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New Pricing Structure For Ethanol Byproducts?

There was a lot of buzz this week about a report from Texas A&M Extension economist Steve Amosson on how the ethanol industry is struggling with the rise in corn prices and natural gas. Uncertain economic conditions and the economic crisis have forced the canceling or postponement of projects with the capacity to produce an additional 11 billion extra gals. of ethanol annually.

The dilemma is that the ethanol-production mandates are still in place; in addition to the 15 billion gals. mandated for production from corn, an additional 21 million gals. generated from feedstocks other than corn are supposed to be online by 2022.

One positive note is that a Georgia plant that plans to convert wood chips into fuel received $90 million in financing from USDA last week. But cellulosic-ethanol production is very much in its infancy. Who knows if the science or the economics will be there in 4-5 years to the scope needed to meet the mandate.

Meanwhile, another report released this week detailed the use of ethanol-production byproducts by the livestock industry, and the likelihood that the ethanol industry will soon be producing more byproducts than what the livestock industry will be able to use. This is an interesting dynamic when one looks at prices for the future.

Initially, demand outstripped supply, and byproducts were priced essentially in relation to the price of corn or other potential feedstuffs. This will likely continue to be the pricing norm for the foreseeable future, but those relationships may adjust if production begins to exceed practical demand.

It’s likely that the price of byproducts relative to the price of corn will decrease over time, making it more attractive to livestock feeders. In turn, this will likely increase the regional advantages or disadvantages, as those with more access to byproducts – or the ability to utilize more byproducts – increase in competitiveness.