By LINDA McGURK
Indiana Correspondent

WEST LAFAYETTE, Ind. — The average American motorist has probably rejoiced in the recent drop in gas prices, but for the ethanol industry plunging crude oil prices is a sign of rough times ahead.

Some producers have suspended construction of new plants, others have drastically cut production in existing facilities. As ethanol producers see profit margins shrink, the value of the co-product dried distillers grains with solubles (DDGS), once more or less viewed as a nuisance, is growing.

“(DDGS) is certainly more important than it was two years ago,” said Chris Hurt, a professor of agricultural economics at Purdue University.

During the initial “gold rush” days of ethanol, DDGS provided only 8-9 percent of the revenue for plants. In the past 15 months, that share has increased to 19 percent, according to Hurt, who spoke to about 80 faculty, nutritionists, ethanol industry representatives and livestock producers during a Nov. 18 DDGS conference at the Beck Agricultural Center near West Lafayette.

With growing acceptance of DDGS as a feed source for livestock, the price of DDGS has started to follow the price of corn and soybeans more closely, Hurt said. And since the agricultural sector is now a player on the energy market – which is notoriously volatile and prone to big, cyclical swings – corn and soybeans as well as DDGS correlate closely with crude oil prices.

“They’re all being influenced by a set of variables in the big world,” he said. “In the 1990s, the correlation between corn and crude oil prices was 12 percent; they were very close to independent markets. But over the last 15 months, corn prices have been moving with oil prices 87 percent of the time.”

The United States produced 23 million tons of DDGS for marketing year 2007-08. Those amounts are expected to increase next year when the ethanol industry is slated for more expansion.
The million-dollar question is exactly how many of the planned ethanol facilities will actually come online, said Frank Dooley, a professor of agricultural economics at Purdue. “Next year is going to be very interesting,” he added.

According to Hurt, the current capacity for U.S. ethanol production is approximately 10.5 billion gallons per year. If all plants under construction are completed and brought online next year, the total capacity will increase to 13.5 billion. But unless energy prices rebound, Hurt guessed production won’t actually reach that level until 2012.

“I don’t see much further growth (next year), even though plants keep going up,” he said. “In reality – with the current economics – we’ll be much closer to 10.5 billion gallons, which is the amount mandated by the Renewable Fuels Standard.”

As DDGS is gaining ground as a livestock nutrient around the world, exports are expected to increase next year, from 4 million tons to 7 million or more, according to Dooley.

Mexico and Canada are the biggest importers of American DDGS, but the Middle East and Southeast Asia also represent significant markets.

Plummeting transportation costs will give exports a boost, Hurt said. “In June the ocean freight rate from New Orleans to Japan was $3.30 per bushel,” he explained. “Last week it was down to $1.02. The decline of the world economy makes transportation of DDGS cheap.”