Impact of Ethanol on the Livestock and Poultry Industry

AgMRC Renewable Energy Newsletter
October 2008

Dr. Robert Wisner  Robert Wisner
  Biofuels Economist
  Agricultural Marketing Resource Center

We preface our analysis with recognition that the entire agricultural sector is experiencing serious stress and uncertainty from extreme problems that have emerged in the last month in the U.S. and global financial and energy markets.  At this writing, these markets are being affected in an extreme way by fear and panic.  It is unclear how the just-passed U.S. financial rescue bill will affect the situation or how long severely depressed financial markets may continue.  These markets are critically important to both the crop and livestock sectors of U.S. agriculture. Their future trends and volatility will affect profitability of all of agriculture, including the biofuels industry, corn growers, agribusiness firms, and the livestock-poultry sector.

Livestock’s Impact on Corn Usage

The U.S. livestock and poultry industries have been the largest source of demand for the nation’s corn crop since the USDA began reporting corn utilization data many decades ago.  The livestock sector thus is very important to corn growers and all parts of the corn-related farm input and marketing sector.  It is a major source of employment in rural communities, with the jobs it provides in producing, processing and transporting meat, as well as employment in feed processing, livestock equipment manufacturing, construction, trucking and other areas.  For decades, use of corn for domestic livestock feeding has gradually trended upward as rising U.S. consumer incomes, new food products, and other developments created growing demand for the animal agriculture sector’s production. 

This sector of agriculture also has been supported for many years by excess production capacity in U.S. grain and oilseeds.  Historically, low feed costs permitted the industry, along with its substantial improvements in efficiency, to provide a plentiful supply of red meat, poultry, and dairy products to the nation’s consumers at declining real (inflation-adjusted) costs.  In recent years, the livestock industry also has experienced strong export demand growth for some of its products.  This industry is cyclical.  Its profits fluctuate over time, alternating from exceptionally favorable levels to occasional periods of very large losses that usually are a result of temporary over-production.

Ethanol’s Impact on Livestock Profitability 

The economic environment for the livestock and poultry sector changed dramatically, starting in 2006.  In a few months, despite a record 2005 U.S. corn crop, feed costs more than doubled and feed price variability increased sharply.  From the spring of 2005 to the spring of 2008, the farm price of corn more than tripled.  Although other factors were contributors, the continuing double-digit growth in corn processing for ethanol was a major element behind the changed feed cost situation.  Current USDA projections indicate that from the 2004-05 corn marketing year to through August 31, 2009, demand for corn by the ethanol industry will have increased by 2.68 billion bushels.  That’s new competing demand that is equivalent to about 43% of the amount of corn fed to U.S. livestock and poultry in 2004-05. 

Feed costs typically have accounted for about 55 to 65 percent or more of the cost of producing livestock and poultry.  The exact percentage varies by species and may fluctuate slightly from year to year. With their largest cost category increasing dramatically, net returns for producers have been under pressure. 

From the 2004 through the 2008 crop marketing year, the increase in the corn usage for ethanol is an amount equal to 43 percent of the entire livestock and poultry corn usage during 2004/05.

Figures 1 and 2 show examples of impacts on net returns for grain-fed cattle feeding and for a farrow-to-finish hog production enterprise since January 2004.  These estimates were developed by Dr. John Lawrence and Shane Ellis at Iowa State University. The cattle feeding illustration is for feeding steer calves to a typical fed cattle market weight.  The negative returns reflect feed costs that have accelerated more rapidly than prices for the finished animals. Actual costs for individual operations will vary, depending on the timing of purchases.  Some long-time livestock market analysts indicate 2008 may go down in history as the largest cattle and hog feeding losses on record.  The dramatic increase in feed costs has created the start of a wealth transfer from the livestock production sector to the crop production sector and to owners of cropland.  Operators of technically efficient and economically well-managed livestock and poultry production facilities have experienced losses triggered by the sharp increase in feed costs.  This has created problems in accessing additional credit.  Producers also have witnessed the disappearance of equity that was built up over many years of operation.

Although corn prices have declined sharply in the last five weeks in response to turmoil in global financial markets, livestock prices also have declined.  At this writing, many livestock producers continue to face large losses.  These losses set the stage for reduced livestock production.  Biological lags will delay the impact on consumer supplies, causing it to range from a few months for poultry to nearly a year for hogs and more than a year for cattle.

Farrow-to-finish Hog production costs and returns 
 Beef calf feeding costs and returns 

Price Risk during Short Crops 

Since crop production is a biological process that can be influenced by adverse weather, diseases, pests and other unpredictable factors, production can vary significantly from year to year. 


