Beef Magazine is part of the Informa Markets Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Ethanol Fallout

Can a feedyard afford to ship in corn at $3-$4/bu.? What if it's too far from an ethanol plant to receive the byproduct? Can it match a plant's bids?

Can a feedyard afford to ship in corn at $3-$4/bu.? What if it's too far from an ethanol plant to receive the byproduct? Can it match a plant's bids? Will Southern Plains yards ease northward?

Feedyards are faced with these questions as a nation thirsty for less reliance on foreign oil turns to alternative fuels brewed from corn and other grains. These operations are undoubtedly facing a tighter supply of feed grains, much of which will be cooked for production of motor fuel instead of feed.

Some feel feeding numbers may trickle toward northern feeding areas due to higher corn prices on top of higher transportation costs caused by — that's right — higher fuel costs. A vicious circle? Maybe not, but it is a double whammy for southern-most feedyards that depend on Corn Belt grain.

Darrell Mark, University of Nebraska-Lincoln (UNL) economist, isn't convinced yet that feeding capacity will shift permanently north. However, he says ethanol-industry growth in the Northern Plains and western Corn Belt creates a competitive advantage for northern cattle feeding in a couple of important ways.

“First, northern feedyards won't have the extra transportation costs on already expensive corn,” Mark says. “Second, Northern Plains feedyards are much closer to ethanol plants and can take advantage of feeding wet and dry distiller's grains plus solubles, and corn gluten feed.”

John Lawrence, Iowa State University Extension economist with the Iowa Beef Center, says even with more accessibility to ethanol plants by northern yards, there's no guarantee southern numbers will dwindle.

“I argue the Corn Belt has had a feed-cost advantage (over Southern Plains feedyards) for 30 years, and the industry moved south. What's different now?” he asks.

Right now, about 30% or more of the nation's fed cattle are finished in the Texas-Oklahoma-New Mexico region, a total of about 7 million head/year.

“We'll continue to have an advantage of feeding cattle in the TCFA (Texas Cattle Feeders Association) area regardless of feed prices,” says Ross Wilson, TCFA president in Amarillo. He points out the future availability of ethanol byproducts in his region.

Several major ethanol facilities are being built or are on the drawing board. In Hereford, TX alone, the proclaimed “Beef Capital of the Nation,” there are two huge ethanol plants being built, each with an annual production capacity of 100 million gallons.

Each will use about 40 million bu. of corn annually for that production. And most byproducts are destined for feedyard rations.

“If 20% of a feedyard ration is the byproduct of an ethanol plant, then a 100-million-gal./year (mgy) plant needs 300,000 or more head of cattle to consume its byproducts annually,” Wilson says.

In late October, the Renewable Fuels Association (RFA) Web site indicated only one, 30-mgy plant in operation in the region; it's in Portales, NM. But RFA says there are plants with a combined 270-mgy capacity under construction. And with the unit-train ability (which both of the Hereford plants will use), the huge cattle numbers and close proximity to the West Coast, Gulf Coast and large Texas city markets, more ethanol plants will likely pop up.

Look at the numbers

History shows Texas emerged as a giant in cattle feeding with the introduction of hybrid grain sorghum coupled with irrigation in the 1960s. Irrigated corn also took off. In October 1964, for example, Texas had about 350,000 cattle on feed, which jumped to 645,000 by 1967.

By October 1993, that number more than tripled when the cattle-on-feed report showed 2.3 million head on feed in Texas. October on-feed numbers have been similar or slowly climbing in Texas ever since: 1.9 million in '88, 2.4 million in '93, 2.6 million in '98, 2.8 million in '03 and 2.9 million in October 2006.

At the same time, Iowa, once the leading cattle-feeding state that always had more than 1 million on feed in October, has seen a decline. That change started in the late '70s and early '80s, as commercial yards got bigger and took the place of most Corn Belt farmer-feeders. Kansas and Nebraska yards held their numbers and grew. So did Colorado. And California has remained a strong feeding state for the state's many dairy breeds.

But cycles can change, Mark says, pointing out that in late 2006, cattle-on-feed data showed growing cattle inventories in Nebraska, South Dakota and Iowa.

“While this isn't enough data to support a new trend, it seems to point to the discovery of a new competitive advantage in the north,” he says, noting the benefits of feeding wet distiller's grain and solubles (WDGS) from nearby ethanol plants.

“UNL research demonstrates WDGS and corn gluten (another ethanol plant byproduct) can be included in up to 40% of the diet dry matter intake, typically offsetting dry-rolled corn, to optimize performance,” Mark says. “Essentially, even though corn prices may be higher with ethanol production, cattle-feeding operations near the ethanol plants may have an advantage because a significant amount of the diet's corn can be replaced with WDGS.”

Lawrence says he expects some successful existing producers (commercial feedyards) to expand in the Corn Belt.

“I also think the Corn Belt will continue to lose the small farmer-feeder who decides to sell high-priced corn rather than buy the WDGS or cattle to feed,” he says. Lawrence expects a loss of more Corn Belt cow herds to expanded corn production.

