The Economics of Distillers Grains

For the past decade, as ethanol production has steadily increased so has the production of distillers grains. Now, despite some ethanol plants idling operations, the industry continues to see ethanol and distillers grains production increase.
By Hope Deutscher | May 04, 2009
The production and demand for distillers grains continues to grow despite several dozen ethanol plants shutting down and/or reducing production capacity. Simla Tokgz, international grains and ethanol analyst with the Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University, says recent research conducted by the institute shows that in 2008, 27.7 million tons of distillers grains were produced, up from approximately 23 million tons in 2007. In 2009, that figure is expected to increase to 31.5 million tons.

"We have higher ethanol production this marketing year and therefore higher distillers grains production," Tokgz says. "It's the same for domestic use of distillers grains and net exports of distillers grains. In the U.S., domestic distillers grains production has increased this year and the net exports of distillers grains to the world from the U.S. have increased as well."

According to the U.S. Grains Council, one bushel (56 pounds) of corn used in the dry mill ethanol process yields about 17 pounds of distillers dried grains with soluble (DDGS) for global livestock and poultry industries. One gallon of ethanol equals about seven pounds of DDGS. The Council has been working to establish overseas markets since 2002, and last year's total DDGS exports totaled 4.5 million tons.

FAPRI's 2009 Agricultural Outlook shows distillers grains production continuing to grow as ethanol production increases to meet renewable fuels standard mandates over the next several years. As well, Tokgz says domestic and overseas demand from livestock producers who include distillers grains in their feed rations for livestock, such as beef and dairy cattle, hogs, and poultry, will continue to increase. According to the outlook report, U.S. distillers grains exports will increase more than 46 percent over the next 10 years, reaching 6.6 million metric tons in the 2018-'19 marketing year. Top destinations include Mexico, Canada, and Asia, including Indonesia, Japan, the Philippines, South Korea, and Taiwan.


SOURCE: John Lawrence, director, Iowa Beef Center

However, because distillers grains is a protein substitute for other feed products, such as corn and soybean meal, the demand among livestock producers will depend on prices. "We looked at the historical data when the first substitutions started and historically distillers grains really follows the corn price a lot because they substitute for each other," Tokgz says. "After the ethanol production boom, this relationship has not changed. Distillers grain prices still follow corn prices really, really closely. Corn prices lead, of course, distillers grains prices just followed and that is because of the substitution of these two types of products."

According to the FAPRI 2009 Agricultural Outlook, growing demand for biofuels, livestock, and dairy will strengthen prices and sustain them at historic highs across all commodities over the next decade. Lower petroleum prices encouraged slower growth in U.S. ethanol production and lower livestock and poultry production contributed to a sharp decline in feed use.

Supply and Demand
Ten years ago, before ethanol production really took off, the supply of distillers grains was relatively small and it was used primarily as a substitute for protein because of its high protein value, says John Lawrence, director of the Iowa Beef Center. With the price of distillers grains tracking fairly close to corn and soybean meal, he says the current distillers grains market is simply supply and demand economics. "And so yes, we've had fewer plants or we've had some plants shut down, and the supply of distillers grains has declined but as those plants shuts down, it's kind of a chicken and egg - they shut down in part because of high grain prices and low fuel prices but as they shut down, more corn is put on the market so farmers didn't have to buy distillers grains, they could buy corn."

Formed in 1996 through a legislative mandate, the Iowa Beef Center at Iowa State University in Ames, Iowa, serves as the university's extension program to cattle producers providing the latest in research-based information to improve the profitability and vitality of Iowa's beef industry.

Lawrence, who tracks the use of distillers grains by the livestock industry, says the question of whether distillers grains will run out is frequently asked. According to Lawrence the answer is simply no. If a local ethanol plant shuts down or reduces its capacity, livestock producers switch to using more corn than distillers grains in their feed rations. "Many of them (livestock producers) like distillers grains, but I don't know very many who would not rather feed corn, not because of quality issues, just because of price. If plants shut down, the price of grains comes back down and it's more profitable for the livestock producers."

