Schwandt, W. Robert

English

Research Papers in Economics

NON-TRADITIONAL  PRODUCTS  FROM CORN
W. Robert Schwandt
A.E. Staley Manufacturing  Co.
The  productivity  of  our  farm  sector  is  one  of the  great  success
stories of history.  The  application  of genetics,  fertilizers, herbicides,
pesticides,  irrigation,  and  new  cultivation  practices  has provided  us
with  an  ever  increasing  yield.  Of course,  we must acknowledge  the
tremendous  contribution  to  this  type  of  agricultural  productivity
which  has  come  from  the  land  grant  universities  and  their  ability
to  sell  their  improvements  to  the  actual  producers.  Thanks  to  the
application  of these  technologies,  the crop  has become  much  more
dependable,  and  the  swings  between  the  fat  and  lean  years  dimin-
ished.
That  such  capital  intensive  industries  as  the  corn  refiners  can
justify  expansion  and  research  into  new  products  is  a reflection  of
our  confidence  in the continued  improvement  in crop  productivity.
The  price  of corn  in both  absolute  terms  and relative  stability  is  of
critical  importance  to  us.  The  price  trend  for corn  over the recent
decade actually declined in terms of constant dollars.
This  does  not  mean,  however,  that  we  have  been  immune  from
fluctuations  in the cost of our raw material.  In the corn wet milling
industry,  we  emphasize  the  products  from  carbohydrate  or  starch
which  represent  about  two-thirds  of the weight  of the corn  kernel.
The  non-starch  materials  are  oil,  fiber,  and protein,  which  are  sold
as  commodities.  Therefore,  when  we  approach  the  economics  of
starch-derived  products,  we  utilize  by-product  accounting.  That  is,
we  cost  the  starch  portion  at the cost of corn  less the value of the
commodity co-products.
The variance  in starch  dry substance shows costs after recovery of
standard  yields  of  gluten  feeds  and  oil  over  the  past several  years,
and  demonstrates  that  there  is  still  a  very  significant,  and  unpre-
dictable, variance  in the cost of our raw material,  that is wider than
the corn  price.  This  variation,  and our inability to control it, heavily
influences  our ability to  expand into  competition with commodities
such  as  sugar and gasoline.  The  key variable  is  the corn  gluten  feed
value  whose price moves independently  of the price of corn. Further,
127since  $3 corn is equivalent to $115 per ton feed, you can see that the
unit value of this co-product is roughly the same as corn.
If corn-derived  products  are  to  grow into non-traditional  markets,
or at least into markets which at some time in their history have been
lost  to  petroleum-based  products,  we  must  be  able  to  show  an
economic  advantage  for  the  corn-based  raw  material.  When  the
starch  fermentation  medium  was  at  the  30  cents  to  40  cents  per
gallon  level  two  years  ago,  announcements  of new alcohol fermenta-
tion capacity  appeared  at the rate of two  or three  every week.  Now
that  there  is  a  realization  that  fermentation  media  costs  can  also
vary,  there  have  been  numerous  deferments  and  cancellations  in
these plans.
Thus,  in spite of the tremendous improvement in basic agricultural
productivity,  a  substantial  degree  of raw material  price  uncertainty
still  clouds  the  future  of  additional  new  products  from  grains.  A
major  variable  is  the  co-product  recovery.  In  our  case,  the  rapid
growth  of  the  European  Community  market  for  corn  gluten  feed
and corn oil have absorbed corn wet mill growth.
This  tonnage  has  grown  over  the  past  10  years  and  we  project
possible  future  growth  from  announced  industry  expansions  for
high  fructose,  the  potential  for 350  million  gallons  of ethanol from
wet  millers,  and  the  potential  incremental  amount  from  another
350  million  gallons  per  year  of ethanol  by  the mash  process  which
yields  DDGS.  The  current  2.5  to  3.0  million  tons  of  gluten  feed
which  is  absorbed  by the  EC  has pretty  well  saturated this  market,
and  there  have  been  numerous  discussions  by  members  of the  EC
about restricting  further growth.
