CHICAGO Demand for distiller's grain, a byproduct of distilling corn into ethanol, will continue to grow domestically and abroad as livestock producers turn to the feed as a cheaper alternative to corn, analysts said.
And with the ethanol industry gearing up for a better year in 2010 after the financial crisis of 2008 triggered by corn prices hitting record highs, more distiller's grain should be making its way into the U.S. livestock sector.
"If we are going to ramp up (ethanol production), we have to find a home for DDGS (dried distiller's grain with soluables)," said Darrel Good, extension economist at the University of Illinois.
"We will export some of those but domestic feeding will have to absorb a big chunk of that," Good added.
The U.S. Agriculture Department forecast ethanol production to rise by 13.5 percent in the 2009 crop year that began September 1, while corn prices could continue to rise as fuel blenders compete for a larger share of a likely record U.S. corn crop.
A third of the corn used in ethanol production comes out as (DDGS), while the feed costs roughly 22 percent less than corn.
The average price for distiller's grain last week in Iowa was $116.25 per ton, compared with $126.25 a year ago, USDA said.
Demand for distiller's grain is growing as domestic cattle and hog producers, seeking to cut feed costs amid shrinking profits, boost the amount of DDGS in feed formulations.
The slowest corn harvest in more than two decades has also reduced the amount of corn on the market and pushed prices on the Chicago Board of Trade toward the $4 level, or about $143 per ton.
Some hog producers have increased the amount of distiller's grain in feed formulations to as much as 20 percent from about 10 percent, said Darrell Mark, extension livestock marketing specialist at University of Nebraska-Lincoln.
"The demand has maybe been a little better from the hog producer because their losses have been so huge," Mark said.
Hog producers have lost upward of $5 billion during the past two years, according to an industry group, due to high feed costs and pork import bans after the H1N1 flu outbreak.
Exports of distiller's grain are expected to increase to 6 million tonnes from 5 million tonnes this crop year, said Dan Keefe, manager of international operations for DDGS at the U.S. Grains Council.
"DDGS has protein, fat and fiber, and it's a good substitute for soy protein, canola protein, fish-meal, even bone-meal," Keefe said. Distiller's grain exports may continue to increase in the coming years as more importing countries learn of its benefits, he said.
The top three importers so far this year, respectively, are Canada, Mexico and Turkey, USDA said.
"For most of the foreign markets, up until 2004 it was an unknown feed ingredient," Keefe said.
'WET CORN' MAY LIMIT UPSIDE
Distiller's grain still makes up only a small portion of overall feed, with DDGS production expected to increase this crop year to 28-30 million tonnes, up from about 24-25 million tonnes in the 2008/09 crop year, according to analysts.
Meanwhile, 5.4 billion bushels of corn of the total 13.025 billion bushel crop estimated for this year is expected to be utilized as feed, USDA said.
Demand for distiller's grain has increased the past month due to a delay in harvesting corn, but interest could be set back when more corn enters the supply pipeline.
Only 25 percent of the total corn crop was harvested as of Sunday, compared with the average pace of 71 percent, USDA said.
Grain elevators may not be able to store lesser quality corn long term. Livestock producers could then buy at a discount the poorer quality corn they can immediately feed to their animals.
(Editing by Christian Wiessner)