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CATTLE TODAY

CHANGES IN THE FUEL INDUSTRY HAVE A BIG IMPACT ON PRODUCTION COSTS

by: Stephen B. Blezinger
Ph.D, PAS

Without a doubt the most common topic of conversation for livestock producers at this point in time is the high cost of production. Not just feed, not just fuel, not just fertilizer, not just equipment but virtually every component of food animal production has escalated dramatically over the last couple of years. At the core of these cost increases we find the fuel and energy issue. Everyone has felt the effects of rising energy cost as it relates to fuel prices and the cost of a barrel of oil. A couple of years ago we discussed the implications as oil prices surpassed $60 per barrel with some expectation of even higher movement. Recently, oil prices passed the $100 per barrel mark with unleaded and diesel prices at the pump staring hard at $4 per gallon – in some instances having already surpassed that mark.

A large portion of this can be attributed to the efforts or lack thereof by our government to develop an energy policy that actually works – one that does not saddle a peripheral component of the economy (agriculture) with a burden, that in the long-run will see questionable success and that holds a variety of potential risks to success. Some of situation is related to the efforts of our middle-eastern “friends,” some of it to shortsightedness on the part of environmental and political activists that would have us return to energy usage levels of the 1800's to spare small amounts of what is considered to be hallowed ground even though research has shown the effects to be minimal. Other effects can probably be attributed to the unwillingness of the auto industry to develop the necessary technologies to improve fuel efficiencies although substantial evidence shows that it can be done. The list goes on and on and there is no single cause.

In an effort to reduce our dependency on oil, foreign and domestic, numerous options have emerged that are proving useful at some level. Two of the most substantial that will have significant effects on US and world agriculture is the use of ethanol and bio-diesel as fuel sources. Both can effectively be used in combustion engines and both are derived from agricultural products. Of the two, ethanol has the greatest head start. Ethanol plants commonly use corn grain as its basic starter product from which this form of alcohol is distilled. It was announced that approximately 60 new ethanol plants were either in the planning or construction phase in the U.S. right now. The growth of the corn ethanol industry has been astounding. In 2002, it was estimated that 996 million bushels of corn was used for ethanol production, in 2003 the level reached 1.186 billion bushels followed by 1.425 billion bushels in 2004. These numbers have only continued to grow, creating a greater demand and driving prices up to historical levels – and increasing the livestock producer's cost of feeding and supplementation in the process.

Something that much of the feeding and fuel industry has to consider are the implications for future grain supplies. First, weather patterns are always uncertain. We have seen significant drought in various regions of the country over the last few years. This obviously reduces both grain and forage production in the affected areas and increases the burden on non-affected areas. As the local availability is diminished for both grains and forages, producers in these areas must procure what they require from other areas that do have an availability of these resources. Second, the current economy affects how grains and crops are planted and in what proportion. At this point, corn planning intentions are down for 2008. A primary reason for this is the cost of fertilizer. Corn has a substantially higher demand for nitrogen-based fertilizers. Given the high and increasing cost of fertilizers, many producers are opting to plant crops such as soybeans which are still profitable given bean prices but which have a lower fertilizer requirement. This said, we can expect a lower availability of corn this coming year from which to meet the demands of the ethanol and the feeding industries.

Implications to the Feed Industry

The changes we are seeing as a result of the increasing cost of oil have many and wide-reaching implications. Let's detail some of these:

