A push by U.S. ethanol companies into corn oil is starting to give the livestock industry indigestion.

Corn oil, which is used both for cooking oil and to make biodiesel fuel, has emerged over the last year as a lucrative niche product for ethanol producers looking to add new revenue at a time of weak returns. Corn-oil production, though, comes with a downside: extracting the oil cuts into the fat content of the ethanol industry's major byproduct--distillers dried grain.


The yellow, powdery substance known as DDGs is ubiquitous in the feed rations for cattle, hogs and poultry. Yet extracting corn oil makes DDGs less effective at helping animals grow ahead of slaughter.

Researchers said concerns over the decreasing DDG fat content are just starting to emerge. Livestock producers could start to reduce their use of DDGs in favor of soybean meal, analysts and livestock nutritionists say.

As corn-oil extraction "becomes more widespread, livestock producers, particularly of hogs, will begin to shift feeding back to meal," said Don Roose, president of U.S. Commodities, a Des Moines, Iowa-based brokerage that advises both livestock producers and ethanol plants.

Prices for soy meal hit six-month highs last week, rising on concerns over global supplies in the face of a disappointing South American soybean crop. The soy product pulled back Tuesday, recently trading $5.60, or 1.5%, lower at $365.30 a short ton at the Chicago Board of Trade.

University researchers and animal nutritionists across the Midwest said they are hearing concerns from cattle and hog producers about DDGs and are trying to determine the effects of corn oil production on the nutritional value of DDGs. Researchers at large state universities from Nebraska to Illinois to Minnesota all plan to release findings in the weeks and months ahead.

So far, demand for DDGs has held up, said Steve Markham, head DDG merchandiser for farmer co-op CHS Inc., the nation's biggest marketer of the feed.

He said exports to Asia have climbed, with several major shipments recently. Still, Markham acknowledged that a large international customer complained about the falling fat content in DDGs during a recent meeting with CHS executives.

Many hog producers in the U.S. and abroad have just gotten used to DDGs, with supplies exploding in recent years as ethanol production surged. The changes in DDGs for livestock producers are "kind of throwing them a curve ball," said Jay O'Neil, agricultural economist with Kansas State University.

Most of the industry's largest ethanol companies--including Valero Energy Corp. (VLO), Archer Daniels Midland Co. (ADM), Green Plains Renewable Energy Inc. (GPRE) and privately held POET LLC--have retrofitted plants in the past year to produce corn oil.

Valero spokesman Bill Day said the company, which extracts corn oil at two of its Iowa plants, actually has seen a recent jump in demand for DDGs. He explained that buyers have become dissatisfied with rival suppliers who are more aggressive about corn oil output, producing DDGs with less fat than what Valero sells.

Corn oil provides a hefty margin for ethanol producers because costs, after the initial investment in equipment, are low. A backlash from livestock producers is unlikely to cause plants to rethink their corn-oil strategy. Ethanol margins have weakened due to slow demand growth and high corn prices.

Since the start of 2011, corn futures at the Chicago Board of Trade are up 5.5% and well above historical averages, while ethanol futures are down 1.8%.

Still, few expect ethanol producers to sacrifice corn oil for DDG.

"It makes dollars and cents to yank out as much fat as you possibly can," Markham said.

source: foxbusiness

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