Written Testimony on Ethanol

January 10, 2007

Washington, January 10, 2007 

Written Testimony of

Gene Gourley
Pork Producer, Webster City, Iowa
On Behalf of the National Pork Producers Council and
the Iowa Pork Producers Association
January 10, 2007
Washington, D.C.
INTRODUCTION

I am Gene Gourley of Webster City, Iowa, and I want to thank the Chairman and the Members of the Committee for inviting me to speak to you today regarding the use of distillers grains in swine diets. I use my master’s degree in animal nutrition on a daily basis as a partner with my three brothers in our family’s farrow-to-finish swine operation and as general manager of the Nutrition and Research Division of Swine Graphic Enterprises (SGE), a 25,000-sow commercial operation 95 percent-owned by Iowa farmers. I am responsible for the feed rations and formulation on all SGE farms.

The National Pork Producers Council is the global voice of the U.S. pork industry. It conducts public-policy outreach on behalf of its 44 affiliated state association members, enhancing opportunities for the success of U.S. pork producers and other industry stakeholders by establishing the U.S. pork industry as a consistent and responsible supplier of high-quality pork to the domestic and world markets.

The Iowa Pork Producers Association represents more than 8,900 pork producers, who produce about a quarter of all the hogs raised in the United States. The organization’s mission is to provide leadership in areas related to the industry to enhance Iowa pork producers’ opportunities, profits, success and stewardship.

The pork industry is of immense importance to the state of Iowa. Iowa pork producers create more than 86,000 jobs for fellow Iowans, contributing $3 billion in annual payroll and generating $12 billion annually in economic impact to the state. Pigs consume nearly one-third of Iowa’s corn and soybean crops. Nationwide, more than 67,000 pork producers marketed more than 103 million hogs in 2005 and those animals provided total gross receipts of $15 billion.

While I am speaking to you only as Gene Gourley, swine nutritionist and hog farmer, my involvement in many industry organizations and activities give me a chance to talk to many pork producers. I believe I will accurately represent the sentiments of thousands of pork producers nationwide.

DISTILLERS GRAINS AND SWINE DIETS

The ethanol industry would have us believe that all of the feed problems created by using a substantial portion of the nation’s corn supply for ethanol production are irrelevant because of the production of distillers grains, a major co-product of the ethanol production process. I am here today to tell you that this product does little to allay the concerns of pork producers regarding the future cost and availability of feedstuffs and consequently, the well-being of our animals and the cost of pork to U.S. consumers.

There are several issues with regard to feeding distillers dried grains with solubles (DDGS) to pigs.

First, DDGS are quite inconsistent from ethanol plant to ethanol plant and even within a plant. There is variability in their nutrient content – protein, fat, phosphorus. If the fermentation or drying process for DDGS is changed or varies from batch to batch, it can have an impact on the digestibility of nutrients.

Additionally, corn can contain mycotoxins that are, in some instances, detrimental to pig performance. The presence of mycotoxins varies by growing season, location and environmental factors. Since the ethanol production process removes the starch (two-thirds of the volume) from corn, DDGS produced from mycotoxin-contaminated corn will have three times the level of mycotoxin that was present in the corn itself. Based on the percentage of DDGS fed and which toxins are present, pigs can experience multiple problems, including immune challenges, abortion and feed refusal. This is a severe limit on the widespread use of DDGS in gestation and lactation diets.

As pigs are fed increasing levels of DDGS, the corn oil present (also at three times the concentration as in corn grain) can increase the iodine value (soft fat) of the carcass. This can result in belly slicing problems and possible rancidity or shelf-life issues. A higher percentage of DDGS in the diet also can have a negative affect on carcass weights, most likely due to the increased fiber content of the DDGS.

