FEED Business Worldwide - October / November, 2011
Biofuels are here and alternative feeds are on the way
by Eric J. BROOKS
At first glance, this month's cover story owes its existence more to human folly more than to genuine supply shortfalls. At 40% of production, or 120 million tonnes, more of America's crop is turned into ethanol than is used for feed. If US ethanol production fell by 50%, that would free up 60 million tonnes of corn. World corn exports would skyrocket from 90 million tonnes to 150 million tonnes, corn's price would crash. With more corn than what the world would know what to do with, we would be left writing about how krill or soymeal could be substituted in place of fishmeal.
Ethanol and the arithmetic of alternative feed grains
But that is simply not going to happen. Instead, with China's feed production overtaking America's the country uses 46% more corn in 2011 than it did 10 years ago. In numerical terms, China's own corn demand went up by some 56 million tonnes, from 122 million tonnes in 2001 to 178 million tonnes today. This is larger than Brazil's entire crop and several times more than Argnetina's.
Meanwhile in the United States, 2001's 252 million corn production had risen by 25.4% to a USDA estimated 316 million tonnes in 2011. However, over the same ten years, America's ethanol production jumped an astonishing 737%. By doing so, it went from consuming 15.1 million tonnes of America's corn in 2001 to 126.5 million tonnes today. This 111 million tonne rise in US ethanol's corn consumption means that in 2001, America had 237 million tonnes of corn available for non-ethanol use. Today, the US only has 190 million tonnes of corn available for non-ethanol use, 19.8% less than it did ten years ago.
What does this mean? With ethanol production eating up more than the combined ten year increase in US, Brazilian and Argentine corn output, world corn consumption jumped by 42.5% or 255 million tonnes, from 605 million tonnes in 2001 to a USDA estimated 861.6 million tonnes this year. With roughly 90% of the world's countries dependent on feed corn imports, global corn exports rose a mere 17.6% over this time, from 77.4 million tonnes in 2001 to some 91 million tonnes this year.
Although not as severe as the situation in feed grains, biofuel output is also forcing the hands of European policymakers. Traditionally, with America's GM soy banned from the EU and China taking up so much of the US crop, EU feed mills got around this difficulty by substituting locally grown rapeseed in place of soy. Now, with biodiesel output using up such a large proportion of EU oil seed supplies, the EU this year modified its policy, allowing in soy that had only a 'trace' amount of GM crops in it.
Biofuels compete against feed w/o government help
Of course, many people think that the government could merely make it more difficult to produce ethanol and make the whole issue of alternative feed grains go away. Unfortunately, that is not economically possible. According to Chris de Lavigne, Frost & Sullivan's global vice-president for marketing, biofuels replace 2.74 million barrels of oil a day or 3% of world consumption. This makes biofuels too valuable to stop turning 15% of corn, 15% of soy and 30% of rapeseed into ethanol or biodiesel anytime soon. 
Therefore, if we suddenly stopped producing biofuels, energy prices would skyrocket. That would mean that any price relief on the feed grain front would be counterbalanced by higher costs for fertiliser, (fossil-fuel based) supplements, transport costs or even feed mill power supplies. Consequently, halting biofuel production is hardly a reliable means of lowering livestock production costs.
In fact, two times in the last six months, biofuels have already made it clear that even without government intervention, mere market forces will make alternative feeds a livestock industry necessity.
First, in early 2011 when corn first touched US$7/bushel, many analysts stated that with corn so expensive, US ethanol production would taper off or fall. Instead, despite high corn prices, ethanol output jumped and the proportion of corn consumed by it went from 37% to 40%. To the surprise of analysts, ethanol making's profit margins were fat enough to absorb the cost of expensive corn.
Ironically, one factor that powered this increase is that with sugar making margins so high, Brazil found it cost-effective to import US ethanol instead of make it from cane sugar. And in the pages that follow, we see this happen repeatedly: market forces connect non-feed ingredients such as sugar and even alternative feeds such as cassava to energy demand, creating competition and shortages for traditional feed materials.
