Wednesday, August 22, 2012

Distiller's Grains on the Brain

The always informative Energy Collective has posted this article by Professor Simon Donner of UBC trying to shed light on the media circus around the US corn crop and the food-fuel substitution argument. I like that someone is trying to dispel the myths around this, but unfortunately he falls into the same fallacy of claiming that feed uses for corn are going away that most analysts with little understanding of the corn ethanol value chain continue to emphasize. To support it, he posts this graph:

This is originally derived from another work, I believe, but all data ultimately stems from the USDA feed grains yearbook.  At first glance this appears to tell a compelling story of how the amount of animal feed in the US has declined, while the amount going to sweetener, chemical or direct food use ("other") has remained fairly constant. Since I've repeatedly asserted this but never before posted data on it, consider this the moment where I finally try to prove my claims instead of simply referring obliquely to the data sources.

The unfortunate part of this analysis is that without an understanding of the full ethanol value chain, you cannot tell the whole story. The whole story is that for every bushel of corn consumed, 17/52 by weight becomes distiller's grains, a food supplement for cattle, hogs and chickens. Cattle can consume it exclusively because they're ruminants, and hogs and chickens can consume up to 15% by weight of it in their diet. If you include distiller's grains in the mix, the story starts to support my assertion that the feed picture hasn't changed, at least in terms of quantity.

So let's look at the US feed consumption of corn.

Note that the USDA uses a slightly different calendar system than the financial world due to the growth/harvest cycle; Q1 06/07 corresponds roughly to September - November 2006. It's immediately clear that the feed business has a very cyclical component, with feeding hitting a peak around Sep-Nov each year and hitting a trough in Jun-Aug the following year. I don't know why this happens because I don't know the animal feeding business well enough. What is clear, however, is that each year since 2006 the peaks have been getting lower and the troughs have as well.

This picture changes when you start to include the mass of DDG produced each quarter, which goes exclusively into feed use:

Total Corn and Corn Derivatives Going Into Feed Uses; DDG is included on an equivalent mass basis to corn
Suddenly, the picture has become less clear, though a slight decrease is perhaps detectable. But wait! DDG is more nutritious than corn is, and the USDA last year acknowledged that a pound of DDG can be substituted for 1.22 pounds of corn in most feeding situations. If we take that into account:
Total Corn and Corn Derivatives Going Into Feed Uses; DDG included on an equivalent nutritional basis to corn
Suddenly, there are no discernible trends. At least in the sense of quantity used for feed and food, the food-fuel substitution crowd doesn't have an argument.

However, this is not where the food-fuel substitution argument against corn ethanol is strong. Where it is strong, and why I think it's significant, is in the realm of pricing.

Sources: FGYearbook Table01, Table 04, Table31, link to USDA feed grains yearbook above.

Friday, August 17, 2012

Falling Out of Love with the RFS

Believe it or not, I actually do fun and engaging things at work, so forgive me if posting has been light.

An item of discussion around the office lately has been the current drought in the American Midwest.  This drought is likely to push wholesale prices of corn to levels that have never been seen before in the US. Jim Hilker of Michigan State University has a good overview here. The upshot of this is that there have never been more voices calling for the repeal of the Renewable Fuels Standard (RFS).

As usual, most of the political storm has left people swimming in misconceptions. For one thing, the magnitude of the American drought is often couched in relative terms or in absolute differences. For context, the 2012/2013 corn crop season is still expected by the USDA to be the 8th largest US corn harvest in history, easily beating out those at the start of the last decade. Despite the hit to yields, corn in the US will still be cheaper than almost anywhere else in the world, unrelated sweet corn prices will of course stay decoupled from field corn, and meat price increases may be delayed due to the early slaughter of many livestock herds in anticipation of higher prices. But the drought has now put agricultural and energy policy directly in the public's eyes, for better or for worse.

I figure it's now an appropriate time to ramble on a bit about the RFS, who's challenging it and why, whether or not it's good policy, and what ought to be done about it in the end.