The grain- and sugar-devouring ethanol industry: The competition for food, feed and fuel

Dr. Pearse Lyons, President, Alltech Inc.

To understand the ethanol industry is to understand the world. Once described as one of the “glasses that changed the world” due to its ability to be a transportable, yet safe source of energy, ethanol is once again front and center of our industry. Driven by the 2002 Kyoto Protocol in which some 40 industrialized countries agreed to cut carbon dioxide emissions back to or below (8 percent) that of 1990 levels in an effort to slow global warning, ethanol is now the darling of Wall Street but possibly the scourge of the feed industry.

In recent months and years, key factors other than the environment continue to drive interest in ethanol – namely reducing dependence on foreign oil and increasing opportunities for farmers.

“Value-added agriculture” and “new outlets for farmers” have become the catch phrases. “The ag sector of Europe has a surplus capacity where we need to find markets for E.U. grain,” said a speaker at a recent fuel ethanol conference. The European Union in 2003 (then 15 members strong) actually adopted its biofuels directive to replace gasoline and diesel with biofuels, but it was largely ignored. Only two countries, Germany (biodiesel) and Sweden (ethanol), met the 2005 target. The move to alternative fuels has now taken on a new life, spurred by oil prices and political events in oil-rich areas of the Middle East, Nigeria and Venezuela.

The U.S. ethanol industry, long overshadowed by the use of the oil industry’s MTBE as an oxygenate, has also found new life with the ban on the carcinogenic MTBE and a presidential directive on biofuels in which President Bush states 30 percent of our fuels should be biofuels by 2030.

Ironically, it was a similar “crisis” [...] that led to the formation of Alltech. At that time, ethanol production in the United States was about 175 million gallons. More than 2,680 plants were anticipated in the United States and “my corn field is my oil field” became the industry’s mantra. Even then it was suggested a simplistic conversion of corn (maize predominately) into ethanol and distillers grain was not the way forward. Corn needed to be value-added – then and now.

While the gasohol industry stalled in the mid ‘80s because of low oil prices ($10 per barrel), lack of environmental concerns and an oil industry with its own oxygenate, ethanol production continued to grow in both North America and Brazil. Flex cars were designed so either ethanol or gasoline, or any combination of the two, could be used.

Twenty-five years later, the paradigm has shifted again with political instability in oil-producing nations coupled with high energy prices renewing interests in ethanol. By July 2006, Ethanol Producer magazine announced there were more than 100 plants in North America in operation or under construction. Ethanol had arrived, they declared, and it had become a public policy driven by three E’s: energy security, environmental protection and economic security for rural America. Meanwhile, world petroleum consumption continues to rise and is expected to be 1.3 million barrels per day in 2006 and 1.8 million barrels in 2007. However, the proven reserves are not increasing and political situations can alter the balance (already thin, at 1.1 million to 1.3 million barrels per day) between supply and demand at any time.

What are the consequences for our industry? Is ethanol a savior or a threat? Whichever it is, we must understand its implications. To do so, we must understand some key facts.

One ton of corn produces approximately 100 gallons of pure ethanol and 330 kilograms (727.5 pounds) of a protein-fiber called distillers dried grains with solubles (DDGS). The U.S. government target for 2010 is for 10 percent of U.S. gasoline (approximately 14 billion gallons) to be replaced by ethanol. To do this would consume 52 percent of the current grain crop and produce approximately 47 million tons of DDGS.

In 2006, the United States will produce about 6 billion gallons of ethanol, less than half the 2010 target. Brazil makes approximately 5 billion. Brazil uses sugarcane as a raw material with effectively no byproducts. Brazil produces approximately 19 percent of the world’s sugar supply, with half converted to ethanol. Further, Brazilian ethanol is two-thirds the cost of ethanol in the United States.

What then are the implications for the feed industry? Could global grain consumption outstrip production as it did in 2005? Will world grain stocks continue to fall from the current level of 270 million tons, the lowest in 25 years? Are we in danger of running out of raw materials such as maize, barley, wheat or sugar? Do we need to look to alternative raw materials? Do we need to secure our own raw materials in a future where competition for feed, food and fuel exists? To answer these questions we must consider where the people are, where they will be, what raw materials we use today and what raw materials we may have to use in the future, what technology is available and do we adopt it fast enough?