Historically, in years of sharply reduced U.S. or foreign crop production, much of the adjustment to reduced supplies and higher prices has occurred in the U.S. livestock industries.  Examples can be found in the drought-years of the 1980s, the 1993 extreme flood year, and the 1995 crop that was modestly reduced by unfavorable weather and a government cropland set-aside program.  In these example years, U.S. corn carryover stocks at the start of the season were large enough to provide some reserve supply and thus tempered the upward reaction in grain markets.  In contrast, corn and feed grain carryover stocks at the end of the current marketing year are expected to be at historically low levels as a percent of annual use. 

With low stocks and government-mandated minimum levels of ethanol blending, the corn market is potentially much more sensitive to adverse weather in the U.S. or in major foreign grain producing regions than in the past.  June 2008 is an example of this potential sensitivity.  Corn futures prices at that time rose briefly to about $8.00 per bushel on some contracts as grain traders reacted to concern over a very late planting season and potential negative crop impacts from extreme flooding in important producing areas.  This increased feed cost volatility creates greatly increased risk for the livestock and poultry sector.  A history of U.S. corn yields since records began in 1867 indicates years of sharply below trend corn yields have occurred about 18% of the time.  However, even yields 5 or 6 percent below the long-run trend can now bring sharply increased corn prices. 


Increased demand for corn for ethanol has shifted some cropland from soybeans to corn, thus significantly tightening soybean supplies and pushing soybean meal prices well above previous average levels.  That, as with corn, has increased the sensitivity of soybean meal prices to adverse weather, or to low yields stemming from disease or insect problems. 

Recently emerged sources of risk in soybean production include (1) aphids and (2) Asian soybean rust.  Aphids are a type of insect that can cause significant yield losses, especially in dry years.  Asian soybean rust entered the U.S. for the first time about four years ago, from South America.  Under ideal conditions during humid weather, it can spread quickly over a large geographic area and can severely reduce yields in a very short time.   This disease is a major problem in Brazil, where its control requires frequent spraying and increased production costs.  Increased supplies of distillers grain only slightly temper this potential price sensitivity since their cost also is influenced by weather.

Distillers Grain as Livestock Feed

In alcohol fermentation, the starch portion of the kernel is converted to ethanol.  Starch is an important energy source in livestock and poultry feeding.  About 30% of the original dry-matter weight of corn is returned to feed channels as distillers grain and solubles (DGS).  DGS is a medium-protein feed ingredient that also provides energy from the corn oil and fiber.  Its energy content may be reduced and protein content increased if the ethanol plant has equipment to remove oil.  With oil present, dry DGS protein percentage is slightly more than half that of soybean meal  The amino acid make-up of DGS is sub-optimum for swine and poultry, thus requiring the addition of amino acids to make it satisfactory for these species.  DGS also has a substantially higher fiber content than soybean meal.  The feasible DGS percentage in rations for swine also is restricted because higher levels of feeding produce soft bellies.  That adversely affects bacon production.  As with swine, the acceptable DGS percentage in poultry rations is much more limited than for ruminants. 

DGS is well suited for beef feedlot rations and for supplemental feeding in cow-calf operations during the winter.  For feedlot rations, it can replace corn pound-for-pound up to about 40% of the ration.  University feeding trials suggest that even higher levels of DGS feeding may be feasible.  Beef feedlots normally are not major users of soybean meal, so DGS mainly replaces corn in this part of the livestock sector.  For dairy cows, DGS substitutes for soybean meal and a modest amount of corn.  For hogs and poultry, it substitutes for both corn and soybean meal, with less than a pound-for-pound substitution ratio for corn. 

There is no official government data series on the amount of DGS fed to various species.  For our Distillers Grain with Solubles Supply/Demand Balance Sheet, we have estimated feed usage by various species based on antidotal reports from the industry and animal science recommendations.  A significant and growing volume of U.S. DGS production also is exported, so not all of the supply is used to replace other ingredients in domestic livestock and poultry feeding.  The DGS balance sheet shows our assumed break-down of DGS use by livestock and poultry and percentage of the supply that is exported.

As ethanol production increases, the supply of distillers grain also will increase.  Since it can be used at higher levels in the beef and dairy industries, these sectors will experience slightly less feed cost pressure than poultry and hog producers.  As new technology to remove corn oil is adopted by ethanol plants, the volume of distillers grain may increase at a slower rate than ethanol production and its nutritional content will change.  Removal of the oil increases the protein content and reduces the energy content.

Some observers give the impression that distillers grain production offsets most of the reduced available supply of corn for feeding when corn is processed into ethanol.  However, this substantially over-states its impact.  When exports and the varying DGS-corn substitution rates by species are considered, our analysis suggests that for each bushel of corn processed into ethanol, an average of about 15% to 16% is replaced by domestic DGS feeding.  Our analysis is based on DGS replacing 3% to 4% of U.S. corn exports.  DGS feeding also replaces some soybean meal, along with corn. 

