Spiking COVID-19 cases cause renewed concerns for ethanol industry

Making a living raising cattle isn’t as simple as just buying a herd and turning it out on pasture. Cattle require a specific diet to maintain proper nutrition and weight gain.

For the past 10 years, Jon Auten has used the co-product from ethanol production as a source of energy and protein in his cattle ration. Using wet distillers’ grains in his cow-calf operation offers myriad advantages.

“Feeding a wet by-product provides protein, particularly bypass protein or rumen-undegradable protein (RUP), which is helpful for younger, rapidly growing cattle,” says Galen Erickson, cattle industry professor of animal sciences, University of Nebraska-Lincoln. “It provides more energy than corn. It helps with ration mixing (e.g., conditioning) and allows for lower-quality roughages to be fed (e.g., stalks/straw instead of expensive alfalfa hay).”

Currently the No. 2 producer of ethanol in the U.S., Nebraska has grown from one ethanol plant in 1985 to 25 today. Combined, they have the capacity to produce about 2.3 billion gallons of ethanol. Spread across the state, these plants use more than 700 million bushels of corn each year and produce more than 6 million tons of distillers’ grains.

“We estimate feeding wet or modified distillers’ makes producers between $30 and $50 more per finished animal,” Erickson says. “This is due to better performance and cheaper cost of gain even when priced the same as corn on a dry basis.”

But as ethanol plants shut down or reduced output in the state earlier this year because of economics and storage, Auten was forced to consider alternatives for his Angus herd that he estimated could push his feed costs up 25% or more.

“Once I’m not able to get wet, or even modified wet, distillers’ grains, I’m going to have to buy high-quality hay to replace the protein needs of my cattle, which comes at a premium price,” says the Ayr, Nebraska, producer.

In April 2020, the Renewable Fuels Association (RFA) reported that seven plants had idled production and three had slowed output across Nebraska. At the height of ethanol’s struggles, Roger Berry says the state saw 11 plants idle; while several others continued to reduce capacity.

“A 2015 University of Nebraska study showed that the ethanol industry in Nebraska is a $5-billion-per-year industry, so the financial impact on our state is huge as these plants idle and cut production,” says Berry, administrator, Nebraska Ethanol Board.

“We were hearing that ethanol plants were shutting down by the day,” says John Robinson, vice president of membership and communications for the National Cattlemen's Beef Association. “Unfortunately, the impact on cattle producers and feedlots that had formulated distillers’ grains into their feed rations was a side effect. They were faced with a difficult situation because they were going to have to find a new source of feed and reformulate rations. That’s really tough on producers and feeders, especially for those who were used to sourcing locally.”

Across the U.S., there are 202 ethanol plants that have 17.1 billion gallons of total capacity, according to RFA. In a typical year, eight to 10 of those may go offline. 

Since March 1, 2020, 69 plants, with an annual production capacity of nearly 6 billion gallons, had been fully idled. Another 64 facilities have reduced output anywhere from 10% to 50%, which took another 1.7 billion gallons out of the supply.

“I’ve been involved in the ethanol industry for about 15 years, and I've never seen anything close to this,” says Geoff Cooper, CEO of RFA. “It's really a devastating time for the industry.”

In a normal year – when every plant is running at normal rates – these facilities make about 44 million tons of distillers’ grains annually. With nearly 66% of production either idled or reduced, that adds up to a significant amount of feed lost.

“After more than half of the industry shut down in April, we saw a slow but steady recovery from late April through June,” Cooper says, adding that demand settled about 10% below normal in June and has stayed there ever since. “Most of the facilities that were offline in the spring are back in operation. But we still have about two dozen plants idled, and most facilities operating are likely running just a little bit under normal operating rates.”

Today, total idled capacity is about 2.5 billion gallons of annual production.

LOSING ONE-THIRD OF FEED

In Kimball, Minnesota, Schiefelbein Farms was thrown for a loop earlier this year when it was notified that one-third of its feed would no long be available – effective immediately.

Bushmills Ethanol, where the family sells its corn at around 75% of its value in return for wet cakes, was planning to reduce ethanol production and would only be producing dried distillers’ grains for the time being. A cooperative made up of about 400 farmers/member owners, the dry mill plant began running in late December 2005. Today, it produces 65 million gallons of ethanol per year.

As the fourth-largest ethanol producer in the U.S., Minnesota is home to 20 ethanol plants that produce over 1.4 billion gallons of ethanol annually. Seven plants have idled operation and another six have slowed production since the beginning of March 2020, according to RFA.

“When we’re feeding wet cakes to the animals, especially ones that are ready to be harvested, it is a dramatic shift in what they are used to eating,” says Don Schiefelbein, whose family raises about 1,000 registered Angus females and feeds out around 10,000 head of cattle. “If we’re feeding them wet cakes one day, and the next we’re not, it can create tremendous havoc.”

