, the farmer would be best
advised to “clip the coupons” of higher grain prices but avoid the facility investment.
Corn, Grain Sorghum and Ethanol Production
The energy bill that was signed by President Bush in August 2005 (Energy Policy Act of 2005)
mandates the increased use of renewable fuels, which should lead to continued growth in the
ethanol industry. Although it is impossible to know at this time whether political forces will
ensure the continuance of these mandates so far in the future, figure 4 shows the potential
ethanol demand based on them through the year 2012. Given a use of 7.5 billion gallons in
2012, as mandated, the ethanol industry will need to more than double in size over the course of
the next eight years.
7
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2010
2012
Etha
nol p
rodu
ctio
n (m
illio
n ga
llons
)Forecasts
Sources: Renewable Fuels Association (2005b); and Kansas State University
Figure 4. U.S. fuel ethanol production, historical and future potential, 1980-2012 Currently, nearly all of the ethanol produced in the United States uses corn as its primary
feedstock (Hansen). Although ethanol can be produced from a number of different commodities,
e.g., barley, wheat, switchgrass, brewery byproducts, and even urban waste, none of these
alternatives currently is believed to be particularly cost competitive in sufficient quantities with
corn and grain sorghum. The data and discussion in this paper focus on corn and grain sorghum,
a very close substitute to corn.
Given the growth in ethanol production depicted in figure 4, the amount of grain such as corn
and grain sorghum going into ethanol production will also increase significantly unless
alternative feedstocks become more competitively priced. Figure 5 shows the total production of
corn and grain sorghum in the U.S. from 1980 through 2005 (2005 is a USDA estimate). Total
production in 2004 was the largest ever, at slightly over 12 billion bushels. The dotted line in
figure 5 represents expected production of corn and grain sorghum through the year 2012
assuming future production follows the same linear trend as it has from 1980-2005. Though
8
production obviously will not follow a smooth trendline as depicted, the projection does suggest
the 2004 production of 12 billion bushels generally is not expected without a significant increase
in acres planted or yield per acre.
0
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1980 1985 1990 1995 2000 2005 2010 2015
Prod
uctio
n (b
illio
n bu
shel
s)
Actual
Forecast
Sources: USDA NASS; and Kansas State University
Figure 5. Total U.S. corn and grain sorghum production, 1980-2012
Given the information presented in figures 4 and 5, it is possible to calculate the bushels of corn
and grain sorghum needed for future ethanol production and the portion of total production they
represent. Based on an average of 2.6 to 2.8 gallons of ethanol produced per bushel of grain,
figures 6 and 7 show the amount of corn and grain sorghum required to meet the ethanol levels
mandated in the 2005 Energy Act. The current usage of approximately 1.4 billion bushels per
year would have to increase to over 2.7 billion by the year 2011 and exceed 3 billion bushels in
the year 2014. If corn and grain sorghum production continues to increase over the next decade
as forecasted in figure 5, the amount of production going to ethanol will exceed 23 percent by the
year 2012 (figure 7). This increasing demand for corn and grain sorghum is the reason many
9
grain producers are optimistic about the potential impact ethanol will have on their market
prices.
0.0
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1981
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2011
Corn
and
sor
ghum
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sum
ptio
n fo
r eth
anol
(b
illio
n bu
shel
s)
Forecasts
Sources: Baker and Allen; and Kansas State University
Figure 6. Corn and grain sorghum required for ethanol production, 1981-2012
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Perc
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us
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r eth
anol
Forecasts
Source: Kansas State University
Figure 7. Percent of corn and grain sorghum production used for ethanol production, 1981-2012
Ethanol Plants
The number of ethanol plants in development and planning stages changes almost daily and thus
tracking production capacity is somewhat challenging. On its website
(http://www.ethanolrfa.org/), the Renewable Fuels Association (RFA) reports the number of
plants currently producing ethanol as well as those under construction. The data reported in this
paper were reported on the RFA website on August 25, 2005. At that time, RFA reported there
are 90 ethanol plants operating in the U.S., with an annual capacity estimated at 3,962.1 million
gallons (mmgy). Another 18 plants are under construction or expansion that will add 1,019
million gallons of capacity, bringing the total U.S. production capacity to 4,981.1 million
gallons. Table 1 shows the ethanol production capacity by state as reported by RFA. It can be
seen that the vast majority of ethanol is produced in the upper Midwest—the Corn Belt. Iowa
and Illinois account for nearly 50% of the production capacity, with another 30% coming from
Minnesota, Nebraska, and South Dakota.
