Slowing Ethanol Industry Force Some Dairy Producers into Feed Volatility
Rick Kment
DTN Biofuels and Dairy Analyst
It was not long ago that the United States was deep in the midst of the Great Ethanol Boom. New ethanol plants were springing up in every region of the county accompanied by a lengthy list of other ethanol plants waiting to begin construction. As the boom continued into early 2008, the demand for corn skyrocketed putting intense pressure on dairy producers as feed costs increased to all-time highs — near $8 per bushel in mid 2008. During these tumultuous times, an increased number of dairy producers turned to dried distillers grains (DDGs) as a less expensive feed alternative.
The boom has since ended and the ethanol industry is facing tougher times due to the downturn of the U.S. and global economy and corn prices have fallen to more “reasonable” levels. But is this reason enough for dairy producers to cheer, or is it another troubling situation for those that now rely more heavily on DDGs produced by nearby plants as a key feed source?
A Downturn in Ethanol Production
As ethanol plants struggle financially – due to lower gas prices, high corn prices and the current U.S. economy – the industry expects the construction of new plants to come to a halt as the demand for ethanol begins to slow. As a result, a significant number of operational plants are not producing at full capacity — producing less ethanol than the plant is capable of — or halting production all together as they struggle to turn a profit.
With the expectation that ethanol production is on the decline much of the investment interest in the corn markets has disappeared. This has led to much lower corn prices, and of course, lower corn prices mean dairy producers can once again begin purchasing more affordable corn for feed. So in some ways, the dairy industry has benefited from the downsizing of the ethanol industry. But please note that I said, “more affordable corn.” For many producers, $4 or $5 dollar corn is still a pricy expense for feed. That is when producers look to alternative feed sources and DDGs have become a popular chioce. DDGs have proven to be an effective alternative providing the necessary energy and protein portion of a healthy dairy cow diet.
Effect on Dairy Producers
But what happens when a dairy producer has future contracted for a set amount of DDGs for the next three months and the ethanol plant providing the DDGs shuts its doors and stops production? The all too real possibility of an ethanol plant not being able to fulfill its DDG contracts creates a significant financial problem for both the ethanol plant and the dairy producer and adds more volatility to local feed markets.
What is even more troubling is that it can be difficult to tell whether an ethanol plant is struggling financially and might potentially cut or halt production. Many ethanol plants are privately-held and will not provide any indication of its challenges with profitability or debt until it makes an announcement that it will limit or shut down production. With little notice in these types of situations, it becomes increasingly difficult for dairy producers to plan a long-term feed contract strategy.
If a plant (or a third-party grain marketer) is unable to fulfill future contracts due to a plant closing, it is likely the supplier will either make the contract null and void or offer an amended contract price – which might be similar to more current feed prices. Although this type of situation might only be affecting a small number of producers in scattered areas of the country, as the trend continues it could create short-term or long-term feed shortages creating a more volatile feed market in 2009.
Feed to Milk Price Ratio
Another important factor to examine is the recent developments in the feed-to-milk price ratio — the amount of feed one pound of milk can buy. Even though feed costs have dropped significantly from the middle of 2008, the feed-to-milk price ratio is at its lowest point since the early 1990s. The relationship between the two has become increasingly negative making it harder for dairy producers to purchase feed with current milk prices. This recent drop in milk prices is due to the decreased demand caused by the current economic environment as families are cutting back on dairy product consumption.
The feed market continues to remain volatile over the spring and summer months, and the changes in the ethanol market seem to be adding to that volatility. Dairy producers are encouraged to continue to work very closely with their nutritionists and feed suppliers in order to secure product supplies of both corn and distillers grain needed through the spring and summer months. The next six months will be critical to the health and sustainability of both the ethanol and distillers grain industry through the Midwest.
Rick Kment, DTN Biofuels and Dairy Analyst
Rick has more than 20 years of experience in the agribusiness industry. As an industry analyst, Kment writes both dairy and biofuels market commentary and analysis for DTN subscribers. His commentary has been feature by CNN Money, the Wall Street Journal, the Associated Press and the Dow Jones newswire. Rick can be reached via email at rick.kment@dtn.com
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