Geocoding â€“ What it means and how it works in RiskMeter

1

PorkBridge – August 2007

Ethanol, DDGS’s and the Cost of Raising Hogs

From information, knowledge

Paragon Economics, Inc.

Steve R. Meyer, Ph.D.Paragon Economics, Inc.

1

Crude Oil Prices 1994-Present



2

Source: NYMEX

Crude Oil Futures Prices through 2012CRUDE OIL FUTURES PRICES, 1997-2012

70

72

74

76

$/Barrel



3

60

62

64

66

68

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

3/2/20073/30/20075/4/20076/18/2007

7/18/2007

Source: NYMEX, Light Sweet Crude

Ethanol production is VERY profitable!



4

U.S. Ethanol Production, 1980-06

3

4

5

6

Gal

lons



5

0

1

2

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Bill

ion

Source: Renewable Fuels Association

Ethanol plants have exploded!



6

2

Ethanol Plant Statistics, 3/13/07 123 plants operating in 21 states with

capacity to produce 6.4444 billion gallons of ethanol per year (49 plants farmer owned)

76 new plants under construction and 7



7

6 e p a ts u de co st uct o a dexpansions with capacity to produce 6.3739 billion gallons of ethanol per year

~100 plants being planned (???)

Source: Renewable Fuels Association

1 8 0 0 0

2 0 ,0 0 0

2 2 ,0 0 0

2 4 ,0 0 0

2 6 ,0 0 0

2 8 ,0 0 0

3 0 ,0 0 0

G a llo n s ( M ln ) .

P o s s ib le

P r o b a b le

C o n s t r u c t io n

(U nde r C onstruc tion , P robab le & Poss ib le by Aug 09)

U .S . E thano l C apacity

The plants under construction will be built!



8

4 ,0 0 0

6 ,0 0 0

8 ,0 0 0

1 0 ,0 0 0

1 2 ,0 0 0

1 4 ,0 0 0

1 6 ,0 0 0

1 8 ,0 0 0

Fe

b-0

7

Ap

r-0

7

Ju

n-0

7

Au

g-0

7

Oc

t-0

7

De

c-0

7

Fe

b-0

8

Ap

r-0

8

Ju

n-0

8

Au

g-0

8

Oc

t-0

8

De

c-0

8

Fe

b-0

9

Ap

r-0

9

Ju

n-0

9

Au

g-0

9

E x is t in g

Sources : RFA , p ress reports , com pany filings, and in te rviews w ith industry contacts.

Ethanol: A corn product for a long time to come

0.6

0.8

1.0

1.2

illio

n B

TUs

corn cellulose imports



9

0.0

0.2

0.4

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

Qua

dri

Source: DOE/EIA, Annual Energy Review, February 2006

U.S. Average Corn Price, 1908-2006

1.50

2.00

2.50

3.00

3.50

4.00$ Per Bushel

1908-1942

35 years

Avg $0.78

1942-1972

30 years

Avg $1.26

1973 2006

What’s the next price plateau for corn price?



10

Source: USDA/NASS

0.00

0.50

1.00

1908

1912

1916

1920

1924

1928

1932

1936

1940

1944

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

1973-2006

34 years

Avg $2.37

The 1940s step: 62%The 1970s step: 88% A 75% step will take corn to $4.15/bu

corn price?

ISU/CARD Research Project -- Scenarios Base scenario: Low oil prices and an E 85

bottleneck Scenario 2: $10 higher oil prices and an E

85 bottleneck Scenario 3: $10 higher oil prices and no E



11

Scenario 3: $10 higher oil prices and no E 85 bottleneck

No need to run a lower oil price scenario- Base case stops new ethanol construction- Existing plants will stay in operation but may

change owners

Key Determinants of Impacts Crude oil prices

- Low oil price was $5 lower than the 2/27 NYMEX close

- High oil price was $5 higher than 2/27 close Policy incentives -- kept $0.51/gal. blenders

tax credit and $0 54/gal import tariff



12

tax credit and $0.54/gal. import tariff Demand for E85

- Made it responsive to the price of ethanol but did not change policies (mainly state) regarding mandated E 10 use

