Can ethanol production of 8 billion to 10 billion gallons per year and livestock production live in harmony in the U.S.? And, if so, who will pay the price of competition?
These were among questions in hot debate at the recent annual meeting of the Virginia Soybean, Corn and Grain Association in New Kent, Va.
On one side of the debate was Doug Anderson, vice-president of Smithfield Foods, who contends a high percentage of ethanol plants will go broke, economically choking on the high price of corn. And, U.S. consumers will pay the high price of pork and other meat products.
On the other side, Bob Dinneen, CEO of the Renewable Fuels Association and Ken McCauley, president of the National Corn Growers Association, contend ethanol and cattle can live in economic harmony and the winner will be the American public.
Anderson contends ethanol plants are coming online faster than U.S. corn growers can increase production to meet demand. He showed a chart, titled, “Ethanol Math,” which makes a compelling argument for economic problems for the ethanol industry.
Factoring in a number of cost items associated with ethanol production, Anderson says the bottom line is ethanol made from $3 per bushel corn corresponds with crude oil at $38.84 per barrel. Ethanol made from $4 per bushel corn corresponds to crude oil at $53.84. Factoring in the 15 percent or so loss of efficiency of ethanol versus gas, makes ethanol from $4 per bushel corn less competitive with gas at current or projected future prices of oil.
The bottom line, Anderson says, is a third or so of the ethanol plants in operation will likely go bankrupt before growers produce enough corn to drive prices back down low enough to make ethanol an economically viable alternative to gasoline.
“We will grow fewer animals this year because of the higher price of corn. And, we will likely import grain to feed our livestock,” Anderson says.
Smithfield Foods Inc. is the largest hog producer and pork processor in the world and the largest beef processor in the United States. Smithfield ranks only behind Archer Daniels Midland and Tyson Foods as the largest food producer in the U.S.
Smithfield Foods has controlling interests in international meat processing operations located mainly in Poland, France, Romania and the United Kingdom, and the company has joint ventures in international meat processing operations and related business located mainly in Mexico, Romania and China.
Through Smithfield BioEnergy, the Company is continuing to investigate the feasibility of converting hog waste into biomethanol and as part of a separate production process has begun the production of biodiesel using vegetable oils.
Clearly, Smithfield Foods has a vested interest in both grain production and energy, with a direct interest in biodiesel production. Anderson says if oil companies cut the price of diesel to $1.70 per gallon, biodiesel from soybean oil, even at today's high grain prices will not be competitive.
“We would like to see technology become simple enough and economically feasible enough for every farm to convert waste to fuel,” Anderson says. Expanding development of biogas and ethanol from other cellulose sources than corn will be a better option than ethanol from corn, Anderson contends.
Bob Dinneen, CEO of Renewable Fuels Association, disputes Anderson's claim that one-third of current ethanol plants will go bankrupt. He points out that no oil refineries have been built in the United State in the past 35 years, and in the past 10 years over 100 ethanol plants have been built. He contends financial backers of ethanol plants are among the most successful investors in the world, and include financial managers who have made few mistakes on investments in recent years.
Dinneen says the interest in building ethanol plants extends to the major gasoline distributors, who will bring ethanol to the American public. The president of that organization, Dinneen contends has said publicly that he expects 12 billion to 14 billion gallons of ethanol could be used within the next few years.
The Renewable Fuels Association leader says the combined effect of financiers on Wall Street, legislators and political leaders, including the President of the U.S., are good indicators that ethanol plants are here to stay. Dinneen says the main reason he disputes that so many ethanol plants will go bankrupt is the determination of U.S. grain farmers to meet the needs of both domestic use and ethanol plants.
Dinneen projects the U.S. ethanol industry will produce approximately 7.5 billion gallons of fuel grade ethanol in 2007. Despite enormous growth, ethanol still only offsets about five percent of the total amount of gasoline, 140 billion gallons annually, used in the U.S.
Ethanol from corn is only the first step in developing the ethanol industry in the U.S., according to Dinneen. Cellulose-based ethanol will provide the bulk of ethanol used in the U.S., but the infrastructure to produce usable fuel from non-corn sources is not in place. He points out the cost of building a 10 million gallon per year plant to make ethanol from non-corn cellulose is approximately 10 times the cost of building a similar sized operation to make ethanol from corn.
Whether the U.S. livestock industry can fully utilize the distiller's grain, commonly called DDG, that is a byproduct of corn-based ethanol systems has been hotly debated. Anderson says the oil content is too high for it to be widely used in livestock feeding systems. Dinneen says it is already widely used for feed for dairy cattle, beef cattle and poultry. He contends the oils in DDG can easily be used for production of biodiesel and that technology can eliminate these oils, making DDG a highly desirable feed for all livestock.
Ken McCauley, president of the National Corn Growers Association and a corn grower in northeast Kansas, says, “we corn growers can and will produce enough corn for livestock and ethanol, but it will take some patience. “In 2007 livestock production will be affected, but production will stabilize by 2008 and 2009. If we are patient in the long-run, increased corn production will pay-off for both livestock producers and corn growers, McCauley says.
In addition to increased production, which McCauley contends will come close to 90 million acres in 2007, technology improvements show a timeline that includes 20-25 bushel per acre increases — just from technology. That would push average yields nationally over 175 bushels per acre, he says.
In the Southeast there are no clear estimates of how many acres of corn will be planted in 2007. There is little doubt the increase will be significant, but how significant is open for debate.
Historically, the Southeast has produced between 100 million and 150 million bushels of corn annually. North Carolina is the largest of the six Southeastern corn-producing states, with about 45 percent of total production. The biggest increases in corn production will likely come in North Carolina and Georgia. Both states traditionally produce large acreages of cotton and peanuts, and acreage reductions of 10 percent to 25 percent is projected for those crops combined in 2007.