Distillers Dried Grains with Solubles (DDGS)
DDGS Comments: There was a modest decline this past week for rail-delivered DDGS to domestic buyers on the West coast, but DDGS prices increased for everyone else. Rate increases generally varied from $9-12/MT for containerized and bulk DDGS, but rates to Taiwan and Alberta, Canada increased well above those levels. Logistical costs are a key factor in determining rate variability to different destinations. Present logistical costs could be substantially different than will exist this fall when multiple crops are being simultaneously harvested. DDGS merchandisers can generally obtain more favorable rates from logistical companies by planning ahead.
A number of DDGS buyers are inquiring about DDGS prices in the October-November-December time period, but they seem reluctant to agree upon a price out of concern for missing a substantial setback in corn futures this fall. However, the preceding outlook section explains why any harvest decline in corn prices this fall is unlikely to be as large as many individuals were expecting even a month ago. Therefore, it is entirely possible that limited corn futures declines and higher transportation costs may not be much different than a combination of current corn futures contracts and prearranged freight rates for this fall. Consequently, any near-term limited sell-off in corn futures contracts is presumably an opportunity for DDGS buyers to work with merchandisers in order to investigate pricing possibilities for the October-November-December time period.
Ethanol Comments: Gasoline futures attempted to break out of a month-long trading range and sell-off on Monday due to concerns about the Chinese economy and global demand. However, it quickly become evident that such bearish action was premature and gasoline futures reestablished themselves back into the horizontal trading range. U.S. domestic gasoline demand has been relatively strong and that is beneficial for ethanol demand. As a result, it makes sense that USDA increased their estimate for the amount of U.S. corn used in ethanol production during the current 2014/15 crop year by an additional 25 million bushels.
As noted in the Outlook discussion, the increase in both domestic and export demand for corn raises the price floor for U.S. corn before the fall harvest. The result of firmer corn prices and horizontal gasoline prices is the narrowing of margins for ethanol producers. At the same time, U.S. ethanol production remains at high levels in order to retain market share. The average daily ethanol production rate increased to 987,000 barrels per day (bpd) for the week ending July 3, which is above the prior-week’s level of 968,000 bpd and the year-ago level of 927,000 bpd. There was also an increase in the total U.S. ethanol stocks to 19.8 million barrels from the prior-week’s level of 19.5 million barrels. The natural result is an emphasis on increasing efficiencies at ethanol facilities.
The need for improved efficiency due to narrower margins is implied by the differential between the cost of corn and the co-products that declined in three of the four primary locations across the Corn Belt for the week ending July 10, 2015:
- Illinois differential is $1.62 per bushel, in comparison to $1.74 the prior week and $3.39 a year ago.
- Iowa differential is $1.59 per bushel, in comparison to $1.52 the prior week and $3.09 a year ago.
- Nebraska differential is $1.28 per bushel, in comparison to $1.37 the prior week and $2.95 a year ago.
- South Dakota differential is $1.87 per bushel, in comparison to $2.12 the prior week and $3.43 a year ago.