3

Base Case Results – Low oil, E-85 bottleneck Ethanol production stops expanding after existing

construction is completed Corn yields and acres grow and minimize ethanol’s

price effect toward the end of the study period Beef producers (here and abroad) absorb most of

the DDGs



13

the DDGs DDGS prices remain above $100 per ton -- just

enough below corn prices to enter ruminant rations and NOT enter pig diets

Using DDGs for cattle alleviates downward pressure on soybean meal prices

Projected U.S. Ethanol Production from Corn

10,000

12,000

14,000

16,000

ons

Ethanol production levels out after 2010



14

0

2,000

4,000

6,000

8,000

2006 2007 2008 2009 2010 2016

mill

ion

gal

loProjected U.S. Corn Planted Acreage

85

90

95

es

Corn acres levels also – then falls at the end



15

70

75

80

2006 2007 2008 2009 2010 2016

mil

lion

acr

Projected Corn Prices

3.30

3.35

3.40

3.45

3.50

Corn price crunch through 2010



16

3.00

3.05

3.10

3.15

3.20

3.25

3.30

2006 2007 2008 2009 2010 2016

$/b

u

Projected Use of DDGS in U.S. Feed ('000 tons)

25,000

30,000

35,000

B f

Beef cattle use the DDGS



17

0

5,000

10,000

15,000

20,000

2007 2009 2011 2013 2015

Beef

Pork

Poultry

Dairy

Impacts of Higher Crude Ethanol plant margins increase -- New

incentive to invest in added capacity Major hurdle will be encountered at 14 – 15

billion gallons due to E-10 saturation Relatively lower ethanol prices will eventually



18

y p yencourage increase in flex-fuel cars

Another 8 billion gal. – total of 22 billion gal. By 2015

- No incentive to grow or exit the ethanol industry- Ethanol will be priced below energy value

4

Full Equilibrium with high crude, E-85 What if ethanol sells at its energy value and

crude oil is $64? Will only happen if E 10 is mandated thereby

freeing up pumps for E 85. Ethanol production increases by another 8

billion gallons to a total of nearly 30 billion



19

billion gallons to a total of nearly 30 billion gallons

Corn price goes to $4.42 per bushel The economic effects are about twice as

large as those discussed earlier

Impacts of higher oil and ethanol . . .

NE Steers/Beef Hogs/Pork ChickenProduction Cost 36.0%Production -1.6% -9.2% -6.0%Producer Price 8 8% +15 0%*

IMPACT OF $4.42/BU CORN



20

Producer Price 8.8% +15.0%Retail Price 4.0% 8.2% 5.0%Exports -8.0% -17.0% -16.0%*Ready-to-cook bird price

Summary of ISU/CARD findings Low-steady oil: Corn growth will suffice Higher oil: Could need MUCH more corn

and drive prices >$4/bu. DDGS are used by beef – advantage! High corn: lower meat exports and higher



21

High corn: lower meat exports and higher meat prices with pork getting hurt worst

All of these assume NORMAL weather – a short crop would result in BIG short-term problems

The ’90s downtrend has been broken but . . . . . . the new uptrend will be offset by costs

