Betty Jo Gigot, Editor and Publisher

Looking toward a new year in the cattle-feeding industry, the booming ethanol business brings to the table a wildcard for farmers, feeders, investors and consumers alike. Ethanol has everyone’s
attention as corn prices show more volatility than they have in decades and players try to find a reasonable position in the vortex of the storm.

Front and center
Announcements of new plants going in come almost daily as the ethanol bubble floats higher. Today’s newspaper headline blares “Kansas Site Chosen for Potential New Ethanol Plant.” After getting approval, the $185 million plant will be completed in the fall of 2008 and will employ 40 to 45 people with a payroll of $2 million.

Needless to say, county commissioners are ecstatic and the town board is overjoyed with the selection of their area for the next ethanol project. And rightly so, for with the boom comes the hope for economic sustainability many small communities need to help keep their local economies intact. Who can blame them or the farmers raising corn? These same farmers and local investors, along with millions of Wall Street dollars, are participating in the scramble to decrease the nation’s dependence on foreign oil. As with any major shakeup, there are pros and cons and the new push in ethanol cuts a wide swath. From the cow-calf producer to the cornflake consumer, no one is immune.

Looking back
Did you know that Henry Ford’s original design of the Model T was alcohol powered because Ford was concerned about farmers? Prior to mechanization, up to 25 percent of a farm’s yield was consumed by the farm’s beasts of burden, and Ford was worried about what was going to happen to the farmers’ surplus grain when their horses were replaced by Ford’s new “horseless carriage.” In an interview with the New York Times in 1925, Ford called ethanol “the fuel of the future.” That opini on was widely shared in the automotive industry.

“The fuel of the future is going to come from fruit like that sumac out by the road or from apples or weeds or sawdust … almost anything,” he said. “There is fuel in every bit of vegetable matter that can be fermented. There’s enough alcohol in one year’s yield of an acre of potatoes to drive the machinery necessary to cultivate the fields for a hundred years.”

Ford also said that there were a lot more alcohol stills in the country than there were filling stations. As we all know, his dream was overcome by cheap petroleum.

The next bump in the road for ethanol was Prohibition. Alcohol was not for drinking and, since it was hard to tell the difference between moonshine and ethanol, it was not for driving, either.

During World War II, the government, nervous about U.S. dependence on overseas oil, revived the ethanol industry. The government even built several plants during the war, but when the war was over, petroleum-based products became the fuel of choice … again.

Then in 1979, wet mill plants owned by ADM and other companies switched from producing corn sweetener for soda pop year round to distilling ethanol in the winter.

In 1980, when Iran took hostages and it was feared that oil was headed to $100 per barrel, once again the country felt threatened by being at the mercy of foreign oil. Consequently, the government quickly responded. (Sound familiar?) Over 1,800 project permits were issued, most much smaller in scope than today’s large proposals. Of the 1,800 permits, several hundred were built and, by 1983 when the smoke cleared, 36 were in operation. Eventually, the country went back to its old suppliers. The ethanol industry grew slowly and barely remained viable, a direct consequence of $15 to $25 oil offering little incentive to investors. Many of the poorly built or poorly located ethanol plants were salvaged.

When talk around the coffee shop turns to ethanol and feeding co-products from ethanol to livestock, most of us in Kansas immediately begin thinking of Jack and Lee Reeve. The Reeve family built their ethanol plant during the 1980s and, since that time, has fed a lot of byproducts in their cattle-feeding operation. When I contacted Lee, he commented that corn-breeding companies have had a very positive impact on the ethanol industry. “The northern tier of states had always raised wheat and barley,” Reeve said. “Then with the advent of short-season corn, the Corn Belt was able to successfully expand north, with one drawback – they needed a place to market the corn.”

States like Minnesota began offering big incentives and mandating usage of ethanol to help their farmers. Many of the first ethanol plants were co-ops, funded by farmers who also committed to supply corn to the plants. “With corn at $2, it was a very good concept,” Reeve said. “What happened was fail-proof because even if the plant only broke even, there was a market for the corn being produced. Producing ethanol from cheap corn was a great solution for these farmers and, by drying the co-products (distiller grains) so they could be shipped south to cattle feeders, these plants were successful.”

The concept spread at a reasonable rate and if you look at a map today, most of the operational ethanol plants are still located in these cheap corn producing areas.

Today’s picture
Fast forward to 2006. The nation replaces MTBE with ethanol as the pollution-control additive and octane booster of choice. Add $80 oil plus unfavorable conditions in the Middle East to this equation and you have “the perfect storm.” The only word that seems to describe the ethanol industry to those of us in the cattle business is stampede. Projects are being promoted all across the country and, as we all know, everyone is on board that bandwagon. Some feel it will change the face of the cattle-feeding industry, moving part of the industry from the South back to corn-rich Iowa and definitely Nebraska. Others see major benefits in costs of gain, putting pressure on those same corn-deficit states. But the picture changes daily.

The future
Petroleum prices have dropped significantly, the Middle East is still in an uproar, and Congress has changed hands. Meanwhile consider the following:

1) The corn farmer will, if conditions stay the same, benefit from higher grain prices. His dependence on government farm programs will be reduced, but input and equipment cost increases could quickly eat additional profits.

2) Cattle feeders will have to adjust to higher grain prices. If they feed distiller co-products, the value of these products will have to be determined relative to corn. How corn will be offset by the use of byproducts in rations will depend on location from ethanol production and the objective of each operation’s feeding program. The fact is, ethanol byproducts have a definite value in rations. The question is “How will they work best for you?”

3) High corn prices will decrease the price of feeder cattle, with the ultimate loser in the industry being the cow-calf producer – a consequence of cattle feeding being a margin business, only paying, within reason, what they can afford for calves.

4) Ethanol processors and investors will profit until 1) the price of gas drops to a level at which ethanol can no longer be produced competitively; or 2) the price of corn drives breakevens higher than gas. Based on $60 oil, it appears corn should be priced around $4 per bushel. Another thing the processor should consider is the finite number of cattle available to eat their supply of byproducts. The rule of thumb in the ethanol business has always been that the sale of byproducts is your profit. As an outsider looking in, it seems to me that a number of proposed plants are each targeting the same cattle to consume their distiller byproducts … kind of like selling 200 percent of a Broadway show.

5) The end-user of ethanol may be dedicated to decreasing the country’s reliance on foreign oil, but won’t, I believe, pay one red cent more for ethanol than gas. There is no point in paying more for one form of energy than another just to go somewhere.

Common sense tells me the industry should calm and growth will be more pragmatic. Future project investors will look at all options to be sure economics of projects are sound before committing millions of dollars on what may not be good investments.

A major concern for everyone is the availability of corn for ethanol plants, cattle feeders and human consumers. In good crop years, that probably will not be a problem, but what happens if Mother Nature does not cooperate?

There are other factors to be considered. If ethanol byproducts are incorporated into cattle rations at high levels, phosphorus in the manure can cause problems for farmers and waste management plans for feedyards. Plants located a great distance from cattle-feeding operations will likely have to use additional energy to dry ethanol byproduct and transport it, again using energy. Further complicating the use of distiller products are the effects of feeding high concentrations in rations, which can negatively affect gains and decrease carcass quality.

The fact of the matter is that change is in the air and everyone involved is trying to be flexible and ahead of the game … an interesting and complicated game. Stay tuned for the next chapter.

Next issue: What university studies are saying about feeding ethanol byproducts.