Whether  this resistance  is  directed at DDGS from subsidized alco-
hol  production,  or  is  broadened  to restrict  all  U.S.  produced  corn
derivative  feeds,  remains  to  be  seen.  In  any  event  it  is  important
that  the  wet  corn  milling  and  grain  alcohol  industries  not  expand
more  rapidly  than  their  ability  to  market  their  co-products.  The
encouragement  of disorderly  expansion  through  federal  government
loan  guarantees,  and  even  grants  for capital  investment in additional
capacity,  could  well  hasten  the  day  when  countermeasures  are
introduced  within the EC.
The  second phase of agricultural productivity  deals with industry's
contribution  towards  the  conversion  of  raw  grains  to  higher  value
products.  The  cost  of  starch  in  corn  at  $3.50  per  bushel  is  about
71/2  ¢  lb.  Some  specific  opportunities  for  the  application  of  starch
conversion chemistry to add value are:
Refined  sugar,  now at  15¢ - 20¢  lb; Ethanol,  27¢  lb; Citric  acid,
70¢  lb;  Sorbitol,  46¢  lb;  Detergent  alkylates,  46¢  lb;  Acetic  acid,
26¢ lb.
128The greatest  success  story of the corn  industry is the recent pene-
tration  of the sugar market  with high  fructose  corn  syrup.  This  is  a
"non-traditional"  product  in that in the previous  80-year  history  of
the industry,  we  did not have  a product chemically  and functionally
equivalent to sugar.
The  industry  had  seemed  to  mature  in  the  late  1960s  because
corn  syrup,  dextrose,  and  starch  markets  had  levelled  off,  and
industry  growth  was  basically  reflecting the GNP.  In 1970 a techno-
logical  breakthrough  occurred  giving  us  the  capability  to  produce
a product  nearly  equivalent  to invert sugar.  The  growth rate for this
product  is high and  high  fructose  corn  syrup  now has 30 percent of
the  U.S. sweetner market.
The  commercial  1980  production  was  about  5.7  billion  pounds,
utilizing  121  million  bushels  of  corn,  or  over  25  percent  of the
industry's  corn  consumption.  The high  fructose industry is expected
to reach approximately  9  billion  pounds by 1985. This success story
reflects  two  technological  breakthroughs:  The commercialization  of
isomerase  to convert  dextrose  to fructose,  and  the liquid  chromato-
graphic  separation  for  fractionation  and enrichment  of higher  fruc-
tose products. These processes are now cost effective.
The  growth  history  and  projection  for future  growth  leads  us to
a  point  in  the  late  1980s  where  domestic  production  of high  fruc-
tose  corn  syrup  and  sugar  could  satisfy  the  total  U.S.  sweetener
requirements  without  imports.  As  we  approach  this point,  we  may
begin  to  see the impact of the disappearance  of the only hard dollar
market for world sugar.
Other  "non-traditional"  markets  are  those where we replace other
raw  materials  such  as  petroleum.  The  most  likely  such  market  at
this  time  is  ethyl  alcohol.  At  the  present,  corn  is a  lower cost raw
material  for industrial  alcohol  than ethylene  and,  with the anticipa-
tion  of  decontrol  of natural  gas,  this advantage  may  widen  further.
The  potential for this market  is  200 - 250 million  gallons per year,
which  would  consume  about  100  million  bushels  of corn.  The  use
of  alcohol  as  an extender  in  motor fuel is not yet  competitive  with
$1  per gallon  gasoline.  However,  as  an  octane  enhancer  at  the  10
percent  level,  it  competes  with  aromatics,  now  worth about $1.40
per  gallon.  The  first increment  of the motor fuel market is for about
one  billion  gallons  of  alcohol  which  can  be  utilized  for  premium
unleaded  gasoline.  A  billion  gallon  market  would  support  20-  25
plants of economic  scale.  Our industry  can  build  plants  at this scale
which  utilize  our  commodity  handling  skills,  as  well  as  advancing
engineering  and  operational  technology.  The  corn  volume  demand
for a billion  gallons  would  be 400  million  bushels,  an  increase of al-
most  80  percent  over  the  1980  usage  of  the  wet  corn  millers  for
existing  products.  While  the  development  of  a  400  million  bushel
industry  might  not  have  a significant  impact on the marketing  of a
1297  billion  bushel crop, the marketing of an 80 percent increase in feed
co-products  could  have significant repercussions on feed markets and
the basic economics of corn conversion.
