1. Economic Impact of DDG’s on U.S. Grain, Oilseed and Livestock markets Dermot Hayes Center for Agricultural and Rural Development Iowa State University Presented at the NCPA’s 112th Annual Convention—May 2-6, 2008 at the Hilton Sandestin Beach Golf Resort & Spa.

2. Overview Existing biofuels industry The economics of biofuels Impact on grain and livestock prices New Energy Act Scenarios Impact on Cotton Seed Product Markets DDGS quality and quality concerns

3. Ethanol Explosion Source: Renewable Fuels Association

4. Biodiesel Growth Source: National Biodiesel Board

5.  Current ethanol capacity: 147 plants, 8.6 billion gallons/year  Total capacity under construction and expansion: 5.1 billion gallons/year  55 new ethanol plants and 6 expansion projects underway  Source: Renewable Fuels Association U.S. Ethanol Industry  2.2 billion bushels of corn were used in producing fuel ethanol in 2006/2007 marketing year.  3.1 billion bushels of corn are expected to be used in producing fuel ethanol for 2007/2008 marketing year.

8.  Current biodiesel capacity: 171 plants, 2.24 billion gallons/year  Total capacity under construction and expansion: 1.23 billion gallons/year  60 new plants underway  Source: National Biodiesel Board U.S. Biodiesel Industry  2.8 billion pounds of soybean oil was used in producing biodiesel in 2006/2007 marketing year.  3.8 billion pounds of soybean oil are expected to be used in producing biodiesel for 2007/2008 marketing year.

9. Source: CARD, ISU

11. Historical Corn Utilization

12. Economics of biofuels Would you invest in a new plant? Almost half the capital costs are covered by tax credits and other incentives, assume that this rewards you for risk This thought experiment helps drive our understanding of the ethanol market because it allows us to calculate the corn price that will stop you from investing

13. Long run ethanol investment decision Assume that ethanol will see for 0.67 times gas, plus the credit Calculate ethanol revenue per bushel Subtract all costs Add a DDG credit based on corn prices Calculate the break even corn price Stop building when corn hits this price

14. Calculating Break-Even Corn Price Oil Price $/BBL55606570758085 Gas Price $/Gal2.072.2582.4462.6352.8233.0113.199 Ethanol Price $/Gal1.8972.0232.1492.2752.4012.5272.653 Ethanol Revenue $/Bu5.3115.6646.0176.376.7237.0767.429 Operating Cost $/Bu1.56 Fixed Cost $/Bu0.72 DDG Credit $/Bu0.7280.8120.8970.9821.0661.1511.236 Total Corn Credit $/Bu3.7594.1974.6345.0725.515.9486.385

15. Historical Ethanol Margins

16. Projected Ethanol Margins

17. Impact on corn and other crop prices If corn prices are ever significantly lower than the breakeven price then we will build more ethanol plants This means that if we know crude oil prices we can predict corn prices If corn prices are high then the prices of other crops plus hay will have to rise by a similar percentage amount So long as speculators believe this logic crop prices will move with crude prices

18. Energy Act Signed in December 2007 Floor of 15 billion gallons of corn ethanol, gradual ramp up to 2015 Gradual ramp up of cellulosic ethanol to 16 billion gallons by 2022 Biodiesel to grow to 1 billion gallons by 2013 The Act mandates but does not provide details on how to achieve its targets Act will penalize plants that do not meet carbon requirements, this suggests more wet DDG’s Huge question is unanswered…will the $0.51 credit for corn ethanol stay around after 15 billion gallons?

19. Renewable Fuels Standard Source: Renewable Fuels Association

20. Motivation – CBOT December 09 Weekly Corn Contract

21. General Description of the Models Broad modeling system of world agricultural economy Behavioral supply and demand equations for production, consumption, ending stocks and net trade Domestic prices linked to world price through price transmission equations Linkages between all agricultural commodity markets and energy markets

22. Two Views of the World Using data derived from: FAPRI 2008 Baseline CARD 2008 Preliminary Baseline Same modeling structure, different underlying assumptions Use FAPRI if you think the ethanol industry will stop at the mandated amount, use CARD if you think it has the political support to grow further

23. Crude Oil Price

24. Corn-based Ethanol Production

25. Cellulose-based Ethanol Production

26. Biodiesel Production

27. Corn Acreage

28. Corn Farm Price

29. Soybean Acreage

30. Soybean Farm Price

31. Cotton Acreage

32. Cotton Farm Price

33. Livestock Market No Credit$0.34 CreditPercentage Change Beef Retail Price (US$/pound) 4.524.714.2% Pork Retail Price (US$/pound) 3.303.444.2% Broiler Retail Price (US¢/pound) 196.07205.324.7% Turkey Retail Price (US¢/pound) 126.28136.968.5% Egg Retail Price (US¢/dozen) 162.98177.078.6% Milk Retail Price (US$/cwt) 14.6515.445.4%