When, and if, an ethanol plant returns to production and begins outputting more distillers grains, Lawrence is confident that local producers will return to using distillers grains. "What we're hearing on cattle has been an interesting evolution. You go back three or four years ago, I had farmers saying this ethanol plant just opened up in my area and they're trying to give me wet distillers grains for free if I'll pay the trucking, should I accept it?' And a year later they are coming back and saying I've been feeding this stuff all year from these guys and now they want me to sign a contract for a year to take it. Should I do that?' And then they come back a year later, saying I want to sign a contract for a year longer to lock in the price and they don't want to do that. They won't guarantee me a supply.' And now you talk to them and they say, well, some plants are drying it and selling it overseas, I can't get anything locally. I'm switching back to corn.'"

In 2005, Lawrence says out of 100 Iowa cattle feeders, more than 70 percent who had at least 500 head of cattle were feeding distillers grains. "I would guess it was probably 80 percent in 2008; early 2009, probably more. It might be 100 percent. We are the heart of ethanol, we are the heart of hogs and I think there are a lot of them (producers) using it." Lawrence says the exception would be the independent farmer who raises his own corn and mixes his animals' feed.

Beef producers will slowly change the percentage of distillers grains ration in their feed, according to Lawrence. "I think what our guys will do is maybe gear up to feed 40 percent, pushing the limits, and get comfortable with that and then as it gets more expensive or they can't get as much as they wanted, they may not go back to zero, they may say I'll put 25 percent in the ration. If I get enough and as price sets up, I can cut it back to there.' Because what happens in cattle is that it has a very high value relative to corn. I've heard as high as a 140 percent for the first 10 percent in the ration. Then you go to 20 percent and its worth 120 percent of corn and you get 30 percent in there, maybe it's worth a 105 percent of the corn. You get up to 50 percent, it's about equal to corn. Depending on how it's priced, so if the price of it goes up, they can cut back to 20 percent of the ration, it's still a good deal for them. But if the price comes down they can push that up to 30 percent, 40 percent or whatever."

Because the renewable fuels standard calls for 10.5 billion gallons of renewable fuel to be produced in 2009 and the majority of that renewable fuel is corn-based ethanol, Lawrence says the supply of distillers grains will continue to increase. However, there is currently lower domestic feed demand from the livestock sector. Lawrence says there are a number of reasons: cattle feedlots have had record losses; dairy prices have dropped; pork producers sustained their largest losses last winter since 1998; last summer's grain prices hit the poultry industry; and people have changed their eating habits as a result of the current recession. "People are more cautious about what they buy," he says. "They still eat but they don't eat out at restaurants. They don't spend as much - they'll have hamburger instead of steak, they'll eat chicken instead of meatloaf - and they're trying to value shop. So there's some demand things going on in the economy that's hitting the livestock producers as well." The response by animal agriculture has been to cut back on production.

Feedlot cattle, which are the biggest users of distillers grains rations, will continue to be lower in 2010, 2011 and 2012, according to Lawrence.

Historically a Volatile Market
There's been quite a bit of volatility in the distillers grain market, Lawrence says. "On a pound for pound basis, you look at dried distillers grains relative to the price of corn - that has declined over time. We used to be at 115 to 120 percent the price of corn back in 2000 and into 2002, now we're down under 90 to 94 percent," Lawrence says. "The volatility has increased a little bit relatively speakingand that's the reason why we see farmers will feed it sometimes and other times it's priced out of the diet, so they'll wait until it comes back in."

Lawrence says the distillers grains market has been historically volatile for several reasons. "Think about the growth of the distillers grains supply over the past five or six years it was one of those where supply was kind of outpacing demand. New plants would come on; there would be a good supply so we had to convince more livestock producers to look at that product." In Iowa, he adds, cattle producers have been feeding distillers grains to their livestock for more than 20 years. "And there was no problem getting adoption here among cattle but it was suddenly, can we justify feeding to hogs? Well, once we figured out we could, then there were a lot of hogs in Iowaso suddenly, boom, there's a big demand for it. Then we bring more plants on and have more supply, well, then it's what about poultry, well we've never tried it before. They start trying it and boom, the poultry comes on and suddenly it uses up that supply." The domestic success of feeding distillers grains kept growing and led to exporting it to other countries.

"I don't know if we've saturated all those markets," Lawrence continues, "...or if there's still untapped markets out thereit's just whether it works today or doesn't work, it ebbs and flows."

Hope Deutscher is an associate editor of Ethanol Producer Magzine. Reach her at hdeutscher@bbiinternational.com or (701) 373-8046.