The  traditional  non-food  applications  of starches  and  sweeteners
utilize  about  20  percent  of the  wet corn  milling industry  grind,  or
about  90  million  bushels  of corn.  Most of the industrial  usage  is  as
starch, and  most of that is in the paper  related  industries.  The  mar-
kets  for  these  products  are  relatively  specialized,  and  much  of our
production  is tailor-made  for specific  applications.  The development
and  sale  of products  for these  applications  has required  a high com-
mitment  to  and  investment  in  research  and  technology.  The  paper
industry  depends  upon  starches  for  paper  strength,  surface  sizing
and coating.
Starch  based  products  supply  the bulk  of the adhesives  for paper
bags,  folding cartons  and  corrugated  boxes.  Starches  are  also impor-
tant to the building industry as wallboard  binders and joint cements.
Cotton  textiles  depend  upon  starch  for  warp  sizing.  The  mining
industry  uses starch for drilling muds.  Research continues to improve
the  performance  of  starches  in  all  these  applications,  but  further
growth is dependent  upon the futures of these  user industries.
Fuel alcohol now promises  to  become  the largest  non-food  appli-
cation  for  agricultural  commodities.  During  1979 and  '80,  goals  of
1  to  10  billion  gallons  per  year  were  set  by  various  government
agencies,  and numerous financial incentives  were placed to encourage
construction of new capacity. The emphasis was upon national  energy
independence  rather  than  straightforward  economics.  The  current
energy values of some of our common fuels are:
Crude oil  @ $32/bbl.  $  5.50/M BTU
Natural  gas  $  3.10/M  BTU
Refined  gasoline  @ $1.35/gal.  $10.80/M  BTU
Alcohol @ $1.80/gal.  $21.40/M  BTU
Alcohol  is  simply  not  cost  competitive  today  as  a  motor  fuel
extender.  However,  the  need  for alternative  fuels is  real.  Fossil fuels
are an exhaustible resource.  Drilling activity in the U.S. is  at a  record
rate  with  over  4,000  rigs  in  operation,  which  will  drill  close  to
70,000  wells  this  year.  Oil  prices  since  decontrol  are  at  record
highs,  encouraging  maximum  production.  Yet  the  American  Petro-
leum Institute  estimates  that 1981 production  will  show no increase
over 1980.  The whole  drilling effort  is  approaching a state of dimin-
ishing  returns,  with  new  discoveries  and  production  barely  off-
setting depletion.
Conservation  and  a  slow economy  have  reduced  demand,  but our
dependence  upon  imports  continues  at  nearly  6  million  barrels  per
130day,  roughly  40  percent  of  our  supply.  The  vulnerability  of  this
supply was demonstrated twice during the 70s.
We  have  very  large  reserves  of  coal  and  oil  shale.  However,  the
problems  of  converting  these  materials  to  useful  liquid  fuels  are
almost  overwhelming.  The  processes  require huge  investments,  new
complex  technologies  still untried  at practical  scale, large  quantities
of water  in  already  water  deficient  areas,  and environmental  prob-
lems of unprecedented  magnitude.
The  multi-billion  dollar  plant  construction  schedules  run  from
three  to  seven  years.  Economically,  they face the  syndrome  of the
receding breakeven point. That is, energy costs bear so heavily on the
general  inflation  of  construction  and  operating  costs,  that each  in-
crease  in  petroleum  price  requires  the  assurance  of  a  subsequent
increase to make the project profitable.
The production  of alcohol  from  grain  utilizes  proven  technology,
and  economy  of scale  can  be achieved  in relatively small (40 million
gal./yr.,  $100  million)  plants  which  can  be  operational  from  a
grassroots site in 20 to 30 months.