34. Why does corn ethanol dominate?

35. U.S. Cottonseed Production

36. U.S. Cottonseed Domestic Use

37. U.S. Cottonseed Crush

38. U.S. Cottonseed Farm Price

39. U.S. Cottonseed Meal Price

40. U.S. Cottonseed Oil Price

41. U.S. Cottonseed Crushing Margin

42. U.S. Cottonseed Meal Total Use

43. U.S. Cottonseed Oil Production

44. U.S. Cottonseed Oil Exports

45. Thanks to Harold Tylstra for the next several slides

46. Where do exports originate from?

47. The Distillers Grains Industry - an estimate of market potential 4 MMT 10% 5 MMT 10% 6 MMT 10% 20 MMT 25% Bold print = estimated annual total use Percentages = percent of the diet

48. Theoretical potential use: Domestic feed use 35 MMT Exports 2 – 4 MMT Non-feed uses ?? (next slide) Total: 36 - 40 MMT annually Source: The ProExporter Network®

50. Distillers Grains price trends Often stated as a percentage of corn price 35.7 bu/ton @ $4.68 = $167.07 DDGS @ $162 = 97% Interesting way to look at historical prices Has tended to be slightly to moderately higher than corn Early fall; trending lower than corn (per ton basis) Early winter; slightly higher than corn Slightly lower than corn (in sync with energy levels?) Not to good at predicting future prices Because corn is just one of the ingredients distillers grains replaces in the diet Because of the rapid increase in supply of distillers grains products

51. From Dan Keefe, USGC meeting, February 2008

52. DDGS Prices from Feedstuffs Location8-200611-20061-20077-20079-200712-20071-2008 Atlanta116.00155.00169.00155.00165.00188.00228.00 Boston115.00162.00167.00131.00143.00174.00197.00 Buffalo100.00135.00142.00111.00117.00154.00172.00 Chicago78.00115.00127.00110.00115.00135.00162.00 Fayetteville, NC134.00160.00172.00157.00166.00188.00225.00 Kansas City90.00113.00125.00120.00110.00122.00140.00 Los Angeles112.00163.00168.00138.00150.00188.00226.00 Minneapolis70.00110.00125.0095.00100.00135.00155.00 Okeechobee116.00157.00164.00153.00162.00188.00225.00 Portland119.00172.50N/A151.50159.00187.50222.50 San Francisco112.00163.00168.00138.00150.00188.00226.00 Twin Falls118.00173.00174.00148.00155.00192.00234.00

53. Estimated Value of DDGS KSU DDGS Calculator.xls Corn, $/bu $ 4.68 SBM, $/ton $ 344.00 Monocal, $/ton $ 490.00 Limestone, $/ton $ 40.00 Lysine HCl, $/lb $ 1.00 DDGS, $/ton $ 162.00 DDGS, % 10%20%30% Change in diet cost, $/ton-$6.85-$11.99-$15.86 Approximate savings, $/pig$2.05$3.60$4.76 Breakeven price, $/ton$230.49$221.93$214.87

54. DDGS – inclusion levels Bold = typical; Italics = maximum 10 - 20% 30% (G/F) >40% (gestation) 5 – 12 % 15% 5 – 15% 20% 15 - 25% 40%

55. What about fractionation? For corn ethanol facilities:  Pre-fermentation - separating kernel into component parts: germ, endosperm, and bran.  Post-fermentation – centrifuge distillers grains into component parts and separating corn oil from solubles.

56. Fractionation considerations: “High protein” distillers grains lower oil content, lower caloric levels?  Example: Verasun removing 7 – 8 million gallons of corn oil from 390,000 tons of distillers grains.*  corn oil ~ 3900 Kcal/pound (ME-swine)  DDGS ~1480 Kcal/pound (ME-swine)  #2 yellow corn ~ 1530 Kcal / pound (ME-swine) Higher protien, but lysine ratio? Importance of ME-swine and lysine in feed formula Germ meals Have not been fermented  Phosphorus still in unavailable form for pigs  About 60% of the phosphorus in DDGS is available for pigs If corn oil is removed, energy levels? *Feedstuffs, January 7, 2008, page 17.

57. AS OF: Fall 2007 = Oil extraction = Fractionation Orange = Operational Blue = Development/Construction Note: This map is not guaranteed to be all- inclusive of facilities utilizing fractionation or oil extraction processes. The map show only those locations that the study’s author is aware of. This study is the property of the National Corn Growers Association and may not be reprinted or redistributed without express written consent from NCGA.

58. Nutrient composition of new, fractionated corn distiller’s by-products (dry matter basis)

59. Variability (Coefficients of Variation, %) of Selected Nutrients Among 32 U.S. DDGS Sources vs. 6 U.S. Soybean Meal Sources. (Shurson)

60. Distillers Grains topics: Mycotoxins Feed stock levels are multiplied in distillers products Best prevention is proper BMP’s at ethanol plant. Testing  Many of the kits available for grain are not dependable for distillers grains  Use laboratories to confirm kit accuracy Recent examples:  Aflatoxin – 2007 Sioux City, IA area  Vomitoxin – 2006 southern Ontario

61. Distillers Grains topics: Use of antibiotics at the ethanol plant Lactrol TM is a virginiamycin containing product from Phibro.  has a “letter of no objection” from FDA permitting use at ethanol plants to control Lactobillus sp. Infections in fermenters. FDA has not made “official” comment on use of other antibiotics in ethanol plants: penicillin, streptomycin, neomycin, etc. Not aware of any antibiotic residue issues from distillers grains in swine feed. Use of distillers products in “natural” pork programs needs to be carefully evaluated.