IA-MINN MARKET HOG PRICES, WEEKLY

70

80

90

100$/cwt. carcass



22

0

10

20

30

40

50

60

73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07

Predicted by LH futures, 7/23/07

USDA frcst.: S/U Ratio of 12.2% ~ $2.80-$3.40U.S. CORN PRICE VS. S/U RATIO

1990-2008

1995

1996

2006

2007

2 70

2.90

3.10

3.30

3.50

$/bu

USDA '06/'07, 6/11 = $3.40

Note: Data label is the

X USDA '06/'07, 7/12 = $3.10



23

19901991

1992

1993

1994

1996

1998

1999 2000

2001

20022003

20042005

1997

1.50

1.70

1.90

2.10

2.30

2.50

2.70

0% 5% 10% 15% 20% 25% 30%

Ending Stocks/Use Ratio

year of the harvest

Corn prices the highest since 1995-96



24

5

Feed costs: HIGH &SUSTAINEDCORN-SOY COST, 16% CR. PROTEIN DIET

160

180

200

$/Ton

Actual

Predicted March 20, 2007

Predicted May 11, 2007

Predicted June 18, 2007



25

60

80

100

120

140

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

U.S. Average Corn Price, 1908-2006

1.50

2.00

2.50

3.00

3.50

4.00$ Per Bushel

1908-1942

35 years

Avg $0.78

1942-1972

30 years

Avg $1.26

1973 2006

What’s the next price plateau for corn price?



26

Source: USDA/NASS

0.00

0.50

1.00

1908

1912

1916

1920

1924

1928

1932

1936

1940

1944

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

1973-2006

34 years

Avg $2.37

The 1940s step: 62%The 1970s step: 88% A 75% step will take corn to $4.15/bu

corn price?

Strategy for 2007 and Beyond



27

Through analysis, careful consideration . .

Buy low Convert efficiently Sell high

. . . have led me to three critical strategies



28

SOME PRINCIPLES ARE FOREVER

BUT THE DEFINITIONS CHANGE!

“Low” corn will be >$3 and maybe >$4/bu.



29

What will a HIGH hog price be in the future?



30

6

What will the next 5 years bring? Well-managed operations will still thrive Lower profit margins but not much red ink –

unless we expand quickly! How many will give up hogs for cash grain?

-- SD’s numbers from March (-13%)



31

The U.S. hog industry will be smaller than it would otherwise have been – I think we will miss out on our usual 1.5%/yr. growth

DDGS gives beef and dairy (?) an advantage Exports will be threatened if we import corn

Please advance to the next slide for the second presentation.



32

Considerations Involving Use of DDGS in Swine

33

Duane Reese, Extension Swine SpecialistAl Prosch, Swine Extension Educator

University of NebraskaAugust 2, 2007

Agenda

General use of DDGS Summary of research results

Factors that may limit DDGS

34

Why is DDGS fed Economic modeling

Estimated DDGS usage

Grower-finisher diets ~85-90% 10-15% dietary inclusion rates

Sow diets ~5-10%

35

Gestation - up to 30% dietary inclusion Lactation - 5-10% of the diet

Late nursery diets < 5% Added at 5-10% of the diet

Shurson, 2007

Inclusion rates, % of diet

Phase Suggested Maximum

Nursery (>25 lb) 5 25

36

Grow-finish 10 20

Gestation* 30 50

Lactation* 20 30

*Maximum 20 % for cull sows?

7

Effects on pig performance

No effect on sow reproductive performance Possibly two exceptions Lactation feed intake Litter size

37

No effect on gain, feed efficiency or carcass merit Possibly two exceptions Carcass yield Mortality

50% DDGS gestation diets and 20% DDGS lactation diets: lactation ADFI

12

14

16

Inta

ke, l

b/da

y

Cycle 1Cycle 2

a xy b x a y a xy

38

8

10

Con/Con

Con/DDGS

DDGS/Con

DDGS/DDGS

Treatment

Fee

d I

a,b,x,y Different superscripts indicate significant difference (P < .10).

Wilson, M.S. Thesis

9.0

10.0

11.0

o.pi

gs/l

itte

r

Cycle 1Cycle 2

a x a y a y a y

50% DDGS gestation diets and 20% DDGS lactation diets: pigs weaned/litter

39

7.0

8.0

Con/Con

Con/DDGS

DDGS/Con

DDGS/DDGS

Treatment

No

a,b,x,y Different superscripts indicate significant difference (P < .10).