1) Everything related to the oil industry increases in price. Most obviously this includes rising fuel cost resulting in higher prices for transportation, electricity and related costs in the feed and ingredient processing industry. Increasing fuel costs causes increased freight rates which affects cost of ingredients to the feed mill and the cost of manufactured product to the end user. Increased electricity and related cost result in an increase in the cost of processing. In the July 18, 2005 issue of Feedstuffs magazine, Eng reported the results of discussions with other consultants related to their estimates of the cost of steam flaking corn (a primary component in the cattle feeding industry) and also the relative improvement in feed value due to steam flaking various grains (grain sorghum or milo, barley, wheat). Steam flaking is the most popular grain processing method, but it also requires the most energy. Furthermore, corn is the most popular feed grain, but it requires large amounts of nitrogen fertilizer and irrigation water. Both of these items are sensitive to energy costs. The corn steam-flaking cost estimates ranged from $3.50 to $7.50 and averaged $5 per ton. The improvement in energy availability of the four grains ranges from 4 percent (wheat) to 15 percent (milo). As might be expected, individual opinions varied, but the ranking was the same for all consultants. Each agreed that grain sorghum responded the most but was hardest to process. The estimated response was lowest for barley and wheat, and the variation in estimates was greatest for these two grains. Also interesting was that each consultant commented that those who were steam flaking would continue to do so regardless of energy prices, and those who were dry rolling or using an alternative processing method would probably not invest in steam-flaking equipment. This is all true as related to feedyard milling. Conventional feedmills should have somewhat lower processing cost of grains since they have lower levels of true steam flaking. Steam rolling and the steam injection used into pellet manufacturing is not quite as energy intensive and thus is a lower cost process.

Additionally, energy costs and possible changes in the farm program could also have an effect on the grains produced in various areas. Since none of the current presidential hopefuls appears to have anything closely related to an aggressive farm program in mind, this is questionable at this time. In most areas, corn will out-yield all other grains, but, as mentioned previously it also requires greater input costs (increased fertilizer, pesticide, transportation), especially in irrigated areas. Grain sorghum requires less water than corn, but the downside is that it is the most expensive grain to properly process. In many areas with limited or no irrigation, barley and especially winter wheat can produce respectable yields at a relatively low cost. However, existing farm programs -- such as the loan deficiency payment (LDP) program -- favor corn because of its high production potential and because of the mandates for ethanol production. This means we could see a shift in the acreage of various grains and the overall volumes of those produced. However, increased demand as related to increased ethanol production will have a major effect.

Other factors we see as related to the increases seen in the oil industry include the cost of processing equipment (cost of steel and other metals), urea (feed and fertilizer grade), etc.

2) Changes in the production of various grains and the demand for each. We know that corn and grain sorghum can be used effectively in ethanol production units. As indicated above, the use of corn for ethanol production has increased significantly over the last few years and will continue to do so. Thus we encounter a situation where livestock feeders will be competing with ethanol producers for the same product. Ethanol producers will very likely be able to bid higher for the corn needed for their process due to the value of the end product against the petroleum markets. There is ongoing, active research into the use of cellulose (very similar to starch at the molecular level) from certain plant species such as switchgrass but this has not proven overly productive or efficient to date.

At first glance this appears to be a major problem. This is lessened however by the understanding that the major by-product coming out of the ethanol process is corn or milo distiller's grains in either a wet or dry form. Several experiments illustrate that distiller's grains (DGS) is a valuable feed by-product and can be fed either wet or dry and at relatively high levels. The industry has already seen that local ethanol plants have helped revitalize several rural areas in the Midwest, and it's likely that these areas will get an additional boost because of increased cattle feeding related to DGS feeding. The DGS byproduct comprises 30 percent of the corn used for ethanol production. Consider numbers we've already discussed. At the 2004 usage levels of corn for ethanol production (1.45 billion bushels = 40.6 million tons), the amount of distillers grains will likewise be substantial (~12.2 million tons). Obviously that's a lot of grain to channel into the feeding industry.

Other considerations, however, must be taken. With increased freight costs, transporting this material to other areas, especially if it is not dried, is costly. Until recently, several Midwest states such as Iowa, Illinois, etc., had lost feedlot numbers, but increasing DGS production in these areas could easily change this picture. There is a good possibility that the corn ethanol industry and resulting DGS production will change both how and where cattle are fed in the future. Otherwise significant consideration must be given to transporting distillers grains to cattle feeding areas and the costs involved.

