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.

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