Market Perspectives June 14, 2013

Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Domestic feed buyers apparently are favoring DDGS in their rations because of tight corn supplies and the run-up in soymeal prices. They are competing against foreign buyers, as both are looking to secure product while attempting to buy hand-to-mouth. At the moment, foreign buyers seem to be giving the domestic buyers stiff competition. 

DDGS merchandisers report that a fresh round of buying interest has been initiated by Asian buyers for export container demand. One merchandiser reports that there is some tire-kicking as domestic buyers aim to get a better handle on market dynamics. As noted in the Outlook section of this report, substantially lower prices seem unlikely for the next couple of weeks because of uncertainty about USDA’s reports that will be published on June 28. Shortly after the reports are released, the U.S. corn crop will go into pollination and prices may remain volatile for another couple of week, but prices are expected to improve.

In relation to near-term pricing challenges, a senior merchandiser is anticipating another “challenging quarter.” He said, “Until we have the new crop, we have to deal with the current crop with very unusually high basis in the cash market.”

So far, DDGS merchandisers have been able to serve their clients through a challenging time period.

Ethanol Comments: There are two pieces of good news on which to report. The first is that the passage of a farm bill may occur next week and there is a high probability that it will include continued funding for renewable energy programs. The second is that ethanol’s discount to gasoline continues to narrow as U.S. ethanol stocks remain tight relative to recent history.

Ethanol stocks for the week ending June 7 declined to 16 million barrels. This is a substantial reduction from last week’s level of 16.4 million barrels and 22.6 percent below the level seen this time last year of 20.7 million barrels. Ethanol stocks are not rebounding in part because weekly production is not increasing. This week’s average production of 884,000 barrels per day (bpd) was slightly below last week’s level of 885,000 bpd. A second reason that stocks are not building is because ethanol imports remain at zero.

The following price differentials between corn and co-product processing values are excellent indirect indicators of changes to facility margins. This week these values give no indication of week-to-week improvements in margins, but the year-over-year improvements are noteworthy. Please note that such substantial annual improvements in the price differentials cannot be entirely credited to improved ethanol demand alone. Instead, increased demand for both ethanol and DDGS has supported the margins for ethanol facilities, despite the difficultires of having to deal with higher corn prices due to tight corn stocks.

– Illinois differential decreased to $2.31 per bushel, which is down from $2.52 the prior week but above $1.06 last year.
– Iowa differential increased to $2.06 per bushel, which is just above $2.05 the prior week and above $1.10 last year.
– Nebraska differential decreased to $2.26 per bushel, which is down from $2.32 the prior week but well above $0.73 last year.
– South Dakota differential decreased to $2.07 per bushel, which is down from $2.28 the prior week but above $1.18 last year.

U.S. ethanol facilities have struggled over the past four years as corn stocks have steadily declined. There may be some relief on the way if USDA’s current corn production forecasts prove to be accurate. U.S. corn stocks may rebound back to levels not seen since the 2005/06 growing season. That is perhaps the most welcome of all news for the U.S. ethanol industry and its clients.