“I don't think we'll see a return to the 1960s with a pen of cattle on every farmstead. I do believe it will be difficult to displace large, well-established feedlots, even though they're not well positioned relative to WDGS,” Lawrence says.

That said, Lawrence adds some of those operations may struggle and even change hands during times of high-priced corn.

“It may be advantageous for successful feedlot managers in the High Plains to feed cattle in the north to learn what they can about distiller's grain solubles (DGS). They may want to focus their next expansion on the Corn Belt,” he says.

Southern success

Even with a local corn basis 50¢ or higher than the Corn Belt, Texas yards have made it work for decades. Larger commercial yards, access to five major packing plants, a steady supply of nearby feeder cattle, and arguably a milder, less humid climate, have helped closeouts compete against northern feedyards with mountains of corn in their backyard.

In the past decade, unit trains added to the Southern Plains mix have helped hold grain costs down in an area that must import 50-60% of its feed grains. But higher fuel costs still make corn more expensive there.

“Our basis has been plus-60¢ or higher in recent months,” says David Baumann, manager of Dawn Custom Cattle Feeders, Dawn, TX, near Hereford. It's part of a company that recently acquired the Bartlett II feedyard to now have a 50,000-head feeding capacity.

Based on futures prices in the $3.40-$3.50 range, that puts a typical cost of corn there at about $4/bu., and the cost of gain at 70¢-75¢/lb. However, breakevens are still in the $84-$85/cwt. range, Baumann says, due to lower feeder-cattle costs, which were in the $95/cwt. range for 7-weight heifers in mid November.

Lawrence says Iowa feedlots at the same time had corn basis at 35¢ under the board and modified DGS at $35/ton. Cost of gain on similar cattle is 62¢-64¢/lb., and the breakeven was in the $82/cwt. range.

TCFA's Wilson says the expansion of ethanol production on the Southern Plains has feedyard operators curious as to the tradeoff on feeding WDGS and other byproducts as opposed to steam-flaked or dry-rolled corn. A 20% portion of the ration is being considered in that region, as opposed to 40% on the Northern Plains.

Baumann, whose feedyard is about a 15-minute drive from one of the 100-mgy plants under construction, sees adding WDGS to his ration. But with questions surrounding the amount of WDGS that will work best in Texas Panhandle rations, he isn't sure how much.

“We see using 10-30% WDGS in our ration,” he says. “The consistency of the amount of dry matter available can differ. An ethanol plant may guarantee 35% dry matter, give or take 5%. That won't work for us. A feedyard needs a nearly exact figure, maybe one-half of a percent.”

No more cheap corn

Have corn prices entered a new era? Most market analysts think so. Cattle-Fax's Randy Blach says the current situation “isn't a short-term thing;” Lawrence sees a price plateau about $1/bu. higher.

“We'll have volatility around it, but I think we'll average closer to $3 in the Midwest than we will $2,” he says. “As a result, when prices are in the low $2 range, there will be buying opportunities (for feeders) rather than selling.

“The basis is yet to sort out and the local demand near ethanol plants will cause more basis volatility, but I still think the Midwest and High Plains will be separated by transportation cost,” Lawrence says.

Mark stresses that cattle feeders must be prepared, not only for higher corn prices, but more variability as well.

“With very tight stocks-to-use ratios for corn, prices will be very susceptible to production problems (drought, flooding, etc.) and react with bigger price changes,” Mark says.

“It's a good idea to be more proactive in managing input price risk, particularly corn, in light of this variability. Consider hedging using a ‘cattle crush’ — shorting fed cattle and going long on feeder cattle and corn — to protect against decline price spreads. Livestock Gross Margin insurance is another way to hedge this risk,” he adds.

Baumann says feedyards take different approaches to securing corn, especially when prices are so high. Futures, options and forward contracting are among them.

Baumann agrees with Wilson that migration of feeding capacity to the north isn't likely.

“We feel there will be better technology that will make it economically feasible to ship more distiller's grain out of the Midwest to our part of the world,” Wilson says.

Baumann points out that, with the realm of biofuels research nationwide into the use of products other than corn to produce ethanol, the demand for corn as the major source may decrease.

“I don't know if it will be five or 10 years,” he says, “but there are efforts underway to design methods of breaking down other forms of cellulose, such as corn stalks and even mesquite. So if you move a feedyard north, by the time that would happen, we may have changed the technology of ethanol production.”

He and others also question how long the federal government will continue to subsidize biofuels production, a subsidy that provides a 50¢/gal. tax break for ethanol production. However, there's evidence U.S. consumers want more independence from foreign oil and don't mind footing part of the bill.

The Biotechnology Industry Organization says a survey conducted by Harris Interactive found 82% of adults say national and state governments should provide financial incentives to biofuels producers to encourage the production and availability of biofuels. Also, 69% say they'd use U.S.-made biofuels even if they cost slightly more than conventional gasoline.

So until ethanol can be made from trees, switch grass, stover or other materials, corn is king. Expect to pay more for it, no matter where cattle are fed.

Larry Stalcup is a freelance writer based in Amarillo, TX.

TAGS: Technology