Milo May Provide Ethanol Cost Advantages over Corn
AgMRC Renewable Energy Newsletter
Professor of Economics and Energy Economist
Ag Marketing Resources Center
Iowa State University
By far, the largest part of the U.S. feed grain supply comes from corn. USDA’s November 10, 2009 crop production report estimates that for the current year, 95.6 percent of the nation’s total feed grain production will be from corn, along with 2.7% from milo (also known as grain sorghum). From a national perspective, because of its much greater production than milo, it is clear that corn will remain the dominant feedstock for starch-based ethanol plants. However, for certain parts of the U.S., use of milo can and does provide an alternative feedstock. Availability of lower-cost milo has been a factor in some plant location decisions, although other factors should and typically have been considered in those decisions.
USDA’s crop production reports show 12 major grain sorghum or milo producing states. (1) The most important ones, from the largest to the smallest, are Kansas, Texas, Nebraska, Oklahoma, and South Dakota, in that order. As shown in Figure 1, Kansas is by far the largest producer of this crop. Milo is well suited for the Great Plains, where rainfall is less than in the main Corn Belt. Milo is more drought tolerant than corn and can be grown without the added cost of irrigation. Nutritionally, it is similar to corn although it typically has a lower price than corn, which is the preferred feed grain for swine and poultry. Milo also can be processed into ethanol in the same type of biorefinery that converts corn to ethanol. Communication with select cattle feedlots in Kansas indicated that distillers grain (DGS) from milo, although darker in color than its counterpart from corn, is considered to be about equal in value to corn DGS.
A new efficient-size ethanol plant typically has an annual rated capacity of about 100 million gallons, with the potential to produce at least 120 million gallons per year. At that volume of output, a single plant requires approximately 42 to 43 million bushels of either corn or milo. From Figure 1 it can be seen that the main production areas where it is feasible to use milo as an alternative feedstock in place of corn are Kansas and Texas. Production in each of the other states in 2009 is estimated to be less than 12 million bushels, which would be much less than needed for an efficient-sized ethanol plant. Nebraska and Oklahoma last year produced slightly more than 10 million bushels each, and might offer occasional limited opportunities to utilize milo as a supplement for corn in ethanol plants.
Corn and Milo Prices in Kansas
Corn and milo prices tend to fluctuate together over time, but do not always move by precisely the same amount. Differentials between the two crops depend on local supply and demand conditions, the amount of forward contract sales farmers have made, and international market conditions. Also, within-state regional differences between prices for the two crops may at times affect the state average and may cause variations at a specific geographic point in the state that differ somewhat from the state average. State average prices paid to farmers for corn and milo in Kansas since January 2005 are shown in Figure 2.
On average over this period, milo was priced below corn by 31 cents per bushel or 9.4% less than corn. However, there were a few months in the 2006-07 marketing year when milo prices exceeded those for corn. EU’s preference for non-genetically modified grain and a shortage of such grain in Europe at that time may have been a contributing factor.
Cost Advantage of Milo vs. Corn in Kansas
To get an estimate of potential cost advantages from using milo as the ethanol feedstock rather than corn, we used the AgMRC ethanol model to calculate ethanol production costs and break-even prices using the two different feedstocks. Details of the 100 million gallon annual (rated capacity) plant used in the model are available. Break-even cost differences are shown in Figure 3. Historical ethanol prices at Kansas biorefineries are not available, so this analysis uses Iowa ethanol prices. Wholesale ethanol prices by state at times in the past have shown that Kansas ethanol prices may be slightly higher than those for Iowa. Wholesale prices are available for purchase through Axis Petroleum’s web site. (2) Ethanol price differences between states depend on such things as local supply and demand factors, proximity to blending facilities, and transportation costs to major markets. By using Iowa ethanol prices, we may slightly understate potential returns for Kansas ethanol plants. However, the relative difference between corn and milo costs and returns is still valid. Note that the cost advantage of milo over corn increased considerably after early 2008, when corn prices began to move sharply higher.
Impact of Cost Savings on Net Returns
Figure 4 shows estimated net returns for processing corn and milo into ethanol in Kansas. As we would expect from the cost data in Figure 3, average returns were greater for milo than for corn over the 2005-09 period. However, it should be cautioned that if the Kansas ethanol industry shifts aggressively into the use of milo in place of corn, the corn-milo price relationship could be narrowed from the historical differential. Over the period from January 2005 through August 2009, the average cost savings from using milo as the feedstock instead of corn was $0.12 per gallon of ethanol.
With the plant operating at 120% of nameplate capacity, total net returns over this period from using milo as the feedstock would have been $61.8 million. That’s almost a 20% greater cumulative net return than was available from corn and could be an important source of cash-flow for reducing the plant’s outstanding debt and increasing its ability to withstand limited periods of depressed returns.
The U.S. corn crop is nearly 34 times larger than the nation’s grain sorghum or milo production and therefore will continue to be by far the dominant feedstock for starch-based ethanol plants.However, in a few parts of the Great Plains, milo production is large enough to support several ethanol plants. In other areas, it may be used in a limited way as a supplemental feedstock for ethanol biorefineries. Kansas is by far the largest milo producing state although production in Texas also is large enough that milo may be a potential ethanol feedstock there. Our analysis shows substantial cost savings from the use of milo over the 2005-09 time period. However, we should caution that two to four ethanol plants in a major milo producing state could quickly strengthen milo prices, narrowing the price differential vs. corn and reducing the advantage of using milo. It should also be noted that in areas outside of Kansas and Texas where milo supplies are available in more limited quantities, milo may at times have a role in lowering ethanol production costs by supplementing but not completely replacing corn supplies.