11
Table 1. Ethanol production capacity UnderState Current construction Total % of total million gallons per year (mmgy) California 31.4 0.0 31.4 0.6%Colorado 1.5 42.0 43.5 0.9%Iowa 955.1 665.0 1,620.1 32.5%Illinois 779.6 50.0 829.6 16.7%Indiana 102.0 0.0 102.0 2.0%Kansas 167.5 0.0 167.5 3.4%Michigan 50.0 57.0 107.0 2.1%Minnesota 437.4 85.0 522.4 10.5%Missouri 105.0 0.0 105.0 2.1%North Dakota 32.8 50.0 82.8 1.7%Nebraska 520.6 0.0 520.6 10.5%South Dakota 476.0 0.0 476.0 9.6%Wisconsin 170.0 40.0 210.0 4.2%Other 133.1 30.0 163.1 3.3%Total 3,962.1 1,019.0 4,981.1 100.0%Sources: Renewable Fuels Association (August 2005); and Kansas State University
Figure 8 shows the geographic locations of the existing ethanol plants as well as those currently
under expansion or new construction. (Maps separately showing existing plants and those under
construction can be seen in Appendix F). This spatial depiction makes it clear that current
ethanol production capacity in the U.S. is heavily concentrated in the upper Midwest. This
concentration is not surprising given that this geographic region is where the majority of the
primary feedstock for ethanol (corn) is produced and hence lowest cost (see maps of corn and
grain production and prices in Appendix A). Hansen points out that the “localized production”
depicted in figure 8 has been important because it has allowed ethanol plants to reduce
transportation costs of both inputs (corn) and outputs (distillers grains). Most of the current
plants that are located in regions outside of the Midwest tend to be the smaller plants and in
many cases are using feedstocks other than corn. It also can be seen that, while many of the
plants currently under construction continue to be built in Iowa and Minnesota, several are being
constructed in areas outside the upper Midwest.
12
Existing plantExpansion or new construction plant
Existing plantExpansion or new construction plant
Existing plantExpansion or new construction plant
Sources: Renewable Fuels Association (2005a); and Kansas State University
Figure 8. Location of U.S. ethanol plants by capacity
Although the amount of expansion currently underway shown in table 1 represents a major
increase in production capacity (+25.7%), it will be insufficient to meet the federal mandate for
the year 2007 and beyond. Thus, assuming the mandate holds, there will need to be continued
plant construction to meet the future demand for ethanol. A big question obviously is “Where
will this future expansion occur?”
Distillers Grains Co-products and Energy Prices
Several key factors led to the heavy concentration of ethanol production in the upper Midwest—
northern Iowa, southern Minnesota, and eastern South Dakota. A significant amount of corn is
produced in the region, making it readily available and at a relatively low cost compared to other
regions of the United States (see Appendix A). In addition, with considerable numbers of cattle
on feed, hogs and poultry (see Appendices B-E), the region provides a reliable market for
distillers grains (the primary co-product of producing ethanol). Producer leadership and the
political economy also were important for the ethanol development that occurred in this region—
state subsidies created economic incentives for ethanol production. Appropriate geographic
locations of future ethanol plants will be critical for plants to be competitive in the market,
13
especially if economic forces turn less favorable towards ethanol. For example, lower crude oil
prices or higher corn prices will make ethanol less competitive as an energy source.
It is important to recognize that ethanol prices generally trend with fossil fuel prices rather than
corn prices (Coltrain, Dean, and Barton; Hansen). However, as Hart (2005) points out, the
relationship between ethanol and fuel prices diverged in early 2005 due to the supply of ethanol
outstripping demand. This emphasizes that it is important to produce ethanol at the least cost
possible after accounting for all costs of production and co-products. While grain represents the
largest portion of the cost of producing ethanol, the net impact that co-products, especially
distillers grains, have on the overall cost of producing ethanol cannot be ignored. On the input
side, the major considerations for proper plant location are the cost of the feedstock (e.g., corn,
grain sorghum) and access to natural gas supply lines and electricity. Likewise, on the output
side, proximity of ethanol markets and outlets for co-products such as distillers grains and carbon
dioxide (CO2) are critical. Current ethanol plant locations (figure 8) reflect that the upper
Midwest has met many of these criteria. However, an important question facing the industry is
whether this region can support the additional plants required to meet future ethanol demand.