As they ready to market cattle, the last thing Schiefelbein Farms wants to do is mess with an animal’s diet. “Once our cattle are in the last leg of their diet, they’re consuming so much feed that any little upset in the feedstuffs can cause an upset stomach, bloat, or digestive problems,” he says.

The fact that Schiefelbein Farms had a contract with Bushmills, and it had prepaid for the product was also concerning. Initially, Bushmills agreed to hold off for a week, so Schiefelbein Farms could stockpile as much supply as it could.

Once the wet cakes were no longer available, Bushmills was going to allow them to switch over to dried distillers’ grains, so they could continue to use the money they had with them.

“Instead of having to make the transition in a week, maybe we can make it over two to three weeks and minimize the digestive problems that may be associated with the transition,” he says.

Depending on how long the plant was in limited production of the dry product also depended on whether or not Schiefelbein Farms would have to switch to an entirely different ingredient like soybean meal. If they had to switch, Schiefelbein estimated feed costs would rise by roughly 20%. 

“There is no other inexpensive, or as abundant, source of RUP than this wet by-product,” Erickson says. “More proteins like soybean meal will be fed and certainly more urea in supplements, which is necessary. Because the type of protein is different, it will impact younger, rapidly growing cattle most. The increased corn in the diet also requires very diligent management.”

Fortunately, Bushmills honored their initial agreement with Schiefelbein Farms. “We never had to change rations,” Schiefelbein says. “In fact, POET called us and also offered us wet cake!”

WHY ARE PLANTS SHUTTING DOWN?

Berry says there are two main reasons ethanol plants close or slow production: economics and storage.

“The ethanol industry has been running very close to breakeven for several years due to federal policy,” he says. “The small refiner exemptions have caused a lot of uncertainty in the ethanol industry over the last three years.”

Add to that the effects of coronavirus on the amount of gasoline being consumed, and it sets up an even worse scenario for ethanol plants to lose money on every gallon they produce.

“Over the past three years many plants have seriously depleted the amount of cash on hand due to the small refiner exemptions,” Berry says. “They were in a bad position before going into the decrease of ethanol use by as much as 50% due to nobody driving nearly as much as they were before the coronavirus hit.”

The reduction in ethanol use was a very fast reduction, and ethanol plants were still producing at the same level when the pandemic struck. “Due to this, the storage facilities started bringing more ethanol in than they were getting rid of,” he says. “Now most storage is holding as much as it can possibly hold, which makes the logistics of getting rid of the ethanol produced very difficult.”

As the economic situation improved, Berry says all but two Nebraska plants have come back online.

“The industry has done a very good job of managing the supply and demand,” he says. “I just hope we don’t get thrown back into the same situation we had back in April.”

With COVID-19 cases spiking again, and many states, counties, and cities instituting new restrictions and closures, RFA is once again seeing some slippage in fuel consumption.

“That is concerning for ethanol producers,” Cooper says. “We don’t expect demand to plummet like it did in the spring, but there is definitely a softer tone in the ethanol market than we saw this summer and into the early fall.”

The bottom line remains the same as it did months ago: In order for the industry to recover from this, Cooper says the economy has to reopen. “People have to get back on the roads. People have to go back to their office buildings. Kids have to go back to school. There’s really no other way out of this box.”

COMPOUNDING AN ALREADY BAD SITUATION

Switching an animal’s diet couldn’t have come at a worse time as the cattle market continued to fall apart. “The futures prices were well below where they were prior to COVID-19, and they weren’t good at that point, either,” Robinson says.

“When your selling price is down, and your cost of production is going up­ ­– even though your feed was contracted and paid for – all of a sudden your economics are turned upside down,” Schiefelbein says.

And it’s not just distillers’ grains being replaced.

“Even with low corn prices right now, you’re also replacing or adding other feed costs that may be higher priced because producers are having to reformulate a ration,” Robinson says. “Those added costs are a horrendous hit to an already bad situation that cattle producers are facing across the country regardless of their feed source.

“The price discovery mechanism in our markets is completely broken,” he continues. “It’s cause for concern, and it has a lot of people asking questions about what’s going on and what’s really at play here. We are going to have to provide some solutions in the market, so that producers really understand what their cattle are worth. Right now, most of those tools are not working very well.”

Read more about

Tip of the Day

3-in-1 welding cart holds it all

3-in-1 welding cart Oct 2020 I couldn’t find a cart that would accommodate my MIG and TIG welders plus my plasma torch, welding helmet, and supplies. So I bought an... read more

Talk in Marketing

Most Recent Poll

Will you plant more corn or soybeans this year?