January 29, 2007

Ethanol set to displace US corn export status

An eFeedLink Exclusive

Efforts to raise ethanol production could well eliminate the United States' corn export capability, leading to higher prices as well as more price volatility for corn.

A key ingredient both in ethanol production and broiler feed, corn was a major talking point at the International Poultry Exposition in Atlanta, which ended Friday (Jan 26). Coinciding with the start of the three-day annual poultry event was the State of the Union address, where US President George Bush unveiled earlier last week a landmark plan to cut crude oil usage in the country by 20 percent in 10 years, primarily through increasing ethanol production.

Funding for ethanol and other renewable energies is estimated to receive US$1.6 billion, as part of a 2007 farm bill that is focusing on energy and conservation issues.

With ethanol production expected to hit 35 billion barrels a year, the US would be hard pressed to meet the corresponding surge in corn demand, unless an additional 12 to 15 million acres are planted giving high and consistent yields, assesses Terry Barr, chief economist of the National Council of Farmer Cooperatives.

Addressing the biofuels impact on feed at a conference during the poultry show, Barr estimates that an additional eight to 10 million more acres of corn in 2007 will bump up total acreage to about 90 million acres by year-end.

Corn prices have already begun to show the 'ethanol effect', soaring above US$3 per bushel in 2006/07. Entering a year with low ending stocks, prices could be pushed up to US$4 a bushel in 2007/08 as corn utilised in ethanol could more than double over the next four years.

This is hardly an exaggeration, seeing that experts have consistently underestimated corn use in ethanol production. Last year alone, the US saw the construction of some 52 new ethanol plants, or at a rate of one new plant every week. On the heels of the ethanol boom is the influx of venture capital, which is unlikely to abate anytime soon, says Barr.

Further compounding the ethanol effect on corn supplies and prices is China, a country whose massive and growing appetite for resources has every potential to single-handedly wreck havoc on the global commodities market. That China looks set to become a net importer of corn by, some say, 2010, coupled with the US' diminishing role in global corn exports, could precipitate higher prices and permanent, drastic adjustments to the feed complex.

Besides possibly relinquishing its corn export status, the US could also see its poultry industry backing out of the global market as the ethanol boom raises the cost of corn. Unlike cattle or even hog, poultry has limited access and is less able to utilise the biofuel by-product, DDGS or distillers' grains. Major production areas located away from the mid-western corn-belt could further drive up feed costs and lower poultry's competitiveness.

Already, several US poultry producers have purportedly abandoned farming in favour of importing chicken, a trend that could have dire consequences on US poultry trade, where major export markets currently include Russia, the European Union and China. Rising ethanol production has already lifted wholesale chicken prices up by 13 cents per kilogramme, estimates the National Chicken Council. Broiler prices expected to fall nonetheless in the 2007 commodity market could hinder output growth, predicts Barr.

But agriculture will continue to "ride the biofuels tiger", as favourable return on investments keep the renewable energies sector booming. Pierce Lyons, president of Alltech, offers a solution to feed manufacturers: a technique called "solid state fermentation" that breaks down the fibre in corn, turning it into a more digestible and utilisable feed for livestock.

Instead of viewing DDGS as a mere "by-product", producers should start thinking of it as a new raw material that could have, with the right technology input, every potential to turn into a low cost, valuable feed ingredient, he said.

In line with predictions that the US may have to cast off its corn export role, global markets are seen to recalibrate the balance away from over-reliance on the US, even as competitive pressures from China spur protectionism. As food and agribusinesses align to an evolving global marketplace, managing inventory and price risks will be major issues not only for poultry, but all sectors.