The distillers grains that are co-produced with ethanol represent a highly valued and nutritious
livestock feed. The grain’s starch is consumed in the production of ethanol, leaving a co-product
(distillers grains) highly concentrated in protein, minerals, fat and fiber. With a protein content
of approximately 28%, distillers grains are considered a middle protein (i.e., lower protein
content than soybean meal but higher protein content than corn). In livestock rations, distillers
grains can be used as an energy source similar to grain or as a protein source (Coltrain). Thus,
the economics of feeding distillers grains is dependent on both grain (e.g., corn and grain
sorghum) prices and the availability and price of protein (e.g., soybean meal). The majority of
distillers feed historically has been dried and sold as distillers dried grains with solubles (DDGS)
and fed to dairy and beef cattle (Renewable Fuels Association, 2005(b); Cooper). Current
research is supporting the use of this feed ingredient in swine and poultry diets as well.
14
However, because distillers grains can be used in either wet (WDGS) or dry (DDGS) form in
beef and dairy cattle rations, they are especially well suited for the cattle industry.2
As noted, having a good market for the grain distiller co-products is essential to the economics of
an ethanol facility. In 2004, 89% of the DDGS produced were consumed domestically with the
other 11% being exported (Cooper). Coltrain reports that distillers grains, either DDGS or
WDGS, account for 10-20 percent of the total revenue stream for an ethanol plant. Furthermore,
as the ethanol industry continues to mature and become more competitive (i.e., profit margins
decrease), the importance of marketing co-products likely will increase. Based on the
assumption that a bushel of grain used in ethanol production generates 17 pounds of DDGS
(Hart, 2004), figure 9 shows the amount of distillers grains that will be produced through the
year 2012 consistent with the mandated ethanol production levels depicted in figure 4. In 1981,
there were less than a million tons of DDGS produced, but that number increased to over 12
million tons in 2004 and is forecast to increase to 24 million tons by the year 2012.
The large increase in the production of distillers grains over the next 5 to 8 years will require the
development of new markets. This requirement has resulted in some industry experts
questioning whether the rapidly escalating supply will outpace the demand (Cooper). Marketing
distillers grains, therefore, will be extremely important in the future and those plants that position
themselves to do this most efficiently likely will have a competitive advantage.
2 Wet distillers grains and solubles (WDGS) are distillers grains that have not been dried and thus have a much higher moisture content (30% dry matter) and shorter shelf life compared to DDGS (90% dry matter).
15
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DD
GS
(mill
ion
tons
)Forecasts
Source: Kansas State University
Figure 9. U.S. estimated production of DDGS (based on 17 lbs ethanol/bu of corn)
Table 2 shows estimates for potential DDGS consumption by livestock class on both a daily and
annual basis. The listed values reflect levels that are considered to be attainable under
reasonable management, but do not consider whether or not these consumption levels are
economical. That is, the values reflect the potential demand assuming distillers grains are priced
competitively. Per head values of potential DDGS consumption are multiplied by the average
number of head for each livestock class to calculate national annual consumption (table 3).
Based on the per head values in table 2 and the 5-year (2000 to 2004) average numbers in the
different livestock classes, the potential demand for DDGS in the U.S. is over 50 million tons
annually.
