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There Is Opportunity In An Ethanol World

Ethanol expansion is forcing the beef industry to change, but there is opportunity in that turmoil.

January 30, 2012

4 Min Read
There Is Opportunity In An Ethanol World

As ethanol expansion continues, beef producers will be forced to become better managers in order to stay in business. That’s the message delivered by a Kansas State University economist Ted Schroeder during the recent Range Beef Cow Symposium in Mitchell, NE.

In 2011, an estimated 40% of the U.S. corn crop was diverted to the production of ethanol. With more and more corn going into ethanol, producers are faced with growing feed costs, higher land values, and less revenue from what they produce.

According to Schroeder, for every 1 bu. of corn made into ethanol, 2.8 gals. of ethanol are produced, and 17 lbs. of dry distillers grain (DDGs).

“When 40% of corn is used for ethanol production, it amounts to about a 28% reduction in feed volume availability,” Schroeder says. “Roughly 30% of the feed volume of corn used in ethanol production is converted into another feed ingredient that is a partial substitute for corn,” he explains. Although DDGs can be used as a partial feed substitute for beef and dairy cattle, it isn’t an equal substitute.

Most segments of the cattle industry have suffered as ethanol production continues to increase each year. “Ethanol production has increased the cost of corn,” according to Schroeder. “However, there are other factors that have also driven up the price of corn. In fact, research has shown corn would be only $1 to $1.50 lower today without ethanol expansion,” he says.

A wide effect

For cattle producers, ethanol expansion hasn’t only impacted the price of corn, but other grains and forages as well.

“As feed grain and corn prices increase, forage prices increase because hay ground can be used for other things. In some cases, it’s been converted to corn,” Schroeder says. “In addition, increased ethanol production and associated corn prices have increased the value of land that is capable of forage production, and indirectly increased grazing land values as well,” he explains.

Producers are also seeing higher costs to just maintain their cowherd and develop replacement heifers. “Conservatively, I think costs have increased $15/head for cows, while revenue has decreased about $60/head, for each $1 increase in corn price. Conservatively speaking, a $75/head loss is a lot of money for producers who already operate on thin margins,” he explains.

In addition, Schroeder says that, as corn prices increase, it’s becoming harder for feedlots to pay more for feed supplies, and afford to keep their lots full. “With every $1 increase in corn and the increase in forage that goes along with it, revenue is probably reduced about $60/head.” 

Since beef cattle have a higher feed-to-gain conversion compared to pork and poultry, the increased input costs make it harder for beef to compete against the other two leading protein sources in the marketplace.

“Although ruminants may be better able to utilize DDGs than other livestock, this isn’t enough to fully offset the higher corn prices. Cattle convert feed into meat less efficiently than hogs or chickens,” he explains. “But, cattle are more flexible in that they can also gain on cheaper forages; so, as grain prices increase, more gain can be secured by feeding more forages and less grain in contrast to hogs and poultry,” he explains.

The beef industry will adjust to the reduction in profitability by shrinking the beef cowherd, Schroeder believes, with some producers eventually exiting the business. “A smaller beef cow industry is likely to result with the individual producers who are left in the industry being more profitable than they were prior to the industry contraction. This is the result of several factors, but the most important are increased prices for beef, fed cattle and feeder cattle,” he notes.

Since feedlot and packing facilities are most efficient when operated at capacity, the shrinking cowherd will increase costs at these facilities, and ultimately force some out of business.

“This excess capacity has helped support calf prices at higher levels in the short run, at least until either the capacity is utilized more fully, or downstream firms or plants exit the industry,” he explains.

A smaller beef industry

But, in the long term, the end result of the increase in feed grain prices associated with ethanol production is a smaller beef industry, restructuring of the industry with the most efficient producers growing in size and higher beef and cattle prices, Schroeder says.

To survive and become more efficient, Schroeder suggests producers continue to invest in technology development and adoption, as well as seeking out intensive management strategies that improve their production efficiency.  

Gayle Smith is a freelance writer based in Kimball, NE.

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