Ethanol production fuels high corn prices

The booming ethanol industry may help ease U.S. dependence on foreign oil, but many California livestock producers fear the growing demand for corn used in ethanol production will drive up costs to feed their cows and chickens.

"Everybody is all excited about ethanol, but all it's going to do is raise the price of corn, which hurts dairies, feedlots and anybody else who uses it for feed," said Sacramento County dairy producer Case Van Steyn.

Despite a bumper crop this year, corn is selling for record-high prices that are expected to remain strong in the coming year as more U.S. ethanol plants come online. While these surging prices may be good news for farmers in the nation's corn belt, they are causing much concern with California dairy farmers and ranchers who depend on the crop for feed.

For the state's dairy producers, the timing couldn't be worse. The rising cost of feed is one more blow in a year already plagued with sagging milk prices, high energy costs and major herd losses from the summer heat wave.

"Right now the dairy business is at its ultimate worst," said San Joaquin County dairy producer Hank Van Exel. "Our feed cost is the highest it's been in 15 years. It kind of caught us off guard. It's going to affect milk production tremendously."

With the 2006-07 corn crop forecast at 10.7 billion bushels, Rich Hoch, president of California Grain and Feed Association, said there's plenty of corn in the market for animal agriculture needs, but the current supply may not be sufficient to cover future demands from ethanol as well as other corn uses such as for production of corn syrup and cereal.

The U.S. ethanol market has grown dramatically in recent years as more states ban MTBE, a fuel additive used to increase octane levels of gasoline, and replace it with ethanol to meet state and federal clean air requirements.

The National Energy Bill passed by Congress in 2005 is also fueling more ethanol production by requiring refiners to increase ethanol usage to 7.5 billion gallons by 2012. About 30 percent of all U.S. gasoline now contains 10 percent ethanol. Californians consumed about 900 million gallons of ethanol in 2004 and 2005, up from 750 million gallons in 2003.

As of February 2006, the annual U.S. ethanol capacity stood at 4.4 billion gallons, with another 2.1 billion gallons on the way as additional plants come into production, according to the U.S. Department of Agriculture. One bushel of corn produces about 2.7 gallons of ethanol.

"The problem is the level of ethanol that's coming online is coming online at such rates that the only way to offset it is to plant more acres of corn," said Hoch, a poultry producer in Stanislaus County. "If the value of corn stays in this range, Midwest farmers will take acres away from something — be it soybeans or wheat — and replace it with corn. Whether they can replace it at a level that will create enough supply for everybody down the road, I don't know the answer to that."

Although corn has not been a major crop in California, some farmers are already heeding the call. Mark Bagby, spokesman for the Bakersfield-based Calcot Ltd., said more cotton farmers have turned to planting corn due to increased demand from Kern County dairy farms.

The bulk of the new corn mainly goes into silage for the cows, which need both hay and corn for feed. The price of corn is stronger than cotton, Bagby said, as is top-quality alfalfa hay, which has seen robust prices for several seasons.

Richard Matteis, executive vice president of the California Grain and Feed Association, said he is not aware of any significant increase in the state's corn acreage at this time, but more corn may be planted as the San Joaquin Valley's two new ethanol plants come into full production.

The Tulare County-based Phoenix Bio-Industries, located in Goshen, opened in late 2005 and currently produces 27 million gallons of ethanol a year with plans to boost annual production to 35 million gallons. Construction of Pacific Ethanol Inc. in Madera was completed in October and is now operating at its capacity of 35 million gallons per year.

Officials from both plants initially said they would like to seek long-term contracts with California farmers to supply corn for ethanol, but so far much of their corn still comes from the Midwest. Calls made to Pacific Ethanol and Phoenix Bio-Industries for comment were not returned.

"If this trend holds, maybe we'll see more acreage go in," said Matteis. "But you always have to remember: California has lots of crops you can grow and sometimes there's a lot of them that are better than corn even at high prices."

Mark Hansen, a cotton grower in Kings County and chairman of the California Farm Bureau Federation's cotton advisory committee, said some cotton farmers may be switching to corn, particularly if they are near dairy farms, but not too many are growing grain corn for ethanol.