16
Table 2. Potential dry distillers grains (DDGS) consumption per head, by livestock class1
Livestock class Daily intake of DDGS
(lbs/day as fed)2 Days fed/year3 Lbs of DDGS per animal per year4
Beef cows 7.22 90 650.0 Dairy cows 4.17 365 1520.8 Other cattle5 2.78 135 375.0 Cattle on feed 5.56 365 2027.8 Breeding swine 1.21 310 374.0 Market swine6 0.47 365 171.6 Breeding sheep 0.50 90 45.1 Lambs 0.38 90 34.1 Broilers 0.0207 56 1.1574 Layers 0.0325 365 11.8740 Pullets 0.0099 365 3.6261 Turkeys 0.0421 151 6.3539 1 Intake values based on DDGS being 90% dry matter (i.e., “as fed” basis). 2 Daily intake values calculated based on information from Johnson; Noll; and Tokach 3 Feeding distillers grains to animals during certain periods of the year or for the entire life cycle of the animal is considered highly improbable. Hence, days are not universally 365. For example, feeding distillers grains to beef cows during the pasture season is unlikely. 4 Values for lambs, broilers, and turkeys represent lbs of DDGS per head over life of animal 5 Other cattle includes calves and feeder cattle (i.e., cattle that are not cows or cattle on feed) 6 Market swine include only hogs 60 pounds and above
Table 3. U.S. livestock inventory numbers and potential DDGS consumption1
Livestock class Annual U.S. number
(1000 head)2 DDGS consumption
(lbs/animal/year)3 Total DDGS (tons/year )
Beef cows 33,253 650.0 10,807,372Dairy cows 9,099 1520.8 6,918,618Other cattle 43,396 375.0 8,136,699Cattle on feed 13,332 2027.8 13,517,097Breeding swine 6,113 374.0 1,143,213Market swine 33,742 171.6 2,895,074Breeding sheep 4,770 45.1 107,562Lambs 2,962 34.1 50,506Broilers 8,545,305 1.1574 4,945,168Layers 337,968 11.8625 2,004,573Pullets 98,093 3.6135 177,230Turkeys 270,746 6.3539 860,146Total 51,563,2591 Intake values based on DDGS being 90% dry matter (i.e., “as fed” basis). 2 Five-year (2000-2004) average U.S. inventory for all classes except broilers and turkeys which are annual U.S. production. Source: USDA NASS 3 With the exception that broilers, pullets, and turkeys are pounds/bird over the life of the animal, all others are annualized lbs per animal
17
The 51.56 million tons for potential DDGS consumption found in table 3 is higher than that
estimated by other experts. For example, Cooper, citing PRX (ProExporter Network), reports a
theoretical domestic market of 42 million tons. While the specific assumptions (e.g., DDGS
consumption per class) used to estimate the potential market for DDGS may differ, making it
difficult to know which value is most correct, the important finding is that the domestic livestock
numbers are sufficient to consume the distillers grains of an increasing ethanol industry. It is
also important to recognize that ruminants (i.e., beef and dairy cattle) make up over 75% of this
projected market, while poultry represents about 15%, and swine accounts for only about 8%.
As would be expected based on the data presented in table 3, the majority of distillers grains is
fed to ruminants (beef and dairy cattle). However, in recent years there has been an increasing
share of distillers grains being fed to poultry and swine. Many of the distillers grains have been
dried at the ethanol plant and marketed as DDGS and then fed to livestock or exported. Distillers
grains that are not dried, WDGS, are considered an excellent feed source for feedlots and
possibly dairies. In a discussion of the market for ethanol co-products, Cooper suggests it will be
critically important to increase the use of DDGS in swine and poultry diets. However, non-
ruminant animals, such as swine and poultry, require distillers grains to be dried if they are to be
included in feed rations. As the increasing cost of energy has increased the cost of drying
distillers grains, there has been an increased interest in feeding wet distillers grains as a means of
reducing costs. Coltrain points out that the savings of not drying can be significant when natural
gas prices are high (e.g., $7/mcf).
Figure 10 shows annual average prices of natural gas from 1981 through 2006 (August 2005
through December 2006 are U.S. Department of Energy forecasts). Natural gas is the energy
source typically used in ethanol plants for manufacturing ethanol and for drying distillers grains.
It can be seen that natural gas prices have increased significantly in the last several years and are
forecasted to remain high through at least 2006. This provides a strong economic incentive for
ethanol plants to market their distillers grains as wet feeds (WDGS) as opposed to drying them.
However, there are several major concerns with marketing distillers grains as wet feeds. First,
the “shelf life” of WDGS is considerably less than that of DDGS. Coltrain reports that the shelf
life for wet distillers is three days during warm weather and six days during cooler weather. This
18
shorter shelf life increases the need for users maintaining small inventories and for “just in time
delivery” from the plants. Another concern with marketing distillers grains as wet feeds is that
transportation cost is higher because much more water is being shipped. Figure 11 shows the
annual average prices of taxable diesel fuel from 1981 through 2006 (August 2005 through
December 2006 are U.S. Department of Energy forecasts). Diesel prices have followed natural
gas prices quite closely. That is, they have increased significantly in the last several years and
are projected to remain high in the near future. This means that there is a strong economic
incentive to minimize the distance distillers grains are shipped due to high transportation costs.
