Ott, Stephen L.

Rask, Norman R.

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THE EMERGING OHIO ALCOHOL INDUSTRY - IMPACTS ON AGRICULTURE FMH V 61 ESQ 890 AGDEX 828 Norman Rask Extension Economist Stephen Ott Research Associate Dept. of Agricultural Economics and Rural Sociology FARM MANAGEMENT HANDBOOK Cooperative Extension Service The Ohio State University The actors In the alcohol industry are beginning to sort themselves out. Farmer interest In producing alcohol on the farm was Initially widespread. Today, however, Interest has dimi-nished as experience demonstrates that smal I farm stil Is, In general, are difficult to operate pro-perly and are often uneconomic. At the Industrial level, however, alcohol production Incentives and opportunities have encouraged the Initiation of an alcohol Industry of some magnitude, er.peclal ly with large scale distl I leries. Whl le farmers wi 11 not be producing rruch alcohol, they wl II be affected by this new industry and need to be aware of some of the changes it wl 11 bring to agrl-cu lture. Corn is the basic energy feedstock to be used for alcohol production. The number of alcohol plants now being seriously considered wt 11 divert enough corn from traditional uses to have a substantial impact on corn and other crop and I I vestock product ion decl s ions. In th Is art i c I e, we report on alcohol production plans in Ohio, and on a prel lmi nary analysis of the potential Impact that alcohol production wl 11 have on Ohio agri-culture. The Alcohol Industry in Ohio It is difficult to project a probable level of alcohol production for a new industry at a very ear I y development stage. A survey, conducted by the U.S. National Alcohol Fuels Q)nrnission in the SlJ'Tlmer of 1980, identified 340 potent I al a I coho I plants nationwide with a projected capacity of 4.5 bi 11 ion gal Ions annually. Of this total, seven were to be I ocated in Ohio. By contrast, the major corn producing states of Indiana, Illinois, Iowa and Minnesota had a total of 76 planned etha-nol plants in the four-state area. By January of 1981, the Ohio Department of Energy had identified 14 potential . plants in Olio with a combined 1 planned capacity of about 200 ml 11 ion gal Ions of alcohol per year. At the present time, there are firm plans for about one-half of 100 million gallons of this potential capacity to be In opera-tion within two to three years. M additional 50 mi I 11 on ga I I on capacity is st I 11 poss I b I e, but p I ans are be Ing de I ayed for var 1 ous reasons. It Is uni ikely that the remaining 50 mi I lion capacity wll I be realized, at least by the specific Industrial groups identif led earlier this year. It ls possible, however, that plans for additional a I coho I capac I ty wt I I b~ deve I oped by others 1 n the future. Al so, the capacity reported above refers to commercial size plants that produce from 300,000 to 60 mi I lion gal Ions per year. Smal I, on-farm capacity has not been Included in the above estimation, but would not materially affect the total planned capacity. The factors influencing plant locations are specific for each situation. They generally include availability of existing capital struc-tures, proximity to fuel (coal} supplies and end use considerations such as location near an oil ref lnery or export market. The major portion of the early al coho I product ion in Olio wi 11 come from two plants In Southern Olio, located along the Ohio River (Figure 1). For the above con-s lderations, these plants and most other planned alcohol plants will be located outside the major corn producing areas. Thus, corn will need to be transported to these locations. Finally, alcohol and related products can be produced in several forms for various uses. As a I lquld fuel, alcohol can be mixed with gasoline in ratios of up to 20 percent alcohol or burned as a "pure fuel." The mixtures with gasoline require anhydrous alcohol, while "pure fuel" can be hydrated alcohol which contains some water and is less expensive to produce. The value of alcohol as a liquid fuel decreases as the concentration of alcohol in gasoline mixtures Increase. Thus, tho most valuable alcohol product is that which I s mixed with gasol lne in smal I quantities as an additive. Ole of the f lrst major plants wi I I pro-duce butanol, a form of alcohol used as a gasoline additive; whl le the other plant plans to produce anhydrous alcohol. The Issues As noted above, the major corn producing states are beginning to develop a signlf icant alcohol industry using corn as the energy feedstock. Ohio has a rrodest share of that Industry. In fact the production of 150 mi I I Ion gallons