Solving the corn supply problem

NEW YORK (CNNMoney.com) -- What's left behind from the ethanol-making process could be what saves the livestock industry from the high price of corn.

Ethanol, touted as the superfuel to rescue the United States from its dependence on foreign oil, has been playing havoc on the agriculture industry lately, sending corn prices to record highs - and causing some cost-conscious farmers to feed their livestock less.

Economists worry that the cycle could affect the nation's meat supply, with smaller livestock yielding less beef, pork and poultry - and sending grocery bills higher.

Mindful of the repercussions, researchers have intensified their work on a by-product of ethanol production that can be used as a high-protein livestock feed. The product, called Distillers' Dried Grain with Solubles, is left over when ethanol makers remove starch from corn during the distillation process. What remains is a mixture rich with protein, fat, vitamins and minerals.

While it's hardly a new product, the lower-cost corn substitute is grabbing the attention of more farmers and economists. That's because demand for ethanol has sent corn prices soaring.

The new feed is not perfect. Owing to its high oil content, some animals can't digest it as well, so it's unlikely to make up 100 percent of livestock diets.

And while newer plants are making a far more digestible form of DDGS and agricultural nutritionists say it's a solid protein source, its application is not universal.

Beef-producing steers, for example, do best with the feed and can use it as up to 40 percent of their diet. Lactating cows can eat the feed for about 20 percent of their diet, with pigs at 30 percent and most poultry around 15 percent, according to Gerald Shurson, professor of swine nutrition and management at the University of Minnesota, who is considered perhaps the foremost DDGS expert in the country.

Costs run about 20 percent below corn and up to 50 percent below soy. That's especially important considering corn prices have recouped just about all the losses seen right after the government reported a big jump in this year's expected corn crop. After falling back near $3.50 a bushel following a March report showing corn plantings to be near record levels this year, corn is again trading near $4, about double the price of two years ago.

The prospect of providing farmers with a nutritionally sound and cheaper alternative to corn has the industry buzzing and researchers trying to find ways to expand the use of DDGS.

"Research has been kind of in high gear and it's kicking into a higher gear right now," said Shurson, who recently testified before the Agriculture Department on the matter.

Shurson's appearance before the panel focused on ways to fund research on things like making the feed more widely available in the pork industry. Doing so would require a reduction in fat content.

One company, VeraSun Energy, has developed a process that cuts the oil content in the feed from a typical 10 to 11 percent down to 2.8 percent - a development that could allow DDGS to become an even bigger part of livestock diets.

The Brookings, S.D.-based ethanol company is not only stepping up its research efforts but also its expansion plans. Over the next year or so VeraSun (Charts) expects to open three more facilities in the Midwest and more than double its output of DDGS, said company founder and CEO Don Endres.

"This is a unique opportunity that is of great benefit to livestock producers," Endres said in a phone interview. "Even though over the last several months people have been talking about higher feed costs from corn, which is true, they haven't been focusing on how, with all this new ethanol production, we're going to see large amounts of distillers' grain available for feed."

Ethanol-producing companies like VeraSun, Archer-Daniels-Midland Co. (Charts), Pacific Ethanol (Charts) and Xethanol (Charts) face uncertainty this spring as continued cold, wet weather could threaten the brief planting season for corn.

A low-yield corn crop this year would send corn prices even higher, hurting ethanol producers. Marketing a product like DDGS, then, would be a key to maintaining profitability.

"What they are finding is that total world demand for this distiller grain is especially high," said Michael Doherty, an economist at the University of Illinois. "And what we're hearing from the livestock people and the ethanol plants is that they are being very inventive in their thinking on how to use these distiller grains. They're reblending and reformulating them in with other feeds so they can be more easily consumed."

DDGS, which sells at about $125 a ton, becomes especially cost-effective for producers and consumers when delivered locally.

When the by-product is first generated, it comes off as a wet feed that's heavy and thus difficult to transport more than about 50 miles. But nearby farms can buy the wet feed at a discount as it saves ethanol plants the costs of drying.

Another economic benefit: the new feed will face no supply problems since ethanol production should keep expanding in coming years.

"The economists are in favor of using more and more DDGS. The problem is that we've never had to use a lot of it here," said John Urbanchuk, an agriculture economist at LECG LLC, a global export services consulting firm in Wayne, Pa. "Now we're re-educating livestock and poultry producers to the fact that this is a viable alternative and it can be used economically and effectively."

More use of the feed will allow farmers to fatten up their livestock to normal levels, lessening upward pressure on the price of meat, economists said.

Nutritionally, DDGS is solid. The University of Minnesota's Shurson said cows in particular thrive on DDGS as the fiber in the feed is actually a more efficient energy source than the starch in corn.

Urbanchuk predicts that the production of distillers' grains will more than double in the next 10 years, to about 23 million tons annually. While quantity won't be a problem, he did say producers need to be careful about what kind of grain they send to market.

"One of the things we've got to do is a better job industry-wide to maintain quality of distillers' grain," he said. "If they're not careful they can scorch it. They get a bad load of this stuff and [the livestock] won't eat it. If it's scorched or burned it's like eating burned popcorn."

Some beef producers, though, are wary of how much benefit their sector will derive.

Jay Truitt, vice president of governmental affairs for the National Cattlemen's Beef Association, said the group questions whether ethanol technology will be able to deliver DDGS to cattle ranches in areas like western Kansas and the Texas Panhandle and to be economical.

"Can we convert ethanol from corn in a way that the industry can use the by-products more efficiently?" he asked. "We have a couple of years to figure that out at most before we start making infrastructure changes in the livestock industry."

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