Other concerns with DDGS include:

  • Flowabililty – As plants try to extract more ethanol from every bushel of corn, some plants grind the corn into a finer material, creating flowability problems of the DDGS at the feedmill as well as in the complete feed in the feed bin.
  • Pelleting – DDGS have been shown to decrease the pelleting efficiency at feedmills. As increased efficiency is needed from the pig due to higher feed costs, more feed will be pelleted. This will increase processing costs.
  • Processing changes – Several plants are looking at extracting other co-products from the DDGS stream, such as the oil for bio-diesel, and at further refining the protein fraction. The feed value of these co-products to swine must be researched.
  • Phosphorus levels – In late finishing, the pigs’ phosphorus requirements can be fairly low. Higher percentages of DDGS fed to pigs could increase phosphorus levels and increase excretions, which must be factored into nutrient management plans and may restrict its use at higher levels in late finishing rations.
  • Enzyme uses – There are major efforts to develop enzymes to help convert fiber in the DDGS to glucose for energy. Initial efforts have not yielded positive results, but resources are being put toward making it work.

Concerning the predictability of co-products, livestock producers need to know:

  • What are each plant’s by-products and how long will they be available in that form?
  • Are the co-products capable of being fed to livestock? If so, which species?
  • Are they locally available to livestock producers?
  • What are the storage, transportation and marketing specifics of each plant’s by-product?
  • What is the relative feeding value of the by-product being produced and how is it determined consistently across all plants?

These issues need to be considered not only for existing plants, but proposed plants will eventually need to provide this insight. Otherwise, there is little incentive for livestock farmers to support more ethanol plants at the expense of lowering the corn supply.

COMPETITIVE EFFECTS OF DDGS

Corn usually comprises about 75 percent of a pig’s diets. The ethanol production process uses 56 pounds of corn and yields only 17 pounds of DDGS. Further, most pork producers will only include DDGS in swine diets at a 10 percent level due to the problems outlined above.

Finally, DDGS are far more useful in diets for beef and dairy cattle than they are for pork and poultry. This impacts pork producers in two ways, both of them bad. First, it means that DDGS will not be a cost-effective substitute for corn because beef and dairy producers will pay more for DDGS and thus prevent them from entering swine diets. This is already happening. Second, the cost of producing beef and dairy products using DDGS will be lower relative to pork than in the past and thus provide a market advantage to these two sources of protein.

CORN SUPPLIES ARE AN IMPORTANT ISSUE TO PORK PRODUCERS

While the pork industry appreciates the opportunity to discuss DDGS, the most important issues regarding ethanol and livestock are the availability and cost of feed when that feed’s usage as an ethanol feedstock is subsidized, the usage of ethanol is mandated at minimum levels and the domestic market for ethanol is protected. These all have profound implications for our business – an industry that adds considerably to the nation’s economy.

A recently completed study by economists Daniel Otto and John Lawrence of Iowa State University estimated that the U.S. pork industry is directly responsible for the employment of 34,720 full-time individuals, many of whom are owner-operators. They calculated that the industry generates 127,492 jobs in the rest of agriculture and is responsible for 110,665 jobs in the manufacturing sector – mostly in the meat packing industry – and 65,224 jobs in professional services such as veterinarians, real estate agents and bankers. All told, the U.S. pork industry generates 550,221 jobs in the U.S., and most of this employment is in rural areas. Overall, an estimated $20.7 billion of personal income and $34.5 billion of gross national product are supported by the U.S. hog industry.

In Iowa hogs are known as the “mortgage lifter” because they are typically raised by young farmers and used to pay off the farm mortgage. Hogs also are raised to help pay for college expenses and to help children get started in agriculture. Hog producers as a group are typically younger than the average farmer, and they typically have more debt and are more likely to rent the ground where they grow their crops.

Pork producers operate on very tight margins, and they have an enormous respect for market forces. Producers have not asked for any form of government subsidies in previous farm bills, and the industry is among the most vocal advocates of free trade and free trade agreements. New technologies have been adopted and productivity has been increased to maintain the U.S. pork industry’s international competitiveness. As a result, pork exports have hit new records for the past 15 years. In 2006, exports represented 15 percent of production.

PORK PRODUCERS’ CONCERNS ABOUT ETHANOL

Until recently, the pork industry was very optimistic about its future. Continued worldwide demand for pork and pending free trade agreements with Peru, Colombia and South Korea, as well as the possibility of a successful WTO Doha Round agreement that would increase access to the European and Japanese markets, painted a rosy economic outlook for pork producers.

Last summer, however, the optimism began to fade in large part because the principal source of the industry’s competitiveness – abundant feed grains – was being diverted to biofuel production, particularly ethanol.