Wilson, M.S. Thesis

DDGS in lactation: ADFI

14 5

15.0

15.5

P = 0.10

40

12.0

12.5

13.0

13.5

14.0

14.5

lb/d

0 10 20 30% DDGS

Song et al., 2006d 109 gestation to d 18 lactation

Carcass yield – study #1

76 5

77.0

77.5

%

Linear P < 0.01

41

75.0

75.5

76.0

76.5

Yie

ld, %

0 10 20 30

% DDGS

J. Anim. Sci. 83:335(Suppl 1)1,040 pigs


72 5

73.0

73.5

%

Linear P = 0.01

42

71.0

71.5

72.0

72.5

Yie

ld, %

0 10 20 30

% DDGS

J. Anim. Sci. 84:3356240 pigs

8


77.5

78.0

%

20 & 30% vs. 0%; P < 0.05

43

76.0

76.5

77.0

Yie

ld, %

0 10 20 30

% DDGS

2007 MW abstr. #104512 pigs


75.5

76.0

%

Linear P < 0.05

44

74.5

75.0Yie

ld, %

0 5 10 15 20% DDGS

2007 MW abstr. #1671,112 pigs


76.5

77.0

%

P < 0.04

45

75.5

76.0

6 5

Yie

ld, %

0 30% DDGS

2007 MW abstr. #168587 pigs

Question

How much does carcass yield change for each 1% addition of 77 0

77.5

46

1% addition of DDGS to the diet? Calculate the

slope of the line

75.0

75.5

76.0

76.5

77.0

Yie

ld, %

0 10 20 30% DDGS

Summary, no. pigs & slope

Study No. pigs Slope Weighted slope

1 1,040 0.050 0.015

2 240 0.052 0.004

47

3 512 0.042 0.006

4 1,112 0.030 0.010

5 587 0.030 0.005

Total 3,491 0.039

Average 0.041

Summary from five studies

%DDGS Carcass wt, lb Difference, lb

0 200.0

10 199 0 1 0

48

10 199.0 -1.0

20 198.0 -2.0

30 197.0 -3.0

265 lb liveweight; 75.5% base yield; for each 1% DDGS addition, yielddecreases by 0.04 percentage units.

9

Factors that may limit DDGS use

Lactation feed intake (P1) Carcass effects Fat quality Yield

49

Protein quality Mycotoxin risk Quality variation Handling Storage space Price

DDGS color and nutrient content & quality varies

50

Nutrient Average RangeProtein, % 27.2 24.1 – 30.9

Nutrient composition of various DDGS sources

51

Fat, % 10.2 8.6 – 12.6Lysine, % 0.78 0.54 – 0.99P, % 0.61 0.51 – 0.74ADF, % 9.9 7.2 – 17.3

Stein, 2007

Determined nutritional values

Item Corn DDGSME, Mcal/lb(n = 10)

1.60 1.56 (1.47 – 1.73)

52

P digestibility, %(n = 10)

19 59 (50 – 68)

Lys digestibility, %(n = 36)

62 (44 - 78)

Stein, 2007

Handling Bridging in

bins, feeders

Other possible limitations

53

Especially fine ground

Our DDGS flows like SBM

Greater bulk density of diet 3% for each 10% DDGS in diet E.g., bin hold 8 tons of corn-soy diet holds

7.8 tons 10% DDGS diet

Other possible limitations

54

7.8 tons 10% DDGS diet

Greater ingredient storage capacity Not an issue for producers using toll-

milled feed

10

Why is DDGS fed to pigs?

