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Understanding the Relationship Between Ethanol and DDGS

The debate about the use of grain for food vs. fuel continues, but should there even be a debate? Critics of ethanol argue that the large amount of corn used in ethanol production is a poor use of the food supply. Congress recently pointed to ethanol as the major contributor to increased prices of feed and food.

The topic of ethanol is not as cut and dry as one would imagine and many critics are forgetting about an important bi-product of ethanol production. When corn is processed at an ethanol plant, ethanol is not the only product; 1/3 of all corn gets recycled into a rich and nutritious feed for livestock, which is called DDGS (Dried Distillers Grains with Solubles).

Ethanol at its basic form is an alcohol, the same type found in beverages. It is also used in pharmaceuticals, paints, lacquers, food, personal care products, and cleaning products. To produce ethanol, only the starch is used from corn and grain sorghum. The remaining nutrients of protein, fiber, and oil are by-products called DDGS and are used as livestock feed. Ethanol plants make up 98% of DDGS production in North America and the other 2% comes from the alcoholic beverage industry.

According the University of Minnesota, "Historically, three types of residual co-products were produced: distiller's dried grains, distiller's dried solubles, and distiller's dried grains with solubles. Once the fermented mash was distilled, the soluble portion of the remaining residue was condensed by evaporation to produce condensed distiller's solubles. The course material remaining in the fermentation residues was the Distiller's Grains fraction. Both of these fractions were subsequently dried to produce either distiller's dried solubles (NYSE:DDS) or distiller's dried grains (NYSEARCA:DDG)."

Ethanol plants dry and blend these two residues to produce DDGS to be used in the feed industry. Approximately 1/3 of grains that are used in ethanol refining come out as DDGS. A bushel of grain makes 2.7 gallons of ethanol, 18 pounds of DDGS, and 18 pounds of carbon dioxide. 80% of DDGS are used for ruminant diets (cattle and sheep). The remainder is fed to poultry and swine due to the excellent nutritional value of proteins, energy, minerals, and vitamins.

Due to its high nutritional value, one metric ton of DDGS can replace 1.22 metric tons of feed consisting of corn and soybean meal. In one bushel of corn used for ethanol production, 32% of it comes out as DDGS, but that amount equates to a 39% nutrient output due to the DDGS high concentration.

Countries such as China, Mexico, and Canada have an increasing demand for DDGS due to the high nutrient content. U.S. exports of DDGS stand year-to-date at 5.25 million metric tons, and is on pace to ship almost 8 million metric tons by the end of 2011, according to Ethanol Producer Magazine.

Forgetting About DDGS

There has been damaging misconceptions of the relationship between corn supply and ethanol production, as DDGS were not taken into consideration. So damaging, the USDA altered the World Agricultural Supply and Demand Estimates (WASDE) report to include DDGS.

"For the first time, the April 8th monthly report on U.S. corn supply and use specified that corn used to produce ethanol also produces by-products such as DDGS, corn gluten feed, corn gluten meal and/or corn oil. In addition, the category that was previously labeled 'ethanol for fuel' now says 'ethanol & by-products,” noted Ethanol Producer Magazine.

Previously, the report only took into account the gross usage of corn for ethanol, implying that all corn going to ethanol production resulted in ethanol fuel. Geoff Cooper, vice president of the Renewable Fuels Association said, "This has led to the inflated claim that the ethanol industry is using nearly 40% of the corn supply when in fact, if coproducts are taken into account, only 23% of the 2010-11 U.S. corn supply and 3% of the global grain supply will be used for ethanol production.”

The DDGS taken from ethanol plants make a positive impact on the feed industry. According to the Renewable Fuels Association, the ethanol industry will produce more than 39 million metric tons of animal feed in 2010-11. To put this in perspective, that is enough to produce 50 billion quarter-pound hamburgers or seven patties for every human on this planet.

Growth Energy recently sent a letter to the House Agriculture Committee noting, “More than one-third of all grain used in the production of ethanol is returned as a nutritious distillers grain, which is 25% cheaper than corn and can displace a greater amount of corn in feed rations, ultimately saving livestock producers’ input costs."

A July 2011 report from Informa Economics found that ethanol is only one factor behind rising corn prices and that speculation, monetary policy, and global demand has driven prices higher. The report concluded that “Statistical evidence does not support a conclusion that the growth in the ethanol industry is the driving force behind higher consumer food prices.”

The Future of Ethanol

Incremental production of ethanol will most likely not take root in America’s corn fields, but with cellulosic ethanol from sources such as switch grass, straw, pulp, and algae. "If this country is going to go big into ethanol, we need to tap into cellulosic ethanol," says UCS Research Director of Clean Vehicles David Friedman, "because it's cleaner and requires less fossil fuels than corn (to produce)."

Global demand for grain and diminishing supplies will continue to make the food versus fuel debate a hot topic, but critics need to make sure they analyze all the data. Ethanol production provides two valuable bi-products to the marketplace and both need to be factored into future decisions.

- Colvin

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.