Almost everyone in Iowa and, indeed, in America is a supporter of ethanol. And prior to the run-up in energy prices two years ago, most even supported the government subsidy that was being given to the ethanol industry because they supported energy security and saw the economic activity that ethanol plants were generating. Additionally, many pork producers also are corn producers, and they view ethanol as a way to get corn market prices up to the loan rate, a price where corn production was profitable without direct government support.

Once world crude oil prices hit $60 a barrel, the ethanol industry did not need support. However, the government continued to support the industry, and this proved to be a boon for those who owned the ethanol plants. These plants were buying corn at $2 per bushel and turning it into $6 or $8 worth of ethanol. They also were benefiting from a host of state and federal tax credits and outright construction subsidies from the USDA and from individual states.

Prices also are high because ethanol is being used as an oxygenate and because the United States uses import tariffs to restrict ethanol imports from Brazil. The result has been an explosion in ethanol production that has not yet reached its peak.

While the Iowa Pork Producers Association and the U.S. pork industry support the development and use of alternative and renewable energy sources, including ethanol, as a way to reduce the nation’s dependence on foreign oil, the explosion in ethanol demand has raised concerns and fears among pork producers about feed grain availability and price, the transition time and about the ability to use the by-product of the ethanol process.

According to data from the Renewable Fuels Association (see attachment), the annual corn need of the ethanol industry has gone from 1.7 billion bushels just six months ago to just under 2 billion bushels today [1]. RFA now estimates that 4 billion bushels of corn will be used by the ethanol plants that will be on line as of January 2008. Iowa State University’s Center for Agricultural and Rural Development (CARD) estimates that ethanol’s annual use of corn will exceed 4 billion bushels by the end of 2007. And Dr. Bill Tierney, currently with John Stewart and Associates and formerly with USDA’s World Ag Outlook Board, believes that the annual usage rate will be more than 10 billion bushels by the end of 2009 if all of the ethanol plants currently under construction or planned actually come on line. Currently, the U.S. pork industry uses about 1.1 billion bushels, and the entire livestock industry uses more than 6 billion bushels. In 2006, corn growers produced 10.7 billion bushels.

To put all of this in perspective, with average yields of 157 bushels per acre, the growth in the ethanol industry in just one year will either require an additional 12.5 million acres of corn or cutbacks in livestock production or exports. To give another perspective, Iowa would need to have an additional 12 million hogs – a 50 percent expansion of the industry – to use the corn from that many additional acres.

Why does the ethanol industry have such enormous expansion capacity? First it is selling an energy product that ultimately competes with crude oil. U.S. ethanol production is not going to drive down world crude oil prices, and as long as OPEC is successful at maintaining crude at the current $60 per barrel target, ethanol will have a price floor.

The growth in ethanol production might slow if corn prices rise. According to a recent CARD study, under existing ethanol tax policy, if the prices of crude oil, natural gas and DDGS stay at current levels, the break-even corn price for the ethanol industry is $4.05 per bushel [2]. (The ethanol industry receives subsidies that amount to $1.53 per bushel of corn and a blender’s tax credit of $0.51 per gallon.) It will be difficult for producers to compete against ethanol for corn as long as the ethanol industry receives the subsidies it does.

At $4.05 per bushel, the CARD study found, corn-based ethanol production would reach 31.5 billion gallons per year, or about 20 percent of projected U.S. fuel consumption in 2015. To reach that level will require a corn crop of 15.6 billion bushels and the utilization of 95.6 million acres of U.S. crop land. This year’s corn crop is 10.7 billion bushels harvested from 78.6 million acres. Soybean prices also would increase as the soybean market fights to retain acres and production capacity.

Dr. Bob Wisner at Iowa State keeps a very close watch on corn use and corn supply. (His current balance sheet is attached.) He shows an end-of-year corn carryover of only 685 million bushels. This is less than three weeks worth of utilization. The last time there was this small a level of carryover was in the fall of 1996 when supplies got down to 2.6 weeks’ worth. Corn was so scarce in Iowa that it had to be shipped in from Texas.