Only corn kernels are used in ethanol production, while silage corn includes the entire plant stalk, which costs considerably more to transport. At this time it is still more economical for ethanol plants to ship grain corn from the Midwest.

"The price for grain corn is probably not high enough to get very many farmers to grow it," Hansen said. "I think most of all the corn is still going to be imported for the ethanol plants, but there might be some growers growing some for grain corn, but the majority is for silage."

Meanwhile, California dairy farmers are tweaking feed rations and feeding their cows more corn substitutes such as wheat and barley.

"We are working with our nutritionist," said Tulare County dairy producer Lori Cardoza. "We're trying to minimize corn as much as we can and replace it with other byproducts that satisfy the same nutrient requirements."

Many dairy producers grow a portion of their feed, typically alfalfa or silage. But they buy most of their grain corn from the Midwest. Transportation is usually 20 percent of the cost. With current corn prices, many producers are changing what they grow on their farms and planting more corn.

Van Exel said he typically grows his own corn for silage, but next year he plans to set some of that corn aside to dry for grain.

"Corn is a major staple of a ration," he said, adding that he has also adjusted his feed ration to use less corn. "I've done a lot of things, but you still have to feed your cows."

For those in the poultry business, corn makes up a major part of the ration — 60 percent to 65 percent, said Hoch, and there's not much he can adjust with that formula.

"We're very dependent upon corn, and we really don't have a lot of good alternatives to replace it, so the net result to us is that I have to pay more to get it, and that makes the cost to produce the egg higher," he said. "What's going to happen is that we as consumers are going to have to pay more. We're going to pay more for the ingredients that we put into our animals that we later consume."

There may be an upside to the burgeoning ethanol market for livestock producers, however. As production of the alternative fuel increases, so will the supply of ethanol byproducts, the most prominent of which is distiller's grains, which can be used in livestock feed.

The high-protein byproduct has so far been primarily used as a feed ingredient in dairy and beef cattle operations but is making its way into feed rations of hogs and poultry. A 56-pound bushel of corn used in ethanol production generates about 17.4 pounds of distiller's grains, according to the USDA.

"It's still not a total replacement for corn," said Van Exel of distiller's grains. "Large, large quantities will be available, but you can only feed so much of that."

Most distiller's grains are produced in the Midwest, where they are dried for shipping, resulting in higher costs. Located in the heart of the state's dairy sector, California ethanol producers are hoping to market the wet byproduct directly to local dairy farms at cheaper prices.

Michael Marsh, chief executive officer of Western United Dairymen, said California dairies could easily use most of the distiller's grains produced in the state, but the byproduct may be more suitable a feed for beef cattle, which are given a high protein diet to add on bulk. One possible spoiler that might prevent dairy operations from taking more distiller's grains is the state's stiff air regulations.

"Farmers have invested significant amounts of money to try to comply with new air regulations on (volatile organic compound) emissions," said Marsh. "If they were to start importing and changing their feed ration, which has been shown to be probably the highest source of VOC emissions on the farm, they may have an additional issue to deal with such as enhanced VOC emissions from the farm."

CaliforniaFarm Bureau Federation

1. Wet U.S. Midwest sections may lead to fewer corn acres
2. Where’s the rain? Parched states can’t shake the drought
3. Ouch — I stuck myself!
4. World Dairy Expo announces dairy cattle show manager
5. Program planned for first U.S. Precision Dairy Conference, Expo
6. Alltech Symposium challenges agribusiness to make an impact

1. 4 rules for growing a business or industry
2. Commentary: Milk faces branding dilemma
3. Chocolate milk a top post-workout food
4. Seven jobs more dangerous than farming
5. What do dairy exports mean for Minnesota?
6. Salma Hayek: Milk part of 'perfect' breakfast

1. Seven jobs more dangerous than farming
2. 2014 Farm Bill: Are we near an agreement?
3. Farm bill and immigration reform action needed
4. Class III futures close out quietly last week
5. 4 rules for growing a business or industry
6. White House urges Senate to cut crop insurance in farm bill