Distillers Dried Grains with Solubles (DDGS)
DDGS Comments: Corn futures have spent the last month in decline, but DDGS price action seems to indicate that end-users are anticipating that a bottom is being placed in the market. Domestic DDGS prices suddenly rebounded by an average of more than $15/MT this past week while containerized DDGS for the export market continued to decline by another $5/MT. Domestic demand has recently been leading the price action in DDGS markets, and so containerized export prices are likely to follow that example and also stabilize next week.
Quoted rail and truck rates for bulk grain have both recently increased in the United States due to anticipation of great logistical demand to move this season’s large harvest. Gran buyers will attempt to compensate by offering farmers lower cash prices, but U.S. farmers will presumably be reluctant to accept low bids. Such a combination of factors could make both grain and transportation costs inconsistent this fall. Consequently, it may actually be more difficult this fall for DDGS merchandisers to arrange extended contract pricing than is presently the case.
The preceding Outlook section notes that an increasing number of large commercial buyers are purchasing corn at present price levels. Those end-users have calculated the price levels that are necessary to generate consistent profits. It can be frustrating for DDGS merchandisers when some of the DDGS buyers seem to be unrealistically focused on purchasing at the season’s low.
It may be possible for DDGS merchandisers to guarantee a buyer that he or she can purchase a limited amount at the seasonal low, for bragging rights, but the merchandiser cannot offer the full contract at that price level. After all, the ethanol plant is also a buyer of corn before it is processed into DDGS. No U.S. farmer is going to offer all of his corn to the DDGS producer at the season’s lowest prices. Therefore, merchandisers must find agreeable terms for both the farmer and the DDGS buyer.
Ethanol Comments: Last week the fact was noted that the spot market differential between declining corn prices and the byproducts had improved for ethanol facilities and was an incentive for production to increase. Data from the Energy Information Administration (EIA) indicates that production did behave as expected and increased from the prior week’s rate of 927,000 barrels per day (bpd) to 943,000 bpd for week ending July 11. A more interesting fact is that total U.S. ethanol stocks declined while that increase took place.
Increasing exports of U.S. ethanol is a likely reason for the decline in total ethanol stocks to 17.9 million barrels from the prior week’s level of 18.3 million barrels. The spread has narrowed to 1.3 million barrels between the current stocks level and last year’s stocks level of 16.6 million barrels. Further declines in the level of total stocks could add some support to the price of ethanol and/or encourage greater ethanol imports into the United States.
The United States imported ethanol at an average daily rate of 5,000 bpd for the week ending July 11. Please note that this is a decline from the prior-week’s average daily import of 9,000 bpd. This import pace is also substantially below last year’s average daily rate of 50,000 bpd and also below the rate two years ago of 18,000 bpd. Considering such factors, the probability seems good that total U.S. ethanol stocks will continue to drift lower – so long as there is no substantial decline in the price of gasoline.
The differential between the cost of corn and the value of ethanol and DDGS at processing plants in different regions of the Corn-Belt are as follows for week ending Friday, July 18, 2014:
- Illinois differential is $3.49 per bushel, in comparison to $3.39 the prior week and $2.43 a year ago.
- Iowa differential is $3.26 per bushel, in comparison to $3.09 the prior week and $1.95 a year ago.
- Nebraska differential is $3.19 per bushel, in comparison to $2.95 the prior week and $2.01 a year ago.
- South Dakota differential is $3.59 per bushel, in comparison to $3.43 the prior week and $2.14 a year ago.