Dr. Wisner also points out that his forecast assumes that corn exports this year will increase by the 2.5 percent projected by the USDA. However, corn export sales to date are running 35 percent above the same period last year. If this pace of export sales continues, the country will simply run out of corn. It may be that the recent surge in export sales is an aberration, but it also may be true that corn importers have begun to stockpile because they realize that the United States may not have enough corn and because other exporters such as China and Argentina have begun to restrict their corn exports.

Most farmers already have made their 2007 planting decisions and have arranged seed supplies. Projections are that about 26 million acres of corn will be needed to supply the ethanol industry by 2008, about half of which will be for new plants that come on line in 2007. The corn futures market price for 2007 has been providing a strong incentive for farmers to plant more corn acres, but there simply may not be enough corn to meet the country’s food, fuel and feed needs – and any shortfall would be acerbated by a short crop.

The CARD study predicted that corn availability for livestock feed would fall by 33 percent, from about 6 billion bushels to 4 billion bushels, causing reductions in the size of the U.S. pork and poultry industries. (The beef and dairy industries likely would use DDGS to offset the reduction in corn availability.)

Another concern is the impact that ethanol already has had on producers’ feed costs. This time last year, production costs were about $40 per hundred pounds or less. Just last week, Dr. Ron Plain calculated that with the feed price increases that producers already have seen, their production costs will be $50 per hundred pounds [3]. This represents a 25 percent increase in costs. At the $4.05 per bushel predicted by the CARD study, pork producers’ production costs would increase by 31 percent.

But the pork industry will adjust as it always has. High production costs will reduce profitability, and at first many producers will try to ride it out, hoping that other producers will blink first. Eventually bankers will be forced to foreclose on some operations, and some producers will simply decide to retire early. Eventually production will fall by enough to bring the market to its new equilibrium. According to CARD, pork production would need to decline by 10 to 15 percent to allow the industry to recoup the higher production costs.This adjustment could take years.

Wouldn’t corn growers be will able to use the extra profits from corn to subsidize their pork habit? While this may be true for about a year, eventually cash rents will adjust to higher corn prices, and/or production costs for corn will go up along with producers’ production costs for pork. The real beneficiaries of the ethanol boom are landowners.

Another concern is transportation costs. Hogs have always been produced where corn and soybeans are grown because it is so expensive to transport grains. Grain transport costs have always worked to U.S. pork producers’ advantage because they pay world prices for grains minus transport costs.

So far, world feed grain prices have increased with those of the United States because this country still dominates world feed grain markets, and this has caused pork production costs in competitor countries to rise as well. However, as the United States develops an enormous ethanol industry, the country eventually could get to the point where it begins to import corn rather than crude oil or ethanol. The Iowa State CARD study estimated that this will occur as soon as the ethanol industry consumes about 7.8 billion bushels of corn.

Corn imports likely would come into Eastern seaboard ports of the U.S. to supply pork producers and ethanol plants that would otherwise have had to pay transportation costs from Iowa. Once the United States begins to import corn, pork producers will be forced to pay world prices plus transportation costs. There is no country that has simultaneously imported corn and exported pork.

Another concern has to do with the regional corn basis. (See the map of Iowa showing the approximate draw areas for the current ethanol plants and for those under construction.) The ethanol industry is following the hog industry to the parts of the state where corn has been plentiful and cheap. Because the same bushel of corn cannot be used twice, the draw areas will probably have to import corn. This means that the traditional basis pattern that has made Iowa such an exceptional location for pork production will be eroded.

Another issue is pork production jobs versus ethanol production jobs. John Lawrence at Iowa State has calculated that a 100 million gallon ethanol plant creates about 80 jobs. If the bushels of corn required to produce that much ethanol are diverted from use in pork production, rural America will lose 800 direct on-farm jobs [4]. Given the multiplier calculated for the pork industry, that would mean an estimated 12,000 lost jobs economy wide.

CONCLUSION
Mr. Chairman and members of the Committee, the U.S. pork industry supports the development and use of alternative and renewable fuels, but it believes – as this testimony lays out – that the industry faces significant challenges because of the rapid rise in ethanol demand. The National Pork Producers Council and the Iowa Pork Producers Association stand ready to work with Congress on solutions to those challenges that will help maintain a $15 billion industry that provides hundreds of thousands of jobs and that helps feed the world.