Although  gasoline  consumption  is  expected  to  decrease,  the  re-
quirement  for  unleaded  fuel  continues  to  grow,  and  may  approach
five  million  barrels  per  day  by  1985.  This  will  require  at least a  2
point  increase  in the clear  octane  pool.  Since  alcohol  has  an  octane
value  over  100, it is  of interest  as  an octane  enhancer  rather than  a
simple fuel extender.
A  number  of chemicals  are  available for octane boosting. Current-
ly  the  largest  volume octane enhancers  are the  aromatics  which  are
produced  by  the hydroforming  operation  at  a  petroleum  refinery.
The  aromatic  compounds are not actually  isolated  and purified  but
become a part of the finished  fuel. There is a significant loss in yield
in  the reforming process  of roughly  20 percent.  When  gasoline  is  in
short  supply,  automobile  manufacturers  will  be  calling  for  higher
octanes  for  better  fuel  economy  while  the  refiners  are  burning  up
increasing  quantities  of their raw  material in order to achieve  these
octane  numbers.  Thus,  the  substitution  of  ethanol  as  an  octane
enhancer  offers  the  added  incentive  of  increased  refinery  yield.
Currently,  mixed aromatics  are  worth about $1.40/gal.,  and ethanol
about  $1.80.  With  a  40¢/gal.  federal  excise  tax  rebate,  ethanol
becomes competitive with the aromatic  compounds.
At the present state-of-the-art,  corn  or grain  sorghum  provide the
lowest  cost  fermentation  raw  material.  Agricultural  waste,  such  as
straw  and  stover,  have  the  potential  of  competing  if  they  can  be
supplied  to a processing plant at $25 to $30 per ton, but commercial
technology  is  probably  two  to  five  years  away.  It would  seem  that
these materials,  and  perhaps  wood  chips,  would  first establish them-
selves  as  solid  fuels,  where  it is feasible to substitute them in station-
131ary  applications  for  other  solid  or  liquid  fuels.  For example,  on-
farm  corn  dryers  use  propane  at  63  cents  a  gallon  or  $6.90  per
million  BTUs  which  is  roughly  equivalent  to  a  value  of  $110/ton
for their stover.
There  are  other potentials  for recovery  of  markets that have  been
lost  to  petrochemicals.  Citric  acid  production  could  utilize  up  to
300  million  pounds  of  dextrose  per  year,  equivalent  to  10 million
bushels  of  corn.  Less  than  one-half  of  this  potential  is  now  corn-
based,  with  the  remainder  as  molasses  and  petroleum-based  sub-
strates.  The largest  citric  acid plant in the U.S. was designed to use a
paraffin-based  substrate.  It has  been  since  modified  to  utilize dex-
trose.
Synthetic,  petroleum-based  detergents  have  displaced  animal  and
vegetable  fats in soaps.  However,  as petroleum  prices  increase,  sugar
or  starch  based  surfactants  may  have  a  new  opportunity.  Tate  &
Lyle,  a British firm,  has  licensed  a commercial  scale  plant to Japan.
The  U.S.  market  for  detergent  base  organics  is  about  one  billion
pounds per year. This  market could provide our next growth phase  in
the late '80's and early  '90's.
Acetic acid is another case  of market lost to cheap petrochemicals.
The  early  production  came  from  the  fermentation  of  alcohol  to
vinegar.  Alcohol has  been displaced  by  a process  for synthesis  from
CO  and  methane.  As  natural  gas  prices  increase,  there  will  be  new
opportunities  for  coal  based  synthesis  gas,  or  even  corn  based  fer-
mentation  alcohol  as  raw  material.  The  plastics  industry  now  uses
over three  billion pounds  of acetic  acid  per year  in the manufacture
of  such  well known items  as vinyl acetate, terephalates,  and cellulose
acetate.  This  large  non-food  market,  which  is  equivalent  to  360
million gallons of ethanol,  may also be a long time away.
132

NON-TRADITIONAL PRODUCTS FROM CORN

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