As recently as six months ago, or this morning, the immediate and visible changes wrought by subsidized ethanol production seemed much like those that accompany a dry spell or some other temporary happenstance. Not much fun to endure, but manageable with familiar adjustments as the rest of the industry hums to long-established fundamentals.

Now, though, it seems more apparent that everything we knew about an industry driven by cheap feed and energy is in flux. The fundamental relationships no longer apply, at least not the way they used to.

“It's the most dramatic change in my lifetime; it's probably the most dramatic change in agriculture since WW II,” says Barry Dunn, executive director and Kleberg Endowed Chair at the King Ranch Institute for Ranch Management (KRIRM).

In fact, Dunn explains, “Many people believe ethanol will be the third leg of an agricultural trifecta that will change the face of agriculture forever, influencing not only how you manage your ranch, but also how your children and grandchildren fare in the business.” The other two revolutionary changes were the introduction of hybrid seed corn in the 1930s and '40s, and the invention of the moldboard plow in the 1850s.

Dunn provided the summary for BEEF magazine's recent BEEF Quality Summit (BQS), which examined cattle business in an ethanol world from a number of perspectives.

Alternative corn use

According to Dunn, the 129 ethanol plants currently operating will have churned out 7.9 billion gals. of ethanol in 2007, and are expected to produce 12.3 billion gals. in 2008. Another 85 plants are under construction, planned or earmarked for expansion.

When you account for plants in production or being expanded, ethanol production capacity is 11.5 billion gals., says John Lawrence, livestock economist and director of the Iowa Beef Center (IBC). Throw in the new plants that have already broken ground, and he says you're talking 14 billion gals. Not coincidentally, that's how much ethanol the U.S. would need if all its gasoline were sold as E10 — gasoline blended with 10% ethanol.

Increased corn demand and corn prices fueled by this subsidized ethanol demand have pulled acres away from other crops; 93 million acres of corn were planted last year, the most since 1944. In turn, prices for other crops such as wheat and soybeans are going through the roof in an attempt to buy acreage back from corn production. On both counts, acres are being taken away from forage production. That's before you talk about the downstream effects of increased input costs and shifting demand.

Now, think about what's happened the past couple of years — how high and volatile feed and fuel prices have been. Consider that there's been no drought in the primary corn-producing states during this time. Keep in mind the changes spurred by about 8 billion gals. of ethanol production, then consider that during his 2007 State of the Union address, President Bush called for 35 billion gals. of renewable fuels by 2017.

Thus, prices have more opportunity to climb than not. Incidentally, Dunn points out that a 1% change in supply of a commodity typically spawns a 6-8% change in the price of that commodity. And that ignores how ethanol production changes the complexion of rural communities and the amount of money that flows through them.

Lots of falling dominos

“Rural communities need both livestock and ethanol production,” says Lawrence, who was also a key BQS presenter. But livestock production is worth more jobs.

According to studies at Iowa State University, using a 50-million-gal. ethanol plant as an example, 18.5 million bu. of corn are required. The plant accounts for 35 workers directly, as well as 98 created and induced jobs, or 133 jobs all together. Funnel that same amount of corn through a feedlot, and you're talking 140 jobs before considering the employment created further downstream in packing and processing.

“Ethanol production is a low-labor business; livestock production is a high-labor business,” Lawrence says.

Along the way, an already depleted national cowherd is finding both incentive and resources for expansion tough to come by.

“The total number of beef cows is declining, and I think it will for a couple of years,” Lawrence says. “I think we'll lose a lot of cow habitat in this part of the world (Iowa, Nebraska, the Dakotas, etc.), so I think we'll have a hard time rebuilding the cowherd in this country.”

That's true despite the opportunity that cattle producers have to feed distiller's grains (DGs), a byproduct of corn-based ethanol production. Lawrence points out that source of energy can be used to stretch grazing with supplemental feeding. With DGs, total-mixed rations can be cheaper than feeding hay, meaning in some cases that weight can be added more cheaply in a drylot situation than in the pasture.

There's plenty that's not known about using DGs, of course. How much can be used in a given situation without negatively impacting cattle, carcass or retail cut performance, for instance?

At the BQS, the University of Nebraska's Chris Calkins, one of the nation's leading meat scientists, described current research evaluating the impact that feeding wet DGs has on carcass characteristics. Turns out, luckily, there is no impact on carcass quality or tenderness.

But feeding wet DGs does increase the level of polyunsaturated fatty acids, thus increasing the rate of oxidation during retail display. In other words, shelf life is reduced. Early on it appears that also feeding Vitamin E for the last 100 days on feed can mitigate those effects.

“In 1995, as we were beginning to recapture lost consumer beef demand at a cost of billions of dollars, we started feeding a product [DGs]. And we had no idea of its positive or negative effect on carcass and beef-eating characteristics,” Dunn says. “We have to be really careful not to compromise the demand we spent billions of dollars to recapture.”

Obviously, price is also part of the demand equation, and ethanol is increasing consumer food prices. For those who argue the point, Lawrence explains the cost of corn as a percentage of total retail beef, hide and offal value ran about 7.4% between 1991 and 2006. It rose to 9% between January and June of this year.

Though domestic beef demand has been strong — even stronger than beef demand indices, according to some — there are limits.

“As an industry, we can't eat our way to profitability,” Dunn says. “As a nation, we've eaten our way to obesity.” Spun differently, presupposing increasing domestic beef consumption, even when allowing for population growth, isn't a sound strategy.

Worse, Dunn points to the unintended consequences of current ethanol policy. In Latin American countries, the consumer cost of corn — the staple of their diet — has doubled. “It would be arrogant and insensitive not to recognize that,” he says.

Undoubtedly the ethanol industry will change — it's already undergone consolidation. But betting against its existence for the foreseeable future is becoming more and more a fool's wager.

Planning ahead

Moreover, it makes no difference whether you agree with the government energy policy that is responsible for all of this change.

“At the ranch or farm level, you have to forget about it and adjust because being right doesn't matter,” Dunn says. “If there was ever a time for strategic planning, this is it.”

Volumes and full-scale academic study are devoted to the subject. In fact, it's one of the disciplines that KRIRM teaches. A dandy starting point to get your mind wrapped around the concepts is a KRIRM guide, “Strategic and Scenario Planning in Ranching: Managing Risk in Dynamic Times” available through that organization (krirm.tamuk.edu).

In simple terms, Dunn describes strategic planning as the big picture by which cattle operations assess their current situation and resources, and examine their strengths, weaknesses, opportunities and threats. These lead to developing a ranch vision, then conducting what's termed a gap analysis — determining how far you are between where you are and where you want to go. Along the way, you develop strategies to decrease the gap.

Next, Dunn suggests stacking all that up against different scenarios. Then you develop and meld strategies for the most likely scenarios, as well as develop feedback mechanisms to monitor progress.

Lots of change is certain

Prepared or not, Dunn emphasizes, “The mosaic of American agriculture will be very different. There's a battle for resources between cow-calf producers, stockers and feedlots. The marketplace and price discovery will be very different. It will all happen faster than we're used to. But there's something else going on.”

At the risk of paraphrasing one of the most insightful, eloquent lines of thinking you'd ever hope to hear, Dunn believes it boils down to this:

By definition, in a capitalistic economy, industries reinvent themselves in order to survive, meaning parts and pieces of industries are destroyed, making room for the new. At the same time, those industries in flux and the markets serving them are trying to find balance.

“It's that conflict between an industry trying to reinvent itself and finding balance at the same time that creates confusion, frustration and opportunity,” Dunn says.