0
1
2
3
4
5
6
7
8
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Nat
ural
gas
($/m
cf)
Source: Energy Information Association
Figure 10. Annual prices of natural gas, 1981-2006 (August 2005 through December 2006 are forecasts)
19
0
50
100
150
200
250
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Die
sel f
uel (
cent
s/ga
llon)
Source: Energy Information Association
Figure 11. Annual prices of taxable diesel fuel, 1981-2006 (August 2005 through December 2006 are forecasts)
The high energy costs that we currently are experiencing indicate the economics of ethanol
production may have changed from the past. Specifically, it may become advantageous to locate
ethanol production plants where they can market co-products as WDGS, thus saving on drying
costs and transportation costs. Another factor that might contribute to this shifting of where
plants will be located in the future is the size of plants. As ethanol plants continue to increase in
size, there likely will be advantages to being located in areas where large markets for the co-
products exist. Appendices B through E show maps of livestock production and inventories.
Using these spatial relationships of livestock numbers, along with the DDGS consumption values
reported in table 2, a geographical representation of the potential distillers grains market was
estimated. Assuming national production of 51.56 million tons DDGS, figure 12 shows the
potential consumption of DDGS by county for every county in the U.S.3 Counties with the
highest potential for consumption of DDGS tend to be in California, the High Plains (northern 3 Note that these values represent the DDGS consumption potential based on values in table 2 and the livestock numbers depicted in the maps in Appendices B-E and do not reflect current consumption of DDGS.
20
Texas, western Kansas, and eastern Kansas), and Nebraska—counties with high concentrations
of beef and dairy cattle.
Source: Kansas State University estimate
Figure 12. Potential consumption of DDGS by county (nationwide total of 51.56 million tons)
Although the information in figure 12 is useful to get a feel for which counties have the most
potential for the consumption of distillers grains, because county sizes vary significantly, a
density measure is more useful. Figure 13 shows the potential consumption of DDGS as tons per
square mile by county. When the market for DDGS is presented this way, it is more obvious as
to why there are numerous ethanol plants in northwest Iowa, eastern South Dakota, and southern
Minnesota. However, this figure also makes it clear that southwest Kansas and northern Texas
represent a large potential market for distillers grains. Furthermore, this market for distillers
grains is almost exclusively driven by ruminants (i.e., dairies and beef cattle feedlots) which can
be fed wet distillers grains. The market in Iowa and Minnesota is much more driven by swine
and poultry, livestock classes that generally require dry distillers grains.
21
Source: Kansas State University estimate
Figure 13. Potential consumption of DDGS per square mile by county (nationwide total of 51.56 million tons)
Considering the high energy costs depicted in figures 10 and 11 combined with the large
potential market for wet distillers grains in the High Plains (figure 13), it seems reasonable to
assume that there could be a shift of new ethanol production in the future.4 However, as was
noted, the upper Midwest has a definite advantage with regards to the availability and price of
corn, which is the primary feedstock of ethanol. Thus, the location of future ethanol plants will
have to account for the trade-off between corn prices and the market for co-products. The large
increases in energy prices and the trend towards larger ethanol plants suggest that what was
optimal in the past may not be optimal in the future.
Summary
The ethanol industry has been growing rapidly in the last five years and often has been viewed as
a “value added” opportunity for corn and grain sorghum producers. Currently, slightly over half
4 While tables 2 and 3 and figures 12 and 13 depict DDGS demand potential and do not mention WDGS, this “standardization” was done for analysis purposes and does not imply the distillers grains would necessarily be dried (DDGS) if it would be more profitable to feed them wet (WDGS).
22
of the ethanol plants in the U.S. are farmer owned, however, less than a third of the plants
currently being constructed are farmer owned. As plants continue to get larger and require more
capital, farmer-owned facilities likely will become less common.
