NC Corn/Ethanol Meetings

Ethanol Changes Economics of Cattle Feeding, Ranching

By Darrel R. Mark, Ph.D.

The National Agricultural Statistics Service projects that slightly over 2 billion bushels of corn will be used for fuel ethanol production in the 2006-07 marketing year. That’s one-fifth of last year’s total U.S. corn crop. With increased ethanol production forecasted over the next several years, the proportion of the corn crop used for ethanol will likely increase. That will result in higher corn prices for cattle feeders, even as they offset some of their corn demand by feeding ethanol byproducts.

From Sept. 1, 2006, through Jan. 26, 2007, Omaha corn prices increased $1.75 per bushel. This has been the primary driver behind the $24.97 per hundredweight drop in 700- to 800-pound feeder-steer prices and $19.87 per hundredweight decline in 500- to 600-pound steer-calf prices since then. Also during this time, fed-cattle prices decreased $4.25 per hundredweight (live weight basis).

Models that account for changes in both fed-cattle prices and corn prices – factors from which feeder cattle derive their demand – can be used to examine the change in feeder-cattle prices based on historical price relationships. Such an analysis reveals that 500- to 600-pound feeder-steer prices would have declined nearly $30 per hundredweight by historical standards in response to a $1.75 per bushel corn price increase and a $4.25 per hundredweight decline in fed cattle prices. Similarly, the price for 700- to 800-pound feeder steers would have dropped $21 per hundredweight. The actual price change for the 500- to 600-pound steers was about $10 per hundredweight less than predicted by historical price relationships, while the actual price drop for the 700- to 800-pound feeder cattle was about $4 per hundredweight more than expected.

Why the difference? First, it appears that calf prices did not decline as much as might have been expected. Supply of lightweight calves this past fall was limited due to a small calf crop and a large number of lightweight cattle being placed on feed earlier in the year. Plus, some feeders, hoping for a drop in corn prices, might have bought lighter weight cattle thinking that feeding margins would improve. Yearling steer prices appear to have dropped a little further than historical price relationships would have forecasted, though. Likely, this reflects a “risk discount” that cattle feeders are bidding into heavier weight cattle to provide protection from increased corn price volatility.

The differences between the actual feeder-cattle price decline and the expected price changes based on historical relationships, while not that large across all weights, may also be influenced by new feedlot economics that have resulted from feeding cattle ethanol byproducts. UNL research has shown that significant improvements to average daily gain and feed conversion can be realized by replacing corn with wet distiller’s grains plus solubles (WDGS). Typically, optimum performance levels are reached when WDGS comprises 30 to 40 percent of the ration on a dry matter (DM) basis.

The marked performance improvements when feeding WDGS should translate to improved bottom lines; however, additional cost factors must be considered as well. For example, handling and feeding expenses associated with mixing WDGS rations and delivering it to feedbunks is expected to be higher given that WDGS is approximately 65 percent moisture. Also, WDGS is typically priced FOB the ethanol plant, so transportation costs must be accounted for as well. Conversely, some expenses might be reduced through feeding WDGS. For example, the performance benefits to feeding WDGS can reduce the number of days on feed, saving on yardage and interest costs.

To assist in evaluating the return to feeding various levels of WDGS and other ethanol byproducts, UNL developed the Cattle Coproduct Optimizer Decision Evaluator (Cattle CODE). This tool will soon be available on UNL’s beef Web site at http://beef.unl.edu. By providing price and ration inputs and other parameters, users can calculate and compare profits associated with feeding cattle various levels of WDGS, dry distiller’s grains, corn gluten feed and other byproduct combinations.

Results generated from the Cattle CODE model indicate that the extra costs for transportation, mixing, etc., associated with feeding WDGS are offset by the benefits generated by improved performance. In fact, cattle-feeding profits can be improved by more than $30 per head in some cases. But those benefits generally vary according to the corn price, distance to the ethanol plant and relative price ratio between corn and WDGS prices. Holding distance constant between the plant and feedyard and the WDGS to corn price ratio, higher corn prices result in higher marginal return to feeding WDGS while increasing the profit maximizing level of WDGS to include in the ration. Similarly, decreasing mileage between the plant and feedyard results in higher returns to feeding WDGS and a higher optimum level of WDGS to use in a ration. This latter result supports the competitive advantage Nebraska has in ethanol and cattle production. Because the state’s commercial cattle-feeding operations are in relatively close proximity to ethanol plants, significant transportation savings are realized.

The better cattle-feeding performance and improved bottom line through byproduct feeding have likely increased demand for WDGS and other byproducts. As a result, the price ratio between WDGS and corn has increased. Once commonly priced at 95 percent of the corn price (DM basis), current market prices for WDGS may exceed 100 percent of the corn price (DM basis). As this ratio increases, the profit maximizing amount of WDGS to include in the ration decreases, as do the marginal returns to feeding the byproduct.

One of the “hedges” the cattle industry has against higher corn prices is to feed WDGS and capture some of the marginal returns to feeding ethanol byproducts. While cattle feeders may be best able to do this and can maintain their feeding margin by decreasing feeder-cattle prices when corn prices increase, cow-calf producers’ alternatives to coping with these changing prices may be limited. However, one possibility is to consider retaining ownership and finishing their cattle. This might capture some of the marginal returns to byproduct feeding. Another possibility for the cow-calf producer is to consider supplementing cows, developing heifers or feeding stockers on pasture or range with ethanol byproducts. UNL research has shown there can be significant cost savings to doing so (see Beef Reports at http://beef.unl.edu).  Y By Darrell R. Mark, Ph.D., UNL Extension livestock marketing specialist, and Galen Erickson, Ph.D., UNL Extension beef feedlot specialist.

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Caption: Darrell Mark addresses the crowd at the Cattle, Corn & Ethanol – Challenges and Opportunities seminar held in January, where he presented information on the economics of ethanol.