Distillers Dried Grains with Solubles (DDGS)
DDGS Comments: This week’s DDGS pricing table shows that merchandisers will pass along saving to clients whenever the market presents opportunities. Domestic DDGS buyers that have coverage seem to be in a wait and see mode as prices decline, while foreign buyers continue to keep their pipelines moving. The export container market has been stable, but buyers do not want to purchase too much product ahead of time when there is a $30-40 inverse hanging over the market.
Domestic DDGS buyers have been particularly sensitive to the inverted pricing conditions, but they are in an opportune position to recognize that the corn basis has significantly declined this week. Of course, there could still be some additional decline in basis between now and fall harvest, but nothing in proportion to what occurred this week.
DDGS merchandisers have reported receiving many more inquires about locking in prices for the September through December time period. Such interest makes a good deal of sense because of this week’s declining prices.The December corn contract seems to have come to rest on rather stable support at $4.75 per bushel, and the contracts from December forward already have a carry built back into their pricing structure. Even with such a carry, the average price of contracts from December 2013 to December 2014 is below $5.00 per bushel. Therefore, both foreign and domestic DDGS buyers may want to open discussion with merchandisers to see if even longer-term pricing arrangements could be made into 2014.
One important consideration for buyers, particularly international buyers, is the prospect of future freight costs. When a buyer knows for certain what his DDGS purchases are, then it is easier to negotiate freight rates. Demand for freight is likely to increase as the harvest gets underway. One seasoned DDGS merchandiser noted that container freight usually increases starting in October, and sometimes by as much as $100/40′ by general rate increase. That means there is some prospect that any additional price savings could be offset by increased transportation costs. Consequently, now seems to be an opportune time for buyers and merchandisers to have open and creative dialogs.
Lastly, the number of U.S. ethanol plants that are officially registered by the Chinese Ministry of Agriculture continued to increase. Those ethanol facilities that still have not registered should be reminded to do so, because at some point Chinese Customs may increase their enforcement.
Ethanol Comments: Congressional hearings occurred this week regarding the Renewable Fuels Standard (RFS) to discuss possible legislative revisions to the program. The present setback in corn prices was an opportune indicator to Congress that any temporary waiver of the mandate is unnecessary. A further indicator is the fact that all corn by-product values are well below year-ago levels. Any adjustment to the policy is expected to be confined to cellulosic mandates.
Ethanol production declined for the week ending July 19 by an average of 23,000 barrels per day (bpd) to a total of 853,000 bpd, which is down from 876,000 bpd the prior week. This occurred in part because of substantial declines in ethanol producer margins across the Corn Belt, which is implied by the proceeding differentials between corn and the value of co-products values:
– Illinois differential decreased to $1.97 per bushel, which is down from $2.43 the prior week but above $1.62 for this same week a year ago.
– Iowa differential decreased to $1.86 per bushel, which is down from $2.02 the prior week and below $1.95 for this same week a year ago.
– Nebraska differential decreased to $1.66 per bushel, which is down from $2.01 the prior week and below $1.95 for this same week a year ago.
– Illinois differential decreased to $1.70 per bushel, which is down from $2.24 the prior week and below $1.96 for this same week a year ago.
Please note the concerning fact that the differential in the regions of Iowa, Nebraska and Illinois all declined below the year-ago level. Further concerning is the continued increase in ethanol stocks to 17.3 million barrels. This is a four percent increase above the prior week’s level of 16.6 million barrels, and less than 10 percent below the year-ago level of 19 million barrels.
Recent ethanol production levels have not been excessive and the rebound in stocks seems primarily attributable to reduced gasoline demand by consumers. Ethanol imports have been moderate up to this point, and stood at 41,000 bpd for the week ending July 19, which was down from the prior week of 50,000 bpd and below the year ago level of 53,000 bpd.
This week’s price setback in corn could be an opportunity for ethanol producers to deal with less favorable market conditions.