Ethanol’s Impact by Livestock Species

Since ruminants are much more able to use the higher fiber and amino acid composition of DGS than swine or poultry, the largest users of DGS are the beef and dairy industries.  When corn supplies are limited, DGS can ease the tightness for beef cattle feeding operations, and to some extent for dairy.  It also can ease the tightness in soybean meal supplies for the dairy industry in times of limited soybean meal supplies.  Thus, the tightness in feed supplies resulting from increased corn processing for ethanol tends to impact the pork and poultry industries more than beef and dairy.  However, all parts of the livestock-poultry sector are affected in varying degrees.

Limited feed supplies due to ethanol demand tend to impact pork and poultry more than beef and dairy.

Corn Ethanol Mandates

The Energy Independence and Security Act  signed into law in December 2007 requires that specific minimum volumes of domestic ethanol and biodiesel to be blended into motor fuel supplies.  The legislation includes a detailed enforcement mechanism to insure that these quantities are met.  For conventional (mostly corn-based) ethanol, the mandate gradually increases the required quantity each year until it reaches 15 billion gallons by 2015.  At the current industry average ethanol yield per bushel of corn, the mandate would require about 5.36 billion bushels of corn to be processed into ethanol – if the entire ethanol quantity is filled from domestic production.  That volume of corn would be slightly larger than the October 10 USDA projection of domestic corn feed and residual use for the current marketing year. 

The 15 million gallon mandate would require about 5.36 billion bushels of corn to be process into ethanol.  This is equivalent to 44 percent of the 2008 corn crop.

Additional quantities of ethanol are mandated in future years to come from cellulose ethanol that likely will be produced from such sources as crop residues, forage crops, forest and urban wastes.  Some crop residue and forage crops used for this purpose may compete with current land and crop uses for livestock.  Cellulose ethanol is mandated to increase sharply after 2015.

Demand for corn for ethanol with mandates

Figure 3 shows the approximate shape of the demand for corn for ethanol when production mandates are in effect.  It is based on the assumption that all of the mandated conventional ethanol for 2015 will come from U.S. supplies.  A small portion of the required ethanol supply might come from imported Brazilian production.  If corn processing for ethanol increases beyond the mandated level, the industry would face gradually declining prices that it could afford to pay for corn (at least in the short run) as infrastructure constraints, limited flex-fuel vehicle numbers and other limitations exert a negative impact on ethanol prices. 

If corn supplies become tight as a result of adverse U.S. or foreign weather, limited availability of cropland or other factors, the mandate would allow the ethanol industry to pay whatever price is needed to obtain enough corn to fulfill the mandate.  That condition is shown by the vertical line in Figure 3.  When the vertical line is reached, the quantity of corn demanded for ethanol becomes insensitive to price.  Livestock and poultry feeders and other users of corn would then have the challenge of adjusting to higher corn prices and reducing use enough to provide adequate corn supplies for ethanol processors.  Concern about a possible weather-reduced corn crop and impact of the mandate were factors pushing corn prices far above old records in the late spring and early summer of 2008. 

If corn supplies are limited, the mandate would allow the ethanol industry to pay whatever price is need to obtain enough corn to fill the mandate.

In case of tight corn supplies, the Energy Independence and Security act gives authority to the Administrator of the Environmental Protection Agency (EPA), in consultation with the Secretaries of Energy and Agriculture to temporarily lower the mandate.  It appears that serious negative economic impact would be a necessity in order to reduce the mandate.

The Future

The rapid expansion in the corn-based ethanol industry appears to be coming to a close. Whether that happens depends on (1) how soon the global financial markets stabilize, (2) future prices of crude oil, and (3) whether the potential shortfall from government 2015 mandates can be filled by imported ethanol.  If construction halts after all current plant construction is completed, increasing U.S. average corn yields over time should provide the livestock and poultry industries with gradually increased feed supplies in the future.  For the next two years and possibly longer, current conditions point to relatively tight corn supplies.  Availability and cost of corn for livestock feeding will depend not only on weather and yields, but also on global economic activity and currency exchange rates.  The current financial turmoil suggests that global economic growth may be quite modest for the next few years.  Long-term economic growth in developing countries in Asia, Latin America, and other areas will create market growth for the American livestock, poultry, and dairy industries.  Longer-term availability and cost of feed will be key factors determining future levels of production of the U.S. livestock and poultry industries.

Other factors affecting the future of U.S. animal agriculture will include energy availability, cost, and variability in energy prices.  Energy-related costs are important in producing, processing and marketing the products of the livestock and poultry industries.  Impact on animal agriculture also occurs through consumer budgets and availability of money for meat and dairy product purchases.  The current sub-prime mortgage crisis has been worsened by a 278% increase in the price of crude oil from June 2004 to June 2008.  Higher energy costs have impacted consumers not only in automobile fuel costs, but also in increased transport and processing costs for almost everything they buy and higher home heating costs.  Stress on consumer budgets tends to reduce the demand for higher-value meat products, thus affecting the profitability of animal agriculture.