of alcohol per year would require about 60 mi I I ion bushels of corn. In an average year that is about 15 percent of Ohio's corn crop. Other states may be committing even larger portions of the Ir corn production to a I coho I • In order to provide th Is extra corn, we wi I I need to produce more, or consume and export I ess. Increased corn production requires decreased production of other crops. Soybeans are a likely candidate since distillers dried grain (DOGS), a high protein feed by-product of alcohol production can substitute for some of the soybean meal in livestock rations. Use of the DOGS, In turn, wt I I cause some shifts in the economics of livestock feeding since it is not a good total substitute for soybean meal in hog and poultry rations. Ruminant animals can consume large quantities of DOGS without perfor-mance loss. Finally, the DOGS can be fed in wet or semi-dry form if fed immediately. In this case, the cost of processing Is less. However, if the DOGS must be dried, stored and shipped over long distances, costs of processing increase. Thus, a major alcohol Industry using corn has imp 11 cations for both the type of Ii vestock pro-duced and the location of I ivestock production. Another way to provide the extra corn for a I coho I production is to cut back on Ii vestock feeding and exports. These decisions are al I related to the market prices consumers at home and abroad are wi I I Ing to pay for the various products f ran agr i cu It ure. We have been accums tomed to meeting food and fiber demands. l'bw we must add a fuel demand and incorporate a new by-product feed into our calculations. These new dimensions wi 11 change some of the historic relationships between crops in the competition tor land use and among classes of I ivestock in the use of feeds. The next section describes a model we are developing 2 to address some of these Issues. This Is fol lowed by a report of some preliminary findings. A Model of Western Ohio To fut ly assess the impact of an alcohol program on the many Issues identified above, It Is useful to construct a rrodel of Ohio agriculture. We are in the process of bu i Id Ing a tu I I state model; however, the preliminary results reported below were generated us Ing a mode I of one sector of Ohio--the western Ohio Corn Belt region (Figure 1). We have included corn grain, corn silage, soybeans, wheat, oats and hay as crop act iv it I es in the model. The livestock production activities include beef fattening, milk (dairy), lamb, pork, chicken, turkey, and eggs/ I ayers. Al so inc I uded are transport at I on activities, soybean processing activities, and alcohol production activities. Energy costs are separated from other production costs In order to generate a realistic alcohol fuel supply response to rising energy prices. In this way, it is possible to incorporate the rising energy prices In the cost of producing the a I co-ho I, as wet I as in the price of alcohol. An important part of the analysis is the feeding of the grain by-product (DOGS) to 11 vestock. DOGS is a h I gh protein feed, with a high fiber content which I imi ts the amount that can be fed to pou I try and hogs. This I imits the arrount of DOGS that can be substituted for soybean meal and thus the amount of soybean land that can be converted to corn. There are some alternative processing procedures that yield a more usable set of by-products. For examp I e, by pre-processing the corn, using a wet mi I I ing procedure, different by-products are produced. They inc I ude: corn ol I, corn gluten meal, and corn gluten feed. Corn oi I is a good substitute for soybean oil and corn gluten meal and corn gluten feed are better substitutes for soybean meal than DOGS. Use of this process al lows a greater land substitution to occur between soybeans and corn. The conventional system producing DOGS only, was used in the model for exam i nation of the above issues. 1-bwever, a separate analysis was made with the alternative processing procedure to test the I mp act it wou Id have on corn-soybean substitution, commodity prices, and I lvestock feeding. Commodity prices are determined in the m;:>del, with price being a function of quantity sold, inc I ud i ng competing comrrod it i es. In deve I op Ing • the model, It was assumed that other states would be producing a I coho I a I so. Therefore, it would not be possible to "Import" corn from surrounding states to produce alcohol. 