Feed tonnage
A recent survey of feed production by the International Feed Industry Federation reported the world feed production at approximately 618 million tons. This level of compound feed is produced primarily where the raw materials are and where meat consumption is highest. North America leads the way with about 122 million tons, although the figure in the United States alone would be 179 million tons if the 57 million tons produced and used on-farm is included. Asia Pacific follows with 157 million tons, with approximately 73 million tons in China. Global feed production was 82 kilograms per person in 1980 and increased to 96 kilograms per person in 2004. The high was 105 kilograms per person in 1995. Clearly, feed production has not kept pace with population growth.

When analyzed in terms of feed per million people, regionally the outlook is even more alarming. The United States produces 0.81 million tons of feed per million people. Canada produces 0.60 million tons. China on the other hand produces only 0.07, and India a miniscule 0.01 million tons. Should these countries move towards feed sufficiency or more meat consumption, a major movement in terms of grain production or grain importation will have to occur. Where would the grain come from? Do we have enough? What other raw materials could we use? What about cellulose?

The current and future raw materials
The current global grain and protein supply today stands between 2,000 and 2,200 million tons, including 120 million tons of soy, the predominant protein for animals. The main cereals are maize (corn) at 700 million tons, wheat at 620 million tons, rice at 400 million tons, barley at 137 million tons, sorghum at 60 million tons, oats at 24 million tons and rye at 15 million tons. Fuel alcohol programs currently focus on these raw materials and, as they do, the consequences for feed supplies become significant.

If the Kyoto Protocol and the Clean Air Act are enacted, these figures will change dramatically with 52 percent of the U.S. grain crop removed from feed use and producing 47 million tons of fiber and protein source of DDGS. The balance of raw material, population and feed production by 2010 could look completely different than today. At the very least, the industry must find a way to use 46 million tons of DDGS as a protein source and energy source. However, the fact that government policies are mandating fuel independence will ensure strident competition for raw materials.

The protein side
Just as the energy side is becoming limited, so too is protein. The predominant protein for animals is soy, with the United States and Brazil the largest producers. This protein is often supplemented with about 6.3 million tons of fishmeal, but both quantity and quality of fishmeal are decreasing. Price, on the other hand, continues to escalate with fishmeal now as high as $1,500 per ton.

An alternative protein is required or at the very least a way to maximize the use of existing protein such as distillers grains.

As previously noted, the world protein and grain supply today stands at 2,200 million tons, of which 120 million tons is soy. In certain parts of the world, starch can also be supplied from cassava (60 million tons) or rice (410 million tons). While the fish industry catches about 130 million tons, only 30 million tons goes to fishmeal. Even the supplies are declining as stocks decline.

While maize, wheat and barley production can and will increase in countries such as the Ukraine, Brazil and Argentina, those nations also have ethanol programs which will consume grain. The prediction is for grain prices to rise. In the United States, the supply of corn is limited, causing land to be diverted into corn production for ethanol and away from other crops such as soy.

In the presence of such multiple demands for land, the feed industry must have a flexible approach from raw materials to feed formulation. Utilization of DDGS, an excellent protein source if it can be utilized, will increase, but so also must the use of cellulolytic materials. Cellulose, the ultimate renewable raw material, will have to be used for both feed and fuel. It is estimated that 1.4 billion tons of fiber (cellulose) are produced annually in the United States alone. This includes switch grass, wood shavings, etc., and it can also be converted into ethanol. In fact, the yield of ethanol (at 70 gallons per ton of cellulose) is not too different from corn (100 gallons), but the technology has to be developed.

The U.S. Department of Energy’s thrust for the next 20 years is in this area, and it can also indirectly help the feed industry. If we can learn how to deconstruct cellulose into energy (glucose and xylose to ethanol), we can also learn how to use cellulose for feed. It is going to take a cross-cutting, a cross-fertilization, of technologies.

Conclusion: The use of solid state fermentation with distillers grains
The world is facing a food and feed fuel dilemma. On the one hand, fuel consumption increases oil shortages, and the agreement to limit greenhouse gases is encouraging the ethanol industry. The logical raw materials for ethanol are maize, wheat, barley and sugarcane. On the other hand, world population increases and prosperity advances an ever-growing appetite for meat and, hence, feed. The world can simply not supply grains for both feed and fuel. While in such a competition, food (feed) will win out. Nonetheless, feed raw material supplies will become tight. Fiber utilization from byproducts or from cellulose will be key for both food (feed) and fuel. Technologies which allow such utilization such as solid state fermentation (SSF) will play a major role. PD

References omitted but are available upon request.

—Excerpts from 2006 Distillers Grains Forum Proceedings