There are alternative processing techniques and feeds that require less energy. Because of increased corn ethanol production and other industrial processes, more byproducts will be available to the feeding industry. These byproducts include gluten feeds, wheat midds, potato waste, bakery byproducts, rice bran, beet pulp, candy, etc. An advantage of each of these byproducts compared to grains is that they do not require processing. Thus, replacing part of the grain with byproducts reduces ration processing costs. As we have discussed in the format many times the future of the cattle feeding industry, no doubt, will include greater use of byproducts, and this can have a big effect on feed mill design. Many sophisticated, highly automated mills are at a disadvantage when it comes to handling byproducts, which may be high in moisture, have poor flow characteristics, etc. The most desirable feed mill design for byproduct usage often is a combination of flat storage, front-end loaders and scale mixers that are either stationary or mobile.

Distiller's Grains Availability and Value

As discussed above, continued expansion of the fuel ethanol industry will increase availability of distillery byproducts well suited for use as animal feed. According to on-going research, especially at the University of Nebraska and Iowa State University, distillers grains with solubles, the predominant distillery byproduct of ethanol, commonly contains the protein fraction of the grain as well as the bran (high in fiber) and the germ (high in fat). Thus, wet distillers grains are valuable both as a source of protein and energy. This was illustrated in various trials including Kansas State work which researched the optimal amount of wet sorghum distillers grains (WDGS) in finishing diets based on steam-flaked corn. They noted that wet distillers grain addition in finishing diets can improve feed efficiency and increase average daily gain. This study included the use of 637 yearling, crossbred heifers (initially weighing 849 lb.) in a 58-day finishing trial. Pens were randomly allotted, within bodyweight strata, to each of the six dietary treatments (0, 8, 16, 24, 32 or 40 percent WDGS on a dry matter basis). Cattle were fed in dirt-surfaced pens of 25-30 animals each, with a total of four pens per treatment. Feed was delivered once daily for ad libitum intake.

Hot carcass weight and incidence of liver abscesses were recorded at time of slaughter, the researchers explained, and yield grade, quality grade, marbling, incidence of dark cutters, 12th-rib fat thickness, ribeye area and percentage of kidney, pelvic and heart fat (KPH) were recorded after a 72-hour chill. Replacing steam-flaked corn with WDGS yielded a quadratic effect (P < 0.02) on daily gain indicating a point of diminishing returns. The maximal rate of growth was achieved when the amount of WDGS was eight percent of the diet dry matter, they said, and this decreased as the proportion of inclusion increased. They reported that feed intake was also maximized with eight percent WDGS, which decreased linearly (P < 0.02) as the proportion of WDGS in the diet increased.

The researchers reported that replacing steam-flaked corn with WDGS resulted in a linear (P < 0.02) decrease in ribeye area. There also was a linear effect (P < 0.06) on the percentage of yield grades 1 and 3 carcasses, they said, with cattle depositing more fat as the proportion of WDGS increased. Everything considered, however, they concluded that replacing steam-flaked corn in finishing diets with WDGS is a viable option for improving dry matter intake, daily gain and feed efficiency of cattle. WDGS can be added at proportions as high as 24 percent without compromising performance during the last two months before slaughter, while noting that the experiment indicates that optimal efficiency is achieved when WDGS is added at approximately 15 percent of the diet dry matter.

This is only one of a variety of completed and on-going experimentation to illustrate that DGS is a valuable feed byproduct and can be fed either wet or dry and at relatively high levels. This research will continue as the industry goes and the need for use of the by-products increase likewise.

Conclusions

Changes in the fuel industry will result in dramatic changes in the feed and cattle industries. We will need to remain firmly planted in the middle of these changes to best anticipate the effects and trends and to best take advantage of the opportunities set before us to improve profits and performance. In the next issue we will review some possible strategies producers can use in upcoming months to offset some of these rising costs and deal with an ever changing production landscape.

Dr. Steve Blezinger is a management and nutritional consultant with an office in Sulphur springs, TX. He can be reached at 667 CR 4711 Sulphur Springs, TX 75482, by phone at (903) 885-7992 or by e-mail at sblez@verizon.net. For more information please visit www.blnconsult.com.

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