1hls assumption al lows the model to generate realistic price adjustments as quant It I es of var I ous commod I ti es change in response to Increased corn production for alcohol. Several levels of alcohol production were chosen for analysis. As noted earl fer, there Is some certainty that Ohio wil I have at least a 100 mi I I Ion gal Ions per year alcohol industry within two to three years. It may be as h I gh as 150 ml Ilion gal Ions. other Corn Belt states wl I I pro-bably exceed this amount. Oiio's production share of the 10 bi 11 ion gal Ions of alcohl needed for a national "gasohol" program is 400 mil lion gallons. The 100 to 400 ml II Ion gal Ion range was chosen for study. 1he model was forced to produce alcohol In Increments of 100 ml Ilion gal Ions, (100, 200, 300, 400). Crop and land Use Changes Clearly, with alcohol production, rrore land is needed for corn. The question is, which crops will give up land to allow the Increased corn production? 1he results of this analysis are shown in Table 1. At levels of alcohol production of up to 300 mi I lion gal Ions, most of the substi-tution occurs with soybeans, since the by-product DDG.5 substitutes for soybean meal. At this level, soybean production has dee I i ned by 26 percent. other crops show s lgn if i cant I y I ess subs ti tut ion at th i s I eve I of product I on • However, at 300 ml I I Ion ga I Ions, enough DOGS has been produced to toa 11 y rep I ace soybean mea I for those Ii vestock rations that can use OOGS. Beyond this level, soybeans can no longer act as the safety valve to al low Increased corn production, forcing the pro-duction of wheat, oats, and hay to decline signi-ficantly as corn production Increases. These changes in production are associated with changes in prices. l\Jain, at the lower levels of alcohol production where DOGS and soybean meal are good substitutes, the price increases are sma 11. At 300 mi I Ii on ga I Ions, however, they are 9 to 17 percent greater and rise rapidly thereafter (Table 1). Increased competition for land and rising canrrodity prices wi 11 also result in increased 3 land prices. The model gives some Indication of the potential magnitude of land value changes. These are given below: Alcohol leve I Cm i II l on ga II ons) 100 200 300 400 Percent Increase in Land Va I ue 3 12 30 68 These potent I a I I and va I ue changes represent the Increases that farmers could afford to pay for I and based on commodity price Increases. Cl ear I y the actual level of land values depend on many other factors. 1he changes in I and va I ues a I so explain why corn prices Increase less than other crop prices. land represents a smaller proportion of total product I on cost for corn than for other crops. 1hus, as land prices increase, the prices of other crops rru st Increase more than corn to remain competitive. Livestock Changes Changes In I ivestock production and prices are less dramatic than for crops (Table 2). They ref I ect adjustments to somewhat lower feed supplies, higher feed prices and a change in high protein feed source as DOGS substitutes for soybean mea I • 1he production and price changes are rather small up to the 300 million gallon level. Beyond this level, too much corn is being rerroved from feed supplies, feed prices are much h lgher, and DOGS has exceeded Its substitution level with soybean meal. These factors plus com-peting demands for I ivestock products combine to push prices rapidly higher. The substitution of DOGS for soybean meal Is an important reason for the relatively minor imp act of an a I coho I program on both crop and I ivestock production at low levels of alcohol pro-duction. A detailed summary of the manner in which this substitution occurs is shown in Table 3. First, DOGS rep I aces a I I the soybean mea I ( SBM) fed to ruml nants and is fed to swine \JP to the maxi mum a I I owed. Second, it rep I aces some of the SBM that is marketed outside of the region Table 2 Effects of Alcoho~ Industry on Livestock Production Table 1 Ohio Corn Belt Effects of Alcohol Industry on Crop Production Ohio Corn Belt Alcohol Production Levels - 1 million gallons Commoditi 100 200 300 400 Alcohol Production Level (millions of gallons) (Percent change in Production) Commodit:l 100 200 300 400 Beef -0.6 -1.0 -1.7 -2.6 (Percent change in Production) Pork -0.3 -0.5 -0.3 -0.2 Corn grain +13 +24 +35 +42 Lamb +15.8 +9.4 -4.8 -54.5 Soybeans -10 -18 -26 -28 Chicken -0.5 -0.9 -1.2 -2.4 Wheat - 1 - 2 - 6 -12 Turkey -0.5 -2.2 -4.0 -10.0 Oats - 1 - 7 -16 -36 Eggs -0.3 -0.5 -0.7 -0.7 ii::.. Corn silage -- 1 - 1 - 3 Milk +1.6 +0.8 +0.4 -2.6 Hay - 1 - 3 - 6 -17 (Percent change in Price) (Percent change in price) Beef +0.5 +1.9 +3.9 +8.5 Corn grain + 1 + 3 + 9 +21 Pork o.o +2.0 +3.9 +11.4 Soybeans + 1 + 5 +11 +26 Lamb -4.5 -2.0 +3.0 +19.9 Wheat + 1 + 6 +13 +30 Chicken +0.5 +2.5 +4.8 +12.3 Oats + 2 + 7 +17 +38 Turkey +0.5 +2.7 +5.3 +13.6 Note: Planned alcohol production capacity in Ohio was in excess of Eggs +0.6 +2.9 ++.2 +13.1 100 million gallons as of September 1981. Milk -2.4 -1.0 o.o +5.7 Note: Planned alcohol production capacity in Ohio was in excess of 100 million gallons as of September 1981. , . '. ( .;"'' • Planned Corn Ethanol Plants September 1981 (million gallons per year) 5 Table 3 Distillers Dried Grains - Use and Price Ohio Corn Belt Alcohol Production Level Item 0 Soybean Meal Ruminants 149 Pork 244 Poultry 130 Marketed 1034 Total 1557 DDGS Ruminants Pork Poultry Marketed Total Soybean Meal $187 DDGS 100 0 185 129 993 1307 141 131 84 356 $187 $144 200 (000 tons) 0 185 128 805 1118 140 131 441 712 $194 $149 (million sallons) 300 0 185 83 706 974 146 131 86 705 1068 $183 $122 400 0 185 81 681 947 280 131 84 929 1424 $198 $119 Note: Planned alcohol production capacity in Ohio was in excess of 100 million gallons as of September 1981. 6 until the maximum substitution takes place. DOGS is then fed to poultry up to a maximum level. At this point, no rrore substitution of OOGS for SBM can occur and any additional DOGS produced must be fed to ruminants as an energy feed. This use I owers its marekt va 1.ue by about 20 percent. Prices for both feeds (DOGS and SBM) Increase initially as alcohol is produced, reflecting an increased scarcity of feed. When the high protein market Is saturated with DOGS, prices for both feeds decline. Then as more DOGS Is produced Its price decl Ines further, but the price for SBM Increases as a result of its scarcity as a non~ rum I nent feed. Some Additional Considerations The resu I ts reported above assume that new land or unused land is not available, that export demand rema Ins at present I eve Is and that crop y I e Ids do not change. Each of these factors can change In a pos It Ive or negative way In any one year or over time. The analysis confirmed that these are Important variables. For example, increased exports will result in earlier and greater pr ice r I ses as more a I coho I is produced. Crop prices will be more volatile in response to y I el d shortf a 11 s when the additional demand for corn to produce alcohol is added. In contrast, if unused land is brought under cultivation or signi-ficant yield increases are possible, the impacts w i I I be I es s. The use of a signif lcant portion of the feed by-product within th~ State of <llio is critically dependent on the continued exi stance of a I lvestock industry. Yet recent trends indicate that fed Ii vestock product ion is moving out of Oh lo. Continuation of this trend wi 11 mean that more of the DOGS wi I I have to be "exported" out-side the state. This would reduce marginally the profltabi lity of alcohol production in Ohio. Production incentives are an important part of the alcohol program. Currently, the price of alcohol reflects a $.40 per gallon subsidy. The analysis confirmed that a subsidy is needed for alcohol to be competitive at present corn and gasoline prices. However, as energy prices rise and a I coho I product I on I eve I s increase, the sub-sidy is less effective, and may be of limited value. Summary A modest a I coho I t ndu stry us Ing corn is now being developed in Ohio. Planned alcohol produc-tion capacity was in excess of 100mi11 ion gal Ions as of September 1981. Other Corn Belt states are also developing alcohol industries. Subs tant i a I changes modity in land use, livestock feeding, and com-prices wll I result from the additional demands put on agriculture to meet food, feed, fiber and now energy needs. Export demand, crop y lei d changes, and land ava I la bi I tty wi 11 have important Impacts on these changes. tori ng of th Is new Industry wi 11 A c I os e mo n i -be needed to assist farmers, agrl-industries and policy makers to make the necessary adjustments, to take advan-tage of the opportun It i es presented, and to pre-serve and enhance the productivity of agriculture. Al I educational programs and activities conducted by the Ohio Cooperative Extension Service are available to all potential cllentele on a nondis-criminatory basis without regard to race, color, national origin, sex or religious affiliation. Issued in furtherance of Cooperative Extensive Work, acts of May 8 and June 30, 1914, In coopera-tion with the u.s. Department of Agriculture. Roy M. Kottman, Director of the Cooperative Extension Service, The <llio State University. 1/82 ,.. ' 

The Emerging Ohio Alcohol Industry - Impacts on Agriculture

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The Emerging Ohio Alcohol Industry - Impacts on Agriculture

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