Based on the ethanol levels mandated in the 2005 energy bill signed by President Bush, the
ethanol industry will continue to increase at a rapid pace. This growth in the ethanol industry
should be positive for grain producers as the amount of corn and grain sorghum required to meet
the mandated levels of ethanol production is estimated to be 25% of total production within the
next 8-10 years. Thus, even though crop producers may choose not to own plants themselves in
the future, they likely will benefit from an increased demand for the grain they produce.
Even though the ethanol industry is undergoing a major expansion, i.e., plants currently under
construction will increase capacity 25.7%, the industry will have to continue to grow
significantly more in order to meet the mandated future levels of ethanol production. The
majority of existing production facilities is located in the upper Midwest (Illinois, Iowa,
Minnesota, Nebraska, and South Dakota). This has been driven by the large available supply and
relatively low price of corn in this region, as well as sufficient livestock numbers to provide a
reliable market for the major co-product (distillers grains) of ethanol production. Several key
factors likely will drive where future ethanol plants will be located. Energy prices, both natural
gas and diesel fuel, are significantly higher today than just five years ago, which provides a
strong economic incentive to market wet as opposed to dry distillers grains (WDGS rather than
DDGS) and at locations as close to plants as possible. If the cost savings associated with
marketing WDGS in close proximity to the ethanol plant exceeds the cost of shipping in dry
corn, then likely we will see an increased number of ethanol plants located in the High Plains
regions of southwest Kansas and the Panhandle of Texas. This area has large concentrations of
feedlots and an increasing number of large dairies that provide potential markets for WDGS.
It is important to remember that the ethanol industry is a commodity industry, which means that
being a low cost producer will be critical for long-term survival in the industry. The feedstock in
ethanol production, typically corn, represents the single largest cost and, accordingly, often
receives the most attention. However, with high energy prices, such as those faced in 2005, it is
23
important to account for all inputs and to credit all co-products when determining the net cost to
produce ethanol. This is especially true given that there is very little relationship between
ethanol and corn prices—high corn (input) prices do not imply high ethanol (output) prices.
References
Baker, A. and E. Allen. Feed Outlook, Economic Research Service, USDA. FDS-05b, February 11, 2005. Cargill. “Demeter Enterprises, LLC to Build Ethanol Plants in Indiana, Nebraska, and Ohio.” Cargill news release, June 29, 2005. Available at http://www.cargill.com/news/news_release/050629_demeter.htm (accessed September 9, 2005). Coltrain, D. “Economic Issues with Ethanol, Revisited.” Kansas State University, September 2004. Available at http://www.agmanager.info/agribus/energy/ (accessed March 1, 2005). Coltrain, D., E. Dean, and D. Barton. “Risk Factors in Ethanol Production.” Kansas State University, April 2004. Available at http://www.agmanager.info/agribus/energy/ (accessed March 1, 2005). Cooper, G. “An Update on Foreign and Domestic Dry-Grind Ethanol Co-products Markets.” National Corn Growers Association. Available at http://www.ncga.com/ethanol/pdfs/DDGSMarkets.pdf (accessed September 3, 2005). Farm Journal Media Beef Today. “Comfy on the High Plains.” November 2004. Hamman, L., K.C. Dhuyvetter, and M. Boland. 2001. “Economic Issues with Grain Sorghum.” Kansas State Univ. Coop. Ext. Serv. Bull. MF-2513. Hansen, R. “Ethanol Industry Profile.” Agricultural Marketing Resource Center Factsheet, Iowa State University, May 2004. Available at http://www.agmrc.org/agmrc/commodity/grainsoilseeds/corn/ethanolprofile.htm (accessed March 1, 2005). Hart, C.E. “Ethanol Revisited.” Iowa Ag Review, Center for Agricultural and Rural Development, Iowa State University, Summer 2005. Available at http://www.card.iastate.edu/iowa_ag_review/ (accessed September 3, 2005). Hart, C.E. “Ethanol: Policies, Production, and Profitability.” AgDM Newsletter Article, Iowa State University, June 2004. Available at http://www.extension.iastate.edu/agdm/ (accessed September 3, 2005). Johnson, B. Associate Professor, Animal Science and Industry Department, personal communication, March 2, 2005.