Lower diet cost Reduced P supplementation May reduce manure P excretion

55

Perceived health benefits Improve gut health related to Lawsonia

intracellularis

Healthy Ileitis

56

Ability of DDGS & resistance to Lawsonia intracellularis challenge

Treatments (80, 17-d old pigs) Unchallenged corn-soy Challenged corn-soy Challenged 10% DDGS

57

Challenged 10% DDGS Challenged 20% DDGS

Results Challenge reduced growth performance DDGS did not reduce disease

incidence/severity

J. Anim. Sci 84:1860

DDGS and mortality

4.0

5.0

6.0

, %

Linear P < 0.05

58

0.0

1.0

2.0

3.0

Mor

talit

y,

0 10 20 30

% DDGS

J. Anim. Sci. 83:335(Suppl 1)

59

Item $/lb lb DDGS Current

DDGS .075 200 15.00

Limestone 05 3 15

Value of DDGS-one method

60

Limestone .05 3 .15

Corn .067 178 11.92

SBM .11 19 2.09

Dical P .19 6 1.14

Total $ 15.15 15.15

11

UNL economic model

Objectives Estimate the value of DDGS in a grow-

finish diet containing 10% DDGS Exam the independent and collective

61

Exam the independent and collective effects that carcass yield reduction and mortality improvement has on DDGS value

• No pig cost, overhead, labor or supplies• 2.8 lb feed/lb gain• Starting weight 45 lb; end weight 265 lb

• (220 lb gain)• 616 lb feed used per pig

Assumptions

62

616 lb feed used per pig• Carcass price $70.65• DDGS @ 10% inclusion rate• DDGS price – calculated to equal corn value• Carcass yield 75.4%

• 0.4% unit decrease• Mortality 4.0%

• 1.4% unit improvement

Corn, $/bu

Diet cost, $/ta

DDGS/t equal price,$

Diet cost, $/tb

2.00 106.1491 91.37 106.1489

2 40 117 1686 104 09 117 1690

Base

63

2.40 117.1686 104.09 117.1690

2.80 128.1881 116.80 128.1881

3.20 139.2076 129.51 139.2072

3.60 150.2271 142.23 150.2271

4.00 161.2466 154.94 161.2463aCorn-soy; b10% DDGS diet.

Corn, $/bu

w/o DDGS w/DDGS DDGS price for equal MOF, $/t

2.00 102.83 102.11 68.00

2 40 99 43 98 71 80 80

Margin over feed cost (MOF, $/pig) with 0.4% unit yield reduction

64

2.40 99.43 98.71 80.80

2.80 96.04 95.32 93.36

3.20 92.64 91.92 106.35

3.60 89.25 88.53 118.90

4.00 85.86 85.14 131.6075.4% 75.0%

Corn, $/bu


2.00 102.83 104.75 153.50

2 40 99 43 101 35 166 50

Margin over feed cost (MOF, $/pig) with 1.4% unit mortality improvement

65

2.40 99.43 101.35 166.50

2.80 96.04 97.96 179.20

3.20 92.64 94.56 192.00

3.60 89.25 91.17 204.50

4.00 85.86 87.78 217.20

4.0% 2.6%

Corn, $/bu


2.00 102.83 104.02 129.75

2 40 99 43 100 62 142 90

Margin over feed cost (MOF, $/pig) with yield and mortality effects

66

2.40 99.43 100.62 142.90

2.80 96.04 97.23 155.50

3.20 92.64 93.83 168.20

3.60 89.25 90.44 180.80

4.00 85.86 87.05 193.60

12

DDGS value ($/t) summary

Corn, $/bu

DDGS price parity

With yield effect

With mortality

effect

Yield & mortality effects

2.00 91.37 68.00 153.50 129.75

67

2.40 104.09 80.80 166.50 142.90

2.80 116.80 93.36 179.20 155.50

3.20 129.51 106.35 192.00 168.20

3.60 142.23 118.90 204.50 180.80

4.00 154.94 131.60 217.20 193.60

Information on DDGS

Prices http://www.ams.usda.gov/lsmnpubs/PDF

_Weekly/Ethanol.pdf

Research summaries

68

Research summaries www.ddgs.umn.edu

Further questions?

Duane Reese

69

Extension Swine [email protected]

Geocoding â€“ What it means and how it works in RiskMeter

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