Second, in mid year, even after the Obama administration removed some of ethanol's blending subsidies, output kept rising for a simple reason: even without government help, ethanol is profitable enough to compete with feed mills for corn. According a September 14th Reuters report, "for the near term, both domestic and export sales are strong, plus profit margins -- though volatile -- are largely healthy, factors that should feed continued strong ethanol demand for corn." A year ago, many predicted that US$7/bushel corn would result in lower ethanol production. With profit margins still healthy, unless corn jumps closer to US$8/bushel, there is no reason to believe that US biofuel production will be much affected at this time.
The challenge
All this means that the world needs to find, adapt and start using non-traditional feed ingredients.
This is the gravity of the situation: From 2010 to 2050, the world's population will rise by nearly 30%, from just under 7 billion to 9 billion. Amid fast rising developing country meat consumption, this means that with arable growing land nearly maxed out and crop yields falling behind demand, the world will require several times more feed and meat from the same resource base.
According to Nabil Chinniah, deputy president and procurement director, Trouw Nutrition Asia Pacific, "Based on current GDP and demand growth, we need three worlds to feed everyone and we are not going to get them."
If the world is incapable of producing such a quantity of meat from current feed input base and crop yield growth cannot keep up with demand, the only alternative is to expand the roster of available feed materials. To do so, we must examine with the three basic feed types and their relationship to biofuel demand.
Three biofuel and alternative feed frontiers
At this time, the competition between feed crops, biofuels and subsequent shortages manifest themselves in three different feed types: Oil seeds, ocean-based protein meals and energy grains.
The least acute front is that of oil seeds. Much like biofuels are partly a construct of government policy, so too are oil seed shortages. Their dilemma is primarily seen in the EU, where import barriers against feed with GM soy and rising oil prices are diverting domestic rapeseed supplies into biofuel output. Indeed, due to rising European biodiesel production helped push EU rapeseed prices to record highs last year.
Having said that, the abolition of EU GM crop import barriers aside, other solutions to oil seed deficits are on the horizon. These include  the use of coconut oil ester or jatropha as biodiesel feedstock in the place of rapeseed or soy.
In fact, thanks to Brazil and Argentina's abundant soy growing capacity, oil seed meals are being increasingly being adapted to solve another class of feed shortages: fishmeal-based protein feeds are increasingly substituting soymeal and other oil-seed based meals in place of fishmeal, whose production has peaked in the face of rising aquaculture output.
In fact, even if the world is incapable of using soymeal and other oil seeds in place of fishmeal, other alternatives loom. These include krill and the possibility of using soymeal made from soybeans genetically engineered to produce fishmeal's vital omega-3 fatty acids. Consequently, despite today's very high fishmeal prices, ocean-based protein meals do not face competition from biofuels and seem within several years of an oil-seed meal based solution.
Energy grain is the real challenge
Instead, the real challenge with regards to alternative feeds is finding an energy source substitute for corn. With meat demand taking off in the developing world and America's corn harvest increase going into ethanol, Latin American corn exports will not be sufficient to satisfy rising Asian demand. This can already be seen in the region's explosive growth in DDGS imports, which have acted as a safety valve of sorts.
China is expected to import five million tonnes of corn within several years and Southeast Asia is already importing seven million tonnes annually. Indonesia and Vietnam are already importing 3 to 4 million tonnes of corn between them. Their combined population of 330 million are the fastest growing feed and livestock markets in the world. Due to such demographics, East Asia is under greater pressure to adapt alternative feed materials to livestock use than any other part of the world. Which is why to choose to survey how East Asian countries on this question.
One thing that we learned is that during the transition to alternative feed ingredients, great flexibility will be required: Alternative feed materials increase animal raising capacity by being put directly into rations in some countries and by replacing grains as biofuel feedstock in others. Moreover, the way one country uses alternative feed materials can impact the capacity of another country to use it in the same way.
For these reasons and many others, East Asia shows greater need and greater creativity in the way it uses alternative feeds and biofuels than almost any other part of the world. But the need to be flexible and adapt alternative feed materials to the country's unique circumstances means that no two solutions work entirely the same way for each country. In the surveys below, we see how four of Asia's fastest growing feed and livestock markets are approaching the issue of alternative feeds.
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