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McNew, K. and D. Griffith. “Measuring the Impact of Ethanol Plants on Local Grain Prices.” Review of Agricultural Economics, 27(2,2005):164-180. National Corn Growers Association. “Ethanol Economics – Ethanol’s Effect on Corn Prices. Available at http://www.ncga.com/ethanol/main/economics.htm#corn (accessed March 1, 2005). Noll, S. “Corn Distiller Dried Grains with Solubles for Poultry.” University of Minnesota, March 2003. Available at http://www.ddgs.umn.edu/diets-poultry/mcga_ddgs_for_poultry.pdf (accessed September 3, 2005). Renewable Fuels Association website, http://www.ethanolrfa.org/ (accessed August 27, 2005(a)). Renewable Fuels Association. “Homegrown for the Homeland, Ethanol Industry Outlook 2005.” February, 2005. Available at http://www.ethanolrfa.org/ (accessed March 1, 2005(b)). Tokach, M. Professor, Animal Science and Industry Department, personal communication, July 5, 2005. Top Producer. “Jump-Start the Grain Belt.” January 2005. United States Department of Agriculture, Farm Service Agency. Available at http://www.fsa.usda.gov/ks/ (accessed June 24, 2005) United States Department of Agriculture, National Agricultural Statistics Service. Available at http://www.nass.usda.gov/QuickStats/ (accessed June 24, 2005). Urbanchuk, J.M. and J. Kapell. Ethanol and the Local Community.” AUS Consultants/SJH & Company, June 21, 2002. Available at http://www.ncga.com/ethanol/pdfs/EthanolLocalCommunity.pdf (accessed March 1, 2005).
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Appendix A – Geographic Distribution of Corn and Grain Sorghum Production and Prices Average corn production (10.06 billion bu), 2000-2004 Sources: USDA NASS; and Kansas State University
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Average grain sorghum production (0.44 billion bu), 2000-2004 Sources: USDA NASS; and Kansas State University
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Corn and grain sorghum production (10.60 billion bu), 2000-2004 Sources: USDA NASS; and Kansas State University
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Corn price (average = $2.32) Sources: USDA FSA; USDA NASS; and Kansas State University
Grain sorghum price (average = $2.06) Sources: USDA NASS, USDA FSA; and Kansas State University
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Appendix B – Geographic Distribution of Beef and Dairy Cattle Inventories Average beef cow inventory (33.25 million), 2000-2004 Sources: USDA NASS; and Kansas State University
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Average milk cow inventory (9.1 million), 2000-2004 Sources: USDA NASS; and Kansas State University
31
Average other cattle inventory (43.4 million), 2000-2004 (other cattle represent all cattle that are not cows or cattle on feed) Sources: USDA NASS; and Kansas State University
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Average cattle on feed (13.3 million), 2000-2004 Sources: USDA NASS; and Kansas State University
33
Appendix C – Geographic Distribution of Swine Inventories Average breeding hog inventory (6.1 million), 2000-2004 Sources: USDA NASS; and Kansas State University
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Average market hog inventory (53.5 million), 2000-2004 Sources: USDA NASS; and Kansas State University
35
Market hog (60+ lbs) inventory (33.7 million), 2000-2004 Sources: USDA NASS; and Kansas State University
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Appendix D – Geographic Distribution of Sheep and Lamb Inventories Average breeding sheep inventory (4.8 million), 2000-2004 Sources: USDA NASS; and Kansas State University
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Average market lamb inventory (2.3 million), 2000-2004 Sources: USDA NASS; and Kansas State University
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Appendix E – Geographic Distribution of Poultry Inventories and Production Average broiler production (8.5 million), 2000-2004 Sources: USDA NASS; and Kansas State University
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Average number of layers (338.0 million), 2000-2004 Sources: USDA NASS; and Kansas State University
40
Average number of pullets (98.1 million), 2000-2004 Sources: USDA NASS; and Kansas State University
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Average turkey production (270.7 million), 2000-2004 Sources: USDA NASS; and Kansas State University
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Appendix F – Geographic Distribution of Ethanol Plants Existing Plants Sources: Renewable Fuels Association (2005a); and Kansas State University (90 plants with an annual capacity of 3.96 billion gallons — 8/27/05)
Plants under construction/expansion Sources: Renewable Fuels Association (2005a); and Kansas State University (18 plants with an annual capacity of 1.02 billion gallons — 8/27/05)
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